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Economists like Joseph Stiglitz and Greg Mankiw say cap-and-trade is inherently susceptible to corruption.
They're very capable men, but I think they don't understand the on-the-ground reality.
Which is?
The first cap-and-trade program done on a massive scale came after the Clean Air Act of 1990, and required a 50 percent reduction in sulfur dioxide over a 10-year period. [Thanks to the economics of cap-and-trade,] the EPA estimates the current system costs $1 [billion] to $3 billion a year, as opposed to an initial estimate in the tens of billions. And the medical benefits associated with reduced health-care costs due to less lung disease will reach $120 billion a year in 2010. I know of no other program that has achieved this kind of cost-benefit ratio.
Wouldn't a straightforward tax be simpler?
I'd rather have the price set by the participants on a daily basis. I also think the cost of administering and collecting taxes would far outweigh the costs associated with the market. And the impact of a carbon tax will depend on how good your accounting firm is.
Most of the growth in carbon emissions is going to be in China and India. Will they have carbon trading soon? Companies there seem much less interested in the idea.
We have five Chinese members [on the CCX], and we have biogas projects in the poorest sections of India, in Kerala—
But can you get the Chinese and Indian governments to impose cap-and-trade?
I think it's going to happen the other way around: the private sector will lead and the government will ratify. We're now in the process of forming an Indian climate exchange. We've signed a memorandum of understanding with the China National Petroleum Corp. I don't think that India and China are quite as behind as many would have us believe, and I don't think Europe is quite as far ahead.
How can you be sure companies are making the necessary reductions?
We haven't had a problem. The monitoring technology is there. Will you find abuses? Yes, of course. Will there be people who put out misguiding earning statements, like Enron? Yes. Are there people who violate commodities laws? Yes. Does the [current financial] system still create efficiency and access to capital? Yes. So many tell you what can go wrong, instead of building things and learning by doing, as we have done in the capital markets over the last couple of hundred years. The European Union started as a steel and coal agreement; it took 50 years to become the European Union. I believe that's the model for a worldwide solution to global warming. I think it will follow the examples of past industrial and financial innovation, and that within 20 years it will have evolved into a worldwide system.
© 2008
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