Direct bioinvestment vs. governance via incentive?

For the most part I've thought that if carbon dioxide emissions—which we undoubtedly cause, with them in case causing anthopogenic global warming—are a problem, we should primarily seek ways in which to limit the resulting harm. Not to micromanage the economy in how to solve the problem, but to price the external harm into the productive processes, and then let the private economy do its usual optimizing job.

Basically, I advocate a proportional, global, Pigovian effluent fee on CO2 emission. Within that framework, we try to gauge the societal, discounted net harm from the effluent, with the harm being counted over everybody on the planet and the benefit already going to the producers and their clients alone. That usually leads to what you might call "an ecological deficit", which is then priced back into production costs via an effluent fee, based on the best, floating estimate of the external harm caused by such pollution.

Theoretically that is the optimal way to incentivize people to limit their CO2 emissions, while at the same time permitting any and all emissions which are societally beneficial in net. In this case even the Coasean critique of Pigou's reasoning isn't too relevant: there is absolutely no way the whole global community could ever come to an efficient bargain over the price. So it has to be set externally, and enforced by force.

In true economic equilibrium it could be true that capping emissions and permitting trade in them would be equivalent to an emission fee, at the margin. That is what we do now, and it's a vast improvement on what happened before. But I still believe it's inferior to an emission fee, for at least two separate reasons.

First, equity. If you cap and trade, you have to decide who gets the initial rights to pollute, which are to be traded. That leads to a distributional problem and an incentive for corruption, because somebody gets to grant free passes to pollute to some interests, while others then have to pay for the right to pollute by bying the pass from them. While at the margin that probably leads to economic efficiency overall, individual actors aren't going to be too happy about the first getter being granted a free pass/windfall, especially since all of this happens at a global level, with developing countries getting far fewer passes than e.g. us here in Finland.

And perhaps more significantly, even the equivalence between cap'n'trade only works on the margin, not wholesale: once you make a small Chinese iron mill pay for their emissions, it's no more a matter of margins, but of total, inframarginal utility as well. They could go to the red, simply by virtue of having to pay the *absolute* base investment in another's windfall, instead of just the relative, marginal extra price which comes with polluting some. Unsurprisingly they will then oppose the idea doubly compared to what happens here and now.

Second, incentive compatibility at the international level. In equilibrium the marginal costs, and so incentives, would be the same all over, and efficient. But if they lead to sustained income transfers between separate countries, sooner or later one country or another is going to detract from any and all treaties causing that. Even if it's reasonable from the global viewpoint that everybody be taxed for their effluent, it's not too stable if that money flows over national borders.

In this case it doesn't have to. If you look at the basic logic of Pigovian taxes on externalities, they are notably one-sided: the whole incentive effect comes from the tax and doesn't depend upon how the resulting tax income is shared, at all. That same thing is why socialism disconnects people's incentives from the real economy and leads to ruin. But here it leads to another, interesting possibility which is only doable with effluent feeds and not with cap'n'trade:

Why not make the primary tool of climate policy a local Pigovian tax on the effluent? It's after all asymmetric in that you can theoretically reach efficiency while not compensating the victim; the distribution of the proceeds is a one of local income transfer, with nobody getting a windfall apart from what has been decided on the political front. The tax revenue being used for whatever means the national and/or more local governments want. As long as the rate is globally uniform, it will lead to global efficiency, with the resulting income transfers staying local. That ought to make global compliance to a minimum level effluent fees much easier to achieve, oughtn't it?

The first point which elicited this blogpost of mine was a bit different, though. It was diametrically opposed to what I've said above. Namely, it came from the idea that perhaps this idealized economic viewpoint doesn't work too fully either, after all. It then goes to the territory of social and public choice, which us libertarians tend to think about more than most.

So, presume you want to build this sort of a system. Who'd be willing to go along with it over the long haul, within our kind of a polical system? Pretty much nobody of any import. Even if this sort of thing could be pushed through, using heavy public pressure, in one single election, the conviction, the publicity and all of the other things which could carry it along would have waned come next election. Then the policy would be summarily overturned. That is the nature of societal/public choice, after all.

The only way to counteract that tendency is to do something irreversible right now. If the money is already spent, it may have caused some good which can't be reversed. Public investments into bioenergy and the like work like that. Espousal of long term political goals like global effluent fees, don't. So even from my libertarian viewpoint, I'm suddenly not so sure the idealistic, fully efficient effluent fee based policy I've been behind really is the way to go in the end.

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