The Economics of Global Warming: Fred Krupp and Miriam Horn’s “Earth: The Sequel”

The cover of Fred Krupp and Miriam Horn’s book “Earth: The Sequel”I’m a bit behind the curve in getting to Fred Krupp (the president of Environmental Defense Fund) and Miriam Horn’s new book Earth: The Sequel— my reading time ain’t what it used to be! While other green bloggers have beat me to the punch on this one, I still wanted to weigh in on this book, especially since the US Senate begins its debate of the Lieberman-Warner-Boxer Climate Stewardship Act today. While this timing was a matter of luck, as opposed to planning, Krupp and Horn’s book provides some valuable insight into the debate that will occur on the Senate floor this week… let’s hope a few of our esteemed representatives have read it.

At it’s core, Earth: The Sequel is an argument for cap-and-trade as a viable, market-based mechanism for addressing climate change. While long-time sustainablog readers are likely up on the concept of cap-and-trade, it’s worth a quick explanation. Krupp and Horn define the concept in the book’s first chapter:

The U.S. Congress must set a legal and steadily declining limit on global warming pollution. The allowances will be divvied up among emitters, or auctioned by the government to raise revenues — or some combination of the two. Polluters who emit more will need to pay for the extra pollution reduction achieved by others; those who can reduce global warming pollution further will profit by selling those reductions in an open market. We can, in short, use the power of the market system to climb out of the hole created by flawed markets.

One might worry that what follows such an introductory chapter might be a long, boring treatise on market-based economics and the environment; rather, the bulk of the book focuses on the companies (mostly start-ups) involved in innovative research and development of next-generation clean energy technologies. I’ll be discussing some of those stories in subsequent posts at CleanTechnica and Ecopreneurist. Today, I want to stay focused on this main argument: cap-and-trade is the mostly viable method of achieving significant reductions in greenhouse gas emissions.

Krupp and Horn acknowledge the debate over this issue: many economists (including Nobel Prize winner Joseph Stiglitz) think a carbon tax provides more promise than cap-and-trade. Stiglitz argued that if the prices of carbon sinks low enough, it pays to pollute; a tax can keep the price in line with the costs imposed by greenhouse gas emissions. It could also provide government revenue for investments in infrastructure, research and preparedness. Krupp and Horn argue that a cap-and-trade system could provide government revenue through the auction of permits, and that such a system will work much better to harness the market: “A tax creates no such market, and so fails to enlist the full range of human potential in a struggle where every bit of creativity is needed.” Furthermore, a tax involves elected representatives in a guessing game: what’s the right price to spur the private sector into action? If they guess too low (and you can bet lobbyists from across the spectrum will push for that), little to nothing is gained.

I tend to agree that letting government set prices is a dicey proposition; rather, our representatives should focus on their main role of protecting the commons by establishing a cap based on the best science available, and then letting the market sort out the prices. Greenhouse gas emissions must have costs associated with them in order for the market to factor them in (or to factor in the value provided by nature’s services), but government generally does a lousy job with establishing prices themselves (just as it does with picking technologies, another argument in this book).

I’m interested in your thoughts, though: what’s the best way to harness the market to address climate change? I’ve created a forum for this discussion, so please share your thoughts.

I’ll continue my discussion of Earth: The Sequel tomorrow at Ecopreneurist. And, if you want to see a really good explanation of cap-and-trade, check out Dr. Holmes Hummel’s PowerPoint presentations on the subject.

  1. miggs

    I’m happy to take up your question on the best way to harness the market to mitigate climate change. I’m associated with Recycled Energy Development, a company that converts manufacturers’ waste heat into electricity and steam. The result is greater efficiency — which means lower greenhouse emissions AND energy costs. We also can do “combined heat & power” plants, which generate the power for a manufacturing facility and, again, recycle waste heat into more power and steam. EPA and DoE estimates suggest that these technologies could provide 40% of U.S. electricity — slashing greenhouse emissions by about 20% while cutting energy costs. The only reason more isn’t being done is that regulations give inefficient utilities a monppoly and make it hard for more more efficient options to emerge.

