On the other hand, a market is more efficient than a ban, but more complex to administer. ....
To which my friend asked,
Is the first part "a market is more efficient than a ban" a statement of faith? I would hope so, since it is hardly provable.
I responded in turn by saying,
It is not a statement of faith, but I did leave out the arguments for it.
Consider the problem posed by people who try to poison me and others by releasing pollutants into the air.
If our government decides that this sort of activity should be reduced, it has two choices:
This means telling a company that its emissions at its smokestack must be less than some value, or else the company will pay a fine. (People often think that a ban means `zero output' of what is banned, but that is not what is meant in practice, which is to reduce an output below a certain level.)
A ban also means organizing a policing unit to check smokestack outputs and/or providing outsiders with a legally permitted mechanism to check companies' actions and take them to court if they violate the ban.
This means deciding on the total amount of the pollutant that will be permitted into the environment and setting up the legal environment that enables people and companies to write contracts regarding the release of this pollutant.
Banning is simpler than creating a market. It is simpler administratively and simpler in terms of how people think and perceive.. A ban is categorical. It is the simplest of the Guttman scales. A market requires thinking in terms of a ratio scale, which the most complex scale.
A market is difficult to create: to succeed, a country needs an administrative system that is not excessively captured by the companies the administration is supposed to regulate. It needs an a reliable, quick, and honest legal system. Otherwise, the process will become a source for bribes and not do the country any good.
Suppose an electric power company owns four power plants, all burning coal:
The average demand for electricity from these plants is 2250 MW; the peak is 2700 MW.
Consider two ways of paying for the reduction in pollution. Please bear in mind that the consumer, namely me and others, will end up paying. I have an interest in a lower electricity bill! The poorer you are, the greater the interest.
This means that three plants need to be retrofitted: the two old plants and the middle-aged one.
This means that the electricity producer pays some cost when operating the middle-aged plant without having retrofitted it and a considerable cost when operating the old plants without having retrofitted them.
The question is, what is the cost to electricity buyers, to gain the same low level of pollution production?
The banning technique means that three plants will have to be retrofitted.
The market technique means, most likely, that the middle-aged plant and one of the old plants will be retrofitted. The new plant produces a low level of pollution and will sell its `pollution credits' to the other old plant. And that old plant will be turned off when power demand is below peak. The electricity customer pays less to reach the same level of pollutant output.
Generally speaking, the second method, the market technique, costs less for a given level of pollution, presuming a good government.
The reason is that different plants are built with different technologies and have different ab-initio pollution outputs and different costs of retrofitting. (As a rule of thumb, for the same reduction in pollution, older plants pollute more and cost more to retrofit than newer plants, per unit of electricity produced. New plants, for example, use different kinds of burner than old plants and build ash collectors into their exhaust systems.)
The same argument applies to `intrinsically polluting' operations, such as burning fossil hydro-carbon for fuel. If two plants are equally efficient, then the one burning natural gas will release less carbon dioxide than the one burning coal, per unit of electricity output. So the idea is to tax carbon, to encourage a switch to fuels that use less or no carbon. (I have heard it suggested that in the US, an effective `carbon tax' would increase the cost of auto gasoline by 10 or 15 cents per gallon. I have no idea if these numbers are good suggestions, but such numbers are what the controversy is about.)
If the contrast is between two 1000 MW plants, one burning coal and the other using uranium, the latter will possibly release a catastrophic amount of radiation, but the former will continually release low levels of radiation in excess of what the nuclear plant releases.
(There is uranium dust in the ash that comes out of the smokestacks of coal-fired power plants. I have been told that coal-fired power plants have been exempted from the radiation release regulations that nuclear power plants must follow; otherwise, the coal-fired power plants would be shut down on account of their low level radiation releases. An acquaintance, a public health specialist, once told me she researched just how much radiation is released and could not get good figures. I do not know if the problem has been exaggerated by nuclear power plant operators or downplayed by those who own both nuclear and coal-fired plants. As far as I know, natural gas plants do not release radiation; they do not have much if any radon in the gas, and no dust.)
The alternative to a carbon tax is to ban fuels that contain carbon, or ban types of fuel. Thus coal might be banned, but natural gas permitted.
However, such a ban immediately wastes the sunk investment into coal burning plants and means that natural gas pipelines must be built to areas which have readily available coal. The idea behind a differential tax is that it discourages new investment in the more expensive fuel and encourages more investment in and full use of plants that use the less expensive fuel.
Since I want both less pollution and lower electricity bills, I prefer the more efficient method.
This is why I favor carbon taxes and other such mechanisms that cause companies to internalize the costs of what economists call `external goods' and to penalize the companies for producing outputs that hurt me and others.
It goes without saying that if courts and government agencies become more corrupt, the market method becomes less efficient and the banning method better. If a government and its courts becomes even more corrupt, then nothing can be done, no method is efficient, and we are doomed.