There are two observations I’d like to make this morning about Paul Krugman’s column this morning in praise of a cap and trade system to reduce carbon emissions in the United States:
Action on climate, if it happens, will take the form of “cap and trade”: businesses won’t be told what to produce or how, but they will have to buy permits to cover their emissions of carbon dioxide and other greenhouse gases. So they’ll be able to increase their profits if they can burn less carbon — and there’s every reason to believe that they’ll be clever and creative about finding ways to do just that.
The first observation is that I believe I’ve discerned a pattern in Dr. Krugman’s policy prescriptions and also identified why I so routinely find them irritating. I think that Dr. Krugman consistently imagines the perfectly crafted and perfectly administered plan and contrasts that with the status quo (or, worse, a distorted version of the status quo) rather than considering the implications of the plan that’s likely to make it through the Congress and how it’s likely to be administered. That is, he’s creating a perfect economic model and using it to make inferences about the imperfect political world. I think that process is inherently flawed.
Dr. Krugman points to the experience with sulfur dioxide emissions:
The acid rain controversy of the 1980s was in many respects a dress rehearsal for today’s fight over climate change. Then as now, right-wing ideologues denied the science. Then as now, industry groups claimed that any attempt to limit emissions would inflict grievous economic harm.
But in 1990 the United States went ahead anyway with a cap-and-trade system for sulfur dioxide. And guess what. It worked, delivering a sharp reduction in pollution at lower-than-predicted cost.
It might work out like that. But, on the other hand, the system introduced to control sulfur dioxide emissions only fell on a very small sliver of the economy and not on the enormous swathe that the cap-and-trade system will affect. And that brings me to the second observation.
I wonder why people so frequently tend to ignore the effects of the fear of regulation in predicting the reaction to policies? It wasn’t just cap-and-trade that influenced the coal-fired power plant owners to change their behavior. It was the conviction that if that plan failed a more direct regulatory approach would be forthcoming.
I don’t think that will be the case with respect to carbon emissions. I think that the various different players will decide they have little to fear from direct regulation (the social and political implications are simply too extreme) and concentrate their efforts on influencing the system rather than reducing emissions. IMO that’s largely what happened in Europe.
The irony of this is that Dr. Krugman himself would undoubtedly prefer a carbon tax as would I, the reasons for which are described in an op-ed also appearing in the New York Times this morning. The argument made by people like Dr. Krugman who know better is that a carbon tax is politically impossible while cap-and-trade is, apparently, politically possible.
One of the reasons a carbon tax is politically impossible is that public intellectuals like Dr. Krugman persist in laying down political covering fire for a Congress that’s disinclined to do anything that’s effective for fear of the political consequences.
If the Congress is unwilling to do anything that might be effective, what does that tell you of the likely effects of the cap-and-trade system they might implement?