The Greening of Industry

Today CNN reports the Chief Executives of GE, BP, and the eight other corporations that make up the United States Climate Action Partnership (USCAP) are petitioning Congress in favor of legislation designed to reduce greenhouse gas emissions. Jeff Immelt, Chairman and CEO of GE told reporters today at a press conference "The time has come for constructive action that draws strength equally from business, government, and non-governmental stakeholders." The plan endorsed by USCAP includes a "cap-and-trade" program similar to that used for controlling sulfur dioxide emissions, and similar to the one proposed in the Kyoto protocol.

I wholeheartedly support environmental legislation to cut greenhouse gas emissions. I truly believe we should be taking global warming seriously, and I believe the longer we wait to get started, the more expensive and less effective our actions will be. The cap-and-trade program worked well for cutting sulfur emissions, so it makes some amount of sense to pattern CO2 legislation after an already successful program. However, William Nordhaus notes in this paper that because of the inelasticity of both supply and demand for credits,

"One of the potential concerns with the current structure of the Kyoto Protocol is that it will induce great volatility in the prices of permits. The volatility can be seen in the history of SO2 permit prices, which have been much more volatile than consumer prices or even stock market prices." (After Kyoto: alternative mechanisms to control global warming, p. 30, fig. 7)

In this same paper he lists a number of possible alternatives, arguing most persuasively in favor of a global carbon tax on emissions. He states:

"Our latest estimates in the RICE-2001 model suggest that a carbon tax of $10 per ton carbon (2001 prices) -- rising rapidly over time -- would appropriately balance the costs and benefits of emissions reductions. This number is slightly above the number that would stabilize the concentrations of CO2 at twice the pre-industrial level (that is, at 550 parts per million)."

I am not an economist. I have heard persuasive arguments for both cap-and-trade (basically, we know that they work) and against cap-and-trade (difficulty of parties joining after the initial offering and the massive transfers of capital to poor countries simply because they already produce almost no CO2 emissions) and in favor of taxes (ease of parties joining in at a later time, lower cost volatility). I do think we owe it to ourselves to examine all available mechanisms for instituting and enforcing carbon dioxide controls, and I think we should have a dialogue right now about what to do on a large, national scale. Programs, once formed, are historically difficult to change, and this is something we should work very hard to get right the first time. What do you, with or without economic training, think of the alternatives (cap-and-trade vs. taxes, vs. simple caps a la Montreal Protocol)?