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Newly released paper details origins of cap-and-trade


Congress has failed to pass a cap-and-trade program to reduce greenhouse gas emissions. (Flickr: hunxue-er)

Imagine this: A farmer spends months tending to his wheat field only to wake up one morning to find, in peak harvesting season, all of his precious wheat has burned to the ground. The culprit, as it turns out, is a stream of sparks from nearby train tracks.

The farmer demands that the owner of the train tracks install spark-catchers to ensure that this never happens again. But the train owner sees no advantage in installing the spark-catchers. They’re expensive and he doesn’t give a hoot about the farmer’s wheat crop.

[Environment1] It’s a classic dilemma: The farmer faces an economic loss if the train owner maintains the status quo, and the train operator faces an economic loss if he installs the necessary technology to protect the farmer’s crops.

The example of the farmer and the train owner, outlined in a 1960 economics paper by R.H. Coarse, laid the intellectual groundwork for Thomas Crocker, an economics Ph.D. candidate at the University of Wisconsin-Milwaukee, to develop one of the most innovative and controversial public policy proposals of our time: cap-and-trade.

In the farmer analogy, Crocker determined that the most economically efficient solution to the dilemma would not be to impose a particular fix on the train owner, but rather to allow him to come up with a method of reducing train sparks that would meet the farmer’s needs without putting too much of a dent in his wallet. Applying this theory to the environment, he showed how the best way to reduce pollution might be to set up an emissions limit and allow polluters to determine how to meet that limit. Under a cap-and-trade regime, an overall cap is set and polluters that fall beneath that cap can sell permits to those that exceed it.

Crocker summed up the origins of the concept in a never-before-published 2008 draft paper, which he gave exclusively to The Washington Independent. He argued that self-organization through an exchange would result in the best results for all actors.

“Exchange makes people care about each other’s wants,” Crocker wrote. “If you are going to grant me what I want, I must learn what you want in return.”

He added, “Shift the design and location of choosing how to meet a pollution control goal from the regulator to polluters and to sufferers because they know more about what is happening and can happen to them.”

Cap-and-trade was used successfully in the 1990s to reduce sulfur dioxide emissions that caused acid rain, but Congress has been struggling for years to pass a similar program for greenhouse gas emissions. The House passed a cap-and-trade bill last year, but the Senate has failed to move a similar proposal.

But although he devised the idea, Crocker said in an interview with The Washington Independent that cap-and-trade is not the best policy to reduce greenhouse gas emissions and, going a step further, raised questions about climate science.

“The economists who have studied this problem, say, ‘Yes, it’s worthwhile taking some measures,’” Crocker said. “But to get into a great big panic and jump overboard right now is really not appropriate.”

In his 2008 paper, “Trading Access to and Use of the Natural Environment: On the Origins of a Practical Idea from the Dismal Science,” Crocker recounted how he developed the concept of cap-and-trade.

“Extremely few economists … thought about the environment,” Crocker wrote, adding, “Environmental assets were seen as backdrops for the interactions of people rather than assets that people use.”

But the 1960s brought a new subgenre of economics that focused on the environment, and Crocker quickly became one of its most famous students.

As a doctoral student at the University of Missouri and then at the University of Wisconsin-Milwaukee, Crocker began to develop his own ideas. Those idea were influenced partly by his life experiences — his work harvesting timber in Maine made him “somewhat aware of the relevance of incentive,” he wrote in the paper — and partly by his academic mentors. “I sensed the problem; education defined it and provided what was in the early 1960’s the seeds of a systematic approach to it,” he wrote.

In the mid-60s, Crocker’s ideas for establishing a pollution trading framework were beginning to crystallize, in part as a response to his work on the economic costs of air pollution in central Florida. But he had not yet put his ideas on paper.

Then, in 1965, Crocker was given an opportunity to present a paper on air pollution and economics in Washington, D.C. Since he didn’t yet have the necessary data to present a paper on his work in central Florida, Crocker decided to dream bigger, writing “The Structuring of Atmospheric Pollution Control Systems.”

In his 2008 paper, Crocker recounted in detail how his 1966 paper, which is credited with first introducing the world to cap-and-trade, came to be:

One grey Milwaukee day I was sitting in my office contemplating land value data from sunny central Florida. I was trying to develop a model whereby property market values could be used to infer the value of environmental improvements. My mentor, Professor Mason Gaffney, entered to inquire whether I would be interested in preparing and presenting a paper at an upcoming conference in Washington, D.C., on the economics of air pollution. Professor Gaffney had been invited but chose not to go. I don’t know whether he had a conflict or he simply wanted to give me some exposure. He suggested I might report some empirical results from my central Florida work. I didn’t yet have any. Instead, over about a month, I wrote Crocker (1966), a paper now generally recognized as introducing the idea of tradeable permits for access to and use of the services of natural environmental assets.

Nearly 45 years later, cap-and-trade has become the pipe dream of environmentalists and the nightmare of many in the GOP.

Today, Crocker, who is retired but continues to do economics research, says cap-and-trade is not the best way to reduce greenhouse gas emissions. It would make more sense to impose a flat tax on carbon dioxide, he argues. In a phone interview with TWI from his home in Wyoming, Crocker said, “Apart from the question of whether or not it’s appropriate to control greenhouse gases in the first place, and given that you’re going to take some form of control, I believe that emissions taxes for greenhouse gases are more economically efficient than is cap-and-trade.”

Cap-and-trade, which Crocker said is not “inappropriate by any means” to reduce greenhouse gas emissions, works better for traditional pollutants like sulfur dioxide, because “incremental emissions of SO2 do a great deal of damage.”

“Whereas with respect to greenhouse gases,” he continued, “the marginal damages of an additional bit of greenhouse gas is not going to do much harm.”

Because each additional increment of SO2 that is emitted into the atmosphere is so detrimental to the environment, a proper policy must give certainty with respect to quantity, Crocker said. Cap-and-trade puts a hard cap on emissions and therefore controls emissions quantity. A carbon tax, on the other hand, provides certainty with respect to pricing — it imposes a certain cost on carbon — but does not set a limit on how much carbon can be emitted across the economy.

Greenhouse gases, Crocker argued, are not as incrementally dangerous as SO2 and other pollutants. Therefore, price certainty, delivered through a carbon tax, is more important.

More broadly, Crocker raised questions about climate science, arguing that the models used by climate scientists are easily manipulated.

“There’s a great deal of ambiguity with respect to the natural science,” he said. “These models that they employ seems to me, they are numerical simulations, and as with any numerical simulation, a great deal depends upon what values you attach to unknown parameters.”

Stressing that it’s “worthwhile” to work to reduce greenhouse gas emissions, Crocker advocated for a cautious approach to policymaking. “One should hedge, but one should not make big jumps,” he said.

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