Resident Scholar Kenneth P. Green

Mr. Pizer makes many claims for the superiority of emission-trading regimes over a revenue-neutral carbon tax. I'll examine two here: First, the claim that the successes of lead and sulfur trading demonstrate the utility of carbon emission trading regimes. Second, that price volatility can be averted with the proper use of "safety valves."

Do SO2 and lead trading demonstrate emission trading is a viable option for greenhouse gases? A bit of drilling down suggests not. Sulfur and lead trading were local issues, and were pollutants of relatively short duration in the environment (before being rained out). There were far less entities that had to trade (as compared with greenhouse gas trading), and the chemicals in question were easily measured at the point of emission. Initially, SO2 trading was only applied to a single sector: Only 110 coal-fired power plants were included in the system, subsequently expanded to 445 plants. In addition, there were readily available technological options to reduce emissions. Carbon trading features none of these: There are no off-the-shelf technologies that can reduce the carbon content of fuel; there would be many thousands of diverse trading entities across multiple sectors of the economy (not simply coal power generation); emissions can only be monitored by proxy indicators; and the pollutants themselves are of long to extremely-long duration in the environment.

Can safety valves fix the volatility issue? Mr. Pizer points to the success of the SO2 trading program to suggest carbon trading would work well to control carbon and avoid price volatility. But as my colleagues and I point out in a recent AEI Environmental Policy Outlook, "There has been significant volatility in emission permit prices, ranging from a low of $66 per ton in 1997 to $860 per ton in 2006, as the overall emissions cap has been tightened, with the price moving up and down as much as 43 percent in a year. Over the last three years, SO2 permit prices have risen 80 percent a year, despite the EPA's authority to auction additional permits as a "safety valve" to smooth out this severe price volatility." Carbon trading has fared no better in initial runs, as economist William Nordhaus points out: "We have preliminary indications that European trading prices for CO2 are highly volatile, fluctuating in a band and [changing] +/- 50 percent over the last year."

It is true, in theory, that a perfectly designed carbon trading system can match the efficiency of a carbon tax. However, in practice, emission trading systems have been plagued by corruption and subversion that make such a perfect scheme highly unlikely.

Kenneth P. Green is a resident scholar at AEI.