Krugman:
One of the most obvious facts about the U.S. political scene is also a fact most pundits refuse to acknowledge: the extreme polarization we now experience, the complete disappearance of any kind of political center, is not a two-sided phenomenon. Democrats haven’t moved drastically to the left — if anything they inched right for a couple of decades, and are only now shuffling slightly back toward a more robust liberalism. But Republicans have barreled off to the right. ...
One prime example is, of course, health reform ...
Environmental policy may, however, be an even better case. Cap and trade began as a Republican idea — a corrective to command-and-control regulation. There was, in fact, a time when many Democrats disliked the idea of using market mechanisms to limit pollution, so this was a case of Republicans pushing policy in the direction of good economics. Bush the elder introduced cap and trade to control acid rain; John McCain even sponsored a climate change bill that relied on cap and trade.
I agree with the sentiment of the post, that Republicans won the political tussle over the appropriate form of environmental policy and then rejected it, but actually, cap and trade began as an economist's idea and was championed by an environmental group, the Environmental Defense Fund, that worked with the Bush 1 administration on the acid rain program. From "the political history of cap and trade":
The theory had been brewing for decades, beginning with early 20th-century British economist Arthur Cecil Pigou. He argued that transactions can have effects that don't show up in the price of a product. A careless manufacturer spewing noxious chemicals into the air, for instance, did not have to pay when the paint peeled off houses downwind—and neither did the consumer of the resulting product. Pigou proposed making the manufacturer and customer foot the bill for these unacknowledged costs—"internalizing the externalities," in the cryptic language of the dismal science. But nobody much liked Pigou's means of doing it, by having regulators impose taxes and fees. In 1968, while studying pollution control in the Great Lakes, University of Toronto economist John Dales hit on a way for the costs to be paid with minimal government intervention, by using tradable permits or allowances. ...
Getting all this to work in the real world required a leap of faith. The opportunity came with the 1988 election of George H.W. Bush. EDF president Fred Krupp phoned Bush's new White House counsel—Boyden Gray—and suggested that the best way for Bush to make good on his pledge to become the "environmental president" was to fix the acid rain problem, and the best way to do that was by using the new tool of emissions trading. Gray liked the marketplace approach, and even before the Reagan administration expired, he put EDF staffers to work drafting legislation to make it happen. The immediate aim was to break the impasse over acid rain. But global warming had also registered as front-page news for the first time that sweltering summer of 1988; according to Krupp, EDF and the Bush White House both felt from the start that emissions trading would ultimately be the best way to address this much larger challenge.
Here is footnote 3 in Keohane, Revesz and Stavins (Harvard Env Law Rev, 1998 [PDF]):
Here is the blurb about Dales' book from Edward Elgar:
In this classic book, originally published in 1968 by University of Toronto Press, John Dales proposed a new policy instrument for tackling pollution problems, namely ‘markets in pollution rights’. Dales was one of the first economists to put forward such a solution, and in subsequent years a system of emissions trading has evolved which is now a centrepiece in international discussions of how to address the problem of global climate change.
The very first economist to suggest tradeable permits may have been Crocker in 1966. This publication received AERE's publication of enduring quality award in 2001 in part, I think, to atone for the historical oversight:
Thomas D. Crocker, "The Structuring of Atmospheric Pollution Control Systems,” in The Economics of Air Pollution, ed. H. Wolozin (Norton, New York, 1966) pp. 61-86.
The Encyclopedia Britannica [and Tietenberg (2006)] give them both credit:
The concept of using a permit market to control pollution levels was first developed by Canadian economist John Dales and American economist Thomas Crocker in the 1960s.
Tietenberg says Dales gets the credit for water and Crocker for air and goes on to credit Baumol and Oates (1971) and Montgomery (1972):
These articles were instrumental in legitimizing the concept of emissions trading in the eyes of those theorists who tend to be distrustful of ad hoc arguments until the formal properties of the system are worked out. (page 5)
Montgomery cites Dales (1968) which may be why Dales gets most of the credit. Baumol and Oates, as far as I can tell, don't suggest emissions trading. Instead, they suggest setting a pollution standard and then finding the tax rate to achieve the standard (instead of setting the tax rate to be equal to the marginal external cost). It doesn't take a great leap to see how cap and trade flows out of their pricing and standards approach. Oates (1992) includes Baumol and Oates (1971), Montgomery (1972) and a shorter version of Dales (1968), which was published in the Canadian Journal of Economics, among his list of 35 seminal papers.
Whoever was the first economist doesn't really matter. While cap and trade was first embraced by Republicans politically it did not begin as a Republican idea.
