Saturday, September 5, 2009

Crap and Paid

Economists made their most important contribution to air pollution
policy about 30 years ago when they introduced the idea of "cap and
trade". Initially environmentalists opposed this idea in large part
because they preferred a strict application of a “standards and
enforcement” regulatory regime. Unfortunately standards and
enforcement works well in theory less so in practice -- largely because
of the politics involved in setting standards.

For the most part environmentalists have come to accept the utility of
using human greed as an instrument of policy. So cap and trade has
become acceptable. (Ironically the economists that study these things
now think the simple tax on pollution above a certain threshold
would be more effective and efficient.) Pollution trading systems work best
-- actually only work -- when there are offsets. So for example if I
want to sell you 2000 tons of carbon pollution rights I should have to
reduce my output by that amount but you should only be allowed say
1500 tons. Unfortunately offsets have often been ignored.

As of this writing it's looking as though any cap and trade system
approved by Congress will be full of giveaways to keep influential
polluters happy. Those that lament a bastardized cap and trade policy should
remember the Family Assistance Program (FAP) and what we almost had
when the Nixon administration attempted welfare reform. Basically FAP
was a negative income tax. As such it would've eliminated the welfare
bureaucracy and simply allowing transfers of income to those in need.
FAP had merit for a number of reasons but it died largely because
Republicans and Democrats couldn't agree on the initial payment
amounts. Had Democrats agreed to what was clearly draconian
supplementary income levels the program would've been put in place and
adjustments could have been made incrementally later. Had that
happened the poor would be much better off today.

Let's hope we don't make the same mistake with cap and trade. Anything
that changes the regulatory regime and puts in place a system that
will alternately reduce admissions should be supported. Once it is in
place we can tinker with the offsets and trading limitations another

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