Cap-and-Trade Creators Dubious of Waxman-Markey (SO2 vs. CO2; political failure vs. ‘market failure’)

The Wall Street Journal recently ran an interesting story explaining that the two economists who invented the “cap-and-trade” approach to regulating pollution do not think it is an effective mechanism for dealing with manmade climate change. As with so many other economists (including those at the CBO [.pdf]), the creators of cap-and-trade think that an explicit tax is a much more efficient way for the government to limit greenhouse gas emissions.

To avoid confusion, let me stress that I am not endorsing a carbon tax myself–indeed I have a forthcoming article [.pdf] in The Independent Review that critiques the standard mainstream case for government pricing of carbon emissions. Nonetheless, it is interesting to see just how tepid the academic support for Waxman-Markey is becoming. It’s not simply “shills for Big Oil and Big Coal” who oppose it, as many activists would have us believe.

On the contrary, even hardcore alarmists such as James Hansen have come out strongly opposed to Waxman-Markey. And, as the Wall Street Journal story details, even the economists who invented cap-and-trade itself don’t think it’s useful in the global warming context.

Here is an excerpt from the WSJ article:

When he was a graduate student in the 1960s working to reduce pollutants, Thomas Crocker devised a cap-and-trade system similar to one being considered in Congress.…

“I’m skeptical that cap-and-trade is the most effective way to go about regulating carbon,” says Mr. Crocker, 73 years old, a retired economist in Centennial, Wyo. He says he prefers an outright tax on emissions because it would be easier to enforce and provide needed flexibility to deal with the problem.…

Mr. Crocker, who went on to become a professor at the University of Wyoming, is one of two economists who dreamed up cap-and-trade in the 1960s. The other, John Dales, who died in 2007, was also a skeptic of using the idea to tame global warning. 

“It isn’t a cure-all for everything,” Mr. Dales said in an interview in 2001. “There are lots of situations that don’t apply.” 

Mr. Crocker sees two modern-day problems in using a cap-and-trade system to address the global greenhouse-gas issue. The first is that carbon emissions are a global problem with myriad sources. Cap-and-trade, he says, is better suited for discrete, local pollution problems. “It is not clear to me how you would enforce a permit system internationally,” he says. “There are no institutions right now that have that power.”

To give some historical context: In an effort to combat “acid rain,” the Clean Air Act Amendments of 1990 included a cap-and-trade program for sulfur dioxide (SO2) and nitrogen oxide (NOx). The emission caps on SO2 and NOx originally applied to only 110 sites, and later were applied to a total of 445 sites. Many observers conclude that the program was a success, as SO2 and NOx emissions did indeed go down as their regulatory caps shrank over time, and the emitters in question did not all go bankrupt because of the regulations. Proponents of Waxman-Markey point to this episode as proof that cap-and-trade will work to mitigate manmade climate change.

However, as Crocker and Dales allude to in the block quotation above, the two situations are not totally analogous. For one thing, there are thousands of significant emitters of greenhouse gases in the United States that would need to fall under the umbrella of a successful cap-and-trade program. This stands in contrast to the comparatively few sites that the Clean Air Act regulated to combat acid rain.

But the most important difference is that acid rain was a (relatively) localized problem. In contrast, anthropogenic climate change–to the extent that it truly poses a significant threat to mankind–is a global problem. If, say, the citizens of California successfully limit the emissions of SO2 and NOx in the Golden State, this goes a long way toward improving the quality of the air they breathe and reducing their exposure to acid rain.

In stark contrast, California-specific caps on greenhouse gas emissions (such as AB 32) does virtually nothing to arrest global warming. This is a fatal drawback to government efforts to mitigate greenhouse gas emissions, whether through cap-and-trade or even through an explicit tax. Unless there is coordinated and near-universal participation among all governments, the plans will be incredibly costly in terms of economic output, in exchange for very little benefit in terms of avoided climate damages.

The longer the climate debate drags on, the more skeptical many academics are becoming of Waxman-Markey. Is it time to scrap the bill entirely and look for solutions that do not rely on the political process?