No Nation Was Ever Ruined By Trade

“Canada is a country whose main exports are hockey players and cold fronts.  Our main imports are baseball players and acid rain.”

                                                                                        Pierre Elliott Trudeau

 

One of the accusations frequently leveled at environmentalists is that they are, much like meteorologists, hopelessly fickle.  People remember widespread reports in the 1970’s about the possibility of global cooling and the potential imminent onset of another ice age, when now all the talk is about global warming.  Or they recall something of Paul Ehrlich’s dire predictions that agricultural production would be incapable of supporting the world’s population, which they watched grow by more than a factor of two in concert with the development of an obesity epidemic.  Or they remember how the controversy over acid rain became such an issue between the United States and Canada, so jeopardizing the Canada – U.S. Free Trade Agreement that Prime Minister Brian Mulroney cynically wondered whether it would be necessary to go to war with the United States over the issue. 

No one talks about acid rain these days, at least not the way they used to.  But what changed? 

The impression that many in the public seem to have is that acid rain became an issue in the early 1980’s, when images of dying forests and lakes were widely circulated, and then withered away as climatologists shifted their focus to other issues.  The reality is, of course, very different.  Ever since the dawn of the Industrial Revolution, the effects of acidity in precipitation have been noted, with the term “acid rain” being coined by Robert Angus Smith in 1872.  It is associated with the emission of sulfur-, nitrogen-, and carbon-containing gases as byproducts of industrial processes that produce acidic compounds when they react with water.  And the reason it is not discussed as widely as it once was is not because the issue mysteriously vanished or because climatologists are opportunistically fickle, but because actions were taken to reduce its impact.

It was George H. W. Bush who had pledged to become the “environmental president” and who in 1990 supported what was then an innovative approach to reducing targeted emissions.  The basic idea was one  that had been studied theoretically by economists and which attempted to adapt market mechanisms as an indirect form of regulation.  Rather than dictate through strict regulation how emissions should be reduced, the Clean Air Act was amended to put those market mechanisms in place by establishing what has since become known as a “cap and trade” system.  The basic idea was to limit the aggregate sulfur dioxide emissions from different sources, but to permit allowances to be traded so that the market would be involved in determining which sources were permitted to produce emissions within the limits and at what levels.  There were many criticisms of the approach, most notably from environmentalists who fretted that it allowed large polluters to flex their economic muscle in buying permission to pollute. 

But the program is largely acknowledged to have been a success, not only achieving full compliance in reducing sulfur dioxide emissions but actually resulting in emissions that were 22% lower than mandated levels during the first phase of the program.  This was also achieved at a significantly lower cost than had been estimated, with actual costs now determined to be about 20 – 30% of what had been forecast.  The annual cost of having companies figure out for themselves how to reduce acid-rain emissions has been estimated at about $3 billion, contrasted with an estimated benefit of about $122 billion in avoided death and illness, and healthier forests and lakes.  

The success of the acid-rain program is naturally being considered as a way of addressing carbon emissions that are associated with global climate change.  Thus far, the United States has rejected a national implementation of cap-and-trade for carbon emissions, causing California to decide to implement it itself in accordance with its Assembly Bill 32, a copy of which can be found here.  Signed by Governor Schwarzenegger in 2006, the bill requires California to reduce that state’s carbon emissions by 2020 to levels that existed in 1990.  A copy of California’s plan to do so using an implementation of cap-and-trade can be found here

Part of what California seeks to do is to improve on a generally failed cap-and-trade program in Europe that began in 2005.  One of the more significant problems with the European implementation was that governments began the program with an inadequate understanding of the level of carbon emissions in their countries.  Too many allowances were issued, causing market forces quickly to force the price of carbon to zero by 2007.  In addition, a number of tax-fraud schemes and a recent theft of carbon credits stored in the Czech Republic registry have resulted in justifiable concern about the program that some worry will affect the California program. 

It is no surprise that the California program has been the subject of litigation, and last week a ruling was issued by the Superior Court in San Francisco agreeing that alternatives to a carbon-market program had not been sufficiently analyzed.  A copy of the ruling can be read here and a copy of the (much more informative) earlier Statement of Decision can be read here

There is considerable interest in the California program.  It is decidedly more ambitious than the more limited program implemented by ten states in the northeastern region of the United States and is being considered by some Canadian provinces as well as by some South American countries.  While last week’s decision certainly derails implementation of cap-and-trade in California temporarily, it is difficult to imagine that it will not ultimately be implemented after deficiencies in the studies have been addressed.  There is too much interest in it as a regulatory scheme that can have less adverse economic impact than other forms of regulation even while achieving the same overall objectives.