Cap and Tirade: Hansen and Krugman Can't Agree

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NASA scientist James Hansen and lefty economist Paul Krugman both want to save the planet from disastrous climate change, but can't quite agree on how. Yesterday, they traded op-eds in the New York Times over the idea known as "cap-and-trade."First, here's how cap-and-trade works: The government requires big polluters to carry permits that allow them a certain volume of harmful emissions. The government then issues a limited number of these permits, which limits the total national volume of harmful emissions. This is the "cap." If one polluter cleans up its act, it can make some extra money by auctioning off its spare pollution permits to another. That's the "trade" part. Our total emissions are capped, and market trading sets the price of pollution depending on how much different industries and businesses feel they need to do it.James Hansen doesn't think it's a good idea:

Because cap and trade is enforced through the selling and trading of permits, it actually perpetuates the pollution it is supposed to eliminate. If every polluter's emissions fell below the incrementally lowered cap, then the price of pollution credits would collapse and the economic rationale to keep reducing pollution would disappear.

Hansen thinks that a tax on carbon is the only way to go. And Paul Krugman disagrees:

If you use a tax, you know what the price of emissions will be, but you don't know the quantity of emissions; if you use a cap, you know the quantity but not the price. Yes, this means that if some people do more than expected to reduce emissions, they'll just free up permits for others-which worries Hansen. But it also means that if some people do less to reduce emissions than expected, someone else will have to make up the shortfall. It's symmetric; there's no reason to emphasize only one side of the story.

Hansen's issue seems to be that, under a cap-and-trade system, the total volume of pollution will never drop below the cap because the market will always buy up all the permits. But that can be addressed with a cap that drops over time. Their back-and-forth sums up a longstanding debate: For cap-and-trade, the devil is in the details, and there are lots of ways for business and politics to defang a bill. But a carbon tax is a political nonstarter.This is a great time to revisit Ben Jervey's column on a third option called cap-and-dividend. A cap-and-dividend system would put a cap on the first producers of fossil fuels. This is better than capping industrial pollution because it adds a cost to all carbon, whether it's emitted from a power plant or a car's tailpipe. But those costs are passed along to energy consumers (i.e. everyone). That's addressed with the dividend part:

All (or most) of the revenue raised from carbon permit auctions would go back, in equal shares, to the American people. Barnes calls it an "Atmospheric Trust" that would work like the Alaskan Permanent Fund, which sends everyone in the state a check each year for their share of oil revenue.Higher energy costs, then, would be offset by monthly or quarterly direct deposits into the bank accounts of anyone with a social security number. Because everyone gets an equal share, it becomes a progressive system that best benefits the lower-income families who'd potentially suffer the most from rising energy prices. The paybacks would more than make up the difference for a poor family with smaller energy demands, but it wouldn't cover the increased costs for the millionaire with two 4,000 square foot houses and a private jet. And that's just fine. Overall, most folks would make money from a pure cap-and-dividend program.

The public could get behind that, right?