Cap and Trade to Support the Commons
Awhile back I wrote a column for the Science Creative Quarterly titled The Tragedy of the Commons Explained with Smurfs. It was easily the most buzzed-up thing I’ve every written, earning lots of praise from scientists who understood the reality, and lots of scorn from economists, who are easily offended by reality and prefer to believe in invisible hands. The Tragedy of the Commons is the phenomenon where people will exploit a natural resource until it is completely gone and no one may use it any longer, be it oil, fish, clean water, or air. We can see it all around us, and occasionally we institute measures to conserve those resources. That’s what Cap and Trade is all about, making companies factor in the environmental costs selling their product places on all of us through increasing global temperatures.
Sarah Palin’s Washington Post column The ‘Cap And Tax’ Dead End argues that taxing the oil industry for carbon emissions will bring economic disaster. Instead, we should emulate her state:
In Alaska, we are progressing on the largest private-sector energy project in history. Our 3,000-mile natural gas pipeline will transport hundreds of trillions of cubic feet of our clean natural gas to hungry markets across America. We can safely drill for U.S. oil offshore and in a tiny, 2,000-acre corner of the Arctic National Wildlife Refuge if ever given the go-ahead by Washington bureaucrats.
The hypocrisy of Palin’s column is that her own state of Alaska profits from a system based on the same principle as cap and trade. Alaskan residents each receive $2,000 a year in return for letting the oil industry have its way with their natural resources. Governor Palin even instituted a windfall tax on oil companies, which the state government turned into an additional $1,200 check to each Alaskan to help them cope with gas prices. What does it say about Palin’s character that she is able to criticize Americans for demanding compensation for the environmental consequences brought on by corporations, while demanding the exact same compensation for her own constituents?
 Aral Sea 1989 – 2003 Photo courtesy NASA |
Whenever I hear someone complain: Why should I have to pay for someone else’s [Fill in the Blank]??? be it Health Care, Welfare, Public Education, or what-have-you, I immediately wonder why I should have to pay for everyone else’s simple carbohydrates and red-meat addictions through farming subsidies, 12-lane highways so people can take their cars to work rather than take a train, or economic stimulus to preserve the wealth of bankers so the rest of us won’t suffer from their irresponsibility. All of these government expenditures are subsidies, paying for conveniences. We are all paying for one another’s modern lifestyle; we are all on welfare.
But who pays for the mercury saturation rendering fish poisonous from Coal Power plants? Who pays for the expanding dead zone in the Gulf of Mexico, caused by fertilizer runoff from American farms flowing into it from the Mississippi River? Who pays for the collapsing fish stocks brought on by over-fishing, which impact all other life in the food chain, including ourselves? Who pays for the uninhabitable desert wasteland produced when farmers drain a sea to irrigate their crops?
 Aral Sea Today Credit: European Space Agency (ESA) |
Anthropogenic Climate Change contributes to all of these deleterious phenomenons, costing people all over the world billions to adapt to the new environment. In addition to exorbitant prices at the pump, the oil companies are also charging us the environmental costs of their industry. They then turn around and spend this savings on distorting science through advertising campaigns and lobbying politicians to write columns and pass legislation defending their industry. There is no injustice in having them put that money towards helping the world clean up the mess our collective oil addiction has made of it. Injustice would be allowing them to push that cost off on us.
FTR, economists are well aware of game theory and have their own related idea, called market failure, to describe the situation where a rational economic behavior results in unaccounted damage to others. In such a case, economic theory prescribes government intervention to internalize the external cost into the market concerned. Cap and trade is a good example. Carbon taxes would be another one. In theory, carbon offsets are also an efficient alternative.
All of these, though, have serious practical problems, with the worst being carbon offsets (how do I know trees are really being planted in Burma?) and the best probably being a carbon tax with revenues earmarked for mitigation efforts (that don’t exist today) Cap and trade is a second-best solution, but the only one that’s halfway workable with current technology.
The problem (or at least something to keep in mind going forward) is that by definition, internalizing an externalized cost means raising prices. And when it comes to goods with relatively inelastic demand (like energy) it’s non-progressive (in the tax sense of the word) at best, regressive at worst. Poorer people have the least efficient energy-using devices and will be paying as much or more than others for mitigation.
I’m in favor of regulations that fix market failures, but they’re politically fraught and not automatically equitable…
Comment by Stacy — July 15, 2009 @ 9:50 am
Thanks for providing me with the concept of “market failure,” it would have been very useful when I was getting dozens of e-mails from economists telling me the Tragedy of the Commons was nonsense; unfortunately, the same people who were e-mailing me probably would have responded that “market failure” was Keynesian nonsense. I am regularly driven crazy by the fact that there is a deluge of empirical economic data, but economists (the ones on TV anyway) never seem to use it.
Newt Gingrich convinced me of a Cap and Trade market as the best solution as opposed to taxes; however, you are absolutely correct that the problem with carbon credits is their enforcability and difficulty in quantification. I think there are some organizations successfully establishing markets with integrity, but there’s a swath of shenanigans also taking place.
One quibble with your comment: I don’t see energy consumption as wholly inelastic because the recession prompted people to cut back on their energy consumption. At the same time, I don’t see company’s being able to pass C&T costs onto consumers, since they are currently charging the maximum price the market will allow for their product. ExxonMobile didn’t pass their tax-cuts along to consumers, they made record profits instead.
Comment by ideonexus — July 16, 2009 @ 7:46 pm
Something to consider. Did the economy really prompt people to cut back on energy consumption, or is it just a temporary by product? You know, I certainly use a lot less gas now, since I don’t have to drive to work everyday. Though I now use more electricity during the day to keep the house cool. The thermostat is now set at 80, where it would have been set at 85 if I wasn’t home. Companies are certainly using less electricity, though that can easily be attributed to them having fewer workers, and less computers turned on sucking electricity out of the grid. Seeing as the average desktop nowadays has a 300W or larger power supply, that’s a lot of energy per employee.
My point is, people have not necessarily voluntarily changed their habits. When the unemployment rate goes down, people will be driving to work again, and companies will be using more energy again due to larger amounts of employees.
Comment by chriggy — July 16, 2009 @ 8:22 pm