A greener private sector: Climate economics


Regardless of whether an economy is socialist or free market based, the private sector will consistently be driven solely by greed and initiative. Following his second inaugural address, Franklin D. Roosevelt said, “We have always known that heedless self interest was bad morals; we know now that it is bad economics.”


Almost 80 years later, we know it’s bad for the environment, too.

It is long past time to do something about controlling emissions of carbon dioxide and nitrous oxide. Since 1996, the United States has been the world’s leading emitter of greenhouse gases. If we continue with business as usual, for the sole purpose of short-term financial gains, many scientists say we are facing a catastrophic rise in global temperatures. To avoid that catastrophe, the government  absolutely must answer the call to wean our private sector from the use of fossil fuels. What’s the best answer?

Cap and trade legislation.

Cap and trade laws enact the concept that businesses should be limited in how much they pollute. A ‘cap’ is provided, and however much companies go over the cap, they are required to purchase an accordant amount of licenses, or tokens (a ‘token’ is often considered synonymous with a tax). Tokens may be purchased from companies that are under the provided cap, not just from the federal government. This gives everyone an incentive to reduce pollution.

Conservatives often point to tokens and call them ‘taxes’, thus oversimplifying the system. If the government simply auctions off licenses and collects the revenue, then it is just like a tax. Cap and trade as proposed, however, often involves handling out licenses to existing players in the free market, so the potential revenue goes to industry instead of government. There is a consensus among economic modelers that this is a market-based approach.

Politically speaking, conservatives have a point about the costs of action regarding cap and trade. Capping emissions would slow economic growth—but not by much. The Congressional Budget Office, relying on a survey of models, concluded that cap and trade as proposed would reduce the projected annual rate of growth for GDP between 2010 and 2050 by about .03 to -09 percentage points.

While it’s unlikely that the CBO got all the numbers right, the U.S experience from its cap and trade program for acid rain (1990) suggests the CBO is more likely to overstate than understate economic costs. In fact, the former cap and trade law’s costs came in far below initial predictions.

So why do the opponents of cap and trade believe that capitalism can’t find ways to make do in a world of reduced carbon emissions? Why do they think the marketplace loses its magic as soon as market incentives are invoked in favor of conservation? The real-life effects of cap and trade is not very much at odds with typical conservative rhetoric. In general, what the models can’t account for is creativity; surely, faced with an economy in which there are big monetary trade payoffs for reducing gas emissions, the private sector will come up with ways to limit emissions that are not yet in any model.

Clearly, opponents of cap and trade abandon all faith in the ability of markets to cope with climate-change policy because they simply don’t accept  government intervention. The truth is that there is no credible research suggesting that taking strong action to limit pollution is beyond our market economy’s capacity.

The cost of inaction by the government should be intolerable to the green movement. We have a good sense of the costs of cap and trade—and they’re manageable. What we don’t have a good sense of is the incredibly unfortunate consequences of living with the status quo. Now we need the U.S government to lead the world in progressive climate economics, and the political will to do what’s right for our planet.