Cap-and-Trade's Unlikely Critics: Its Creators

Published on
by
Wall Street Journal

Cap-and-Trade's Unlikely Critics: Its Creators

Economists Behind Original Concept Question the System's Large-Scale Usefulness, and Recommend Emissions Taxes Instead

by
Jon Hilsenrath

In the 1960s, a University of Wisconsin graduate student named
Thomas Crocker came up with a novel solution for environmental
problems: cap emissions of pollutants and then let firms trade permits
that allow them to pollute within those limits.

When
he was a graduate student in the 1960s working to reduce pollutants,
Thomas Crocker devised a cap-and-trade system similar to one being
considered in Congress.

Now
legislation using cap-and-trade to limit greenhouse gases is working
its way through Congress and could become the law of the land. But Mr.
Crocker and other pioneers of the concept are doubtful about its
chances of success. They aren't abandoning efforts to curb emissions.
But they are tiptoeing away from an idea they devised decades ago,
doubting it can work on the grand scale now envisioned.

"I'm skeptical that cap-and-trade is the most effective way to go
about regulating carbon," says Mr. Crocker, 73 years old, a retired
economist in Centennial, Wyo. He says he prefers an outright tax on
emissions because it would be easier to enforce and provide needed
flexibility to deal with the problem.

The House has passed cap-and-trade legislation. The Senate could
take up a measure in September. But Republicans strongly oppose the
idea -- arguing that it is a tax that will hurt the economy -- and
Democrats are struggling to come up with an approach that apportions
the inevitable cost of a cap-and-trade system among different
interests, from consumers to utilities to coal plants.

Mr. Crocker, who went on to become a professor at the University of
Wyoming, is one of two economists who dreamed up cap-and-trade in the
1960s. The other, John Dales, who died in 2007, was also a skeptic of
using the idea to tame global warning.

The Cap-and-Trade Effect

"It isn't a cure-all for everything," Mr. Dales said in an interview in 2001. "There are lots of situations that don't apply."

Mr. Crocker sees two modern-day problems in using a cap-and-trade
system to address the global greenhouse-gas issue. The first is that
carbon emissions are a global problem with myriad sources.
Cap-and-trade, he says, is better suited for discrete, local pollution
problems. "It is not clear to me how you would enforce a permit system
internationally," he says. "There are no institutions right now that
have that power."

Europe has embraced cap-and-trade rules. Emissions initially rose
there because industries were given more permits than they needed, and
regulators have since tightened the caps. Meanwhile China, India and
other developing markets are reluctant to go along, fearing limits
would curb their growth. If they don't participate, there is little
assurance that global carbon emissions will slow much even if the U.S.
goes forward with its own plan. And even if everyone signs up, Mr.
Crocker says, it isn't clear the limits will be properly enforced
across nations and industries.

The other problem, Mr. Crocker says, is that quantifying the
economic damage of climate change -- from floods to failing crops -- is
fraught with uncertainty. One estimate puts it at anywhere between 5%
and 20% of global gross domestic product. Without knowing how costly
climate change is, nobody knows how tight a grip to put on emissions.

In
this case, he says Washington needs to come up with an approach that
will be flexible and easy to adjust over a long stretch of time as more
becomes known about damages from greenhouse-gas emissions. Mr. Crocker
says cap-and-trade is better suited for problems where the damages are
clear -- like acid rain in the 1990s -- and a hard limit is needed
quickly.

"Once a cap is in place," he warns, "it is very difficult to
adjust." For example, buyers of emissions permits would see their value
reduced if the government decided in the future to loosen the caps.

Joseph Aldy, a White House adviser on the environment, calls the
argument a "straw man," saying a market-based cap is being designed
with built-in flexibility. For example, a price ceiling on carbon
allowances could prevent the program from becoming too big a burden on
households and businesses and a floor would prevent a big loss in the
value of permits. And unlike a tax, he says, a cap ensures carbon
reduction.

Pollution has been a puzzle for economists for decades. In the early
1900s, a British economist named Arthur Pigou proposed taxes on
polluters. Ronald Coase, a University of Chicago economist, won a Nobel
Prize for his 1960 book, "The Problem of Social Cost," which showed how
market economics could address pollution problems.

In 1966, Mr. Crocker, still struggling to finish his thesis at the
University of Wisconsin at Milwaukee, sketched out the cap-and-trade
idea to deal with air pollution produced by fertilizer plants in
Florida. Mr. Crocker first pitched the idea of trading at a conference
in Washington. He had been asked to attend as a stand-in for a
professor who couldn't go and present data on the Florida plants. He
didn't have all the data yet and came up with the theory instead.

Working separately, Mr. Dales in 1968 published a book called,
"Pollution, Property and Prices," which used the same approach for
farmers who were polluting Canadian lakes and streams.

Their logic went like this: When governments capped smog emissions
from power plants or the runoff of pesticides by farmers into local
streams, it was indirectly putting a value on these emissions. Some
farmers and some power plants could reduce these emissions more
efficiently than others, and some placed a higher value on them than
others. By setting caps on pollution but then allowing the polluters to
trade these rights, the economists theorized, the polluters themselves
would figure out the cheapest way to meet new targets.

Another economist, David Montgomery, advanced their ideas in the
1970s, converting their theories into the complex mathematical formulas
to demonstrate that they weren't merely an idea but were also
economically feasible. Mr. Montgomery, too, is a skeptic of
cap-and-trade for greenhouse gases. He prefers an outright tax.

"You get huge swings in carbon prices with a cap, which creates more volatility and uncertainty for business," he says.

Cap-and-trade got a big boost in 1990, when President George H.W.
Bush signed amendments to the Clean Air Act that imposed new limits on
emissions of sulfur dioxide, which produces acid rain. Economists said
the move let producers save billions of dollars and still hit their
targets.

Still, Messrs. Dales and Crocker never got much personal mileage out
of the idea. Mr. Crocker says he had such a hard time getting funding
to further his research on the subject that he moved on to other
matters. So far, he has stayed on the sidelines in the debate about
cap-and-trade.

Share This Article

More in: