More than 1 billion people around the world do not have access to safe drinking water. 5000 people die every day as a result of drinking unclean water. People who live in high-density air pollution areas have 20% higher risk of dying from lung cancer. United States produces 30% of the world’s waste and uses 25% of the world’s natural resources. Almost 80% of urban waste in India is dumped in the River Ganges. Over 1 million seabirds and 100,000 sea mammals are killed every year.
So what are all these statistics related to? Pollution. Pollution is the introduction of harmful substances or products into the environment. How does this issue affect the government? Well, the government would have to set new regulations and introduce funding programmes to clean up the pollution. Also, if too many people become ill from all the pollution present in our environment, actions would need to be taken to make sure the right treatment is available therefore increasing government expenditure, creating an opportunity cost.
In 2005, the European Commission set up an Emissions Trading System (ETS) in an attempt to limit greenhouse gas emissions from heavy industry. Tradable pollution permits are an attempt to solve the problem of pollution. Its main focus is to curb carbon dioxide emissions by major polluters in the European Union.
So how does it work? Every year, the European Commission allocates a set amount of carbon dioxide permits to national governments, who then divide up the allowances among firms who are a part of the scheme. These permits are tradable, which means that firms can buy and sell between themselves thereby creating a market. Most of the pollution permits are free and have been allocated to firms depending on how much pollution they created before the scheme was introduced. However, the government are able to retain up to 10% of the permits and offer them for sale. Some of the permits are also kept as a reserve to enable new firms to enter.
Is this the most efficient way to solve the issue of pollution? The price mechanism is used to internalise the negative externalities created by pollution. Furthermore, governments are able to raise their funds by selling permits that they reserved. And by having these permits, it creates an incentive for firms to invest in clean technology and so reduce carbon emissions in the long term – resulting in a decline in pollution. If firms exceed their allowance then they face fines which will increase their costs of production. This means that they learn their lesson and do not exceed their allowance next time. However, if the European Commission issues too many permits, there is little incentive for firms to reduce pollution which means that these pollution permits are pointless. Moreover, firms may decide to pass on the cost of purchasing these permits onto consumers. This means that the prices of goods and services will increase. The government also face a cost of running this system as they have to monitor the pollution emissions from the many companies part of the ETS.
We must consider that the EU is just approximately 15% of the world and unless all countries decide to run a similar carbon monitoring scheme, then global emissions will continue to increase and have many severe effects on the environment.