The Law of Demand

According to a recent University of Michigan transportation study, the average carbon emissions per vehicle decreased 3 percent from October 2007 to April 2009. How did we achieve this emissions reductions? Cap and trade? Command and control regulations? No, the reduction instead occurred as consumers responded rationally to higher gas prices.

As a result of higher gas prices last year, consumers bought vehicles with better fuel efficiency and drover fewer miles. Thus, on average, each driver emitted less carbon. This is exactly how a carbon tax would work. The government levies a Pigovian tax roughly equal to the social costs of pollution and lets the market take care of the rest. As gas prices rise, people drive less and choose fuel efficient cars.

Unfortunately, the current administration seems to think that byzantine fuel economy standards will do the trick. But such standards are much more amenable to rent-seeking behavior. This is clearly demonstrated by the fact that the announced standards are favorable to light trucks, which benefits American producers but hurts the environment.

Cap & Trade: The Next Gov't Failure

There is a lot uncertainty about the future effects of the proposed Waxman-Markey climate-change bill. As the Wall Street Journal points out, the bill is full of exceptions and concessions. It will establish a system that looks nothing like the cap-and-trade model I teach to my econ students. According to the Journal:

The leadership's solution to this problem [of placating various Democrats] is to simply claim the bill defies the laws of economics.

The bill is terrible. I'm almost certain the costs of the bill will far exceed the benefits - a classic case of government failure. Once again, according to the Journal:

Americans should know that those Members who vote for this climate bill are voting for what is likely to be the biggest tax in American history.

The Congressional Budget Office (CBO) provided an optimistic appraisal of the bill, but:

A closer look at the CBO analysis finds that it contains so many caveats as to render it useless.

I'm not in favor maintaining the status quo. Global warming is a serious problem that needs to be dealt with soon. (I'm currently writing an article about climate-change cost-benefit analysis.) But I'm beginning to think that cap-and-trade won't work on this scale, given our political system's proclivity for satisfying special interests' rent-seeking requests.

Why can't Congress implement a carbon tax with zero exceptions? Administrative costs would be much lower. The tax revenue could be used to solve other environmental problems. Polluters would directly bear the costs of their action. We wouldn't need additional regulations for vehicle emissions, since drivers would already pay a higher price for low mpg vehicles. Sure a Pigovian tax wouldn't spur the innovation that advocates of cap-and-trade envision, but at least the rules of the game would be set beforehand and the system would be much less amenable to corruption.