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How did cap and trade, hatched as an academic theory in obscure economic journals half a century ago, become the policy of choice in the debate over how to slow the heating of the planet? And how did it come to eclipse the idea of simply slapping a tax on energy consumption that befouls the public square or leaves the nation hostage to foreign oil producers?
The answer is not to be found in the study of economics or environmental science, but in the realm where most policy debates are ultimately settled: politics.
Cap and trade evolved from a debate that began in the early 1960s when Ronald H. Coase, of the University of Chicago Law School, wrote an influential paper, "The Problem of Social Cost,” that examined when government should intervene in cases where a private entity causes public harm.
In 1971, W. David Montgomery fleshed out the idea of emissions trading and has spent much of the last three decades trying to figure out how the marketplace can deal with environmental problems that are caused by relatively few actors but have consequences felt globally.
He supported the acid rain trading program, but said it was based on “unique historical and economic circumstances” that did not apply to the much more difficult problem of carbon dioxide emissions.
Mr. Montgomery, now a vice president at Charles River Associates International, a consulting firm, said Mr. Waxman’s proposal would ultimately act like a tax on carbon-producing industries, disguised by a complex cap-and-trade system.
“It is a steel fist of regulation covered by a velvet glove of emission trading,” Mr. Montgomery said. “Why not just impose a carbon tax?”
But despite its success in the relatively contained problem of acid rain in the United States, cap and trade has proved less useful in other environmental problems and has gotten off to a troubled start in Europe.
Even some early devotees of a system of tradable emissions permits believe that it will not work for carbon dioxide, by definition a planetary problem. A straightforward tax on each ton of carbon dioxide emitted by any source, they say, would provide more a more predictable price and a simpler system to police.
“If a philosopher king could design a system, he or should might pick a taxation system,” said Robert Hahn, a White House economist under Mr. Bush who backed the acid rain program but is skeptical that it will work for the much more pervasive problem of carbon dioxide.
Former Vice President Al Gore has (hypocritically) long supported a carbon tax. “Tax what you burn, not what you earn,” he says, as a way of both attacking global warming and remedying some of the inequities in the income tax.
Not long ago, many of today’s supporters dismissed the idea of tradable emissions permits as an industry-inspired Republican scheme to avoid the real costs of cutting air pollution. The right answer, they said, was strict government regulation, state-of-the-art technology and a federal tax on every ton of harmful emissions.
Cap and trade, by contrast, is almost perfectly designed for the buying and selling of political support through the granting of valuable emissions permits to favor specific industries and even specific Congressional districts. That is precisely what is taking place now in the House Energy and Commerce Committee, which has used such concessions to patch together a Democratic majority to pass a far-reaching bill to regulate carbon emissions through a cap-and-trade plan.
"Estimating the Costs of Mitigating Greenhouse Gas Emissions"
Montgomery states it could be very expensive to try to meet near-term targets and timetables for emissions reductions, based on analyses of the economic impacts.
He cites alternatives that can achieve the same climate goals at much lower costs, including:
accumulating more scientific information about climate change;
investing in research and development on energy efficient carbon-free energy supply technologies;
avoiding placement of resources into very expensive near-term emission reductions, but instead putting them as a hedge into finding the kind of technologies that will make it possible to reduce emissions much more cheaply in the future;
and planning for only very modest and very low-cost emission reductions in the near term, until these new energy sources become available.
His contention is that such alternatives represent the best direction indicated by the analysis of the economic costs of emission reductions.