McCain Doesn’t Understand His Own Cap and Trade Policy?

June 17, 2008

This is truly baffling. In a recent press conference, Presidential Candidate John McCain had this to say about how he plans to regulate air pollution:

MCCAIN: I believe in the cap-and-trade system, as you know. I would not at this time make those — impose a mandatory cap at this time. But I do believe that we have to establish targets for reductions of greenhouse gas emissions over time, and I think those can be met.

This comment makes very little sense, though it might not be immediately apparent why.

The issue for air pollution, in economic terms, is that there is no market to ensure an efficient use of the atmosphere. No one “owns” the air, and so no one can change “rent” on firms that use it as a dumping ground for industrial waste. The result is that firms treat the disposal of their airborne wastes as if it were a free resource, and pollute far more than they actually would if the environmental costs of pollution were actually factored into the market.

The whole point of a cap-and-trade system is that you artificially create scarcity in the market for “polluting” by issuing a limited amount of shares, each of which represents a certain amount of pollution you are allowed to create. This scarcity then forces companies to seriously consider how much their relative need to pollute is worth to them. Some companies can afford to pollute less at certain times, and so they can sell their shares to companies that can’t afford to cut pollution as much. If situations change later, they can buy them back as needed.

The end result is restores a great deal of the economic efficiency and flexibility that you’d get with a normal market, but that you’d lose with traditional, static regulations (in which a set cap impacts all companies equally, despite their very different underlying incentives and needs). And the beauty is that the government can still set an overall level of allowed pollution just by changing the value of the shares. It’s one of the biggest no-brainer improvements to government regulation in a long time: you lose none of the overall control over total pollution, but you gain a self-adjusting system that increases overall efficiency.

McCain, on the other hand, isn’t making any sense. How can cap-and-trade work if the system isn’t “mandatory?” Our atmosphere isn’t actually owned by anyone, and there isn’t actually a limited amount to which all industries can use it. The market only exists insofar as the government requires everyone to pretend that it does.

Confusing the issue even more, McCain talks about how he intends to establish “targets” for less pollution. Again, this makes no sense in the context of cap-and-trade unless the “cap” part is a mandatory and enforced total limit. No capped total limit on pollution, no scarcity of pollution shares, no market, no reason to buy and sell pollution permits, no cap-and-trade system at all. McCain is talking as if by “target” he meant “wishful thinking” and that he expects that the pollution levels will simply, by happy chance, meet his hopes.

So what the heck is he talking about? Another, older, interview gives us a clue:

It’s not quote mandatory caps. It’s cap-and-trade, OK. It’s not mandatory caps to start with. It’s cap-and-trade. That’s very different. OK, because that’s a gradual reduction in greenhouse-gas emissions. So please portray it as cap-and-trade. That’s the way I call it.

It appears that McCain has been spending far too much time with his PR spin team, but doesn’t quite understand what they are telling him to say. What they want to do is have him avoid using the term mandatory caps, and use the term “cap-and-trade” instead. The latter sounds better, the former scares industry.

But somehow, along the way from this interview to yesterday’s press conference, it seems as if McCain got it into his head that this is more than a difference in political language. That he really is against mandatory caps, and supports cap-and-trade… instead of just being instructed to avoid the former terminology in favor of the latter.

HT: Gristmill.