By Gary D. Libecap
In his famous 1960 paper, “The Problem of Social Cost,” published in the Journal of Law and Economics, Nobel Prize winner Ronald Coase argued that command-and-control regulation of the environment could be more costly than the problem of pollution itself. He outlined an alternative, the assignment of property rights to environmental goods that could be traded, to achieve a far less costly and more effective response to environmental problems. This insight became the basis for so-called cap and trade programs that have been implemented to address greenhouse gas emissions.
In theory, cap and trade for greenhouse gas controls works like this: A cap on emissions is set and emissions permits are distributed within the cap. Permits must be released by offending firms for every metric ton of CO2 released. Firms that have high compliance costs need more permits than they hold, forcing them to go to…
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