Cap and Trade: better than the worst

Below are some thoughts on the cap-and-trade system making its way through Congress. This is in response to a discussion by some libertarian Democrats, in which the bill was heralded as a "free market" reform. I'm assuming the audience is familiar with the basic economics of the situation.

Overall, I'm tolerant of this legislation because I believe that we need to get serious about reducing our CO2 emissions. However, I don't think that it illustrates any revolutionary change in our economy or politics. In fact it is a good illustration of "more of the same", where special interest groups use their political power to rob the rest of us, and politicians respond to every problem (even problems they created) by expanding their own power, as discussed after the Freedom Democrats post. Those two tendencies have made substantial contributions to our environmental problems, and ultimately pose a greater threat to humanity than even rising sea levels, megastorms, and the spread of tropical disease.

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I agree that Cap and Trade, being a broad and direct approach to the problem of CO2 accumulation, is better than micromanagement of indirect contributors to the problem (e.g. fuel efficiency standards). However, I don't think that this improvement is due to libertarian influence in the Democratic Party, and think that the "trade" part of the policy should NOT be lauded as a "free market solution".

First, this lighter form of regulation is due to broad changes in our political culture that have developed over the past 30 years -- and probably got their main push from Regan's political success (and possibly from an academic consensus and the development of new tools for enforcing broad regulations).

Second, there is nothing "free" about the invention of a market that has no reason to exist. As far as I can tell, Economists generally prefer a direct emissions tax over a cap and trade system. We only have the CnT system due to general economic ignorance among the populace (such that Republicans can score points by calling it "cap and tax", simply pointing out that it would increase costs in the same general manner that a tax would). CnT also seems to get some support from the fact that it is easily corruptible, allowing massive handouts to powerful special interest groups. The main effect of the market in emission credit will be to cause uncertainty in the price of carbon emissions. A market doesn't do anything productive if the government has already placed a hard limit on the supply of a good.

Which gets to another big "anti-market" aspect of the Cap and Trade system relative to a carbon tax: there is no way for the public to make tradeoffs between different goods. We are not free to decide, in aggregate, that the ability to emit carbon dioxide is valuable or not. No matter how valuable these credits are, we will not be able to produce more carbon dioxide. Conversely, if a technological breakthru allows us to produce clean electricity for the same cost as coal electricity, then the price of the credits will plummet and we will produce the same amount of CO2 as before. The only change is that the rentseekers and speculators will extract less wealth from the rest of us.

A tax would behave much more like an ideal free market where the price of a good tends towards the cost of its production.