What’s meant by a “cap and trade” regulatory scheme? As of a decade ago, I couldn’t have told you but I’ve become familiar with this concept and have read widely from both proponents and opponents of the concept. I’m going to try to do justice to the idea here, in a few of its most notable forms but I’m still not entirely sure where I stand on the idea. I can at least say that, in general, it beats “command-and-control.”

Command-and-control is likely the way most of us think of environmental regulation most of the time and it’s a good starting point for this discussion of pollution abatement. Under this framework, government agencies (predominately the EPA) scrutinize the minutiae of production processes that result in pollution and mandate precise protocols for mitigation compliance. We libertarian types have always recoiled from this type of heavy-handed government rule-of-fiat meddling in the manufacturing and energy production sectors. And it was libertarian thinking, in part, that led to something better, beginning around 1990.

The first testing ground for “cap and trade” was the much publicized issue of acid rain. In short, manufacturing, automobiles and especially power generation from fossil fuels sends acidic or acid-inducing emissions eastward with prevailing North American weather patterns. The acidic precipitation impaired plant communities, particularly in high elevations of the Appalachians and Adirondacks and negatively impacted many animals such as, notably, the native brook trout. With the 1970 Clean Air Act and its subsequent amendments, the EPA initially responded by applying mandates to whole production processes, mandates enforced by meticulous and burdensome record-keeping and overseen by an army of inspectors. Construction of new power generation was also delayed by the new regulations as old facilities remained cheaper to run than new, compliant, facilities were to build. But C. Boyden Gray and William Reilly, officials of the first Bush administration, are generally credited with fusing the idea of credit trading to clean air.

In his 1995 tome, “A Moment on the Earth,” Greg Easterbrook chronicled the government machinations that evolved along with the original regulatory framework. There was soon something in the legislation for all big-money interests, including protections for high-sulfur coal producers in Appalachia. The typical right/left battle lines were drawn and protracted compromise processes resulted in an unworkable morass of mandates. Instead, Reilly and Gray proposed a system by which utilities could sell each other the right to pollute. The pilot initiative involved power plants specifically and each power plant was initially given an emission (sulfur) allowance. Plants could not exceed their emission allowances but the particular mechanisms for achieving goals were left in their hands, obviating much bureaucratic meddling and cumbersome compliance. If a plant came in under allowable emissions, it could sell credits to another plant in need of additional production capacity. This resulted in the development of technologies the bureaucrats could have never envisioned because of the economic incentive created. And so, “cap-and-trade” was born.

In his 1990 book, Bionomics, Michael Rothschild laid out the result of his years of research and thought on the environment, one train of thought that had pre-figured emissions trading. A constant theme of this far-sighted work was the idea that the laws governing economics have much in common with the laws governing the natural world. Resistance to these natural market forces, such as in the example of the Soviet Union which was just officially crumbling as this book was published, results in an irresistible pull toward disaster – unsustainability defined. Indeed the book’s subtitle is “The Inevitability of Capitalism.” In the book’s 24^th chapter, Mr. Rothschild introduces the vein of thought that underpins libertarian thinking on “big-picture” environmental issues to this day. The author segues from a discussion of the early ‘80’s savings and loan scandal to ecology:

“Only the self-regulation of the market – where individuals directly bear the cost of their bad judgment – can discipline greed. Whenever the cost of a valuable resource is fixed artificially at zero, that resource will inevitably be abused.”

“Tragically, as long as the political system insists on a zero price for resources that have real value, the pollution crisis will become worse. A black market stimulates abusive private behavior  by setting prices at infinity. A nonmarket commons does the same thing by setting prices at zero. At either extreme, when markets are not allowed to work,the normal self-organizing processes of the economy are straightjacketed.  No efficient solution can emerge.”

There’s much more to explore here, including the application of this idea to commercial fisheries and to global warming. But I’m going to break this into a couple of installments – it can be tedious stuff. I just wanted to introduce and discuss this concept here because I think it’s unfamiliar to most of us, even many who really care about environmental issues. And it’s seldom discussed from a libertarian standpoint, so that’s why I’ve chosen to take it on.