Jim Manzi has been doing a tremendous amount to educate the public about the costs and benefits of ACES, so I won’t go into too much detail. Rather, I’ll revisit a favorite theme of mine, namely comparative insights on carbon pricing. 

Last year, Monica Prasad wrote an Op-Ed on carbon pricing that is a useful introduction to the complexities of the subject. I’ve written about it quite a lot, as I think it’s extremely valuable. The Op-Ed was a brief summary of the conclusion she reached in a longer paper on “taxation as a regulatory tool,” which weighed the evidence from a number of carbon pricing efforts in Europe. Her conclusion is sobering: only one country, Denmark, has put in place a carbon tax that has led to an appreciable reduction in emissions. And in Denmark, there was an accessible alternative to carbon-intensive energy: wind power and bicycles. They key issue, as Prasad emphasized in a guest post at the environmentalist blog Grist, is the availability of substitutes. 

Without substitutes, you’re creating a new revenue stream and there will be powerful incentives to preserve that revenue stream. Note that the Obama White House had intended to use carbon tax revenues for everything from a Making Work Pay tax credit to healthcare. But as Prasad explains, carbon taxes tend to succeed when succeed when the revenue it generates is applied to the regulatory aim. Otherwise, it is possible that the state will set rates to maximize revenue rather than to achieve the aim.

ACES, of course, generates very little revenue, so that’s not the danger. The real threat posed by ACES is that it will prove to be burdensome yet ineffective, and that it will advantage incumbent firms that are able to influence the regulatory regime over new entrants. The consensus among environmentalists, for obvious reasons, is that the ideal regulatory regime will involve either an auction-based cap-and-trade system or an actual tax in order to avoid a massive corporate giveaway. The cart that should be driving the horse, though, is the cultivation of alternatives. The hope is that the tax will accelerate this process, and over time it just might. It’s not clear, however, if it will happen before the regulatory regime is corrupted beyond recognition.

In fairness, the story has changed a bit since Prasad’s paper. Brad Plumer, one of America’s best environmental journalists, has an interesting post on the European Union’s Emissions Trading Scheme, which has been Exhibit A for anti-cap-and-traders like yours truly on the vulnerability of cap-and-trade systems to regulatory capture. His basic argument is that after early fumbles, the ETS has evolved into a fairly effective system for reducing carbon emissions. 

Moving on, in Phase II, the EU tightened its caps and started auctioning off a greater chunk of the pollution permits. According to Lehman, once the initial kinks were hammered out, the system “succeeded, and fairly quickly, in imposing a price on carbon.” Emissions have now fallen for four straight years. According to the European Environment Agency (EEA), the EU-15 has slashed emissions 5 percent below 1990 levels, and is on pace for a 11.3 percent cut by 2012—easily exceeding the 8 percent goal required by the Kyoto Protocol.

Brad offers a useful proviso.

And, to be sure, some of the recent drop has been due to the global recession, but not all of it. In 2008, the EU economy shrunk 0.8 percent, but emissions fell much faster—3 percent. The European Commission credits the ETS with much of that drop.

I also wonder about what happens when you factor in population growth and decline in the ETS states. The overall EU population growth rate is 0.11 percent, though I can’t speak to the ETS participants. Political scientist Bruce Berkowitz has convincingly argued that a country’s stance on curbing carbon emissions can be reliably predicated by its rate of population and economic growth.

Because Brad is very intellectually honest, he zeroes in on another huge issue, namely “outsourced emissions.”

My biggest caveat is that, when you look at Europe’s “outsourced” emissions, the picture looks much grimmer. According to the Stockholm Environment Institute, Britain’s carbon emissions have actually grown by 20 percent when you factor in imports from China. No domestic cap-and-trade system can fully work unless it’s placed in a global context.

And as Jim has argued convincingly on many occasions, the prospects for a binding international agreement are not very good.