Academic

Baldwin on Emissions Trading

By Lawrence Solum

Robert Baldwin (London School of Economics (LSE) - Department of Law) has posted Regulation Lite: The Rise of Emissions Trading on SSRN.  Here is the abstract:

Emissions trading is the governmentally - promoted hope for a sustainable world. In different contexts, trading regimes display varying potential - both in absolute terms and in comparison with other regulatory instruments. Emissions trading, however, is a device that raises urgent issues regarding its objectives, cost-effectiveness, fairness, transparency, and legitimacy. Its use places emphasis on its 'acceptability' and the virtues of regulation that is 'lite' because it is non-threatening to the most powerful interests. Emissions trading is resonant with assumptions that are highly contentious - notably that it is acceptable because it involves no losers, or because, in desperate global circumstances, we have no choice but to use it. There is a need to confront the difficult issues presented by emissions trading; to face the challenges of combining 'market' and 'democratic' systems of legitimation; and to avoid taking refuge in all too comfortable beliefs in cumulative checks and balances.

And from the text:

Emissions trading, it is said compares poorly with traditional regulation regarding high-end innovation. This is because trading reduces the incentives for high ? cost facilities to innovate in order to save costs.52 As one critic has contended: ?Why bother making expensive long term structural changes if you can meet your pollution rights from operators that can cut their carbon cheaply??53In short, high-end buyers of credits will tend not to innovate but low end sellers will seek to release credits ? not by engaging in the cutting-edge development of productive innovations, but by implementing low-tech changes. It might be responded that the scenario described is efficient ? that it is better to abate via cheap low-tech means rather than through expensive research and development. Such a response, however, fails to take on board the syndrome of falling abatement costs ? the propensity of initially expensive innovations to develop in the longer term (notably through economies of scale) into cheap, efficient abatement mechanisms. The effect of emissions trading, at least under certain conditions, may be to postpone or reduce the chances of discovering newly efficient abatement systems.

I am recommending this, despite the dubious economic analysis of the quoted paragraph.  As some frequent readers of LTB know, I first became interested in emission trading schemes as a high school student in 1971.  It is interesting how far the idea has come.

Full post as published by Legal Theory Blog on February 28, 2008 (boomark / email).