Thanks heaps for replying, it is much appreciated. I have written a response up as a post. It should magically turn up at 8am tomorrow 🙂

I should also note that I agree with you here. The problem with the ETS is that it shields polluters too much, and replaces permit auctions (which provide a fair method of allocation) with free handouts to entrenched interests who should be allowed to go to the wall if they are not profitable when paying the full costs of their activities.

I’m not so much “against market instruments” as simply not ideologically biased towards them. Other countries have used regulations, or mixed regulatory and market mechanisms, and they’ve worked in reducing emissions. The ideological bent of our policy culture is the primary explanation for why we have not done the same.

It’s that latter point which is important: I’m interested in environmental policy which actually works. I don’t care what colour the cat is, provided it catches mice and doesn’t shit on the carpet. An ETS would work, that’s great. Regulations would work too, that’s great as well. One might not work quite as well as the other? Better an imperfect solution which is actually implemented than a perfect one which never happens. If optimisation is too hard, then satisficing will suffice.

Which brings me to regulation. Other people have noticed that there is a very real chance of the ETS failing, and of the big theme of NZ climate change policy – doing nothing while quibbling over the perfect market mechanism – repeating again, and asked about regulatory alternatives. My post was an effort to explain what a regulatory alternative might look like. The choice proposed is not between regulation and the ETS, but between regulation and nothing. And on that, I’ll take regulation which decreases emissions in a way which improves aggregate welfare over nothing any day. And if that is heresey (or “anti-market bias”) to economists, then so much the worse for them.

Because there is still a market instead of direct regulation. The impact of the tax is to change the price in the market – rather than trying to legislate a certain quantity.

“In your scheme”

Just to be clear, none of these scheme are “my scheme”. I was just trying to defend having a carbon market as compared to direct regulation.

From your post I can see that you want a Coasian solution to the environmental externality – but, I think the transaction costs are too high, and the information requirements are too severe, for this to be the efficient cause of action.

Government, which is 38% of the total economy (local and federal) will use that money to fund its operations, and where does government get its emission slips? They just create them, the result being very suboptimal.

The perfect market mechanism is when the person who is damaged by global warming sues and collects from the people who are emitting.

Who is the damaged person? The person who uses much less than the average emissions.

In your scheme, what do bicycle commuters get? Nothing, unless they can get their claims through a congress which is distributing global warming taxes to other government services.

In my scheme, bicycle commuters would have sued five years ago, the bicycle commuting industry would have expanded, and we would have optimum equilibrium.

Use government, not the legislature, but the tort system. Step one is to get the legislature to hand the problem over to tort asap. If the legislature tries to find a path to equilibrium, expect the problem to last another 40 years.