Hormesis, hotspots and emissions trading

Instrument choice--the comparison of technology standards, performance standards, taxes and tradable permits--has been a major topic in environmental law and environmental economics. Most analyses assume that emissions and health effects are positively and linearly related. If they are not, this complicates the instrument choice analysis. This article analyses the effects of a nonlinear dose-response function on instrument choice. In particular, it examines the effects of hormesis (high-dose harm but low-dose benefit) on the choice between fixed performance standards and tradable emissions permits. First, the article distinguishes the effects of hormesis from the effects of local emissions. Hormesis is an attribute of the dose-response or exposure-response relationship. Hotspots are an attribute of the emissions-exposure relationship. Some pollutants may be hormetic and cause local emissions-exposure effects; others may be hormetic without causing local emissions-exposure effects. It is only the local exposure effects of emissions that pose a problem for emissions trading. Secondly, the article shows that the conditions under which emissions trading would perform less well or even perversely under hormesis, depend on how stringent a level of protection is set. Only when the regulatory standard is set at the nadir of the hormetic curve would emissions trading be seriously perverse (assuming other restrictive conditions as well), and such a standard is unlikely. Moreover, the benefits of the overall programme may justify the risk of small perverse effects around this nadir. Thirdly, the article argues that hotspots can be of concern for two distinct reasons, harmfulness and fairness. Lastly, the paper argues that the solution to these problems may not be to abandon market-based incentive instruments and their cost-effectiveness gains, but to improve them further by moving from emissions trading and emissions taxes to risk trading and risk taxes. In short, the article argues that hormesis does not pose a general obstacle to emissions trading or emissions taxes, but that in those cases where hormesis does pose such a problem, a shift toward risk trading or risk taxes would be the superior route.