SALT LAKE CITY – A new study shows that, in the right circumstances, certain industries can benefit from air pollution regulations to increase their profits, contrary to the notion that all regulations are burdensome and costly to the industry.
This increase in bottom line was contrasted by results explored in unregulated industries in the work of researchers at Weber State University and the University of Utah.
“That doesn’t mean that every company is better off,” said one of the study’s co-authors, Francois Giraud-Carrier, assistant professor of supply chain management at WSU’s Goddard School of Business and Economics.
Giraud-Carrier said emission limits like those of a cap-and-trade system are forcing the industry to invest in cleaner technology, increasing their prices to consumers to offset the investment, and over time, those increased prices will add to the bottom line of a business.
“The big companies sell very high volumes, but we get a cleaner environment and while we may pay more, we get cleaner air,” he said. “Businesses make more money, consumers are better off and society is better off.”
The study, co-authored by Krishnan S. Anand, Professor of Operations and Information Systems at the University of Utah, was recently published in Management Science.
Francois Giraud-Carrier Weber State University
Cap and trading systems create a market with a fixed number of pollutant rights, commonly referred to as emission allowances. Industries that pollute less than their regulatory approval allows may sell excess allowances to companies that pollute more than allowed. The paper claims that this type of system encourages companies to invest in efficiency and innovation so that they can benefit from the sale of certificates.
Giraud-Carrier said the ability to increase profits in some industries is particularly relevant for “concentrated” industries such as oil and gas, cement and aluminum, which are dominated by a few competing companies that have significant market power.
Because of this market power, they are able to soak up the investment in cleaner technology to fund pollution reduction while making a profit, the study says.
He said that shifting emissions rights among actors can contain pollution in a cap and trading system more effectively than a tax that is stagnant and doesn’t offer the same incentives to invest in the most innovative technology.
“Nobody likes regulation. We understand, but sometimes regulation is necessary, ”he said. “If you don’t have regulations, there is nothing natural that will cause individuals and companies to change their behavior when it comes to the environment.”
The paper notes the extreme tension between industry, medicine, and clean air advocates over pollution control, and makes reference to the 2015 Mercury Rule, enacted by the U.S. Environmental Protection Agency.
Electricity utilities warned that the costly regulation would lead to the premature shutdown of coal-fired power plants and the layoff of hundreds of workers. Critics countered that the cost to society of mercury pollution is much more damaging, leading to birth defects and other unhealthy consequences.
In Utah, the mercury rule forced the early shutdown of the Hunter power plant outside Price.
The results showed that carbon shifting only works if the regulations are “moderate” and not drastic or criminal.
“Cap and trade should clearly be one of the instruments to combat climate change, but we are not saying that this is the only way,” said Giraud-Carrier. “It should be an item in a tool arsenal that is particularly well suited to large, concentrated industries.”
Bryce Bird, director of the Utah Air Quality Department, said regulators are using a variety of emission reduction tools based on government plans put in place in areas that do not meet federal clean air standards that set pollutant thresholds.
The department acts as a “banker” in overseeing company-to-company transactions when it comes to the amount of emission reduction credits carried over.
Government plans limit emissions so any new business that emits pollution will have to buy loans from another business to stay below that ceiling.
The government plans come with inherent cuts, so the loans are not handled one-to-one, but instead require the denials so that the cap is not exceeded.
“So if you were to bring in 1,000 tons of new emissions, the (credits) would have to prove that 1,100 tons of emissions are being shut down,” he said. “It’s a net gain for the air shed because it’s not a 1: 1 ratio for these pollutants,” Bird said.
Bird said that while the division was not involved in pricing the transactions, the emissions reduction credits were in effect.
“It provides incentives for companies to reduce their emissions and get paid by the company that needs the offset.”
The department also uses a regulatory “tax” by setting an annual fee for major industrial pollution sources based on the number of tons of pollutants they emit.
In addition, road projects that receive federal funding must match a transportation budget for emissions in areas where air pollution is challenging along the Wasatch Front and elsewhere in the state.
The combination of these regulatory tools had been effective over time, and the crowded Wasatch Front could reduce air pollution despite the rapidly growing population.
The advent of Tier 3 fuel being refined and distributed along the Wasatch front, as well as new, cleaner model cars going online, are also helping to hit a bump.
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