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An Idea Whose Time is Past

14 August 2009

One of the most clever solutions ever posed to water and air pollution is the concept of capping the releases at a specified level, converting that “cap” to a marketable commodity in the form of pollution credits, and then trading those credits on the open market, whose alchemy can then seek the most efficient way of achieving the pollution levels represented by the cap.  Over time, assuming the authorities have the prerogative to do so, regulators can reduce the magnitude of the cap, after which all of the polluters must reallocate the credits and destroy enough of them to reach the new objective.  That, in a nutshell, is “cap and trade.”  Genius, right?  Pollution reduction in a market framework; and the standards are performance based, not prescriptions per se.  Freedom and innovation, it is thought, are preserved.

Of course, the devil is always in the details.  In the first place, one has to have an approximately closed system to make it work – in fact, the geography represented by the market has to be both politically closed and ecologically closed.  If it’s not politically closed, and neighboring sovereigns differ on critical matters like relative valuations, the optimal magnitude of the cap, etc., industries in the two sovereigns will be playing on a tilted pitch.  (This problem is the origin of interstate water compacts; a finite resource serving competing sovereignties.)  If the system is not ecologically closed, there’s no way to ensure that the cap will be achieved because external sources, which cannot be regulated by the system’s internal authorities, may add to the system’s load.

Beyond those two fundamentals are many other gremlins in the logistical realm; measurement standards, accounting standards, accountability structures, uncertainty, etc.

The Congress is considering using cap-and-trade to reduce emissions of so-called greenhouse gases (GHG) in the United States.  This proposal sounds clever, but it violates both aspects of the “closedness” requirement.  Here’s a good article from the Wall Street Journal in which the co-inventor of cap-and-trade, Professor Thomas Crocker, conveys his deep skepticism that cap-and-trade can deliver on what the Obama Administration and Rep. Henry Waxman (D-CA) promise.


2 Comments leave one →
  1. 14 August 2009 9:14 am


    You and I are together on this one. The matter is too complex and the market is open to too many possibilites (regulated or not). If Cap and Trade were a workable approach, it could be modified to be applied to any social evil, i.e. domestic abuse and illegal drugs and fast food.


  2. 14 August 2009 12:09 pm

    It appears to have been modestly successful in reducing SO2 emissions, but the domain within which it is likely to be successful is pretty limited, I think. We do the same thing in impaired watersheds with these things known as Total Maximum Daily Loads (TMDLs), but there’s a lot of opportunity for mischief because inherently imprecise quantities (e. g., diffuse sources of soluble phosphorus from heterogeneous landscapes) are accorded a very precise, monetary value. Shysters can have a field day under those circumstances; and policymakers know that, so we tend toward prescriptive remedies anyway. The result, I think, is that the market ends up being superfluous to the environmental remedy itself, which means the market is just a contrived playground on which naked emperors are able to lift others’ wallets with relative impunity.


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