Emission control

ON WEDNESDAY, when Governor Mitt Romney pulled Massachusetts out of a pioneering pact to limit the greenhouse gas emissions of power plants in nine Northeastern states, many of the pact's supporters, a group comprising not only environmentalists and Democrats but prominent business leaders and Republican officials from the other eight states, privately speculated that the governor was primarily concerned about his presidential prospects.

The pact in question, known as the Regional Greenhouse Gas Initiative, or RGGI (pronounced ''reggie''), was the first attempt by state governments to fill the climate change policy vacuum left by the Bush administration. Like the international global warming treaty known as the Kyoto Protocol, RGGI would set up a market-based system of tradable pollution allowances to reduce emissions of the most prevalent greenhouse gas, carbon dioxide.

Oddly enough for a former venture capitalist, Romney's chief complaint was that RGGI was, in effect, too rigidly market-based. It needed, he insisted, a ''safety valve,'' a price cap on emissions permits that would prevent energy costs, for both utilities and customers, from rising too high. The seven states remaining in the plan (Rhode Island also dropped out last week) disagree, and are pressing ahead without a safety valve.

The most striking thing about the debate over Romney's 11th-hour pullout, however, was its through-the-looking-glass sheen: environmentalists extolling the workings of the market while the governor and the state's big power companies cautioned against the market's dangerous caprice. ''I guess I have more faith in markets than Governor Romney,'' said Fred Krupp, president of the environmental advocacy group Environmental Defense, with a combination of bewilderment and sarcasm.

But whether Romney was arguing in good faith or with an eye on 2008, economists who study emissions trading suggest he may have a point. According to Thomas Tietenberg, a professor of economics at Colby College and a leading emissions trading authority, ''I would put a safety valve in all emissions trading programs-whether or not Romney is part of the negotiation.''

The controversy surrounding the safety valve-a seemingly arcane technical matter-is also part of a larger argument over how the market might best work to protect the environment, and over the purpose of regional emissions-trading programs like RGGI. At the very least, when economists find themselves trying to convince environmentalists of the need for market restraints, it shows just how far the debate over environmental regulation has shifted in recent years.

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The idea behind emissions trading schemes like RGGI and Kyoto is that the right to pollute is a property right like any other, something that can be bought and sold at whatever price the market will bear.

In its most common variant, a ''cap and trade'' system, an emissions trading program sets an upper limit on the total amount of a pollutant to be allowed, then divides that amount into pollution allowances, or credits, that are either auctioned off or handed out. Firms that use up their pollution allowances have to buy additional credits from those that don't. The more firms that blow their pollution limits, the fewer extra credits there are, and the more they cost, and the greater the incentive to find ways to pollute less-either by conservation, technological innovation, or shutting down dirty plants or factories. Rather than pass laws specifying how pollution targets be met, the government only needs to set those targets, then let private parties figure out how to meet them.

Unsurprisingly, it was an idea thought up, in the 1960s, by economists. Just as unsurprisingly, it was for years deeply offensive to environmentalists. In 1982, criticizing an early EPA pollution trading program, an attorney for the National Resources Defense Council argued that ''Any pollution reduction that can be identified should be applied to making progress toward the [pollution] standard'' rather than traded or sold.

But the 1990 Clean Air Act-which, using a nationwide emissions trading scheme, reduced acid-rain-causing sulfur dioxide emissions from coal plants far more quickly and cheaply than anyone had predicted-turned the political tide. Since then, although many environmentalists remain skeptical of using emissions trading to reduce localized pollutants like mercury (something the Bush administration has proposed), the idea has gained adherents across the ideological spectrum and become central to international efforts to fight global warming.

''What we've learned,'' says Krupp of Environmental Defense, ''is that markets work really well to process innovation. When you introduce into the market this powerful disincentive, that the laggards pay extra and that the innovators get rewarded, it's remarkably effective.'' The problem, to put it simply, was that in the old days markets hadn't been structured to treat pollution as a cost.

