Cap and Trade is Not a Tax; or Why Delmarva Dealings Failed His Economics Class

Because in spite of this attempt to invoke this appeal to the authority of a basic economics class (which this person Cato has clearly never had), just claiming that TAXES ARE BAD is just not an argument when dealing with cap and trade. Because cap and trade is not a taxation system, it is an emissions trading system for emissions allowances.

Those allowances price in to the cost of energy production and delivery the cost of pollution by greenhouse gasses. But they also represent a total cap of emissions too. Back in the 90’s a cap and trade system for emissions causing acid rain was implemented and has been more successful — and cheaper — than expected. The reason that this is not a tax is because the power plant owns something of value when they buy an allowance. And because an emissions trading system typically builds in some scarcity (the cap — the number of allowances is finite and that number typically decreases after time), those allowances can become fairly valuable. But also fairly expensive for a plant that is pretty dirty. A some point, a plant will discover that it is in its business interests to just invest in cleaning up rather than to continue to pay for allowances. Plants that are cleaner or who get cleaner (if they time it right) can have a valuable asset to sell to those plants who are still dirty and still in need of many allowances. These allowances start to really devalue once the demand for them slows — after lots of plants clean up.

There aren’t any taxes that act that way. But apparently they only way he can possibly object to this scheme is to misname it. But this is a conservative and one of their core tenets is hat taxpayers should always foot the bill to cleanup after corporate polluters. And yet for SO2, pollution reduction attainment was faster than expected, compliance costs by power plants was lower than predicted, and energy prices did not get out of control.

But go take a look at what an emissions market — cap and trade — did for SO2 emissions since 1989. (I can’t embed that map, but do click the arrow in the lower left hand of the map to start the animations.)

I don’t normally answer back blogs calling out my work, but this one is important. Cap and trade has a real and hugely successful history here, in the US (in fact, Tom Carper is working on new SO2 and NOx criteria in a revised version of the CAA that will include, I think Mercury) and the biggest reason it has been successful is that it used the power of markets to drive different behavior, let each plant decide for itself how it could most efficiently reduce its emissions AND its timetable for doing so and reduce the environmental costs for all of us. But mostly I trust that the liberals and progressives who read here will actually get how these markets work — unlike the conservatives among us who (in spite of their claims otherwise) really don’t get how markets should work and just resort to their usual clowning to make a point.