I’ve recently seen several conservative commentators refer to cap-and-trade systems for pollution as “anti-market.” I don’t think that label is accurate, but I’d like to hear what people think.
A cap-and-trade system uses market forces to accurately and efficiently internalize the cost of pollution. The initial allocation of permits can differ from system to system, but it often involves an auction (which obviously operates according to market principles). Then, once permits are allocated, the market governs their value and trade. If I decide to invest in greener technology for my firm, I can sell my permits. Similarly, if I decide that reducing my carbon footprint is too expensive, I can buy permits.
The only thing not governed by the market is the total number of permits. But even that number could be (and often is) set to whatever the market has decided is efficient now (i.e. the current level of output, or a higher level building in room for growth).
I think, at its most coercive, a cap-and-trade system is merely forcing the internalization of costs which are normally paid by society (e.g. in the case of a cap-and-trade system for SO2, the costs of acid rain, medical care to asthma sufferers, etc.). That might be “anti-market” in some sense, but it doesn’t strike me as the kind of anti-market regulation that conservatives are traditionally opposed to. Surely an “anti-market” policy would be the sort of command regulation we see now under the Clean Air Act, wouldn’t it?
I agree with everything you posted. Pigovian taxes or marketable permits are price-like, market-friendly instruments and most of those on the right would agree that they’re a good response given acceptance of costly human-caused pollution.
Many - but not all - conservative responses of the sort you mention are probably bad faith arguments. But here a few somewhat respectable ones (I’m assuming this is mainly about Greenhouse):
[ul][li]The market will find a solution[/li]Markets are more subtle and flexible than the standard neoclassical picture. If left alone, they find ways of internalising externalities - and better than governments. Businesses find way to avoid the tragedy of the commons in may circumstances. They overcome difficult informational asymmetry problems in nifty ways. Etc, etc. Often these kind of arguments appeal (wrongly, in my view) to Coase.
[li]Technology will save us[/li]Technological solutions will arise as we get richer and cleverer due to the market. The problem will just go away in time and it would be a bad idea to interfere with the market by incurring big costs now on a problem that will just disappear. This one ignores the incentives for tech change that would be provided by pricing pollution as well as possible irreversible effects in climate change.
[li]Governments can’t create value[/li]Some people have an ideological position that only free exchange can create value and that by definition coercive government action to impose costs must be an undesirable interference with the market.
They’re the ones that specifically address the “anti-market” claim. Other somewhat respectable conservative arguments against a carbon tax or trading system include:
[li]Costs are overstated[/li]People can move. Crops can be grown elsewhere. Warming will have gross benefits in many places. There are other important things we could be doing.
[li]The cure will be worse than the disease[/li]Governments in practice fuck things up. Introducing a big change like this involves large transitional costs, may create large new government revenue and losts of opportunities for rent-seeking.[/ul]
Cap and trade doesn’t really internalize the externality though, or at least not in a true market sense. A true market solution is calculating the cost of the externality, and imposing a tax equal to that cost. The amount of the externality then produced will be whatever is profit maximizing to produce.
Unless I misunderstand cap and trade, it sets a predetermined amount of the externality that can be produced, and allocates that, then permitting a secondary market to trade those allocations. The quantity of the externality is thus determined through non-market means.
I’m not opposing cap and trade here, and it is possible I might have misunderstood it, but it isn’t a true “market” solution. It’s a non-market solution that uses a market.
Well, like I said in my post, one can calculate the cap based on market forces. But otherwise I think you’re correct in identifying the least market-based aspect of the scheme. The question is whether this makes it “anti-market.” It seems to me that, by this definition, almost any regulation will be anti-market.
And it does internalize the externality insofar as firms aren’t paying for emissions now but must do so under the program. It may not be as efficient as a Pigouvian tax, and as you noted will depend on the cap, but it is still internalizing what it otherwise an external cost.
I think “anti-market” is often used casually to mean not “incompatible with the ideas and structure of markets in general” but rather “inconvenient or undesirable in the context of particular existing markets”.
