THE THEORETICAL BASIS OF THE “EMISSIONS TRADING” SYSTEMS

There are three major theories on “emissions trading” systems: the externality theory; transaction cost theory in economics; and property theory on environmental capacity resources.

The main proponents of the externality theory were Professors Marshall and Pigu at Cambridge University in the twentieth century. Externality theory refers to the by-products or the side effects of economic activities beyond the regulation of market mechanism, that is, the side effects of part of economic activities that cannot be reflected in the price. It can be divided into external economy and external diseconomy. Pollution is the external diseconomy of economic activities, as the enterprises' business activities produce negative effects on others and its surrounding environment, but the enterprises never bring this into its cost and price of the market transaction. The enterprises gain benefits from these economic activities, while the society and others bear the burden of paying the controlling fees caused by its emissions, and become the victims of emissions, which leads to a gap between the enterprises' cost and the society's payment, thus forming the so-called external diseconomy. This is the basic theory western economics uses to explain the environmental issues. As the government pays the pollution controlling fees, and its revenue mainly comes from taxes, the enterprises gain profits from this process, which is not in keeping with social justice.