Wednesday, August 30, 2006

California tackles global warming

A student emails me some kind words and also some news about California's latest environmental policy:

I took Econ 110 here at BYU over the Summer and we used your excellent book (Principles of Economics) as the text for our class. It is probably one of the very few texts that I will be keeping around with me as I graduate and move on.

On a less "brown-nosing note" I thought you might be interested in this article from the Guardian regarding California and Arnold's deal with the Dems to create an exchange for companies to buy/sell/trade pollution permits; they call them emission credits... same thing. I guess my home state (one of the most polluted) is finally coming around and smelling the roses... or at least making it possible for everyone else to smell them! :-)

Based on the article (and a similar one at the Washington Post), the proposed new system for carbon emissions appears to be exactly the sort of pollution permit market discussed in chapter 10 of my Principles text and which economists have long endorsed.

The article does not say how these permits would be allocated. Ideally, they would be sold. A sale provides the government nondistortionary revenue that can be used to reduce distortionary taxes. If that is the case, I will make Arnold honorary president of the Pigou Club.

In many similar cases, however, the permits are given out for free to established firms. This is surely second-best from the standpoint of economic efficiency. And it is questionable on the grounds of equity: Why should established polluters get a free ride while future polluters have to pay for the right?