Outlaw Dumping of Carbon Dioxide

One possible policy approach to global warming is to outlaw dumping of CO₂ into the air where it affects neighbors, just as we outlaw dumping human waste onto a neighbor’s lawn. This is not a favored policy approach for now; Dr. Alley knows of no serious proposals to outlaw most CO₂ emissions in the short term. However, some of the proposals in President Obama’s plan involve laws or regulations that reduce emissions, through actions such as requiring that trucks travel more miles per gallon of diesel fuel, or that power plants emit less CO₂ per kilowatt-hour of electric generation. In some sense, this is outlawing a small fraction of CO₂ emissions.

Economists generally recognize the utility of at least some regulations, such as those prohibiting dumping of human waste on a neighbor’s lawn. (Although, the British publication The Economist editorialized against sewers in 1848, as reported by S. Halliday in The Great Stink of London, 1999.) But, there is fairly broad support among economists for using “price signals” instead of regulations where practicable.

Cap and Trade

For example, instead of outlawing CO₂ emissions, governments could set a limit on how much CO₂ could be emitted, and sell or give away permits to emit that much CO₂. Then, the people holding those permits could actually emit that CO₂, or sell (trade) those permits to other people who wanted to emit the CO₂. This process is often called cap and trade. By reducing the permitted emissions over time, or raising the price of the permits, total emissions could be reduced.

At any time, the trading of permits allows the economy to reduce emissions at the lowest possible price. If CO₂ is reduced by regulations rather than price signals, those regulations might be written with an eye toward political expediency rather than economic optimization, and so might end up cutting emissions in rather expensive ways. By letting markets achieve the reductions, more-efficient ways are likely to be found. At the time of this writing, cap and trade was being used in Europe to address CO₂, in the US to reduce acid rain, and in other ways around the globe. Some danger typically exists that political considerations will cause caps to be set so high that there is little practical effect of the policies. However, with appropriately set caps and sufficiently well-regulated and monitored markets and emissions, this approach can work, and has done so in some cases.

In the broadest sense, cap-and-trade with permits sold by the government is a complex way to levy a tax on CO₂ emissions. In part because of the complexity, many economists argue that it would be much more efficient to just tax CO₂ emissions directly.