Curbing the cost of bad behaviour

factory chimneys billow smoke into the air.

Pollution costs

Pollution costs

Researchers have created a revenue raising mechanism that operates like a ‘Robin Hood tax’ to help address climate change.

By creating a new way to initially allocate permits, a team of environmental economists led by Dr Ian MacKenzie have managed to make a ‘good tax’ that makes environmentally unfriendly actions more costly, while generating revenue for other sources like healthcare.

“Economics can be applied to help the environment,” Dr MacKenzie said.

“It can be used to help create better models and methods that have a real world impact and stimulate discussions with policy makers.

“Climate change is one of the biggest threats we face as a global society, and this model, while not a complete solution, makes organisations mindful of their environmental impact and encourages them to decrease it.”

This work on the design and implementation of pollution regulation looks specifically at pollution auctions and how current systems fail to achieve desired outcomes.

These auctions allow firms to purchase a limited number of permits that enable them to complete certain regulated actions that are considered to be pollutive.

“When working efficiently, pollution auctions support a ‘good tax’ so you can distort people’s behaviour away from doing bad things like pollution and generate revenue that can be used for positive change,” Dr MacKenzie said.

However in his research, Dr MacKenzie was able to demonstrate that mechanisms used to control the price in US auctions were not working as expected.

“What we have seen in the US pollution auctions is that the cost containment mechanism increases not decreases cost, paradoxically,” he said.

Dr Ian MacKenzie sits smiling.

Dr Ian MacKenzie

Dr Ian MacKenzie

“This was not ideal because when this tool is more efficient it generates more revenue – revenue that can be used for schools or hospitals etc.

“A lot of current models have flaws – they distort price and they don’t generate revenue – our research is informing how we can design new improved permits.”

To address this problem the researchers have designed a new revenue raising mechanism via an auction.

“We hope this solution will achieve more efficient and effective regulation to solve one of the world’s most pressing issues,” Dr MacKenzie said.

Read more stories about how research at the School of Economics is creating change, locally and globally.