Cap and Trade: A disaster in waiting

I read a very interesting book a number of years ago about public policy. The book was Losing Ground: American Social Policy 1950 - 1980, by Charles Murray. Murray shows that public policy will almost always achieve exactly the opposite of what was intended. The war on poverty resulted in an explosion of people living in poverty, for instance. The problem, of course, is that we never learn from out mistakes. Government officials always believe that a new law will solve any problem before us and, unfortunately, the public is frequently demanding that the government do just that. No amount of evidence that the policy will fail will stop something like this once it gets a head of steam. And, we are toying with doing it again, this time with policies to address climate change.

One of the leading policies proposed to address climate change the emissions of greenhouse gases is a program called 'cap and trade.' This is the way it is suppose to work. The government issues certificates allowing businesses to emit a certain amount of greenhouse gases. If they emit more gases than they are allowed then they can do a number of things. First, pay a hefty fine and face regulation. From a business viewpoint, that would be bad. They can balance it by investing in something that takes greenhouse gases out of the atmosphere, such as planting a forest. That would feel better about that, but not great because the business would still have to spend a lot of money on something that doesn't bring in any profits. Or, they can buy certificates from businesses that did not emit all of their allotted greenhouse gases. That would be best. They can just purchase certificates from someone at a going rate and continue on their sweet way. In this way, in theory, those that emit greenhouse gases are being punished and those that control their emissions are being rewarded. So, businesses would then work to control and reduce their emissions.

Sounds great, right? And, considering that I have already spoken about how we should be doing something about climate change, you would expect that I would be all in favor of cap and trade. The EPA certainly is. But, I do not. The result of cap and trade would be to dramatically increase the amount of greenhouse gas emissions, not reduce it. See this well done explanation by Kate Evans for a detailed explanation in graphic novel form.

There are a number of reasons why cap and trade would fail. First, there is no way to monitor it. The government would simply rely on industry to honestly report their emissions. Another reason is that certificates could be issued by the government for what ever reason it wanted. For instance, to protect a nationally important industry, or as a reward for a big campaign contribution. Does anyone think those kinds of things would not be going on? Plus, those certificates that are sold by companies that are not emitting gases would then authorize a company that does emit to increase its emissions. And, it would be approved by the government! Businesses would purchase additional certificates and increase their emissions for as long as it was cheaper than adapting new technology to reduce emissions.

Despite everything that shows cap and trade would actually increase emissions, there is still a great deal of public and governmental pressure to enact it. The line of reasoning is that there is a problem so government has to do something to address it.

But, as Murray showed in Losing Ground, we need to be sure that the policy will not make things worse. Once cap and trade is implemented and businesses see how much they can profit from it, it will be very difficult to ever remove it.

Take a look at an alternative solution here.