Thursday, May 28, 2009

Cap and trade

The idea of a cap and trade emissions bill frightens me. The idea of a hard cap on emissions is bad to begin with, as though politicians could somehow pick the optimal amount of emissions to allow without imposing too great an economic cost. But what really concerns me is how these caps are going to be determined. The principle seems to be to cap companies at what their current emissions levels. Cyclical changes could presumably be smoothed out by applying the cap at an average of the firms' last three years, or perhaps the highest of the last three years (not that I think regulators would be so generous). So it might be possible to assign reasonable caps for an instant in time.

Then what? What if a firm opens a new plant? Who is going to decide how much emissions they will be permitted? What happens when a new company starts up? This sounds like an endless political struggle to me, with the biggest corporations using it to push out smaller players, and opportunities for bribery and fraud at every turn (see also this article in U.S. News). Normal industrial decisions will be dominated by emissions considerations -- not how to reduce emissions (which is fairly limited in scope), but how to negotiate for the right to produce more emissions. A whole new, giant bureaucracy will have to be set up to enforce the regulations. The initial bill is already 1000 pages long, and that's not considering the new volumes that will be written by the regulatory administration itself.

What, then, is to be done? Let's assume for a moment that man-made emissions are a serious climatological problem -- which I regard as far from proven. (Anytime someone says a debate is over, it is a sign that the debate is very much in doubt.) Why not just tax emissions? This would have the exact same effect of encouraging companies to reduce costs by using cleaner energy, but without setting an absolute limit. Companies would therefore be encouraged to undertake feasible emissions-reductions activities, while retaining the right to continue emissions at the current rate if there is no cost-effective way to reduce them. This would protect the American consumer from drastic increases in energy costs. Best of all, this system would not be open to political and bureaucratic maneuvering -- everyone would pay the same tax, so smaller and less politically connected companies would have the same opportunity as giant corporations.

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