Surely, as you point out, there’s nothing intrinsically “anti-market” about handling greenhouse-gas emissions in a market structure. What’s intrinsically “anti-market” is externalizing the costs of emissions, because externalities hamper the efficiency of markets. But that doesn’t mean that trying to internalize external costs won’t disrupt or interfere with the workings of existing markets which operate on the assumption that those costs will continue to be externalized.
Yeah, well, I’m not claiming that they’re using the term “anti-market” accurately. I think a lot of people tend to conflate existing, imperfect markets with the theoretical idea of markets. (This can happen on both sides of the political spectrum, with lefties claiming that markets in general are inherently bad because of the flaws in particular existing markets, while righties claim that existing markets should be sacrosanct because theoretical markets are optimally efficient.)
I didn’t mean to imply you were. I was just suggesting that even if there are multiple ways to use the term, I don’t think they are using it in the existing markets sense.
I’m also not so sure the existing markets sense of anti-market *is *valid. At a minimum, it is very misleading. It means that anti-trust actions are anti-market, right?
They can be, but it depends on what those actions are.
I don’t see that cap and trade practices are intrinsically “anti-market”, but they can be. If they are used as a way to reverse the government subsidies that have historically been given to fossil fuel consumption, then I’d say they are “pro-market”. If they are used to enforce some social policy unrelated to that subsidy, then they would be “anti-market”.
Of course, “anti-market” ≠ bad. As a general rule, I like to use the market as the default mechanism for transactions unless there is a compelling reason to do otherwise. And, of course, the big debate is what constitutes a “compelling” reason. I don’t think the market can be used effectively to mount a military necessary for a country’s defense, for example. Nor do I think it can serve as a judiciary (although it can in some instances). Those are the obvious examples.
To me, “the market” is just free people trading with each other. Nothing more, nothing less. But when free people infringe on the rights of others, the government needs to step in to stop it. I don’t see that anyone has the right to spew greenhouse gases into the atmosphere, so I can see a legitimate role for government in managing that. Historically, we haven’t done that, but we didn’t realize what we were doing. Now we do realize what we’re doing, so there is nothing “anti-market” in addressing the problem.
Yup, it is. Sorry, I’m not making myself clear here. I just meant that I think some people don’t do a very good job of logically separating the ideas of theoretical free markets and particular existing markets. So when something comes along that interferes with the current workings of some particular market, they talk about it as though it were undermining the concept of markets in general.
AFAIK, neither Novak nor Milloy is actually an economist, so I wouldn’t be surprised if they happened to be accidentally conflating these ideas in the way I’m talking about. And I’m sure some people on both sides of the political spectrum deliberately conflate them as a propaganda move, too.
Note that some of the same people who call “cap-and-trade” anti-market were touting how wonderful it was when Bush proposed to use such a system, dubbed the Clear Skies Initiative, to replace some of the Clean Air Act provisions to regulate certain pollutants from power plants like sulfur dioxide, nitrous oxides, and mercury. (And, admittedly, on the environmental side, some of the people who tout cap-and-trade for CO2 were characterizing it as something like “paying companies not to pollute” when talking about the Clear Skies Initiative.)
Of course, the fact of the matter is that the reason that many conservatives are opposed to cap-and-trade with CO2 is because they are opposed to any regulation of CO2 emissions. In fact, my guess is that they would prefer cap-and-trade to most other alternatives but they prefer no regulation most of all.
And, the real reason that environmental groups opposed the Clear Skies Initiative was not primarily because of the cap-and-trade issue (although there was some concern, particularly in the case of mercury, that this might create local pollution problems…an issue that is not relevant for CO2). Rather, it was because the caps that the Administration wanted to set were weaker than what the Clean Air Act mandates would force. (In fact, I think a Democrat, Senator Carper of Delaware if I recall, introduced a modified version of the Clear Skies Initiative that set the caps lower than the Administration did…In fact, it set the caps at about the level that the EPA had originally discussed when they presented the proposal to the power companies but before the power companies and the White House weakened it.)
Just for the record, here is a good discussion of some of the stuff I was talking about in regards to Bush’s “Clear Skies” cap-and-trade plan. It makes a fun read concerning the sort of deceptive shenanigans that the Bush Administration was pulling long before the Iraq debacle overshadowed everything else.