Pollution, carbon and waste

Pollution is a significant negative externality and can result from a number of activities. Industrial pollution by sulphuric and nitric acid (acid rain) can arise as a by-product of the production process in many industries, such as smelting and refining. Pollution can also arise from transportation, heating and lighting, and from waste storage and disposal. Pollution can take a number of forms, including chemical pollution of the air, sea and rivers, and noise and visual pollution. Chemical and noise pollution can easily be measured, but visual pollution is much harder to measure as it is subject to personal judgment. Environmental economists attempt to develop alternative ways to achieve the socially desirable level of pollution in the short run, rather than to prevent it entirely. In the long run, the widespread application of green technology may enable the global economy to reduce dramatically what is considered to be the socially desirable level of pollution.

Source: https://oilprice.com

Greenhouse gases

So-called greenhouse gases include naturally occurring gases such as carbon dioxide and methane, as well as those arising as a result of industrial production, transportation, and household consumption, including chlorofluorocarbons (CFCs) and hydrofluorocarbons (HFCs). Though occurring naturally, carbon dioxide emissions have increased significantly, largely as a result of burning fossil fuels. The combined result of these gases is to create a warming effect, which most scientists believe is responsible for global warming.

Estimated growth in carbon dioxide emissions, 1990 – 2013



The environment as a scarce resource

The environment is regarded as a scarce resource and care for the environment is increasingly seen as an important economic objective. The key debate is the extent to which markets fail to conserve the environment as a scarce resource.

Why has pollution and waste increased?

Pollution and waste have increased for two main reasons:

  1. Rapidly rising incomes since 1945 have increased consumption and production, which in turn has increased the amount of energy consumed, and the amount of waste produced.  Rising incomes have led to a greater than proportionate increase in consumption of goods with a high income elasticity of demand, including motor cars, computers, TVs and ‘white goods’. These products tend to have a very high carbon footprint in terms of the energy used in their manufacture, distribution, and use, and in terms of the excess packaging they use. Transportation of goods by airfreight and road haulage is a major contributor to carbon pollution.  Rising incomes have also led to much greater use of private motor cars while at the same time contributing to a decline in demand for greener, inferior, forms of public transport such as tube and bus travel.
  2. The real price of most consumer goods and many services has fallen over the last  50 years, and this has further stimulated  consumption, production and the creation of waste. Increased competition and globalisation have reduced the real price of many consumer goods, and cheap package holidays have encouraged more air travel, and more chemical pollution.

The Kyoto Treaty

The purpose of the Kyoto Treaty, which was signed in Kyoto, Japan, in 1997, was to get the major industrialised economies of the world to commit to reduce their greenhouse gas emissions in two phases. The first phase ended in 2012, and the agreement states that signatories should reduce emissions to levels less than those occurring in 1990 by that date. The Treaty was signed by 156 countries and came into effect in 2004.

The target for the first phase was for the EU as a single trading bloc to cut emissions by 8%, with the UK independently agreeing to a 20% reduction by 2010. Developing countries are not subject to the agreement, though they have been widely encouraged to become more environmentally conscious. Many are concerned that, as a developing economy, China is not subject to the limits agreed in Kyoto, yet it is predicted that China will become one of the planets biggest polluters over the next 10 years.

By 2003 the UK had reduced its greenhouse gases by 13% from its 1990 levels, and by 2006, emissions had fallen by 20%. (Source: Defra.gov.uk). However, other countries had not been so successful, with emissions from Spain and Portugal up by 42% and 37% respectively.

(Source: The Times, December 2005).

Under the Kyoto rules, if countries exceed their agreed limits in the first phase (2008-2012) they are penalised by having to make up for the ‘overshoot’, plus a 30% further reduction, in the second phase (from 2013.)

In global terms, growth in car usage and air travel is likely to make it difficult to achieve any of the targets. Unfortunately, the world’s biggest polluter, the US, pulled out of the agreement in 2001, though Russia did eventually join in 2004.

Despite the effects of the first and second Middle Eastern oil crises (1973 and 1979 respectively) which sharply increased the global price of oil, and the Kyoto Protocol, global carbon emissions have continued to rise over the last 35 years.

The Copenhagen UN Climate Change Summit, 2009

Delegates from 192 countries met in Copenhagen in late December 2009 to discuss ways to reduce global carbon emissions, which are widely regarded as contributing to global warming. The Conference was made necessary because the existing global targets are set out in the Kyoto Protocol are due to expire in 2012. The draft agreement required developed countries to reduce their emissions by 2020 to between 25% and 45% of 1990 levels, but there was strong resistance from the developed nations to such ambitious targets. Part of the deal involved developing countries receiving financial support to help them adjust to a low-carbon future. Negotiations also involved trying to agree an explicit target for temperature increases.

The Paris Summit

Reduction in CO2 emissions in the UK


The economic theory of pollution suggests that producers and consumers do not take carbon and other chemical emissions into account when they calculate their marginal private cost and benefit. This makes it extremely difficult for markets to resolve the pollution problem.

In theory, markets will work efficiently when those suffering from a specific instance of pollution can identify the polluter, and can take them to court. In this case, if found guilty, the polluter will consider the fine or legal damages a marginal private cost, and, to avoid further costs, will reduce pollution. This process might work with noise pollution from a specific factory, because local residents can take the owners to court. However, with carbon pollution, property rights over the atmosphere cannot be established, and specific polluters cannot be identified and sued directly. This means that there is no ‘built-in’ incentive to be a non-polluter.

There are a number of remedies proposed under the Kyoto Treaty, and by environmental economists. Either remedies can exploit the price mechanism’s ability to signal, ration and provide incentives, or they involve legislation and compulsion.

