Altruism and cap and trade

Paul Krugman has written 2010’s treatise on climate change policy. All should read it. The ultimate conclusion is that the probability of catastrophe should guide climate change policy and this is something that I agree with. The question is how and that is a much harder question that Krugman does not really address.

But he does touch on the issue of taxes versus cap and trade but without taking a stand. I suspect he thinks there isn’t much in it. But I do want to comment on one argument against cap and trade that raises its ugly head again:

What Hansen draws attention to is the fact that in a cap-and-trade world, acts of individual virtue do not contribute to social goals. If you choose to drive a hybrid car or buy a house with a small carbon footprint, all you are doing is freeing up emissions permits for someone else, which means that you have done nothing to reduce the threat of climate change. He has a point.

Krugman then dismisses this on the basis that altruism is no basis to conduct policy. However, he could also use some economics. Suppose that altruistic behaviour is currently holding emissions down to a significant degree. If you put in cap and trade, it looks like those actions will lead to emissions being allowed elsewhere relative to not providing those actions. However, that presupposes our would be altruists are naive in their altruism. If they are sophisticated, emissions caps give them more options rather than less for actually reducing emissions. What they can do is buy permits and burn them. They don’t have do change behaviour, altruists just need to be altruistic with their money. Pure, simple and far more straightforward than trying to work out what impact you are currently having by walking and not driving. Certainty should drive more altruistic behaviour, not less.

An emissions tax, it should be noted, does not provide this same opportunity. There are no new options for altruists. What is more, to the extent that such behaviour is holding down emissions, it is also loosening the pressure on governments for a higher tax as they can target the same level of emissions with a lower one. Increase altruistic behaviour and the pressure for a higher future tax is reduced. In other words, it seems that the concern that altruistic actions will come to bite them back with a limited impact on emissions, is even more salient with an emissions tax.

2 thoughts on “Altruism and cap and trade”

  1. “What they can do is buy permits and burn them”. That presupposes that permits would be available – from a practical perspective – to be traded in by individuals. My impression of the debate so far is that permits would be too inaccessbile and too expensive for this to be the case. I beleive that is part of Hansen’s points: the public needs be engaged and one of the ways of doing so is designing a system such that permits are essentially retail rather than intitutional only instruments.


  2. Joshua,

    The altruism issue is slightly more complicated than you describe. Currently, to purchase green electricity, you pay a premium to your retailer of, say, $50/MWh. But, under carbon pricing, everybody will be paying such a premium. An altruist will have to pay an extra $50/MWh to purchase and cancel emissions permits.

    So, an altruist appears to pay twice for being green. In practice they are not. The income from the sale of permits is recycled to taxpayers (or should be). But it does create a PR issue. How do you easily explain to an altruist that they are not being taken for a ride?


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