Saturday, February 20, 2010

A short thingy on the merits of cap and trade (repost)

Catnlion said:
Climate change, don't you like how they don't call it global warming anymore, people want to use this to put in Cap and Trade, aka Cap and Tax. On the face C&T makes no sense. The point is to lower CO2. So what are we going to do, say you have to quit producing CO2, unless you pay us? Since taxes are a business expense that are passed along to the final customer the polluter is just going to pay the tax, pass the cost along, and keep putting out CO2. How does this cut the amount of CO2?


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You seem to be missing some essential features of cap and trade, so I'll try to explain it as well as I can. To illustrate, we'll go with a simplified form of cap and trade. The United States emits a total of 5.7 gigatons of emissions annually. To begin reducing emissions, say we implement a cap at 5.5 gigatons. Then, the government sells 5.5 billion permits, each one granting the holder the right to emit a ton of CO2. If a coal plant can't buy a permit, then it can't emit any CO2.

Within this system, individual actors can continue doing exactly what they've been doing, so long as they buy a permit from somebody, either the government or some private entity that has already purchased one.

But because there are only a limited number of permits, somebody has to reduce their emissions and sell their permits to those who wish to continue emitting. To reiterate: you have to have a permit to emit a ton of CO2, and not enough permits are available to emit as much as we did the prior year.

The companies which choose to sell permits are the ones who can most cost-effectively reduce their emissions, while those which choose to buy the permits are the ones which would find it very expensive to reduce their emissions.

Cap and trade makes great sense, because it doesn't matter at all which molecule of carbon was emitted where or to what end. All that matters is the aggregate amount. If we have to choose between two plans for stopping a gigaton of CO2 from entering the atmosphere, one which costs a trillion dollars, and one which costs six billion dollars, all else being equal we should go with the latter. Cap and trade sets a goal, and lets the market figure out the most cost-effective approaches to meeting the target.

Now, the cap and trade bill before the Senate is more complex, because it also includes unrelated research funding, but more because it has to deal with real-world issues like verifying emission levels and all the other things needed to keep people from gaming the system. But the overall effect is the same: give the market the ability to internalize the costs of greenhouse emissions.

[Originally from the comments section of David Brin's blog at Salon]

5 comments:

Bryce said...

Carbon is a negative externality, meaning it's a good that's total cost is hidden to the supplier. This creates a market place that overproduces the good, what the cap-and-trade system is meant to do is correct this externality by bringing the cost of the good to a closer to the real level so that the market no longer over-produces it do to being able to shrug their costs off onto the rest of society.

It's effectively intended to create a shortage of the good. What's happening now is that the cost of carbon emissions isn't equal to the price, so when you say "Since taxes are a business expense that are passed along to the final customer the polluter is just going to pay the tax, pass the cost along, and keep putting out CO2." well, ultimately, yeah. The free market only works when you're producing something for full cost.

Catnlion has a very poor understanding of economics if they don't understand simple supply and demand.

Bryce said...

Ugh, I should have written that post better.

Bryce said...

I completely understand what you're saying, Other Bryce. You did fine.

People who claim to be free market devotees often can't grasp the idea that polluters shouldn't be able to pocket the profits of pollution while shoving the damages off onto someone else.

Bryce said...

Namespace collisions are problematic. From now on, could everyone please refer to me as UID-1932479734957898678612? I mean, unless it's taken already.

Bryce said...

There are a lot of things free market devotees don't understand. When you devote yourself entirely to something you're already wrong anyway.

And I'm betting it is already taken, it is a pretty big internet afterall.