Two schemes that arose out of the Kyoto agreement were the EU Emissions Trading market and carbon-offsetting through the Clean Development Mechanism (CDM).

Tradable pollution permits

Tradable permits provide an incentive to polluters to ‘internalise’ the externality. Tradable permits to pollute involve:

  1. The government, or an appointed agency, selling the right to generate a given quantity of pollution to firms in an industry.
  2. These can be bought, and traded, with the result being:
  1. The high polluters have to buy more permits, which increases their costs, and makes them less competitive and less profitable.
  2. The low polluters receive extra revenue from selling their surplus permits, which makes them more competitive and more profitable.
  3. There is clearly an incentive to be a non-polluter!

Tradable Permits in the EU

In response to the Kyoto Protocol the European Council adopted the Emissions Trading Directive in 2003. This directive  set up a time frame for the establishment of the European Emissions Trading Scheme (ETS).

Participants can:

  1. Meet their emissions target by reducing their own emissions, or:
  2. Reduce their emissions below their target and then sell, or store, the excess emission allowances, or:
  3. Allow their emissions to stay above their target, and therefore purchase emissions allowances from other participants.

Carbon offsetting

Carbon offsetting involves the attempt to neutralise the effects of harmful CO2 emissions resulting from consumption or production. Encouraging polluters to invest in, or donate to, a low carbon or carbon reducing scheme can offset the carbon they produce.

Under the Kyoto Treaty, the Clean Development Mechanism (CDM) scheme was established to enable polluting countries in the industrialised world to offset their emissions by investing in carbon reducing schemes in developing countries.

A typical example might involve an airline investing some of the revenue from ticket sales into a wind farm in a developing country. The high-carbon airline is attempting to offset some of its carbon by investing in a very low-carbon energy source.

See: British Airways carbon offset scheme

Carbon accounts and carbon rations

According to the UKs Environment Agency, one way to meet targets for reducing greenhouse gas emissions is to set up a carbon account system for each individual or household, similar to the European carbon trading system currently being used to reduce emissions by industry.  Each individual is given a unique identifying number, and when they make purchases, the carbon weight would be calculated and added to their account. Once the pre-agreed limit has been exceeded, individuals would be required to purchase unused credits from others. In this way, carbon is rationed, and ordinary individuals are encouraged to think about the carbon effect of their spending and consumption.

Pollution taxes

In many cases, it may efficient for government to impose specific taxes on polluting activities. The effect of the tax is to internalise the externality, and help achieve the socially efficient level of pollution.

Pollution taxes are increasingly common. Across Europe, national governments are experimenting with various ‘rubbish’ taxes, based on weight of rubbish or numbers of rubbish bags used. However, one disadvantage of such schemes is that they encourage illegal dumping of waste.

Waste disposal

Increased waste is a significant negative externality, and like pollution, is a result of increased consumption and production.

Landfill taxes

A landfill site is an area of land that is set aside by local governments or private companies for the purpose of waste disposal. Sites are licensed and regulated by government.

A landfill tax is an extra charge, on top of normal disposal fees, for disposing of waste, and is designed to encourage businesses to reduce the amount of waste they produce. In the UK landfill taxes are set at two rates – the lower rate is for inactive like rocks and soil, and the higher rate, currently at £32 per tonne, is for active waste, such as plastics, chemicals, and metals.

Evaluation of market solutions

Selling permits to pollute, and taxing polluters work by manipulating market forces to encourage consumers and producers to take externalities into account when planning their consumption and production.  In other words, polluters are forced to consider pollution as a private cost.

However, in the case of pollution taxes, consumers might respond inelastically to the price rise, and while tax revenue is generated, polluting behaviour continues.  With fuel taxes in particular, it is likely that consumers are relatively insensitive to higher prices, especially given the lack of suitable alternatives.

Therefore, such taxes may be a good source of revenue for the Chancellor, but they may fail to make a substantial impact on pollution.

Permits to pollute force firms to take their pollution into account but, again, there is no guarantee that behaviour will be altered sufficiently to reduce pollution levels.

Carbon offsetting has come in for special criticism because many schemes have been discovered to be bogus.

Command solutions

Command solutions try to by-pass markets and rely on legislation and the force of law. Government can pass laws which directly force consumers and firms to alter their behaviour. Examples include:

  1. Banning sources of pollution, such as cars and factories, from urban areas
  2. Forcing firms to install air filters setting up ‘smokeless zones’
  3. Setting emission limits for motor vehicles, or emission control zones
  4. Fining those who break these laws or limits

Small nudges

Behavioural economists have proposed that changing behaviour away from ‘bad’ activities requires a new approach in which an individual’s choices can be manipulated so that the default option leads to a better outcome. This is required, they argue, because existing choice architecture leads individuals to make decisions which ay be harmful to society.

For example, the behaviour of graffiti artists in New York was studied and, following experiments, economists concluded that if authorities acted quickly on low-level graffiti it would spread a culture of cleanliness which would lead to reductions in more serious crime and vandalism. This approach became known as broken windows theory, suggesting that the existing choice architecture encouraged more anti-social behaviour, and that by changing the choice architecture behaviour might become ‘social’.

The Clean Neighbourhoods Act

In 2005, the Clean Neighbourhoods Act set the maximum fine for ‘local’ polluters of £50,000 and up to 1 year in jail. The Act also enables local council officers to impose on the spot fines for ‘light’ pollution including the dumping of cars and graffiti.


A major criticism of legislation and prohibition is that it is difficult and costly to police.

There is also an assumption that government knows the best way to control behaviour, but, like markets, government may also suffer from information failure.

Go to The Paris Summit 2015

See also: positive externalities