    So, first proposal: ease utilities’ monopoly protections.

    Second: amend the Clean Air Act, which now voids the operating permits of any power plants that want to take a few steps to improve their efficiency. (Old, dirty plants were grandfathered in; if they change the plants in any way, they’re subject to new rules; as a result, the plants are left unchanged.)

    Third, establish a cap-and-trade system in which dirty producers pay clean ones for the right to pollute. Do NOT create a government-run slush fund that doles out subsidies to energy companies, a la Lieberman-Warner. Instead, let the market pick the winners and losers. In the process, the emissions limit should be based on efficiency — that is, on pollution per unit output — to reward clean, productive plants.

  2. Bobby B.

    Any cap-and-trade (or tax) system on carbon emissions is nothing more than a redefining of the socialist model for confiscatory wealth redistribution. Although we generally think of taxing “the rich” in terms of wealthy individuals, now our focus has become the evil industrial giants. And they are “evil” because – like rich individuals – the presumption is that they had to have done something unethical to become wealthy. Rich individuals are presumed to have achieved wealth via the silver spoon phenomena, plain old luck, or dirty tricks. Big corporations are presumed to have achieved wealth on the backs of the working class and shady deals in smoke-filled rooms. Although a few highly publicized examples and some well-written novels have made a case for such presumptions, past Robin Hood economic schemes have done little to separate the rich from their riches. Increasing the capital gains taxes keeps speculators from investing, which only trickles down to hurt the little guys. Luxury taxes only encourage the wealthy to take their business offshore, beyond the reach of such taxes, which only serves to put the little guy out of a job. Sin taxes on alcohol and cigarettes have created a black market that negatively impacts honest business people. It’s interesting that the schemes designed to give the little guy a “leg up” on the big boys only keeps the big boys – big.

    So, a new scheme has been developed across the pond in the form of a cap-and-trade system on carbon emissions. The old guard players get penalized for their emissions, so that the green upstarts can have some operating capital. Why do these wonderful green businesses require a government mandated break to compete in the market? Even though the system is approaching failure in Europe (just like socialized medicine), some in the United States believe that we’ve got what it takes to make a flawed idea a success. And believe it or not, I am coming around to agree with the greens. You see, the US is a marketer’s paradise full of consumer’s just waiting to receive direction as to where to spend their purchasing dollars. Whereas in Europe the emphasis was on the taxing and redistributing of wealth, here in the States the appeal is being made to our sense of doing what is considered right by an imperiled planet while sticking it to the man – whoever he is. Buy a reusable tote bag to save trees and reduce the amount of plastic that helps feed big oil’s bottom line. Switch to CFL’s to reduce power consumption and your personal carbon footprint, and cut into big energy’s profits. The list of examples is and has always been endless, but there is new angle being played that I believe will carry the movement into widespread acceptance across the United States. Religion.

    For the first time in US history, the marketers of green (ergo socialism) have established an alliance with mainstream religion (i.e. the Judeo/Christian faiths). This alliance is beginning a metamorphosis from shared beliefs in conservation to an entirely new religion. Gaia is equivalent to Jehovah. Pantheism (which stresses the interwoven relationship of all living things) is replacing the human/Creator relationship. Green Works (good deeds) are replacing Grace (something unearned). In this new religion mankind’s eternal judgment is weighed against his individual efforts to save the planet (a.k.a Mother Earth, Gaia, god). Does anyone else find it interesting that “religious” people are not questioning – and in many cases are aiding – this transition? Is anyone else amazed that religion is moving away from man needing God to save him to god needing Man to save her? Maybe I’m blowing it out of proportion, but faith is directly tied to morality, and different faiths have different codes of conduct. What morality will follow a religion that supports population control, supports abortion on demand, allows millions to die through pesticide bans, equates boys to rats to pigs to dogs, etc.? Will we enter a “Logan’s Run” type reality where we all have government assigned expiration dates? Sound farfetched? Maybe. But check out this green website that calculates when you should die based upon your carbon footprint:


    Yikes! And sorry about ranting for so long, but it’s been a while since I’ve gone on a rant. Green is about more than business, more than politics, more than the planet, and more than faith. If you think otherwise, you are fooling yourself. A green shift will affect everyone differently. Some may benefit, many will not.

