Professor Advocates Cap-and-Trade

A cap-and-trade system is the most practical, cost-effective way for the government to limit carbon emissions, according to a paper recently published by Harvard Kennedy School Professor Robert N. Stavins and University of Manchester Economics Professor Robert W. Hahn.

Their paper concluded that Congress is more likely to pass a cap-and-trade system—in which the government puts a cap on the amount of a pollutant that can be emitted—than a carbon tax, because the cap-and-trade system exhibits the “independence property”—the theoretical and actual ability of a system to keep costs low and environmental performance high.

Stavins said in a recent interview with The Crimson that a cap-and-trade system would be more efficient and less controversial than a carbon tax because limiting the total amount of carbon that corporations emit does not require an equal distribution of pollution limits. He explained that while a carbon tax would be superior in theory, a cap-and-trade system would be more practical when political realities are taken into account.

“The government can determine the overall cap however it wants to and then it can leave it up to the representative democracy to fight over the pieces of the pie,” he said.

A carbon tax enacted by the government, on the other hand, would be weaker than a cap-and-trade system because Congress would be too preoccupied with keeping taxes low, Stavins said.

While the number of cap-and-trade policies have decreased in recent years, Stavins said he believes this option is by no means dead.

In the paper, Stavins and Hahn used current-day examples—such as the sulfur dioxide trade amendment in Ohio that aimed to substantially reduce acid rain—to prove that the cap-and-trade system would work both in theory and in practice.

Stavins, who also directs the Harvard Environmental Economics Program, said that the independence property is not a new idea; Harvard-educated economist W. David Montgomery first coined the term in a paper printed by the Journal of Economic Theory in 1972.