The Problem of Pollution Hotspots: Pollution Markets, Coase, and Common Law

Pollution markets, it has been argued, offer significant cost savings per unit cleanup when compared with direct regulation. In lieu of uniform demands that all sources control emissions to the same extent, pollution markets allow sources with higher pollution control costs to pay their lower-cost counterparts to reduce emissions. These markets are indifferent to the location of sources that opt to buy pollution credits and those that opt to sell. This indifference underpins the cost savings associated with pollution markets, since it allows pollution credits to flow to areas that are expensive to clean up while mitigation efforts flow towards zones where pollution can be reduced more cheaply. Because of this fluidity, pollution markets can contribute to uncontrolled localized pollution "hotspots," or concentrations of pollutants that are not spatially fungible. In opting for this tradeoff, pollution markets mirror a key precept of the nuisance doctrines that historically governed air pollution regulation under the common law. Under these doctrines, required levels of control varied in accordance with prevailing land uses and socio-demographic conditions in affected locales. Dissatisfaction with the common law regime prompted the rise of continental-modeled administration geared at pollution mitigation across all sources. These "command and control" regimes were subject, in turn, to criticism for reasons of economic inefficiency. Pollution markets emerged in this connection as the leading alternative to uniform direct regulation. This article argues that the justification for pollution inequalities associated with such markets built on the work of Ronald Coase, and via Coase, the common law. Coase viewed as inefficient legal rules requiring across-the-board internalization of harms, such as pollution. He found in the common law's propensity to balance opposing economic interests evidence of an (implicit) symmetrical construction of the competing rights at play. On the one hand was the right of property owners to put their resources to productive use even when that use imposed harm on others; on the other was the right of neighboring residents not to be subjected to such harms. Neither right enjoyed a priori protection under a common law regime that varied the outcome of pollution and other nuisance disputes in accordance with the circumstances of each case. Coase's critique of uniform direct regulation, then, was quite clear. Less evident was his contribution to the instrument of pollution markets, and many observers trace the idea to Coase without identifying his explicit contribution. The core concept that early writers on emissions trading such as Thomas D. Crocker and J.H. Dales appeared to borrow from Coase was the idea of legally protected rights to pollute and an attendant expectation that levels of pollution control would vary by locale. This in turn appears to be the central insight that Coase took from the common law. In this way, uncontrolled pollution hotspots are as intrinsic to pollution markets as they were to the common law's nuisance regime. By contrast, insistence on uniform controls, even at the cost of inefficiency, characterizes regulatory instruments fashioned after the continental paradigm.