Like Paul Krugman, I am puzzled by James Hansen's piece in the NYT attacking cap and trade. Hansen writes:

Because cap and trade is enforced through the selling and trading of permits, it actually perpetuates the pollution it is supposed to eliminate. If every polluter's emissions fell below the incrementally lowered cap, then the price of pollution credits would collapse and the economic rationale to keep reducing pollution would disappear.

Eh? If the system succeeded so well that emissions came in below the cap, that would be a problem? If cutting emissions is the goal, I can think of worse. And in that case, anyway, couldn't you just lower the cap?

Hansen explains his objection in even simpler terms:

Still need more convincing? Consider the perverse effect cap and trade has on altruistic actions. Say you decide to buy a small, high-efficiency car. That reduces your emissions, but not your country's. Instead it allows somebody else to buy a bigger S.U.V. -- because the total emissions are set by the cap.

Or consider the salutary effect cap and trade has on selfish actions. Say you decide to buy a big SUV. That increases your emissions, but not your country's. Instead it obliges somebody else to buy a small high-efficiency car--because the total emissions are set by the cap.

Cap and trade, as Krugman points out, makes the price outcome uncertain (if it is allowed to bind). The carbon tax that Hansen appears to prefer makes the quantity of emissions uncertain. That is why those calling for strong action on greenhouse gases usually prefer cap and trade. Perhaps Hansen's distaste for a market in emissions--somebody might make some money off this--is confusing him. But a tax would be mediated through a market too, obviously.

I'm for a carbon tax, because I would rather set the price than the quantity. It has other advantages too: it is harder to game and makes international co-operation on climate change easier to arrange. Cap and trade with a price collar, as proposed in the Senate bill, combines desirable elements of both, and might be the best way forward, on economic as well as political grounds.

But Hansen's article makes no sense at all. Paraphrasing Wegman on the hockey stick, Bad reasoning + Correct Answer = Bad Economics.

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