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By Bruce Yandle Introduction
In addition to being demonstrably the least cost-effective of all control instruments, command-and-control, which focuses on inputs instead of outcomes, has the additional disadvantage of eliminating the competitive spur for developing and implementing cost-effective methods for reducing emissions. U.S. style command-and-control, which sets stricter standards for new versus existing emission sources, also weakens the competitiveness of national industries and encourages cartelization through regulation. Command-and-control has been shown to extend the life of older capital in polluting industries, thereby producing a dirtier rather than a cleaner environment. However, the opportunity for raising price through regulation attracts the support of some industries and firms for technology-based, command-and-control regulation. This support is buttressed by the support of some environmental organizations that favor the apparent certainty of centralized, top-down, command-and-control regulation. Those regulations that cartelize major polluting industries at the national level also cartelize national environmental organizations and support their economic success. In recent decades, the U.S. has supplemented technology-based regulation by the addition of market mechanisms including cap-and-trade air pollution control. The use of cap-and-trade regulation for sulfur dioxide emission control and the requirement for air emission offsets in air quality in non-attainment regions are prominent examples of cap-and-trade air quality control. Recent emphasis on watershed institutions for managing water quality now encourages water quality trading within the limits set by technology-based regulation. The use of these incentive-based approaches for managing environmental quality has demonstrated their effectiveness in reducing both emissions and costs. The Use of Taxes for Emission Control Oddly enough, the United States has never adopted emission fees or taxes as a federal instrument for controlling emissions, although emission taxes have been used at the regional level of state government. Experience with emission taxes elsewhere demonstrates their effectiveness in reducing unwanted emissions. Unsuccessful U.S. efforts to control by taxation reach as far back as the Nixon administration and are as recent as the Clinton administration. However, every attempt to regulate by taxation has been rebuffed by an anti-tax objection that taxes raise costs, as though command-and-control regulation or cap-and-trade does not. Since any form of regulation will raise costs, the anti-tax objection apparently hides a real objection that may in fact be the preference for regulations that cartelize and raise profits, which is something taxes or fees cannot do. It is also possible that political preferences for command-and-control or even cap-and-trade rest on preferences for the possibilities that some sectors and industries will be treated advantageously when the controls are imposed and the permits for pollution caps are granted. Controlling Carbon Emissions When approaching the design of institutions for controlling carbon emissions, it is understandable that policy makers would be attracted to consider cap-and-trade as an appropriate mechanism for achieving the overall goal of reducing emissions, especially during times of fiscal stress when there is the possibility of auctioning off the rights to pollute. The political preference may be explained by the following reasons:
As indicated, the expected political support rests largely on the possibility of transferring wealth to favored groups, at the expense of the forgotten and disregarded groups. Cap-and trade is an excellent example of my theory of Bootleggers and Baptists in action. Industrial groups and firms that are low carbon emitters, for example nuclear powered electricity producers as opposed to coal-fired producers, play the role of bootleggers who favor laws that limit carbon. The environmental groups are the obvious Baptists who take the moral high ground. Those who might object to the Bootlegger/Baptist political threat can be bought off by giving them an allocation of emission permits that can then be sold at auction. Assessment of the relative merits of cap-and-trade for carbon control are based on critically important assumptions or no statement at all about the cost of determining the initial allowable level of carbon emissions for sources, the cost of monitoring outcomes, and the cost of enforcing and managing the standard. Put another way, the proponents of cap-and-trade generally behave as if there is no cost associated with the operating the trading institution. Attention paid to the sad European Union experience with cap-and-trade carbon control might lift the importance of assessing the prospects for successfully designing a trading institution that actually works. Cap-and-Trade versus Taxation Under a set of well specified conditions, it can be shown analytically that a properly designed carbon tax can induce the same level of carbon emission reductions as a cap-and-trade system and do so at the identical cost per ton of carbon emissions eliminated, assuming the cost of operating the two institutions is the same. Put another way, in a classroom setting with full information on production, production costs, and energy costs for all industries, an approach using either system can be shown to generate identical results, in a static situation. Of course, when politicians speak of adopting one approach or another, they are not operating in a classroom environment. The world is full of unknowns, uncertainties and continuous change. When a tax approach is compared to cap-and-trade, the tax approach offers the following advantages:
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" I can see several stories in the next year spinning out of some of the things I heard (at PERC)."
- Tim Egan, New York Times |
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For decades, policy makers have debated the relative merits of alternate instruments for controlling unwanted stationary and mobile-source emissions. The instruments include 1) performance standards, 2) technology-based, command-and-control, 3) taxes and fees, and 4) cap-and-trade, market-like mechanisms. There is a strongly held conviction among economists and other analysts that technology-based, command-and-control regulation is the most costly and least effective instrument for reducing emissions. Even so, top-down command-and-control lies at the heart of basic U.S. statutes for controlling both air and water pollution.
