As a free-market environmentalist, I should probably be more excited about President Obama’s cap-and-trade program to reduce carbon emissions. After all, it’s not a tax, which would allow the government to gain financially from pollution indefinitely… a situation, like any vice tax, that causes the government to suffer unhealthy conflicts of interest. No, according to the O administration, cap-and-trade is a market-based incentive that conservative greenies can embrace. But I’m not hugging yet.
Cap-and-trade sounds good in theory; if companies are polluting our environment, this presents a cost to society these companies should pay. Robert Murphy, an economist for the Institute for Energy Research makes this argument, saying that “markets are only efficient when firms take all costs of their behavior into account.” And carbon permits can force higher polluters to bear more of the associated polluting cost than lesser polluters. Sounds great so far.
But Murphy points out that the cap part of cap-and-trade reflects the main error made when government intervenes in a market: its inability to accurately price something. Government bureaucrats love to price things arbitrarily, though their reasoning never seems arbitrary: let’s make the minimum wage conform to a level we think is necessary… let’s make rents in this part of town conform to a level we think is prudent… let’s keep access to credit conform to a level we think is fair. All this fair-minded “reasoning” may seem grounded and logical, but to the unbiased market it’s completely arbitrary – not based on any real-world market considerations. And it completely bypasses the price mechanism.
What is the price mechanism? How are prices determined in a real-world market situation? This is how I explain it to 9-year-olds (in my economics book for kids): prices are determined by how much the producer is willing and able to charge, AND by how much the consumer is willing and able to spend. It’s a conversation between two parties that must end in agreement. It’s that agreement that makes the transaction moral, but it’s also the agreement that makes the transaction efficient.
With cap and trade, the government bypasses the price mechanism by arbitrarily determining the price of carbon emissions. They do this by deciding (arbitrary) what the cap should be in the first place, then issuing a fixed supply (arbitrary) of carbon credits. “A carbon tax and tradable carbon credits presuppose that we know the appropriate amount of carbon to be emitted and whether achieving that level is worth the cost. Neither is the case,” writes Terry Anderson, executive director of the Property and Environment Research Center. For this reason, Anderson describes cap-and-trade programs as “market like,” not full-fledged free-market environmentalism.
Then there’s the ripple effect President Obama, himself, predicts: higher energy prices for everyone. Murphy goes on to point out: “[I]f the prices of oil, coal, and other fossil fuels explode because of a cap and trade program, this won’t reflect genuine scarcity. Consumers will be forced to restrict their use not because there is less supply available, but because of a number dreamed up by Washington bureaucrats. This is no more a ‘market price’ than if the government decided to sell people permits giving them permission to sneeze.” Forget trying to determine if emission reductions are worth the cost to polluters; we also need to determine if reductions are worth the cost to consumers… in this current economy.
Understanding your costs and benefits is central to economics, central to efficient incentives, and central to the price mechanism. When you stop to consider that carbon credits have no intrinsic value (they exist as a financial instrument merely because government mandates it so), that their supply is determined arbitrarily, and that consumers in this economy can’t afford higher energy costs, it’s clear that cap-and-trade isn’t a true market based solution. Let the market price emissions and maybe we’ll hug.
15 responses so far
1 nolan084 // Mar 9, 2009 at 12:20 am
We would’ve been under the Kyoto Treaty requirements had we built nuclear plants at the same rate as France. How the French allow themselves to get 3/4 of their electricity from nuclear power, while we can’t (mostly because of the Environmental Left) is beyond me.
2 ericna // Mar 9, 2009 at 3:51 am
If Mrs. Herman could come up with a market based alternative that works better, I would be impressed. By the way, Terry Anderson’s statement is false. One only needs to know the marginal damage that carbon creates in order to fix a tax on emissions. Further, such a tax allows one to learn about the the cost of emissions reduction. Murphy’s statement is true, but irrelevant. The carbon emissions tax (or the energy price increase under cap and trade) should is reflect the damage that carbon does, not the scarcity of carbon based fuel.
3 esurience // Mar 9, 2009 at 4:00 am
I could be dumb, but I don’t understand this article at all. The author says, “Let the market price emissions” — How?? How are you not supposed to arbitrarily set a price on emissions? It seems to me that arbitrary is the only way. The whole point is that these companies don’t face any cost for their pollution. They get the profit, we breathe the air they polluted. That doesn’t seem so fair. You need to correct for the negative externality… and I don’t see how you do that without being somewhat arbitrary. Can someone enlighten me?
4 Stewardship // Mar 9, 2009 at 5:36 am
George H. W. Bush instituted cap and trade for emissions that cause acid rain. It was a great success. Lakes and forests all across the northern part of the nation have recovered from the problem. And our economy enjoyed an unprecedented run for 20 years after institution of the plan. Not that cap and trade is an economic stimulus– but it certainly didn’t harm the economy.
