"Capitalism Against Climate Change":

In today's W$J, economist R. Glenn Hubbard, former Chairman of President Bush's Council of Economic Advisors, makes the case for a carbon emission trading scheme along the lines proposed by the National Commission on Energy Policy.

We do not know how much long-term climate change will result from our ever-expanding economic activity — primarily from the burning of fossil fuels — or how much climate change is "safe." To understand this from an economic perspective, we need a flexible, measured approach, one that continues to research the consequences of climate change and how we can avoid damage in the future. This approach would establish a policy architecture that sends appropriate signals to businesses and consumers in order to spur climate-saving innovations, while engaging both rich and poor nations in similar, cost-effective activities to reduce the threat of climate change throughout the world. . . .

. . . near-term actions should not impose greater risks than the problem they seek to address. MIT economist Richard Schmalensee, a member of the NCEP, once put forward a helpful analogy: If you smell smoke at home, it would be silly to do nothing until you actually see flames, but you also should not hose down the house after one whiff of what might be smoke.

For the global warming debate, uncertainty justifies neither inaction nor over-reaction. As the smoke analogy suggests, the United States should pursue a moderate policy that can be justified as we learn more about the threat of climate change and the costs of alternative responses.

The NCEP proposal meets this test of taking serious action while not imposing economic risks greater than the threat of climate change itself. It comprehensively addresses all U.S. emission of CO2 and other climate change-related gases. It does this using one system: tradable permits. In such a system, the use of coal, oil and natural gas will require permits in proportion to their CO2 emissions, typically sold along with the fuel — so individuals need not deal with the permit market.

Those businesses and individuals who can reduce their fuel use and emissions most inexpensively will do so. Those who cannot will end up purchasing more permits and supporting those who can. In this way, the program flexibly encourages the least-expensive efforts to reduce emissions without constraining any individual or business. And revenue from the auction of a portion of these permits could be used to reduce the corporate income tax, blunting adverse economic consequences.

This approach, Hubbard argues, will help control emissions "without betting the bank." Can the same be said for any legislation likely to pass this (or any) Congress?

Related Posts (on one page):

  1. "Capitalism Against Climate Change":
  2. Choosing among Climate Policy Instruments:
Houston Lawyer:
It seems to me that a carbon tax would have the same effect. I really like the "revenue from the auction of a portion of these permits could be used to reduce the corporate income tax" line. I'll have some of what he's smoking.
5.31.2007 11:15am
Daniel Chapman (mail):
Isn't this a carbon tax? What's the difference? (Not that there's anything wrong with a carbon tax) Instead of taxing use, the government sells permits. Is this just an effort to avoid the "T" word?
5.31.2007 11:22am
TJIT (mail):
One look at the biofuels situation lends pretty good support to the idea that a carbon trading will be gamed to generate lots of revenue and not much reduction in carbon emissions.

Early experiences in the European carbon trading market show the same general results.
5.31.2007 12:27pm
Anonymous Skeptic (mail):
Mr. Chapman,

There are a few differences between a carbon tax and a cap-and-trade system. First off, and most importantly, a tax sets the price of a good while the market sets the quantity consumed---thus the effectiveness of the program is dependent on the effectiveness of the government's estimate of carbon's externalities. In contrast, the government sets the quantity of a cap-and-trade system and lets the market set the price---thus the effectiveness of the program is dependent on the effectiveness of the government's estimate as to how much carbon dioxide is a good thing (probably a more knowable quantity by using the current quantity of carbon as a baseline).

Second, a cap-and-trade system creates a new market whereas a carbon tax relies on current markets. Thus the cap-and-trade system imposes additional costs (setting up the market, fees for its administration, and costs of negotiating trades) but comes with other benefits (e.g., environmentalists can raise the price of carbon by buying up permits if they so choose).

Third, a cap-and-trade system allows for the differential allocation of initial permits. What does this mean? Well, the allocation of permits or a carbon tax are essentially equivalent if *all* the permits are allocated through a Dutch auction or some similar device. However, it is also possible to allocate permits based on some other criterion, such as current levels of carbon production, so as to lessen the cost on the economy (note that this would effectively favor incumbents over start-ups). Note that this third difference is also the reason why most large companies favor a cap-and-trade system over a carbon tax---the public would scream bloody murder if the government gave corporations an equivalent subsidy via a break on the carbon tax, whereas an allocation of permits to polluters (for some reason) seems downright reasonable.
5.31.2007 12:38pm
Tim Dowling (mail):
"Can the same be said for any legislation likely to pass this (or any) Congress?"

Legislation "likely" to pass this Congress might well be a null set. There are several bills kicking around, but I haven't heard anyone pronounce one as likely to pass in the 110th.

But as for future Congresses, why do you think it's so unthinkable that a bill incorporating this approach might be enacted?
5.31.2007 12:49pm
Jonathan H. Adler (mail) (www):
Tim --

Given my current cynical view of things, and the recent experience of U.S. energy policy and the efforts to create a trading market in Europe, I am inclined to think that any emission credit legislation adopted by a future Congress is likely to be seriously compromised by rent-seeking, such that it either fails to control emissions or will "bet the bank" in that it will impose excessive costs.

5.31.2007 1:25pm
Sigivald (mail):
Anonymous: That writeup doesn't mention a cap, just "permits", is the thing. As described it doesn't seem any different than a tax, since there is no cap described, to make the "quantity vs. cost" point hold.

