The Folly of 'Cap and Trade' Approach to Pollution Reduction
Pollution control is mandatory if humanity is to survive, but the way that governments world-wide are going about it is astonishingly insane
September 7, 2009
Fred Foldvary, Ph.D.
Economist

There is a movement in government circles to bribe less developed countries into accepting limits on their pollution. A document of the G20 Climate Finance Experts Group click here calls upon the wealthier developed countries to give environmental protection money to the governments of developing countries.

Congress and the Obama administration are assembling a “cap and trade” law that in effect is a tax on pollution. Some are thus calling it “cap and tax.” The total amount of pollution will be capped with an upper limit, and companies will buy pollution permits in order to be able to produce and pollute. This will amount to an enormous tax on production.

A pollution tax would not harm the economy if it were revenue neutral, so that income taxes would be cut by the amount of the pollution tax, Indeed, such a “green tax shift” would benefit the economy, since income taxes have a deadweight loss, a burden on the economy beyond the tax burden. In contrast, pollution taxes do not have this excess burden, since the tax shift removes the social cost of the pollution, in effect removing the subsidy to polluters.

But no! The cap-and-trade being enacted by Congress and pushed by the executive branch will not be accompanied by an equal income tax reduction. Just the opposite: the Obama administration seeks tax increases on upper-income families and businesses. Moreover, the cap tax will be imposed on everybody, rich or poor.

Now comes word that instead of using the pollution tax revenue to reduce punitive income taxes, the cap tax will be used to bribe developing countries to reduce their pollution. This bribing is completely unnecessary. China, India, Indonesia, and all other developing (or not developing) countries can efficiently reduce their pollutions with a green tax shift, a tax on pollution offset by reduced taxes on income, value added, goods, and trade.

Pollution control is mandatory if humanity is to survive, but the way that governments world-wide are going about it is astonishingly insane. Regulations, cap and trade, and subsidies have not worked, as the plundering of the planet may be accelerating, not slowing. An example is the huge and growing mess of plastic litter amassing in the Pacific Ocean.

The solution is so simple, that a 5th grader would have no trouble understanding it. Just punish the polluters with a stiff charge equal to the cost of the damage. There is no need for a complex “cap and bribe” system. Just send the polluters a bill. They will then decide whether it is cost effective to keep on polluting, and if they do pollute, they will have compensated society for the social cost.

There is no need whatsoever to bribe less-developed countries to reduce their pollution. They too can have green tax shifts. They refuse to do so because they seek to extort bribe money from the USA and the European Union. The more developed world should refuse such extortion.

The chiefs of China know they need to reduce their pollution, since China is slowly poisoning its economic base. China is committing slow suicide by ruining its rivers, contaminating its soil, expanding its deserts, and choking on air pollution. China is on a rise and fall parabola path. But the prospect of multiple billions of dollars extorted from the USA prevents the Asian, African, and Latin American chiefs of state from confronting their pollution problem. The prospect of cap and bribe is increasing rather than reducing pollution.

If you think the angry reaction of some Americans to the socialization of medical care is worrisome, wait until the American public becomes aware of the cap-and-bribe policy. Americans will turn against pollution control, revolted by the prospect of giving away billions to China and India, when Asians already hold trillions of dollars from the trade deficit. This will set back pollution control, leaving wide open the path to an earth-destroying climate catastrophe.

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Fred Foldvary, Ph.D.
Economist

FRED E. FOLDVARY, Ph.D., is an economist and has been writing weekly editorials for Progress.org since 1997. Foldvary's commentaries are well respected for their currency, sound logic, wit, and consistent devotion to human freedom. He received his B.A. in economics from the University of California at Berkeley, and his M.A. and Ph.D. in economics from George Mason University. He has taught economics at Virginia Tech, John F. Kennedy University, Santa Clara University, and currently teaches at San Jose State University.

Foldvary is the author of The Soul of LibertyPublic Goods and Private Communities, and Dictionary of Free Market Economics. He edited and contributed to Beyond Neoclassical Economics and, with Dan Klein, The Half-Life of Policy Rationales. Foldvary's areas of research include public finance, governance, ethical philosophy, and land economics.

Foldvary is notably known for going on record in the American Journal of Economics and Sociology in 1997 to predict the exact timing of the 2008 economic depression—eleven years before the event occurred. He was able to do so due to his extensive knowledge of the real-estate cycle.