Lately I’ve noticed a lot of misconceptions about how various policy instruments for GHG control actually work. Take this one, from Richard Rood in the AMS climate policy blog:
The success of a market relies on liquidity of transactions, which requires availability of choices of emission controls and abatements. The control of the amount of pollution requires that the emission controls and abatement choices represent, quantifiably and verifiably, mass of pollutant. In the sulfur market, there are technology-based choices for abatement and a number of choices of fuel that have higher and lower sulfur content. Similar choices do not exist for carbon dioxide; therefore, the fundamental elements of the carbon dioxide market do not exist.
On the emission side, the cost of alternative sources of energy is high relative to the cost of energy provided by fossil fuels. Also sources of low-carbon dioxide energy are not adequate to replace the energy from fossil fuel combustion.
The development of technology requires directed, sustained government investment. This is best achieved by a tax (or fee) system that generates the needed flow of money. At the same time the tax should assign valuation to carbon dioxide emissions and encourage efficiency. Increased efficiency is the best near-term strategy to reduce carbon dioxide emissions.
I think this would make an economist cringe. Liquidity has to do with the ease of finding counterparties to transactions, not the existence of an elastic aggregate supply of abatement. What’s really bizarre, though, is to argue that somehow “technology-based choices for abatement and a number of choices of fuel that have higher and lower [GHG] content” don’t exist. Ever heard of gas and coal, Prius and Hummer, CFL and incandescent, biking and driving, … ? Your cup has to be really half empty to think that the price elasticity of GHGs is zero, absent government investment in technology, or you have to be tilting at a strawman (reducing carbon allowances in the market to some infeasible level, overnight). The fact that any one alternative (say, wind power) can’t do the job is not an argument against a market; in fact it’s a good argument for a market – to let a pervasive price signal find mitigation options throughout the economy.
There is an underlying risk with carbon trading, that setting the cap too tight will lead to short-term price volatility. Given proposals so far, there’s not much risk of that happening. If there were, there’s a simple solution, that has nothing to do with technology: switch to a carbon tax, or give the market a safety valve so that it behaves like one.