Pollution caused by a process or industry is a prime example of a negative externality. The pollution producer makes decisions on the cost of and profit from an activity. The cost of pollution is not born by the producer or even the consumer, but rather by impacted individuals or society as a whole.
Society can ban activities which pollute, but this will reduce economic activity which is also detrimental to society. One method to try to meld these opposing ideas is a system of pollution trading. This generally involves governmental establishment of a “tolerable” level of pollution as a cap, then a right to a portion of the allowed pollution can be bought and sold just like a commodity. With a cap in place, pollution can’t get worse, and the cap can be gradually lower to reduce total pollution.
Pollution trading in the United States began with Sulfur Dioxide (SO2,) the principle source of acid rain. The major source of the pollutant is produced by burning coal. In 1990, a cap of 10 million tons per annum was established. Utilities had to buy a “right to” pollute. The cap was then lowered in future years. Companies that could eliminate part or all of their share could sell the pollution rights to other utilities who were unwilling or unable to reduce their emissions.
The assumption is that the environment can deal with a small amount of pollution, as long as it is sufficiently dispersed. For the case of acid rain, alkaline soils or areas with a limestone formations can absorb some acidity. Another type of pollution is nutrient overload. Certain compounds of Nitrogen and Phosphorous are used as fertilizer. If the the fertilizer spread on a crop isn’t absorbed, it runs off and can damage the environment.
Agricultural activities and waste treatment plants in the Chesapeake Bay were seriously damaging water quality. Four states – Pennsylvania, Maryland, West Virginia, and Virginia joined together to create Total Maximum Daily Loads (TMDLs) for nutrients across the watershed. The ongoing program through nutrient trading and a gradual reduction of the TMLD, is resulting in improved water quality. There are costs associated with operating a trading program, but it produces positive externalities such as improved fisheries, and increased tourism due to improved water quality.
In 2015 the Arkansas legislature approved ACT 335, to “Authorize the implementation of nutrient water quality trading, credits, offsets, and compliance associations and for other purposes…” The plan is to employ nutrient pollution trading to ultimately improve the water quality in several impaired watersheds across the state. Biannually, the state of Arkansas must submit a list of impaired water bodies known as the 303(d) list. By capping total nutrients leaving the watershed and then slowly lowering the cap, water quality should improve. Market forces will determine how to best reduce nutrient pollution, not stringent regulations. Waste treatment facilities and farms which are successful at limiting nutrients we be able to “sell” their improvements to others not so successful.