firm that creates a ton of sulfur dioxide must buy a $22 permit to release that amount of pollution.

This regulatory approach creates an incentive for firms not to pollute, and they will respond by looking closer at their production processes to economize on pollution. As shown by the United States’ experience with the sulfur dioxide trading market, the net effect will be lower pollution at minimal cost, as those firms with an edge in abating pollution will be rewarded for doing so.<sup>9</sup> The pollution permit system can add millions of dollars of government revenue if it requires polluters to purchase the permits. The government’s alternative to keeping all this revenue is for it to freely allocate some of the permits to the affected industries. A skeptic can argue that if one city unilaterally starts such a market and does not freely allocate the permits, “leakage” can result as factories will be more likely to migrate to a city without regulation. In cities with a large informal industrial sector, such regulation in the formal sector could encourage more firms to join the informal sector, making them less likely to be regulated under the emissions cap. The extent of this “leakage” remains an empirical question, but regulators have an incentive to anticipate this effect—and a simple solution. Local governments can freely allocate the permits to industrial firms and then give them the right to sell them to each other at the market price.

If the government can keep some of the pollution permit revenue, its fiscal resources will increase. Environmental economists have argued that, with the revenue collected from pollution permit auctions, other distorting taxes (such as labor taxes) can be reduced.<sup>10</sup> The famous “double dividend” motto is to “tax waste, not work.”

# **_Disclosing information_**

A second policy for reducing industrial pollution is for the state to collect and disseminate information about industrial polluter activity. Information is a public good, and governments’ unique powers give them a cost advantage in requiring firms to report their emissions and in auditing the veracity of these reports. After the 1984 Union Carbide chemical disaster in Bhopal, India, the United States created the Toxic Release Inventory dataset, requiring manufacturing firms to publicize their emissions released to air, water, and land. Developing countries, such as Indonesia, have followed a similar path, and research suggests that this informal information regulation has been effective.<sup>11</sup> Such trusted information helps create accountability among those who used to keep information about their polluting activities private.

As education attainment rates rise in developing cities, local communities will be empowered to take action.<sup>12</sup> Even in China, microblogs are active sources of information about environmental issues. In July 2012, _The New York Times_ provided a case study of the power of environmental protest in China’s cities.

China’s days as the place to do cheap but dirty mining and manufacturing may not be over, but a growing environmental movement has made potentially polluting projects much harder to build and operate. Large and sometimes violent demonstrations against the planned construction in southwestern