Putting the "Trade" in Cap and Trade

By Megan McArdle

Matt Steinglass, whose blog doesn't get nearly enough love, wrote the other day about one reason to prefer cap-and-trade over taxes:  tradeable offsets.

Without cap and trade, projects that create tradable carbon emissions credits (CECs) by fixing carbon or otherwise reducing greenhouse gas levels -- things like preserving forests and planting new ones, trapping gases from organic waste and livestock excrement, or getting third-world villagers to use low-CO2-emitting gas stoves rather than free firewood from local forests (which also emits lots of greenhouse-causing soot) -- wouldn't exist. The carbon tax reduces carbon emissions by making it more expensive to burn fossil fuels. But it does nothing about all these other sources of greenhouse-causing emissions. Only cap and trade does.

What's interesting is that to me, this is a feature, not a bug.  Everything I've read, heard, and studied about offsets indicates that the audit problem is essentially insurmountable.  Favorite private projects like planting trees really don't work at all, because you can't just plant a tree--you have to certify that the land you have planted with trees will contain at least that much tree-mass forever, because as soon as a tree dies, its carbon returns to the atmosphere.  This is not really feasible in other than trivially small doses, and the larger plots tend to be in places where you really can't make that sort of committment, because it's too dependent on the continued goodwill of the government in an area where governments are historically very unstable.

The plans to pay Chinese firms to shut down polluting plants, or villagers not to adopt a carbon-intensive lifestyle, are even worse.  Carbon has about a 100 year shelf-life in the atmosphere, so it's no good just switching people into developing countries to a lower-carbon technology if the carbon is displaced into some other use.  Say you give someone a nice treadle-based irrigation system so that they don't use an inefficient kerosene generator.  Great.  Now that person has the money they would have spent on kerosene, and a generator.  If they buy a motorcycle instead, you have not saved carbon.  Steinglass points to phasing out sooty cookstoves, which is indeed a carbon reducer in the short term.  But all the stuff that gets burned in the cookstoves would have decomposed and released its carbon in another, longer-lasting form.  It's helpful, but no panacea--and it's the absolute best of the initiatives, as far as I can tell.

China is even more problematic, because given the state of the Chinese manufacturing sector, five gets you ten that whatever factory you pay someone to shut down wasn't actually making any money.  So you've just created a lucrative business in owning and operating heavily polluting facilities.

The problem is, it's very hard to certify the alternative world-state.  I don't mean this as a demand for some impossible proof, but with things like paying manufacturers not to pollute, there's very good reason to think that this might not work--indeed, have the opposite of the intended effect. 

A source fuels tax is not nearly as sexy as cap and trade; it is a less sophisticated instrument that will fall too heavily on some of the wrogn people.  But it's also hard to game.  Given all the observed problems with the European trading system, we should give that simplicity quite a bit of weight.

This article available online at:

http://www.theatlantic.com/business/archive/2009/05/putting-the-trade-in-cap-and-trade/17642/