Tag Archives: carbon emissions

How Economics Can Save the Environment

During his presidency, Ronal Reagan helped introduce a “cap-and-trade” system to curb America’s use of lead-based gasoline.  Experts today believe that Reagan’s cap-and-trade system lead to a much more rapid elimination of lead-based gasoline use in the United States while saving the economy $250 million each year relative to a “command-and-control” system (under which the government explicitly dictates which technologies and energy sources can be used).  George Bush senior led a similar environmental revolution through the use of a cap-and-trade system, effectively reducing SO2 emissions in the 1990s.  Given its historical success, it seems logical for governments to continue using a cap-and-trade system to address today’s environmental issues.

Unfortunately, however, cap-and-trade systems are losing favor.  In the United States, even Republicans have “demonized their own creation,” leading to a reduction in cap-and-trade usage.  As a result, over the last 5 years, the United States has mostly switched to command-and-control systems, leading to less efficient, less swift, and more costly reductions in pollution rates.

Europe has also abandoned its cap-and-trade system.  In April 2013, Europe disbanded its cap-and-trade regulations on carbon emissions entirely.  According to European officials, the economic pullback has resulted in below-equilibrium production levels.  Consequently, firms are naturally emitting fewer pollutants than allowed by cap-and-trade issued quotas, leading to a reduction in quota prices.  With prices so low, quota trading has become inconsequential and essentially irrelevant.  As such, instead of focusing on renewable energy sources (Europe has a goal to obtain 20% of its energy from renewable sources by 2020), many European firms have reverted to the large-scale use of coal.

Interestingly, as prices have gone down, Europe has failed to reign in the supply of quotas made available to firms.  Failing to do so undermines the entire purpose of a cap-and-trade system, as keeping the supply of emission quotas constant fails to reduce emissions over time (and as technology improves, it naturally leads to a reduction in quota prices).  Ultimately, it seems that Europe’s failure to commit to a strong cap-and-trade system is what caused the system’s failure; by not reducing the supply of emissions quotas, Europe could not effectively control the price of emissions.

Fortunately, California is showing that there is still hope for cap-and-trade regulation.  After introducing a cap-and-trade system in 2013, California has decided to expand the program in 2014.  Like Reagan, California has seen success through cap-and-trade regulation, as evidenced by the state’s reduction in carbon emissions.  Auctioning off emission quotas has also helped California raise over $1 billion dollars in revenue, which has helped fund subsidies for renewable energy.  Indeed, California has seen so much success in its cap-and-trade system that as of January 1, 2014, California has partnered with Quebec to create the first international cap-and-trade system.

It is surprising to me that conservatives, typical proponents of the free-market system and the original supporters of cap-and-trade regulation, have abandoned such a historically successful system.  As Reagan and Bush senior made very clear, economics and the free-market system can be environmentalists’ best friends.  That said, I am comforted by California’s use of a cap-and-trade system, and I am hopeful that conservatives will get on board, partnering with one of America’s most liberal state (and Quebec) to bring economics and environmental policy back together.