The Market and Global Warming: Alternatives to Cap and Trade

This is one of my favorite articles I wrote for SwiftEconomics.com on global warming and some market-oriented solutions to it. Following this is an upcoming article on all the corporate welfare that exists in the global warming "industry."

There’s been a lot of discussion lately about a series of emails among climate scientists that were released after some hackers got into the computer networks of a top university. The emails, some of which you can see here, show that many of these global warming scientists had doubts, possibly manipulated data and attempted to censor skeptics. It’s certainly caused an uproar and is pushing public opinion against the cap and trade scheme that has made its way through Congress and is awaiting a vote in the Senate. But let’s ignore the emails and skepticism for now and simply assume global warming is man-made. Is a carbon trading system really the best we can come up with to deal with the problem?
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The carbon trading concept seems very reminiscent to the history buff in me. Back in the Middle Ages, the Catholic Church and some other unaffiliated snake oil salesmen, sold what were called indulgences. These indulgences offered penance for a variety of sins and could either commute or completely eliminate one’s arduous trip through Purgatory.

Today, we have a similar situation; we have an entire market of carbon credit traders (even now, when in the United States, it is not mandatory). Basically, you buy offsetting carbon credits (for someone, probably in a third world country, to plant trees or something like that) to make up for your “carbon footprint.” This allows one to pollute conscience free and Al Gore has notoriously used these to “offset” his enormous personal “carbon footprint.” Hmmm, perhaps we should consider this for other “sins.” As Michael Kinsley of Time magazine analogized:

“What’s needed is a market in child-abuse credits. Somewhere in the world there is a parent who is slugging his kid every night. For a price, he would refrain for a night, or even two. By paying that parent not to slug his kid twice, you gain the right to slug your kid just once.” (1)

Maybe that’s going just a wee bit too far; regardless, carbon credits will hereafter be referred to as carbon indulgences. And now, the Obama administration is trying to institutionalize these indulgences throughout the entire economy, via cap and trade.
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Cap and trade works like this: carbon dioxide emitting industries will be given certain arbitrary quotas, which they cannot exceed. If they are above their quota, they must buy offsetting carbon credits from firms that are below their quota.

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Cap and trade is undeniably a tax increase. Unless the carbon indulgences are set so high that no firm ever has to buy any (making the whole scheme pointless), firms will have to raise their costs to meet the expenses imposed by the new quotas. The Congressional Budget Office estimates that it will cost $175 per family, annually (2). The conservative Heritage Foundation estimates that the CBO has grossly underestimated this figure by not including the effect the bill could have on reducing the nation’s GDP, among other issues. According to their own estimates, by 2020, institutionalized carbon indulgences will reduce GDP by a $161 billion, translating to $1870 per household. (3)
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It’s also not, as John McCain called it during the election, “a market-based solution.” Yes, there is a market, but it’s a market the government created at its own whim. It would be similar to calling the lobbying industry a free market system for political favors. As economist Robert Murphy put it, “the number of permits is an arbitrary scarcity imposed by government fiat” (4), i.e: not a free market.

However, it should be noted that there is some validity to a carbon indulgences trading scheme. First a little background, though. As shocking as it may be to environmentalists, one of the best ways to protect the environment is property rights. People always take better care of their own property than someone else’s (think used cars) and no one has the right to pollute someone else’s property without due compensation. Furthermore, the tragedy of the commons comes into play with collectively owned resources. Essentially, if land is not privately owned (or properly regulated), there is no incentive for people to use the resources of that land judiciously. Biologist Richard Dawkins explained it well when describing Port Meadow in 1987:

“Ecologically speaking we do have the makings of a tragedy here…ragweed is poisonous plant and cattle won’t eat it. And it’s an indicator plant of overgrazing…for the past fifteen years [ragweeds have] been taking over this meadow as there has been an increasing overgrazing problem… which is of the city government’s own making. Fifteen years ago they asked each commoner how many animals he would like legal rights to graze on this common land. Naturally each of them, being human, submitted his own selfish estimate of the most he could possibly want. All those bids got accepted. So even if each farmer is only grazing what he’s legally entitled to, there’s a huge overgrazing problem.” (5)

When land is either privately owned or regulated properly (which, given the influence of various special interests, is rare), maintaining the land increases its value. There is a natural, economic incentive to be environmentally conscious. But with the lack of either private ownership or proper regulation, that incentive is removed. Thus, it should be no surprise that the worst environmental degradation has taken place in communist countries and countries that lack de jure property rights. Contrary to popular wisdom, Stalin was not a tree hugger and Mao did not spend his nights drenched in patuli oil, singing “Kumbaya” around a campfire while smoking some dank ganja he picked up in Amsterdam. A 1970 article for Time Magazineentitled “Communist Pollution,” concluded, “[The environment] is often worse in Communist countries, where technocrats toil to boost industrial production with little thought to environmental consequences.” (6) And Chinese expert, James Kynge, assessed China’s state-run capitalism, without de jure property rights, effect on the environment as follows:

“Streams and rivers are drying up all over the northern half of the country… Acid rain falls over 30% of its territory…The U.S. Environmental Protection Agency recently reported that a third of the nation’s lakes and nearly a quarter of its rivers are now so polluted with mercury that children and pregnant women are advised to limit or avoid eating fish caught there.” (7)

Unfortunately, pure, unfettered capitalism runs into an environmental stumbling block with the oceans and an environmental roadblock with the air. How could you possibly privatize the air? Regulation is almost a must, assuming the regulatory burden is worth the cost it would impose to protect the environment. So government regulation is almost certainly necessary regarding air pollution. Furthermore, indulgence trading is also supported by the successful use of a similar program for acid rain in the early 1990’s.
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However, air pollution and carbon dioxide emissions are not exactly the same thing. Set aside the fact that the European’s version of cap and trade basically failed: why are the only solutions being proposed government programs and tax increases? Carbon dioxide is harmless to people, the danger it poses is to hasten global warming. Compare a factory, bellowing out mercury or other toxic fumes, to a one bellowing out carbon dioxide. If it were the only factory emitting carbon dioxide, it would be irrelevant. It’s the grand total of carbon dioxide emissions, not individual ones which cause the problem. Given that distinction, as well as the large costs institutionalized indulgence trading would bring, why not look at some market alternatives that seem to have been mostly, if not completely, ignored. Five that come to mind:

1. Strictly enforce property rights. We’ve been getting away from this for years, but in obvious cases where a company causes significant harm to other people or property via pollution (be it air pollution or otherwise), they should be liable for those damages. In some ways, regulation can simply allow a company to violate other people’s property rights to whatever extent the regulation deems acceptable.

2. Deregulate nuclear power. Nuclear power certainly poses the risk of a catastrophic meltdown, but no one in the United States has ever died from it. We had one accident 30 some years ago at Three Mile Island, and although no one died, and we’ve had 30 plus years of technological improvements, we haven’t built a new plant since. On the other hand, we hear stories of coal miners dying every other week. Nuclear power is very clean burning (it boils water), produces almost no waste and the little it does can be fairly easily stored away. 80% of France’s electricity is nuclear; they are a net energy exporter, have the cheapest energy in Europe and very low CO2 emissions. (8)
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3. Reduce our military presence abroad. How much oil do we use funding two wars, one of which certainly did not need to be fought? In addition, how much unnecessary oil is used by having our military spread over the world with over 700 bases in 130 countries?

4. Eliminate subsidies to oil companies and corn-ethanol companies such as pork barrel champion of the world, Archer Daniels Midland. It’s obvious that we should eliminate the subsidies to oil companies; however, corn ethanol subsidies are even dumber. Corn ethanol requires an enormous amount of energy to produce and must be transported in trucks instead of pipes because it degrades. University of California Engineering Professor, Tad Patzek, wrote that corn ethanol requires 29% more fossil fuel energy than the ethanol contains. (9) Furthermore, by pushing resources into a faulty method of emission reduction, the government discourages capital from finding its way to an effective method, such as…

5. Legalize hemp. The government wouldn’t even have to legalize marijuana (although they should do that, too). Hemp ethanol, unlike corn ethanol, does significantly lower emissions. Hemp can produce a whole host of other products as well. Yet, hemp is illegal to grow in the United States, despite the fact we have a fertile climate for it. (10)

Furthermore, there are many cheaper methods that could be done with limited government involvement, if any at all. Environmental economist, Bjorn Lomborg discusses global warming in an almost unique way; namely, a purely rational way. He discusses proposed solutions in terms of costs and benefits. We have to remember that not only will cap-and-trade cost the industrialized world a lot, it will make development in the third world much more difficult, if not impossible.
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Lomborg invited a group of eight top thinkers, including four Nobel Prize Winners (sorry, Al Gore and Barack Obama were not among them) to form the Copenhagen Consensus. They looked at 10 major problems in the world from malnutrition to government corruption to global warming. Their goal was to determine which areas would investment yield the best returns for humanity. They voted micro-nutrient supplements for children first and lowering trade barriers second. The first solution to global warming comes in at 14th; and it’s research into new technologies, not cap and trade. (11)

Indeed, technology seems to offer much more cost-effective solutions. We could go with nuclear power or hemp fuels like I mentioned above, or other technologies that have, for the most part, been ignored. Steven Levitt and Stephen Dubner, authors of Superfreakonomics, propose geoengineering to combat global warming. Levitt describes one possibility, we could implement today if we wanted to, as follows:

“[One possible solution is] a cloud whitening scheme. Dark things absorb a lot of heat and the oceans are very, very dark. There are not very many clouds over the ocean because there are not the nuclei that seed the clouds which is usually from dust. There’s not much dust over the ocean. Salt can also seed clouds. And so what you need to do is figure out how to spray some salt water up into the air and that can serve to make the clouds. The belief is, from the models, that if you can just have 10,000 little, solar powered dingies that just puttered around in the ocean and flipped up some salt water into the air, that that would generate enough cloud cover over the oceans that would reflect enough of the sunlight that through that channel you could also lower the temperature of the Earth to offset any effects of warming.” (12)

These projects could be government funded for sure, but they’re cheap and would require very little interference in the economy. They would also be more effective. The Kyoto Protocol for example, was expected to make very little, if any difference, even when it was enacted. By 2050, it’s supposed to reduce the mean temperature by perhaps 0.2 degrees Celsius, or maybe as little as 0.07 degrees. (13) Either way, it’s an irrelevant reduction. It would be just about as useful to simply burn money (as long as burnt money is carbon neutral of course).
Furthermore, we have to ask whether dealing with the consequences of global warming would be a more effective than trying to prevent it. Despite the hysteria, many of the consequences could very well be manageable. For example, the International Panel on Climate Change estimates that sea levels will rise between 0.6 and 2 feet over the next century. (14) That sounds quite manageable.
Yet the solutions being discussed, such as indulgence trading, are all big government solutions. Despite the existence of alternatives, our wise leaders can think of little other than massive tax hikes and intrusive schemes. This makes me very skeptical of our noble politician’s goals. Could politicians be looking for a power grab? Or perhaps well-connected firms are looking to profit off the new system? Oh, there I go again, questioning our wise, benevolent leaders. I’m trying to break the habit… honest.
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Next: The Market For Global Warming: Green is the Color of Money
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(1) Michael Kinsley, “Credit for Bad Behavior,” Time Magazine, June 21, 2007, http://www.time.com/time/magazine/article/0,9171,1635840,00.html
(2) “Cap-And-Trade Costs,” Congressional Budget Office, June 19, 2009 http://www.cbo.gov/ftpdocs/103xx/doc10327/06-19-CapAndTradeCosts.pdf
(3) David Kreutzer, Karen Campbell and Nicolas Loris, “CBO Grossly Underestimates Cost of Cap and Trade,” The Heritage Foundation, June 24, 2009, http://www.heritage.org/Research/energyandenvironment/wm2503.cfm
(4) Robert Murphy, “Cap & Trade Is Not A Market Solution,” Institute of Energy Research, June 4, 2008, http://www.instituteforenergyresearch.org/2008/06/04/cap-trade-is-not-a-market-solution/
(5) Richard Dawkins, “Nice Guys Finish First,” copyright 1987, http://video.google.com/videoplay?docid=-3494530275568693212
(6) Author unnamed, “Environment: Communist Pollution,” Time Magazine, November 30, 1970, http://www.time.com/time/magazine/article/0,9171,904549,00.html
(7) James Kynge, China Shakes the World, pg 151-152, First Mariner books, Copyright 2007
(8) See “Nuclear Power Now,” NuclearPowerNow.com, http://www.nuclearnow.org/ and “Nuclear Power in France,” Wikipedia.org, http://en.wikipedia.org/wiki/Nuclear_power_in_France
(9) Robert Bryce, “Corn Dog,” Slate Magazine, July 19, 2005, http://www.slate.com/id/2122961/
(10) See “Pollution: Petrol vs Hemp,” Hempcar.com, http://www.hempcar.org/petvshemp.shtml
(11) See Copenhagen Consensus Center, http://www.copenhagenconsensus.com/CCC%20Home%20Page.aspxand “Copenhagen Consensus,” Wikipedia.org, http://en.wikipedia.org/wiki/Copenhagen_Consensus
(12) Steven Levitt, “Superfreakonomics with Steven Levitt and Stephen Dubner,” Commonwealth Club, Fora Tv, http://fora.tv/2009/11/04/SuperFreakonomics_with_Steven_Levitt_and_Stephen_Dubner
(13) For a 0.2 degree reduction from a proponent of Kyoto, see Niklas Hohne, “Impact of Kyoto Protocol on Stabilization of Carbon Dioxide Concentrations.” ECOFYS energy and environment, http://www.stabilisation2005.com/posters/Hohne_Niklas.pdf, from a skeptic claiming 0.07 degrees see “Kyoto Count Up,” Junkscience.com, http://www.junkscience.com/MSU_Temps/Kyoto_Count_Up.htm
(14) Parry, Martin L., Canziani, Osvaldo F., Palutikof, Jean P., van der Linden, Paul J., and Hanson, Clair E. (eds.), IPCC. 2007 – Climate Change 2007; Impacts, Adaption and Vulnerability, Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, Cambridge University Press, Cambridge, United Kingdom, Pg. 1000, http://www.ipcc-wg2.org/index.html