Now, maybe there's a ca

(I'm not a WSJ subscriber, so I can actually see less on their website than is pasted here!

Also, the report as such on the NCEP website is a .doc file, which is double reason not to download it to see if they mentioned a cap somewhere that goes otherwise unmentioned in this context.

The sheer incompetence of that is not reassuring.)
5.31.2007 1:41pm
J. F. Thomas (mail):
Weren't you ridiculing Europe's cap and trade efforts just the other day?
5.31.2007 2:43pm
Anon. Skeptic &Mr. Chapman,

This is a clever euphemism for a carbon tax...just ask Greg Mankiw Hubbard Endorses a Carbon Taxe
5.31.2007 2:45pm
a bean:
Capping doesn't work: The european experience shows us that regulatory capture is likely.

Trade doesn't work: carbon offsets are mostly bogus and a mistake during the capping phase can easily make the price of carbon ridiculous.

Lets be serious about this: a carbon tax is the most honest approach. But the revenues should be offset by other tax cuts. People need to be taxed for their cars; power companies need to be able to pass the tax on to their subscribers.
5.31.2007 3:03pm
Andrew Okun:
As can be said of most opinion pieces printed in the Wall Street Journal, it has very little to do with the subject it is about and everything to do with the political and ideological line-up behind the subject. The first paragraph is

The case for action to combat global climate change has grown increasingly compelling in recent years. Sadly the same can not be said for specific proposals to address the problem. Ideas grounded in sound science and good economics have been lacking.

He then goes on to describe a system which seems to combine features of a cap-and-trade system and a carbon tax, which they are calling cap-and-trade. Those are ideas grounded in sound science and good economics. They have been banging around for years, along with a host of other proposals, like investing in certain technologies, which the NCEP now recommends but which have been banging around for years.

In fact, these were all ideas being trumpeted by environmentalists last year and the year before. They are mostly pretty reasonable, mostly blend ok with a vibrant capitalist economy. If you think there is a climate problem, these are reasonable ideas, though one may be better or worse than another. In any case, specific proposals grounded in sound science and good economics, far from lacking, have abounded.

Last year, though, these were the screechings of "watermelon socialists" who wanted to destroy the Western world and have us back living in caves. This year, it is sound science and good economics. How to paper over the appearance that the Bush Administration is just doing what Al Gore is forcing them to? Simply claim it is completely different now. Those ideas last year were useless and very damaging to the economy. This year's ideas, created by sound, thoughtful people, are thoughtful and carefully constructed to make America stronger. Now with Boost(tm)!!

Hubbard's piece is wallpaper being used to cheer up an otherwise gloomy room that Republicans find they are now going to have to live in. And perhaps it's also a way of trying to keep some life in the "environmentalists as insane cultists" idea that Republicans have found so useful politically, even as what those same environmentalists have been saying for a while is coming to seem compelling.
5.31.2007 3:10pm
Cynicus Prime (mail) (www):
I thought the years-old Clean Air Act did this already, or was it not for carbon emissions but other pollutants?
5.31.2007 5:17pm
mishu (mail):
That was for other pollutants like sulfur, Cynicus.

Cap and trade is all well and good until someone successfully lobbies the government to increase the cap. I would bet that someone probably shorted the emissions market beforehand.
5.31.2007 5:38pm
peter jackson (mail) (www):
First off, no one smells smoke. We've just noticed the house is a degree warmer than it was this morning and some of us have constructed some spreadsheets that extrapolate a conclusion that we should be smelling smoke.

Now, presuming one day that we do actually catch a whiff of smoke, cap and trade would be a superior simply because it doesn't enrich the government. Should we ever wind up with a carbon tax, you can bet that we'll still be paying it even if the '70s guys turned out to be right and we find ourselves plunging into a new ice age. A cap and trade system would be far more ditchable in the event that future data indicates carbon constraints were useless.

5.31.2007 6:00pm
megapotamus (mail):
Global Warming is just a ruse to deflect us from the TRUE problem.... SYSTEM WARMING. The system in question is of course the solar system. What scheme of this or any other government can do to control the cyclic fluctuations of solar output is iffy, to say the least. But I always was for a carbon or BTU tax, presuming the unpresumable: that this would replace, not augment, existing taxes. (A good reason to vote for Clinton in '92, or so it seemed.) The foundation is simple and Smithian... the fossil fuel based tax has the braodest base and can therefore be set at the lowest rate. Pretty theoretical stuff but sounder by far than the rantings of the degraded lunatic Al Gore and his hoard of reactionary chicken littles. What's really funny though is that, after preventing us for half a century from embracing the atomic future we should have enjoyed in the '50s, finally the baseless hysterias of the Enviro-Left are going to usher it in, as nukes are the only technology that can power civilization without those nasty, Rightwing CO2 emissions. What a larf!
5.31.2007 6:07pm
M. Simon (mail) (www):
6.1.2007 10:30am
Scott Teresi (www):
I wouldn't count this against the carbon tax, but for what it's worth, Exxon appears to prefer it over cap-and-trade:

"Most economists who have looked at this issue would come away saying a carbon tax makes the most sense. It's the most efficient policy, the most sector-neutral. It doesn't favor or disfavor one part of the economy over another." (Ken Cohen, the Vice President of Public Affairs for ExxonMobil)
6.4.2007 3:35pm