Saturday, August 10, 2013

A Simplistic Analysis of Pollution Economics

In today's New York Times, here, Dirk Forrister and Paul Bledsoe, observe China's new carbon emissions trading program and wonder why the US seems to have abandoned efforts to create a emission trading system for controlling carbon emissions. I wholeheartedly support their (no doubt vain) call on Congress to pass climate legislation of some sort; although, as long as we're pretending to live in a first-best world, I'd prefer carbon taxes over cap-and-trade. But that's a minor complaint relative to the two big problems with their op-ed: (1) their casual presumption that emissions trading is always superior to traditional regulation; and (2) their supposition that China's emissions trading system will be successful.

It's just an op-ed, after all - not the place for an extended analysis of the issues. But overly simplistic treatments of complicated regulatory issues and instruments don't do readers any favors. The authors might at least have acknowledged that emissions trading systems have a mixed record of success, and that both theory and evidence (including my own 1998 article with Peter Grossman, here) explain that economic instruments, including emissions trading, are not always preferable to traditional regulatory standards.

Meanwhile, there is little reason to presume that China's experiment with emissions trading will be successful, especially given the past history of unsuccessful deployment of economic instruments for pollution control in socialist economic systems. Under communism, Poland developed the world's most extensive system of environmental taxes, fees, and fines. But endemic soft budget constraints on state-owned enterprises, whose survival depended only on meeting planned production targets, completely undermined that system. (On the history of failed environmental protection efforts in communist Poland, see my book, Instituting Environmental Protection: From Red to Green in Poland (Macmillan 1998)). What reason is there to expect that China's efforts to impose market-based environmental controls on enterprises not subject to market-discipline will yield better results?

It's long past time for advocates of cap-and-trade to stop treating their preferred regulatory instrument as an environmental panacea. There are no universal first-best solutions to complex and highly contextualized pollution problems. Sometimes, cap-and-trade can be expected to work very well, e.g., where monitoring is inexpensive and regulated firms are subject to hard budget constraints. At least one of those requirements is not met in the case of Chinese emissions of carbon dioxide. And given the dysfunctions in the US Congress, stemming from gerrymandering following the 2010 census and abuse of the filibuster in the Senate, no basis exists to complain about the costs of EPA's greenhouse gas regulations compared to some ideal emissions trading program that cannot possibly be enacted.

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