As stressed by Tietenberg (2010, p. 359), “from its inauspicious beginning as an idea that was little more than an academic curiosity, emissions trading has matured into its current role as the centerpiece of the US program to control acid rain and international programs to control greenhouse gases.” The functioning of such markets in emission permits, today called cap-and-trade, is simple: first a suitable emission level is established by public authorities and an equivalent number of emission permits is allocated among polluters. Second, these permits are made tradable among polluters: for each polluter is assumed to equalize his marginal abatement cost to the permit price, all polluters’ marginal costs are equal at the competitive market equilibrium – which is the condition for total abatement cost minimization. This short paper attempts to enlighten the early history of this idea in the late 1960s.
In the 1960s, the nascent environmental economics was developing as an academic field distinct from natural resources economics, with a new focus on environmental quality. It started to regard growing pollution as an important environmental externality. Ronald Coase (1960) had already suggested his bargaining solution between the receptor and the polluter even though his influence remained thin in the environmental literature during the 1960s. The Pigovian tax, understood here as a tax that would equalize marginal benefits and damages in order to be optimal, was discussed in the literature on externality that was in renewal at that time and suggested as a mode of internalization (Oates 2000…