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Krugman: Cap-and-Trade Might Stimulate Economy

The objections to cap-and-trade legislation have been almost entirely economic: an emissions reduction program, the argument goes, would raise energy costs and cripple industry, while also increasing people’s electricity bills. But today Paul Krugman makes the case for cap-and-trade as an economic boon that could stimulate flagging business investment.

His reasoning is quite simple, though it’s been strangely absent from the climate debate. Cap-and-trade won’t take effect until at least 2012, meaning that higher electricity costs won’t kick in for several years. But business investment will, since industries will begin the transition to cleaner means of production in anticipation of the legislation’s onset:

Right now, the biggest problem facing our economy is plunging business investment. Businesses see no reason to invest, since they’re awash in excess capacity, thanks to the housing bust and weak consumer demand.

But suppose that Congress were to mandate gradually tightening emission limits, starting two or three years from now. This would have no immediate effect on prices. It would, however, create major incentives for new investment — investment in low-emission power plants, in energy-efficient factories and more.

As a result, cap-and-trade could help pull us out of the recession in the short term, while its moderate negative economic impact wouldn’t take effect until we’re in a better position to cope with it. It’s a compelling argument — but given conservatives’ strong distaste for Krugman, don’t expect it to have too profound an effect on the debate over climate change legislation.

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