Off to Market
Over at The New Republic, Gregg Easterbrook takes a look at the three main proposals for energy policy offered by the nonpartisan Resources for the Future in a report entitled New Approaches on Energy and the Environment. While I agree that market-driven solutions are key--as Easterbrook champions below--I am still firm in my belief that legislating standards for fuel efficiency (coupled with market-based incentives and penalties) should also be a tool for setting the agenda. If we're really serious about detaching ourselves from the teet of Middle Eastern oil, we need to send a message to car companies to jumpstart their move to more hybrid-like cars (which are gaining in popularity--heck, the classy, stylin' Prius just voted European car of the year).

Its triumph was the 1991 Clean Air Act revisions that created an allowance-trading program for acid rain reduction. Since 1991 acid rain has declined spectacularly--that's why you never hear about it anymore--and the trading system designed by Resources for the Future is the reason. Not only was the system successful, it cost far less than expected. When the 1991 program was enacted, the Environmental Protection Agency estimated that reducing acid rain would cost about $10 billion a year. It turned out to cost only about $1 billion annually, because trading allowed the system to be efficient in market terms. Trading also created incentives for utility companies to invent new ideas to reduce emissions--because if a company cuts its acid rain below the legal mandate, it can sell the extra credits to someone else.

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The analysts of Resources for the Future offer these basic possibilities for progress on greenhouse gases and foreign-oil dependency: higher taxes on gasoline or on any carbon-containing (fossil) fuel; higher federal miles-per-gallon standards on vehicles; or a carbon-allowance trading system modeled on the acid-rain trading system. If you polled economists, I bet 95 percent of them would prefer higher gasoline taxes, though many would want such taxes to be revenue-neutral, meaning other federal taxes would decline to the same extent the gasoline tax rose. Greg Mankiw, the president's chief economic advisor, favored a revenue-neutral 50-cent gasoline tax increase--favored it, at least, until he accepted his White House job. I'd love to see a dollar-per-gallon increase in the federal gasoline tax, so long as it was revenue-neutral. This would discourage the mega-SUVs and mega-pickups that waste fuel and cause hundreds if not thousands of avoidable highway fatalities annually, while reducing road rage, oil imports, and greenhouse emissions. But what are the odds of a higher gasoline tax going through Congress? You know the answer.

So what about stricter federal MPG standards for vehicles? Resources for the Future adds the nimble idea that stricter MPG standards could be tradable--if one car company's vehicles did better than the standards, it could sell the credits to car companies whose vehicles fell short. Lack of progress on MPG standards, which have not risen since 1988, is the single greatest problem in American energy policy. But the reason MPG standards have not risen since 1988 is that Congress has repeatedly voted not to raise them. The House and Senate have both totally sold out on this issue, and that's just the reality. So the odds of stricter MPG standards are low.

That leaves carbon trading, and here I am guardedly optimistic. The emission-trading regime worked incredibly well for acid rain. "Tradable" is a good word in economics and in politics; systems based on trading allow individuals, not government officials, to be the ones who make the decisions about environmental priorities. Resources for the Future proposes a pilot program that would place a five dollar-per-ton charge on carbon emissions. All companies, such as electric utilities, that emit carbon dioxide would pay five dollars per ton, while companies that sell fossil fuels to individuals, such as gasoline retailers, would factor the charge into consumer prices. Every carbon-emitting corporation would get a maximum level--a "cap." The cap is what causes the reductions, by setting an upper limit. Any company that reduced emissions below the cap would be awarded tradable credits. As with the acid-rain trading program, the latter provision creates an economic incentive to invent ways to reduce greenhouse gases, since extra reductions create a product that can be sold. The product in this case is an emission allowance. Right now, no one is working on technology to limit greenhouse gas emissions because there is no economic incentive to do so. Experience teaches that once there is an economic incentive, human beings prove to be spectacularly ingenious.