Is Emissions Trading an Economic IncentiveProgram?: Replacing the Command andControl/Economic Incentive Dichotomy

I. Introduction Is an emissions trading program' an program? Emissions trading programs allow polluters to avoid pollution reductions at a regulated pollution source, if they provide an equivalent reduction elsewhere.2 Most scholars, government officials, and practitioners equate emissions trading with incentives, but they do not define economic This failure to define incentives leaves unsupported the suggestion that emissions trading realizes environmental goals through incentives, but that traditional regulations (rules that limit discharges of pollutants into the environment without allowing trading) do not. Both traditional regulation and emissions trading rely upon the threat of a monetary penalty to secure compliance with government commands setting emission limitations.3 Perhaps neither traditional regulation nor emissions trading should be considered programs, because both rely upon government commands.4 Or perhaps both should be considered programs, because monetary penalties provide a crucial in both systems. Rather than define incentives, scholars employ a conventional dichotomy that contrasts and regulations (rules that dictate precisely how a polluter must clean-up) with incentives.5 They claim that command and control regulations work inefficiently, discourage innovation, and fail to provide continuous incentives to reduce pollution, but that emissions trading and other programs overcome these problems.6 The dichotomy between command and control regulations and incentives has had a powerful influence upon policy.7 On October 22, 1997, President Clinton outlined his plans to address global climate change, an increase in global mean surface temperatures that emissions of carbon dioxide and other gases cause.8 The President's speech stressed the issue's importance by referring to some possible consequences of climate change including disruptive weather events (such as droughts and floods), the spread of disease bearing insects, and receding glaciers (which might cause inundation of coastal areas).9 President Clinton did not mention a single new traditional regulatory or propose any specific cuts in greenhouse gas emissions, such as carbon dioxide, below 1990 levels to combat this potential menace. Instead, he announced a of strong market incentives, tax cuts and cooperative efforts with industry.'o The President's package included emissions trading, which is the economic program most often implemented. His proposal would allow polluters in one country to avoid greenhouse gas reductions at home in exchange for pollution reductions abroad. Not surprisingly, emissions trading became an important element of the subsequently negotiated Kyoto Protocol on climate change, in which the developed countries apparently agreed to modest cuts in greenhouse gas emissions.'2 A few days prior to Clinton's speech on climate change, the Environmental Protection Agency (EPA) released its proposal to address interstate pollution, an important impediment to delivering healthful air under the 1990 Amendments to the Clean Air Act.'3 The EPA, predictably, called for an interstate emissions trading program.'4 This Article develops a theory of incentives. Any to regulate or to deregulate creates incentives.'5 The programs referred to as economic incentive programs all envision a substantial governmental role of some kind. That is why lawyers, experts in law, write about them.'6 Moreover, traditional environmental law creates free markets. Law performs a fundamental role in creating markets generally, and environmental law is no different. For example, laws requiring businesses to keep promises to customers and suppliers (contract) make commercial transactions possible. …