Silas (aka Person) has been keeping me honest regarding my cap & trade op ed. He first criticized the piece on the Mises blog, and now more recently has carried his concerns over to the discussion of my critique (pdf) of Nordhaus.
(BTW, even if you don't really care about my arguments with Silas, you might want to glance at the thread at Aguanomics. I am having trouble getting beyond first base with David Zetland, if you view a home run as changing the other's mind. Any suggestions [posted here on Crash Landing] as to how I can approach from a different angle are welcome.)
Rather than try to quote and respond--which would get very tedious--I'll just point interested readers to the links above to see Silas' concerns in his own words. Below I offer some general responses:
FIRST and most important: The cap & trade bill recently discussed, as well as any cap & trade bill that will be proposed in any remotely plausible future, will not be "a market solution" for any reasonable meaning attached to that phrase. Such a bill will quite obviously distort markets grossly.
SECOND, I concede that there is a sense in which Silas is right. I was assuming (for the sake of argument) that the climate science in the IPCC is correct, and yet I still claimed that cap & trade was no more a market solution than if the government sold people permits giving them the legal right to sneeze. This may have led some readers to conclude that I was saying the very nature of the situation rendered carbon permits as illegitimate property titles, the price of which could not possibly correspond to genuine economic scarcity.
However, as Silas correctly notes, if James Hansen and the guys at RaalClimate are right, then CO2 emissions affect others just as conventional pollution does. If one agrees that one can have property rights to a clean stream etc., then in principle one could have a property right to the atmosphere and this could spawn a market in which the right to inject CO2 into this property is sold.
OK try not to get lost folks, for it gets a bit subtle at this point. I am claiming that whether we take the situation as it is, OR if we imagine a truly free society built on libertarian principles, then in EITHER CASE there would not be anything resembling a market for the right to shoot CO2 into the atmosphere. Hence, both in practice and in theory, I stand behind my claim that cap & trade is not a market solution. Even in an idealized market setting, no such mechanism would evolve (I claim). In the remainder of this post I'll try to explain this latter claim.
Why Cap & Trade for CO2 Would Probably Not Arise in a Free World
Although Silas is right that it is theoretically possible to imagine a completely voluntary system yielding a version of cap & trade, I don't think it would ever evolve in any plausible scenario, without governments creating it through fiat. To put it simply, this method of slicing up property rights bundles seems like a very inefficient method to deal with the (stipulated) externality.
For an analogy, we can imagine ecologists lobbying the federal government back before barbed wire. They explain the tragedy of the commons, and the concerned federal officials then institute a massive program of coating the grasslands with agents who monitor cow movements. They keep sophisticated records of whose cattle entered which piece of land. At the end of each month, the records are run through a central processing agency and then each rancher is sent a bill telling him how many cow-boundary-crossing slips need to be turned over to the government, not to the landowners. Depending on the lushness of the grass, the government charges a higher or lower price for issuing the permits. (I.e. the price is higher when the grass has been severely overgrazed and needs to be given a break.)
So the government can go ahead and implement that scheme. In that case, there is much less incentive for anyone to adopt barbed wire, since the government will just adjust the price of its permits in order to continue extracting large rents from the ranchers. There will never be much surplus left to fund payments to landowners. Thus the "market solution"--after all, the feds aren't nationalizing the cows or land, and ranchers can decide where to steer their cattle--will have largely displaced the true market solution, and the government will seize a much larger share of output, permanently into the future.
I hope it is clear how this situation is analogous to the situation with CO2 and climate change.
OK possible alternatives? Insurance companies could pay major emitters to adopt less carbon-intensive techniques. Public education campaigns would bring consumer pressure to bear on emitters. Depending on the severity of the situation, insurance companies and philanthropic organizations could spend dozens of billions of dollars on giant space mirrors, pumping aerosols into the atmosphere, and other geoengineering techniques, at least to buy time.
Under any reasonable scenario, I think focused, voluntary efforts coming from companies that actually stand to make or lose trillions of dollars would be far more effective than world governments throwing around tax dollars and unfunded mandates. What is particularly absurd is that if governments ever actually "won" the war against climate change, they would lose a huge chunk of their power. Does anyone expect the government to declare victory in the wars on drugs, poverty, or terror anytime soon?
The types of private efforts I have mentioned above would, in my opinion, be far more likely than the evolution of permits to CO2 emissions that would need to be enforced on a worldwide scale. That is simply too costly to monitor and enforce, in my opinion. Surely a different legal mechanism would evolve to deal with this stipulated threat.
Cap & trade is not a market solution.