Saturday, February 17, 2007

A Green Market

Kevin Drum recently wondered out loud why liberals are so crazy about carbon taxes when studies have shown that gas price has very little impact on usage. He favors raising CAFE standards -- the law which mandates that car manufacters maintain a certain average fuel efficiency for their fleet. Kevin argues that CAFE standards have had a proven impact, enjoy some bipartisan support, and are easier to pass politically than an oil tax. But he adds an interesting twist... that car companies should be able to trade credits. I think that's a powerful idea. You could get a credit/debit for every mile per gallon a car you sold was above/below a certain level; at the end of the year you would have to be even. Detroit manufacturers who feel they need to make big gas-guzzling SUVs to make money could buy credits from smaller startup companies making electric cars, say. Unleashing market forces would make the cost of CAFE standards to the car industry plummet.

But I think this idea has a broader applicability. Along these same lines, you could do the same thing with bulbs, refrigerators, air conditioners, or any energy-consuming product. Take compact fluorescent bulbs, for instance. These bulbs are longer-lasting and far more energy efficient than incandescents. Furthermore, their color profile is much improved in recent years so that now they are virtually indistinguishable from incandescents yet use 50-80% less energy. One organization has calculated that if every household in the U.S. replaced just three bulbs it would be the equivalent of taking 3.5 million cars off the road. Incandescent makers could buy credits off compact fluorescent makers, lowering the price of these bulbs and speeding their acceptance and market penetration.

This philosophical approach is better than coercive bannings and more efficient than taxation. It would use market forces to unleash further innovation... if someone could make an even more efficient bulb and sell it, they would have even more credits to take to market. Moreover, it is the most politically saleable way of encouraging both conservation and innovation.

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