The Pope and Cap and Trade

Pope Francis listens to the welcome speech during a visit to the Lutheran church, in Rome, Sunday, Nov. 15, 2015. Pope Franci
Pope Francis listens to the welcome speech during a visit to the Lutheran church, in Rome, Sunday, Nov. 15, 2015. Pope Francis has condemned the Paris terror attacks, calling it "blasphemy" to use the name of God to justify "the road of violence and of hatred." (AP Photo/Gregorio Borgia)

Pope Francis didn't win many friends among mainstream climate economists when his recent environmental encyclical Laudato Si' condemned the notion of buying and selling carbon credits, suggesting that it could "lead to a new form of speculation which would not help reduce the emission of polluting gases worldwide" (¶ 171).

That was seen by many economists as a direct swipe at the "cap-and-trade" systems underway or planned in places like California, Canada, Europe and (soon) China. Cap and trade works by setting limits -- which get stricter over time -- on the total amount of greenhouse gases that can be emitted, and then issuing pollution permits that add up to that total amount. Those who want to exceed their limits can buy permits on the open market from those who have extra permits they don't want to use themselves.

The encyclical's policy stance received harsh reviews from such top climate economists as William Nordhaus and Robert Stavins. In a blog post here, Stavins concluded, "although there is much about the encyclical that is commendable, where it drifts into matters of public policy it is -- unfortunately -- not helpful."

With the news that 2015 will likely turn out to have been the hottest year on record, and the critical Paris climate talks only a week away, climate change and climate policy are back in the public eye. It seems an opportune moment to review the case for market-based climate policies and to examine the Pope's critique: Does he mean what his critics think he means? If so, is he right?

Why do so many economists favor cap and trade?

Economists favor policies that put a price on pollution, whether that's a tax like a carbon tax or a cap-and-trade system that introduces a market in pollution permits. The price creates an economic incentive to conserve, clean up and innovate toward greener technologies. With a market in pollution rights, we switch from a situation in which it is profitable to pollute more to one in which it is profitable to pollute less. Pricing pollution is also cost-efficient, because it provides an incentive to conserve, as well as a nice payoff to the polluters who can clean up most cheaply and profit from permit sales or lower taxes.

Cap and trade has the particular attraction that it places a firm and certain cap on total emissions -- important if we want to avoid a threshold of greenhouse gases that could bring about truly catastrophic change.

Is it possible that Pope Francis is actually OK with cap and trade?

There is such a case to be made. First, the specific language of the encyclical criticizes "carbon credits," which some people, including Joe Romm of the influential Climate Progress blog, have read as referring to carbon offsets -- an easily abused system in which people get credits for hard-to-monitor activities that lend themselves to "greenwashing." Especially without a cap on emissions overall, many mainstream economists would share the Pope's skepticism of carbon offsets.

Second, Francis's criticism of carbon credits comes in a chapter in which he notes that past consumption by developed countries like the United States is by far the biggest cause of current carbon levels -- and that such countries have the most wherewithal to pay for solutions. Meanwhile, developing countries may need to be allowed room for more consumption and even increased carbon emissions in the short term for equitable levels of growth. So the Pope's critique may be narrow: namely, that a cap-and-trade system that allocates permits based on current consumption would be unfair.

It is telling that nowhere in the encyclical does Francis come out against a carbon tax, which is a market-based policy that most environmental economists would happily sign onto. In fact, some might read an implicit endorsement of carbon pricing in the encyclical's reference to "the obligation of those who cause pollution to assume its costs" (¶ 167). Still, I'm not so sure: My reading of this passage is that it is a statement about moral responsibility, not optimal policy.

Humble advice to the Pope

The simplest resolution to this ambiguity would be for the Pope or one of his top advisors to clarify his position: Does he truly oppose all cap and trade, or is he just insisting that countries historically responsible for the current CO2 levels should be restricted more than emerging economies?

At a recent conference on the encyclical held at Santa Clara University, the question was put directly to Cardinal Peter Turkson during the Q&A period after his keynote address. Cardinal Turkson is president of the Pontifical Council for Justice and Peace, and is widely considered a main drafter of the encyclical. His answer was diplomatically vague: "The point is, if we all agree that carbon is a polluting source, then it is wise to gradually wean ourselves away from it. If carbon taxes are ways of persuading, [okay], but ultimately [the goal is] to further replace all of these polluting agents with less polluting ones."

The Pope's ambivalence about market-based policies reflects his deep concerns about the down sides of capitalist economic growth, including inequality and environmental degradation. But the climate will not wait around for the revolution to happen. The modern global economy is likely to be driven by market capitalism for the foreseeable future, so it behooves us to harness the strengths of the market to help solve global climate challenge. Although the climate change crisis is the consequence of a colossal market failure, we actually know how to remedy that failure using the very levers of capitalism and markets. Where Francis's stature as a moral leader could play a more constructive role in shaping policy would be in providing guidance on how to implement cap and trade or a carbon tax in a manner consistent not just with economic efficiency and environmental effectiveness, but with global social justice as well. Let's get that discussion started now.