A Straight Dope Classic from Cecil's Storehouse of Human Knowledge

Can companies buy "pollution futures" that give them the right to pollute?

March 19, 1993

Dear Cecil:

Please enlighten your earth-conscious fans about the commerce in "pollution futures" at the Chicago Board of Trade.

The term suggests that the pollution lobby has invented a sneaky way to poison the air at its own discretion. Don't the anti-pollution laws already in place preclude the creation of such "pollution rights"?

Cecil replies:

You're never going to make it in the PR game with that attitude, Eugene. For starters, you don't want to call them "pollution futures." The CBOT would rather you said "clean air futures."

The whole thing sounds a little Machiavellian, but therein lies the genius of it, as we shall see. Even the Environmental Defense Fund thinks pollution futures are cool.

Here's how it works. The federal Clean Air Act allows companies that reduce pollution to sell "pollution credits" to firms that are still besmirching the skies. The polluters can use the credits to avoid prosecution, having in effect purchased the right to pollute.

Sounds sleazy, but actually it's pretty smart. It rewards companies that reduce their emissions at the expense of those who don't.

It also greatly simplifies enforcement of the anti-pollution laws, since you don't get into stupid court battles with polluters who claim they just can't reduce emissions. You can't? Fine. Buy your way out of your problems.

There are a variety of pollution credit programs, most of them regional in scope. What the Chicago Board of Trade is involved in is a new national program intended to reduce sulphur dioxide emissions by coal-burning electric utilities. (SO2 is thought to be a leading cause of acid rain.)

The feds selected the CBOT to hold an annual auction where utilities could buy "air emission allowances" (i.e., pollution rights).

The first auction was held March 29, 1993. One hundred fifty thousand allowances sold for $21.4 million.

The CBOT did the whole thing for free in the expectation that its members could make money on the side by trading pollution … sorry, clean-air futures — that is, the right to buy a set quantity of emission allowances at a set price at a set future date.

The utilities who buy and sell futures do so because they want to lock in their future revenues/expenses. The traders want to trade them because the future-contract price of the emission allowances will probably vary from the actual price, and they hope to make money on the difference.

Sounds confusing, but if people can make millions selling pork belly futures, they can do the same with pollution.

But, you object, they're trafficking in our planet's future! Well, yeah, I guess they are. But if we've learned one thing in America, it's that if people can make money on the deal, they're more likely to go along with the program.

Besides, pollution futures are a game at which two can play. A Cleveland-based not-for-proft organization, the National Healthy Air License Exchange, said it planned to buy pollution allowances in order to make them too costly for businesses to use.

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