Cap-and-trade is not ‘market oriented’

One often hears, from moderate, socially-conscious capitalists such as John McCain, why climate change — or at least the emissions they think might cause climate change — can be dealt with most effectively using “market oriented” means, such as a cap-and-trade system. The idea has merit, in that the market will indeed most efficiently allocate the government-mandated cuts in emissions. I’ve always been uncomfortable with the idea, however, since the cap is not imposed by the market, but rather by politicians. It’s a bit like imposing price controls not directly, but by requiring a given average price from all producers. It’s better than capping all prices, but it’s still price control.

Harvard economics professor Greg Mankiw takes McCain to task on exactly this issue. McCain favours cap-and-trade, but disfavours carbon taxes. Mankiw clearly and concisely points out that there is no economic difference between the two policies, other than that taxes raise revenue for the state.