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Don’t Pay Polluters

Paying firms not to pollute gives rise to a perverse incentive.

A little known greenhouse gas called HFC-23 made the news recently. Also called fluoroform, it’s a waste gas generated in the manufacture of refrigerants. Compared to carbon dioxide (CO2), HFC-23 is a minor greenhouse gas. Pound-for-pound, however, it traps more than 10,000 times as much heat.

The UN’s Clean Development Mechanism (CDM), set up under the Kyoto accord as a way for industrialized countries to “offset” their own CO2 emissions by paying for comparable actions in developing countries, counts destruction of one pound of HFC-23 as equivalent to prevention of 11,700 pounds of CO2 emissions.

The CDM pays large sums to coolant manufacturers in India, China and elsewhere to destroy the HFC-23 they produce. Indeed, these payments have become the largest single item in the CDM budget: this year, HFC-23 disposal is getting 50% more CDM money than wind power and 100 times more than solar energy.

Also See: The Toxic 100: Top Corporate Air Polluters Identified

The rub is that paying firms not to pollute gives rise to a perverse incentive. A firm that threatens to pollute more gets paid more. So manufacturers have upped their production of the refrigerants (themselves greenhouse gases, albeit less potent ones), in order to produce more HFC-23, so they can then get paid to destroy it.

It’s a great example of what economists E. K. Hunt and Ralph d’Arge once called capitalism’s “invisible foot”: when polluters are paid to clean up pollution, they create more of it, as if guided by an evil twin of Adam Smith’s invisible hand. Today some firms make half their total profits from HFC-23 disposal payments.

People living near the coolant factories don’t do as well. In the state of Gujarat in western India, residents of an adjacent village complain of skin rashes, birth defects, and damages to crops caused by a noxious fog that burns the eyes and lungs.

The European Union has halted further HFC-23 payments, prompting firms to threaten to release the gas into the atmosphere. A scientist at the Environmental Investigation Agency, which opposes the pollution subsidies, put the matter baldly: “Attempting to force countries into squandering billions on fake offsets that actually increase production of greenhouse gases,” he said, “is extortion.”

The HFC-23 fiasco offers three crucial lessons for climate policy.

Lesson Number One: Don’t pay polluters. Instead make polluters pay. Putting a price on pollution via carbon taxes or auctioned permits – while also controlling emissions by means of conventional regulation – can be a good idea. But how good depends on who pays whom. When polluters pay to pollute, they have an incentive to cut emissions above and beyond what’s mandated by existing regulations. Furthermore, the payments establish the core principle that the waste-absorption capacity of the atmosphere is not an unlimited resource that polluters can use free of charge, but rather a scarce resource that belongs to us all. In keeping with the principle of common ownership, pollution payments should be returned to the people via green dividends and investments in public goods.

Lesson Number Two: No offsets. A major problem with offsets, as this example illustrates, is that it can be difficult or impossible to ensure that they cut emissions below what would have occurred in their absence – an issue known as “additionality.” There are compelling moral and practical reasons for industrialized countries to help developing countries to reduce greenhouse gas emissions. But this assistance should come on top of acting to cut their own emissions at home, not as a substitute for doing so.

Lesson Number Three: Watch co-pollutants. Emissions of greenhouse gases often go together with emissions of toxic co-pollutants that harm nearby communities. The magnitude of air-quality impacts varies from polluter to polluter, depending among other things on investments in pollution control. “The accounting logic in the UN system is that one ton of CO2 removed in Gujarat is the same as one ton in New York,” notes economist Siddhartha Dabhi of the University of Essex, “but that doesn’t consider local effects.” Climate policy should consider the local effects of co-pollutants, and be designed with an eye on securing health benefits, particularly in the places with heavy pollution burdens.

If policy makers manage to learn these lessons, those HFC-23 payments will not have been entirely in vain.

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