Tuesday, November 21, 2006

Carbon Trading "Markets"

In this week's Economist, Charlemagne says the following about the EU's emissions trading scheme:

Yet at a time when policies on climate change are coming under scrutiny, the European Union's flagship programme, the emission-trading scheme, is in serious trouble. It was set up last year amid high hopes: it is the first international arrangement that uses markets to reduce soot and smoke. But unless reformed, it will go down as a good idea, badly executed.

The system works as follows. National governments decide how much carbon the five dirtiest heavy industries in their countries may spew forth (the industries are things like power generation, pulp and paper, and metal bashing). They then allocate “permits to pollute” to each company in that line of business. If a firm wants to go over its limit, it must buy “pollution permits” from cleaner firms or credits from developing countries that have set up special projects to lower emissions.

To me, there is a bit of a deception in the characterization of the scheme in the first paragraph above and the description in the second paragraph. In the first paragraph, it is stated that the arrangement "uses markets." But in the second, the detailed description makes clear that it is a government regulatory program. Based on the description, it is clear that the scheme bears little resemblance to the "free market." Now granted, the word used was "market," not "free market," so it is not as though the writer claimed this was a "free market" policy. But nevertheless, the statement that the arrangement "uses markets" seems to me an attempt to distract from the governmental nature of the plan. It's a regulatory program, plain and simple. Don't try to sugarcoat it by saying it "uses markets." Perhaps it does, but that doesn't mean it's not a regulatory program.

Of course, it might be said that it works in a way that is less interventionist than other regulatory programs, and thus the phrase "uses markets" is appropriate. But I'm not sure that it is less interventionist. I would judge regulation not by whether it incorporates elements of markets but by its simplicity and effectiveness. If the goal of a program is to reduce carbon emissions, the relevant questions are how and whether it does so. If a tax (or even a ban) does this better and more simply than a program with market elements, then I say go with what works.

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