Congressman Jim McDermott on the radio last week:
You have to believe in a tooth fairy to believe that we can regulate a cap and trade system.
Say what?! That’s an odd thing to say. Cap and trade markets have been in existence for well over a decade— and the programs have worked quite well.
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There are already two operational carbon cap and trade systems: the EU’s ETS and the northeastern states RGGI program. Neither system has exhibited evidence of gaming or market manipulation. (The previous problems with the ETS were much hyped by carbon-pricing opponents, but these were largely fixable problem related to the distribution of carbon permits, not lack of regulatory oversight.) Moreover, there have been a half dozen or so cap and trade programs for other air pollutants in the US over the last couple of decades. Like you would expect in any regulatory program. there have been occasional and minor hiccups, but what cap and trade is best known for is its relative ease, efficiency, and cost-effectiveness.
I’m not trying to pick on Congressman McDermott, but to address what seems to an intellectual error cropping up in some circles. It’s an anti-market fervor that’s unhelpfully deployed against cap and trade—and it’s a bit bizarre.
Consider that when we discovered e. coli in US spinach we invested in more vigilant food safety. We didn’t ban vegetables! It’s just the same for cap and trade. We prevent carbon trading manipulation through regulation and oversight, not by pretending that markets are inherently bad.
Update 4:45 pm:At least one very smart blogger has been puzzled by my title, which makes me think that I outsmarted myself again. Drat! It’s supposed to be a reference to the way we treat e coli in spinach: we regulate food safety so that we can eat it. We don’t use an instance of regulatory failure as a reason to abandon food safety programs, which is sort of what the anti-market folks are doing when they see financial market failures as a reason to oppose carbon markets.
“Individual Transferable Quotas” in fisheries is basically a cap and trade on fish catches. Talk about leakage potential! Yet they’ve done it and so far, I believe it’s been very successful. The SO2 and NOx programs are also cap and trade programs. The evidence of success is out there.
Ocean fishing is an example of a few participants in a setting that’s capable of detecting cheating, and all the participants have an incentive to keep dealing with each other—it’s zero-sum for them (if he cheats, I lose out). SOx and NOx trading are, again, a few participants in a very visible setting that’s capable of being measured to a gnat’s ass with stack monitors. And, again, the participants have every incentive to keep each other honest, because the value of their emissions reductions depends on everybody participating honestly.Now, consider CO2, emitted by everyone who burns any fossil fuels—whether they be a power producer or a small lawnmower driver and with “reduction” occurring in a bewildering variety of little-understood ways, with CO2 sinks behavior apparently changing by the second. Now how is it that we’re supposed to be able to detect cheating? Of course, we all know that no big financial firms ever cheat or ignore flashing red warning lights and signs that the assets they are trading are not quite what they seem . . . oh, also, CO2 has a half-life measured in centuries, quite distinct from SOx and NOx.I’m all for cap and trade when certain, obvious conditions are met: few participants, easy transparency/close monitoring, well understood sources and sinks (removal or reduction mechanisms—in the case of NOx and SOx, burning less).Anyone who says the SOx and NOx emissions control programs are good models for CO2 cap and trade either doesn’t understand how the SOx and NOx programs work, doesn’t understand the carbon cycle, or both.
Eric de Place
But John, not a single issue that you raise is a problem for carbon cap & trade. Procedurally, cap & trade will work very much like a carbon tax. It will require permits for carbon UPSTREAM, at the first place where carbon enters the economy (mine mounth, oil wellhead, pipeline, tanker, etc). It has nothing to do with lawnmowers or individuals. It’s just like how we have a federal gasoline tax now and people mowing their lawns don’t have to calculate what they owe. In fact, we already carefully track and tax nearly all of the carbon that enters our economy before its combusted. Because of the physical properties of fossil fuels, we already know in advance their carbon content—every gallon of gasoline is nearly carbon-identical to every other—so we can easily require energy importers and producers to hold permits equivalent to volume of carbon that they introduce. Roughly 90% of US carbon emissions are like this: EASY to quantify, track, and enforce. The other roughly 10% falls outside the boundaries of cap & trade (and outside the boundaries of taxes too)—these are things like agricultural emissions and logging. Plus, a properly conceived cap & trade wouldn’t deal with carbon sinks and all their complexity. (An offsets program, which could be a feature of c, taxes, or regulation, might try to deal with sinks.)Your carbon cycle objection is irrelevant too. CO-2, the vast majority of emissions, is a very well-understood gas. Other ghgs treated by converting their carbon content into “CO-2 equivalents” usually on a 100-year basis. This is the recommended methodology of the IPCC, among others. So permits are required for the volume of CO-2 on a 100 year basis (which, again, is exactly how a smart carbon tax would tax carbon). In fact, a carbon cap & trade system would work—no, already DOES work—just like the SOx and NOx markets. To quote you: “the participants have every incentive to keep each other honest, because the value of their emissions reductions depends on everybody participating honestly.” That’s a great point! If you’d like to do some reading about cap & trade, you should check out Sightline’s primer: “Cap and Trade 101”. I suspect you’ll find it illuminating: http://www.sightline.org/research/energy/res_pubs/cap-and-trade-101