Krupp and others, therefore, saw Romney's price cap as an affront. In the interest of protecting a few apprehensive electric utilities, they charged, the governor was mucking up the plan's Adam Smithian simplicity. According to Dan Lashof, a climate change expert at NRDC, ''a price cap tends to undermine the technological innovation that is one of the key advantages of a cap and trade system.'' If the price for emissions permits is kept artificially low, he argues, ''you end up with higher emissions.''

As Krupp sees it, a cap like Romney's, in which the government steps in and sells extra credits to level off price spikes, works like a tax, because above a certain point it allows companies to pay a flat fee per ton of emissions no matter what the market conditions. Furthermore, like a tax it shifts revenue from the private to the public sector ''instead of directly to the companies that innovate to cut emissions.'' That, he adds, will be ''much less effective in creating the new clean technologies we need.''

But today many economists who specialize in environmental regulation believe a tax is precisely the most efficient way to limit carbon emissions. To begin with, unlike emissions credits, which tend to be given away, a tax actually raises revenue. William Pizer, an economist at the environmental research institute Resources for the Future, has carried out comparative studies of carbon taxes and emissions trading schemes. ''A carbon tax,'' he says, ''has efficiency gains, because we can use the money it raises to cut taxes on things we like, like labor and capital'' by taxing something we don't, namely pollution.

Furthermore, economists tend to prefer the way that a tax stabilizes costs and lets emissions vary from year to year-a trading scheme does just the opposite. In a basic cost-benefit calculation, the cost of emissions control is linked directly to the rate of emissions (both taxes and permits are calculated per ton of carbon emitted) but the benefit-in the form of reduced global warming-is linked to the accumulation of carbon dioxide in the atmosphere. As a result, fluctuating costs will be more acutely felt than fluctuating emissions. As Robert Stavins, an economist at Harvard's Kennedy School of Government, puts it, ''It's the distinction between the rate of water coming into the bathtub and the amount of water in the bathtub.'' It's the total amount of water-or carbon dioxide- we care about.

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All of which makes perfect sense in the rational, apolitical world inhabited by homo economicus. But in the real world of politics-where any program, to be successful, must win the support of key interests-there's little contest between a tax and a trading permit. Unlike a pollution tax, a permit system in effect buys polluters off by giving them a valuable property right.

This is where the safety valve comes in. A safety valve scheme, many economists argue, offers a politically palatable solution by allowing for a measure of tax-like stability in an emissions trading scheme. And there is no reason it need necessarily discourage the innovation that price fluctuation provides. As Pizer puts it, ''A price cap of $10 a ton [of carbon], which Romney has discussed, when the expected market price is $2 to $3, leaves a lot of volatility in the market.'' Prices, in other words, could still climb high enough to make it well worth a firm's while to cut emissions.

Environmentalists like Krupp are quick to point out that the 1990 Clean Air Act's wildly successful emissions-trading plan contained no safety valve. But, Pizer responds, in the case of sulfur dioxide, the solutions-switching to low-sulfur coal and installing smokestack scrubbers-were already known. With carbon dioxide, we're still not entirely sure how we'll cut emissions to the necessary levels.

Finally, some environmental analysts suggest that there is a broader political argument to be made for the safety valve, one that gets at the question of what RGGI's ultimate purpose should be. Massachusetts accounts for around 1 percent of total US carbon dioxide emissions, notes David Victor, director of the Program on Energy and Sustainable Development at Stanford University. Given the state's negligible impact on global warming, he argues, ''the idea that Massachusetts's complying with an absolute binding cap is something we should value above all other attributes of the trading system is absolutely ridiculous.''

It's far more important, as Victor sees it, to show that a carbon trading scheme is actually workable-to set up a system where, for the first time ''firms understand that emitting carbon dioxide will come with costs.'' In imposing those costs, Victor believes, it's perfectly reasonable to do what we can to ensure that they are bearable.

Drake Bennett is the staff writer for Ideas. E-mail drbennett@globe.com.