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Time to copy the carbon trading market

Marketplace Staff May 23, 2007

Time to copy the carbon trading market

Marketplace Staff May 23, 2007

TEXT OF COMMENTARYSCOTT JAGOW: California isn’t waiting for the federal government to do something about global warming. The state wants to impose its own standards for greenhouse gas emissions from cars and trucks, but it needs federal permission to do so. Yesterday, California demanded the federal government give its OK. California’s also leading a group of Western states calling for a carbon emissions trading market. That, says commentator Glenn Hubbard, is a fine idea.

GLENN HUBBARD: Most serious students of climate change believe that the likelihood of adverse effects is sufficiently great to warrant action.

The Bush administration maintains that overreaction could damage our economic growth, but that’s no reason for inaction.

Here’s where economics comes in. We need take sensible steps that don’t impose economic risks greater than the threat of climate change itself. Like tradable permits.

The government would require businesses like factories and utilities that use coal, oil, and natural gas to buy emissions permits.

Those businesses that can reduce their fuel use and emissions most inexpensively will do so. Those that can’t will end up purchasing unused emissions permits from those that can.

That way no one is constrained to reduce emissions, but anyone that can do it inexpensively will.

Now, permit markets can be volatile, especially when they’re first introduced. That makes it hard to gauge the economic impact of the program.

That’s why it’s important to include a “safety valve”— a cap on the price of tradable permits that limits the cost of the program to business.

Over time, new investment and technology will reduce costs; we don’t want to force overly expensive reductions now when cheaper opportunities are just around the corner.

And pushing too hard, too quickly will simply encourage factories and jobs to move to other countries that haven’t adopted similar policies.

Now some environmental advocates are in a big hurry. They seem unconcerned about economic impacts or argue that technologies exist now to achieve their goals inexpensively.

The former is irresponsible; the latter is economically risky. A serious response to climate change can be neither.

Our first step has to be turning down our emissions without betting the bank. If that kind of plan came out of Washington, that would be a breath of economic fresh air.

JAGOW: Glenn Hubbard was the head of President Bush’s Council of Economic Advisors.He’s now the Dean of Columbia’s Graduate School of Business.

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