Friday Follow-Up: Environmental Stuff, Cap and Trade Explanation

I’m amazed how this group can make even discussions of government regulatory policy interesting.  A few links and clarifiications.

Regulatory Philosophies — I promised I’d post a link to an article on the differences between the U.S. and European approaches to regulation.  Here it is: “Why We Sue,” and here’s an interesting comment from an interesting blog, The Economist’s Democracy In America blog, that attempts to explain U.S. politics to no doubt puzzled Europeans.  Also, please search our blog for previous posts I did related to an earlier discussion we did on tort reform (tag = “tort reform”)

Cap and Trade — I don’t think I was clear last night on something.  I said there were two types of regulations: command and control (e.g., ment one-size fits all solutions, like banning things or requiring a specific technological change), and some other thing I gave a vague name to.  Barry was right to correct me that the second type is called “market-based” regulation. 

But, I failed to mention that carbon cap-and-trade is as clear an example of market-based regs as you’ll ever find.  It is designed specifically to work with markets to let the private sector and consumers decide how best to solve the market failure (to price in the social cost of greenhouse gases), not against them. All cap-and-trade would do is have the government set a limit on CO2 emissions that slowly ratchets down the total amount allowed to be emitted over time.  Companies have to buy permits to emit any given amount and, since there are fewer permits every year, every company knows that it’s going to get nore expensive to buy their permits in the future — unless they retool to pollute less.  But, the genius is that the permits are freely tradeable,  This establishes a market price for emitting. 

Sounds coercive and command and controllish.  But heres the ingenious part.  Pedrmits are tradeable.  The firms that can reduce their emissions the cheapest do so first because they can then sell their unused permits.  It flips companies’ incentives: emitting GHG becomes costly; retooling to do so less makes money (Technically, it helps offset some of the costs of doing so.  All the firms that can retool at a cost lower than the money they’d make from the leftover permits would do so.  That’s the retool/don’t retool decision point, where costs = benefit.).  In the end, markets under a cap-and-trade system end up reducing greenhouse emissions in whichever way is most efficient and cheapest. 

Sounds Rube Goldberg?  Well, it worked for CFC emissions in the late 1980s.  It worked so well that, before global warming as hoax became a conservative article of faith, conservtatives supported carbon cap and trade as an alternative to more blunt methods of regulation.  FYI, this originally was a conservative idea, at one time endorsed by Bob Dole and John McCain.

Priop. 23 — I also came across this today:  So far, 97% of the money raised to support Proposition 23 comes from the oil industry, and 80% from three companies from out-of-state: 2 Texas oil companies and the notorious Koch industries.  For the full-throated case against prop. 23, go to

Terminology — Finally, Richard asked why they only talk about carbon, not methane, etc.  That’s my fault.  I was using “carbon” a lot, but but I think the term of art is greenhouse gases, or GHG.


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