Although the Waxman-Markey bill employs the market efficiencies of cap and trade, efforts of governments to reverse global warming by regulating production are bound to fail for two reasons. First, they create a competitive burden when they price carbon dioxide pollution that only affects their manufacturers. Second, any gains within a jurisdiction may be offset by pollution beyond its borders. Global warming requires is a global problem that requires a global solution.
Attempts by national governments, federal entities such as California, and even alliances such as the European Union do not have the ability to regulate carbon dioxide pollution globally. Nonetheless, a jurisdiction can address global warming effectively if property rights initially belong to citizens and residents rather than producers.
Some markets such as the G7 nations, the European Union and even the biggest American states can affect production practices around the world by regulating the products that may be marketed within their borders. Consumption regulations create a level playing field since imports are subject to the same costs as domestic products but exports are not. Even better, consumption regulations have had cascading effects that have reduced pollution beyond the borders of the regulating governments.
However, it is impossible to determine a consumer’s carbon dioxide consumption without measuring the pollution of the source of production. Emission permits initiating with residents link consumption and production. In principle, the government would distribute the pollution permits to residents on a per capita basis. Climate and feasibility requirements would determine the annual allowable carbon dioxide emissions. As a matter of fairness, each human being has the right to pollute the same amount. Residents of a regulating country will receive pollution permits that reflect their global share. Retailers will have to account for the carbon dioxide permits of their products, which residents would sell on an emissions market. It will be in the interest of producers to reduce carbon dioxide pollution.
The regime will cascade beyond the borders of the regulating government. As competitive imbalances no longer exist, the G7 nations will accede so that their residents will collect emissions permits. For the same reason, the least developed countries (LDC) will join the regime. Rich countries, that emit more than their share of permits, will depend on the accession of LDCs. The latter will benefit from a new revenue stream that will improve the living conditions of their people and their current account balances.
As the unregulated share of the global economy shrinks, the incentives to join the carbon dioxide regulatory regime will increase for newly industrialized countries as well. If they do not join, their exports will remain subject to pollution costs while foregoing the revenue of pollution permits. As most emerging economies are export oriented, they will sustain a positive pollution permit balance for some time.
Importantly, the government that initiates regulation can structure the institution. The government will be able to enshrine its values, such as individualism, which will not only shape the management of the global commons but also the modernization of the least developed countries. Designing the emissions permits and their trading mechanism will allow the first mover to locate the trade within its territory. Likewise, the design of the pollution inspections mechanism provides the opportunity to win an over proportional share of inspection related jobs.
Empowering carbon dioxide consumers to coordinate pollution reduction in a market, cap and trade is the right tool. However, the European Union and the Waxman-Markey Bill fall short because they give producers rather than consumers the right to pollute. Rather than creating competitive pressures to move factories beyond our borders, emission permits would pressure other countries to participate in a global environmental regime when we confer property rights on citizens or residents.
In light of Adam Smith’s ideas about liberty, self-interest and responsibility, it should not surprise us that such a solution also happens to be more efficient.