5 ModerateGal // Mar 9, 2009 at 10:01 am
I’m with esurience below in wondering how the market will price emissions. And who will the payment go to under your scenario? Do you even know what you mean because I’m not sure that the rest of us do.
6 sinz54 // Mar 9, 2009 at 10:54 am
The only way the market could price emissions, was if we could put a price on the earth’s atmosphere. How do you propose we do that?
7 sinz54 // Mar 9, 2009 at 10:58 am
esurience: The simplest way is Milton Friedman’s solution: An effluent tax. We can calculate how much it would cost if our coastlines were inundated by rising sea levels. (How much of our GDP would we lose if Florida were submerged?) Ditto for all the world’s nations. (How much would it cost to relocate the 200 million people in Bangladesh, if their nation were submerged? What if they demanded to come to America?) Then just raise enough money through a carbon tax to cover that. The reason why politicians don’t like effluent taxes, is they’re trying to cover up the true cost of compliance by hiding it inside the rising costs of goods and services due to these cap-and-trade trading permits. Whereas with a carbon tax, it could even be printed on the price tax of your next gas-guzzling car, alongside the luxury tax.
8 Stewardship // Mar 9, 2009 at 12:26 pm
We have a pretty good idea of the cost of relocating people. Here is a quote from a website pertaining to moving Kivalina, small coastal Alaska village, that is already in grave danger:
Global warming and its effects are a reality we have to deal with. Peoples lives are in danger because of it. Swan noted that official reports from the U.S. Army Corps of Engineers and the Government Accountability Office have found that Kivalina is directly harmed by global warming and must relocate at an expense that could cost $400 million or more.
$400 million for a very smal village. Can’t wait to open the bill to move Miami! As a conservative, I’d rather take action now to stop, slow, or reverse the effects of climate change today, than risk unlimited and rising costs in the future.
9 dendup // Mar 9, 2009 at 1:47 pm
Globla warming is probably the biggest example of the “Tragedy of the Commons”. Here’s a link to the original essay. http://www.sciencemag.org/cgi/content/full/162/3859/1243 If you’re not familiar with it the Widipedia article is as good a place as any as a start in understanding its implications and literature. http://en.wikipedia.org/wiki/Tragedy_of_the_commons
10 farmerjohn // Mar 9, 2009 at 3:16 pm
More free market fantasy. The pricing mechanism of markets doesn’t exist in a vacuum and consumers do not have much power in the market when it comes to purchasing many/most essential goods and services. Your description of how the pricing mechanism functions is exactly what it’s claimed to be: an explanation for 9 year-olds.
11 annecognito // Mar 9, 2009 at 8:46 pm
The problem with letting the market price emissions is that up to now, that’s exactly what we’ve done, and the market says “if I don’t have to pay for it, why should I?” Companies aren’t going to let some pesky thing like preserving the earth for future generations get in the way of their bottom line.
How about the government hires some specialists, like environmental engineers and financial analysts, who can tell us exactly what is the cost of the carbon we emit in real terms and then use that information to set policy? I would imagine that’s what’s being done right now, but what do I know.
12 Advocate123 // Mar 9, 2009 at 10:48 pm
Look, this is totally schizophrenic. I have yet to see any real opposition to the Green movement, which is the only means by which to combat the Cap and Trade.
13 sinz54 // Mar 10, 2009 at 7:52 am
annecognito: It’s not just companies, it’s consumers. Every owner of a huge, pollutiing SUV has made his decision: He cares more about the functions the SUV can provide him, than how much smog it emits or how much greenhouse gas it emits. I still believe that a carbon tax is the simplest way to fix that. By printing the dollar amount of the carbon tax on the car’s sticker, and printing it on every gasoline pump in every gas station, every would-be buyer will know exactly how much he has to pay for the right to spew carbon dioxide into the air.
14 sinz54 // Mar 10, 2009 at 7:57 am
Stewardship: I believe that approaching global warming solely from a “prevention” point of view will be devastating to our economy, more than other nations. Other nations, like France and Japan, get much of their electricity from nuclear power; we only get a fraction. Other nations, being smaller, have efficient rail systems. Our vast nation, in which suburbia is the dominant life style, has made the automobile the absolute dominant transportation mode. We must invest heavily in alternative sources of energy, and in flex-fuel and hybrid automobiles. I remember the energy shortages of the 1970s. There were actual riots, as truckers actually rioted on the nation’s highways. A prevention-only approach to global warming will hurt us even more. It might keep us in a permanent depression, until we figure out how to power and transport suburbanites around.
15 Stewardship // Mar 12, 2009 at 11:00 am
sinz54- I fully agree with you. When one considers the other side of the coin…the vast number of new jobs and wealth accumulation to be created by forward-thinking energy policies and investment in those industries…it’s a wonder the entire stimulus package didn’t target this opportunity.
You must log in to post a comment.