Gernot Wagner on The Futility of Going Green and the Economics of What Really Matters (Podcast)
TH: Cap and trade. Definitely a controversial topic. I'll quote you here giving a description to it: "Cap and trade is an enormous, publicly structured program to take money from the inefficient and unimaginative and pay it to the efficient and innovative. It is the definition of doing well by doing good." That sounds great and hard to argue with. So unpack how that actually works.
Wagner: Cap and trade is really just short for creating a market where there was none before. Creating a market for valuable services, in this case emissions reductions, and making sure that people actually benefit when they reduce emissions. It's as simple as that.
A publicly structured program essentially hands out allowances to everyone covered by this cap and trade system, hopefully the entire economy. Once you have that, it is the ones who are more energy efficient, the ones who can reduce their emissions further than the next guy, who benefit.
And the ones who can't, the inefficient ones, are the losers. In the end that's exactly the kind of place we want to get.
TH: When environmentalists wag their finger at cap and trade and say it's a horrible idea, what are they arguing? What's the most common dissent?
Wagner: A common dissent is that this is giving away a right to pollute. It's allowing someone to pollute. Well, news flash, it's already happening. We are polluting left and right, including you and me, of course. We're trying to do all the right things but, well, as the average American we emit about 20 tons of carbon dioxide a year. So we are already polluting. The question is what can you do to get the pollution down? There I'm very hard-pressed to find another way that is quite as effective in the end.
TH: It almost sounds like a moral thing. We don't want policy that says, "it's OK to pollute." Is that it?
Wagner: I guess so. But of course the whole point is to say it's not OK to pollute, and to make sure that everyone gets that message by saying, "If you pollute, you pay." That's as simple as it gets.
And yes, from a purely moral perspective you could argue that you are handing out an allowance that allows one ton of emissions. But really you don't want to hold these allowances. They are worth money. You want to give them up. You want get rid of them. You want to sell them, and in order to do that you need to reduce emissions. In order to make that happen, you need a system that makes emission reductions benefit you personally.
TH: How did we get rid of lead gasoline in the U.S.?
Wagner: Actually, that's one example where something like emissions trading played a quite significant role. To be honest it was a quite different system from other cap and trade systems. But in the early '80s, when the EPA decided that lead in gasoline not only causes engines to run smoother but also knocks a few IQ points off our children, we decided to phase down and then phase out lead in gasoline.
For two or three years during that phase-down we had a trading system in place, and the result was that companies decreased the lead content in fuel faster than anyone thought possible.
They also did it more cheaply, which goes hand in hand because the cheaper it is, the faster the companies will do it. This was probably one of the earliest examples of a successful cap and trade system.