Plain Sense Economics

The cap and trade process for regulating the negative externality of pollution has been tested for a couple of decades, and recently has had more attention from Kyoto to Pres. Bush’s Clear Skies Initiative. Society (through the government) chooses a limit or cap on pollution of a compound. Then polluting facilities buy and sell permits that allow a certain amount of that compound to be released. The total number of permits is set by the cap. The ability to trade permits gives individual facilities financial incentives and flexibility to meet the new goal. Cap and trade is not a perfect solution – particularly for those residents who live near a facility that chose to buy a lot of pollution credits.

One charming by-product of this approach is that interested third parties can participate in the permit trading market. They can bid to buy permits, and then remove those permits from circulation.

Here is a small example of this process – reported by the Adirondack Daily Enterprise – published in Saranac Lake, NY.

U.S. Rep. Kirsten Gillibrand said she’s dreaming of a green Christmas.

The recently re-elected Democrat from Greenport permanently retired nine tons of carbon dioxide pollution allowances on Monday evening, for a cost of $75, the first person to do so. She bought three $25 certificates, one for her and one for each of her sons.

“It’s a very special Christmas gift for each of them,” she said.

Sounds like good stocking stuffers.