  3. Jeff McIntire-Strasburg

    Bob– Only have a few minutes here before listening to presentation of executives from one of those giant, evil corporations… but a few notes:

    1. Cap and trade is as American as baseball… first use of it was here, and implemented under the first Bush administration to control sulfur dioxide emissions (a leading cause of acid rain). It worked. Now, CO2 is a different story because of the global implications of climate change (acid rain happened closer to the source of the pollution)… but there’s tremendous potential for the system to work. See Krupp and Horn’s first chapter (available online for free at Amazon).

    2. Cap and trade isn’t about taxing or punishing anyone — it’s about factoring in the recognition that greenhouse gas emissions impose a cost that must be paid by someone. If a free market’s going to work, it’s got to have the right information going into it… The current system is really more socialistic: business pollutes, and government pays the costs, thus making costly activities more “affordable” in the short term. You’d rather pay the government to deal with these issues? Isn’t a free market, given the right information, more agile in terms of finding creative solutions that lower costs?

    3. A government break? Freedom from royalty payments on oil and gas leases is a government break. Loan and insurance guarantees are government breaks. The companies in this book have all received millions of dollars in backing from some of the most successful investors out there… but having to compete against companies and technologies getting government breaks puts them at a distinct disadvantage. Cap and trade gets government out of the way of the market… but also require that government does its actual job, which is to protect the commons.

    I’ll have to get to the rest later… but always good to have you here… requires me to think!

  4. Bobby B.

    1. I thought that the incidences of acid rain were reduced via the installation of scrubbers to knock out the SOx and NOx in the exhaust flues of large factories; not the transference of monies from one entity to another.

    2. Your statement “it’s about factoring in the recognition that greenhouse gas emissions impose a cost” is still just the result of academic consensus, not scientific fact. How is government (i.e. the taxpayer) paying any costs? Clean-up efforts are generally funded by the polluter and overseen by government authorities. Sure, the polluter offsets the expense via higher prices and we all get taxed to support the ever-growing government authority, but we can still choose not to purchase goods from the polluter if we want to negatively impact his bottom line even though we can’t do much to avoid taxation.

    3. The libertarian in me agrees with getting the government out of the market, but we have become so dependent on cheap staples (food, energy, etc.) that undoing what is in place will impact the lower- and non-wage earners the hardest and the longest. That action will make more people dependent on the government dole. In you scenario, the country transitions from what you call a socialist business model to a socialist society in general. Being a member of the unwashed masses, I prefer living under the belief that I have a measurable amount of personal freedom vis-a-vis my buying power. I would suspect that most people also enjoy this. If deregulation leads to hyper-inflation and millions of us are suddenly left without any buying power, the majority will look to the government to provide sustenance. I’d rather work for “the man” than be forever enslaved by “big brother”.

  5. Environmental Taxes: Better for the Planet & Economy | Sustainablog

    […] Cap-and-trade systems using tradable permits are sometimes an alternative to environmental tax restructuring. The principal difference is that with permits, governments set the allowed amount of an activity and let the market set the price of the permits as they are auctioned off or given away. With environmental taxes, in contrast, the environmentally destructive activity’s price is incorporated in the tax rate, and the market determines the amount of the activity that will occur at that price. […]

  6. Agree? Lowering Income Taxes While Raising Pollution Taxes Reaps Great Returns

    […] Cap-and-trade systems using tradable permits are sometimes an alternative to environmental tax restructuring. The principal difference is that with permits, governments set the allowed amount of an activity and let the market set the price of the permits as they are auctioned off or given away. With environmental taxes, in contrast, the environmentally destructive activity’s price is incorporated in the tax rate, and the market determines the amount of the activity that will occur at that price. […]

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