Is cap and trade the future?

I agree with Matt that, as a moral matter, any cap-and-trade permits should be auctioned rather than given to current emitters; I see no prior right to pollute that must be honored in the breach. As a political matter, it's not a large amount of revenue, and the giveaway to the companies will probably go a long way to pacifying their lobby--plus you don't risk a situation like the British bandwith auction where everyone overpaid, netting fat fees for the treasury, but setting back investment for quite a while.

As a practical matter, I agree with the economist I lunched with yesterday that cap and trade is doomed as long as it includes offsets and doesn't price the carbon cost of foreign goods. Otherwise, all we do is displace consumption of fossil fuels to China--an excellent, though thoroughly inefficient, charity program, but no good for the environment. In fact, the net environmental result might well be negative. China and India use fossil fuels in a much less efficient, much more polluting way, because clean technology has a higher capital cost; a ton of coal or a barrel of oil consumed in China produces less output and more pollution than the same ton or barrel consumed here.

Meanwhile the most optimistic hope for the global offset market is that it will pay a fair number of companies to do things they would have done anyway. The darker possibility is that it will encourage developing-market companies to keep polluting facilities open longer in the hopes of selling the offset. Indeed, they might even build new ones so that westerners can pay to shut them down.

The results from Europe's scheme have so far been pretty underwhelming, though everyone keeps assuring me that they're going to take off any day now. Theoretically, cap and trade is indistinguishable from a tax provided that you know either the true externality cost of emissions, or what level of emissions is socially optimal. Since we know neither, and cap-and-trade so far looks pretty weak, I vote for a tax instead.

Of course, I'm the only one so voting, so probably we'll get cap and trade, and probably it won't do very much good. I just wanted to lay the ground for a triumphant "I told you so" later.

Not that this makes me happy; quite the reverse. I think we should do something serious about global warming. I just don't know how to overcome the political and technical problems to do so.