In 1990, by an overwhelming majority, Congress amended the Clean Air Act to establish a market for electric utilities to trade the right to emit sulfur dioxide, one of the main contributors to acid rain.
The law was based on a simple economic insight. If utilities facing high costs to cut emissions could, instead, buy allowances to pollute from those who could cut emissions for less, reducing overall pollution would be much cheaper. The idea had been successfully used before, during the Reagan administration, to reduce lead in gasoline.
It worked again. By 1996, sulfur dioxide emissions had declined by a fifth. A study published a few years later concluded that trading of pollution permits cut the cost almost by half, saving utilities and their customers billions of dollars.
Here’s the not-so-funny punch line: A decade and a half later, when President Obama proposed using “cap and trade” to cut emissions of greenhouse gases — the biggest environmental threat of our time — lawmakers looked back upon this unquestionable success and said “no.”
Members of Congress have changed, of course. Many Republicans who say that climate change is a myth or believe that the Obama administration is engaged in an unnecessary “war on coal” may have been hoping to block any environmental program. What they achieved, however, was to direct the nation’s efforts to combat climate change in a much more expensive direction. ...
“It is a mystery,” said Gilbert E. Metcalf, an economist at Tufts University specializing in energy and the environment, “why the Republican Party drives environmental policy away from using Adam Smith’s invisible hand.”
There is plenty of evidence of the high cost of regulation. Sebastian Rausch, from the Center for Economic Research at ETH University in Zurich, and Valerie J. Karplus from the Massachusetts Institute of Technology have modeled how a cap-and-trade policy would look compared to a variety of regulatory options — including a federal renewable portfolio standard, a clean energy standard, fuel economy standards and the like.
A standards-based policy, which is what we have now, is generally much more inefficient, delivering only one-fourth the emissions reductions of cap and trade for the same cost.
“The politics are making the administration do things in a much more expensive way,” said Michael J. Graetz of Columbia Law School, “than if the Congress had acted to do something about climate change.” ...
As Robert N. Stavins, who heads the Harvard Environmental Economics Program, points out, using regulatory standards to limit greenhouse gas emissions from many millions of households, factories, farms, cars, trucks — all of which face very different costs of abatement — would be an implausibly complex task.
“The only way to do this is to send information through markets,” Professor Stavins said. An economywide carbon price, he argues — as does much of the economics profession, including many Republicans — would give everybody the incentive to reduce emissions at the lowest possible cost.
But little progress has been made. While carbon is often implicitly priced via excise taxes and other taxes on energy, the price tag is almost always too low to encourage substantial reductions in CO2 emissions.