Markets in Everything

Now that the EPA has declared greenhouse gases a threat to public health and welfare under the Clean Air Act (as well as begun efforts to potentially restrict CO₂-related ocean acidification under the Clean Water Act), we're due for a discussion of the relative merits of fighting climate change through command-and-control regulation, as the EPA would likely do, or through market-based mechanisms, as President Obama and Congress would want to do through a cap-and-trade system. As it happens, Robert Stavins provided a good starting point last week in a post that tried to explain why enthusiasm for market-based mechanisms like cap-and-trade has been on the rise among environmentalists. As glossed by Danny Morris over at Common Tragedies, Stavins' reasons are:

1. Increasing pollution control costs
2. Strong support from parts of the environmental community
3. Market-based solutions were designed to reduce pollution
4. Separate consideration of goals and policy instruments
5. No status quo exists for unregulated pollutants, so there is not constituency to fight for them
6. Political shift to accept markets as ways to solve social problems
7. Luck put the right people in the right place

Both Morris and Tim Kidman's commentary on Stavins are worth reading, and I'm largely in agreement with them about the limits of applying economic theory to environmental problems. I would add that, in addition to markets not being a universal solution, market-based mechanisms like cap-and-trade aren't even markets. That is, it may be more accurate to say that a cap-and-trade system is a simulacrum of a market or, less charitably, an instance of "political capitalism," to use Will Wilkinson's phrase. Unlike ordinary markets, where there is no overarching goal except the interests of the individual participants, cap-and-trade has an explicit end: reduce pollution. While governments may set rules to ensure that ordinary market transactions are fair and efficient, they must design a pollution market from scratch -- after all, firms seldom reduce their pollution output voluntarily. And whereas ordinary markets generally tend to grow over time, cap-and-trade systems must get smaller and smaller (in terms of the volume of pollution credits traded) if they are to achieve their goals.

Seen in this light, the differences between a command-and-control approach and a market-based approach to dealing with climate change aren't quite so distinct from each other. Granted, if the EPA tries to regulate greenhouse gases using the Clean Air Act, it's going to produce much different results than, say, the Waxman-Markey cap-and-trade plan. But in both cases, the importance of having well-designed rules and a competent civil service enforcing them is manifest. And that, in turn, is not a guaranteed outcome.