With all due respect to Professor Borenstein--he is a very distinguished scholar and his brief tribute to "The Problem of Social Cost" here is quite nice--I think his discussion is misleading. Specifically, the following:
It is ironic and disappointing to hear some commentators laud Coase while at the same time saying that cap-and-trade would be too costly to the U.S. economy. The WSJ editorial page, and many others of similar inclination, have argued instead that “the market” will solve pollution problems without government intervention. . . .
But on climate change, the right wing now fights against assigning any property rights on greenhouse gas emissions, even as the science becomes virtually certain that GHGs are the cause of climate change. Leaving the property rights unassigned is equivalent to giving unlimited rights to emit and making those right untradeable.
Leave aside the "virtually certain that GHGs are the cause of climate change"--a conclusion that at least some scholars dispute. Focus instead on those "many others" who argue that the market "solves pollution problems without government intervention".
The criticism of market advocates here, as in many other instances, fundamentally mistakes the advocates' position. It's not that markets can solve all problems "without government intervention". It's that markets, while imperfect, tend to work better than government in a large number of instances, particularly the U.S. national government as currently constituted. This fundamental idea explains why market advocates would sharply question the supposedly wonderful cap-and-trade policy Professor Borenstein advances. In particular, I think there are four reasons to question cap-and-trade:
1. There is a real consensus--not just the questionable one about the causes of global warming, if any--that action taken by the U.S. alone will do virtually nothing to solve the problem. Supporters of cap-and-trade can talk about setting a moral example or starting the process, but if the rest of the world, particularly China and India, refuse to curb their carbon dioxide emissions, we would just incur a large cost for virtually no gain. Maybe the supporters believe in the effectiveness of international collective action. Maybe they believe the League of Nations and the UN have eliminated war, hunger, and poverty, and the other evils that plague mankind. I don't. And history gives, I think, little ground for optimism.
2. Cap-and-trade as outlined on economists' whiteboards and cap-and-trade as actually legislated by the Congress and implemented by the Executive would likely be substantially different. There are hundreds of examples of this to choose from. Is affordable housing a good thing? Sure. But are rent controls and huge mortgage subsidies and regulations requiring lending to low-income borrowers good things? No. Would greater access to health insurance be a good thing? Yes. Are the multiple taxes, exceptions, and complications of Obamacare good things? The jury is still out, but it's not looking good.
3. Even if a simple, clean law were drafted--again given the very large stakes potentially involved, that seems quite doubtful--there are likely to be unintended and unforeseen--unforeseen at least to some--effects. Anybody remember the yacht tax?
4. Finally, experience shows that we sell short technological change and the creativity inherent in markets at our peril. What if an excellent substitute for beef were developed, a substitute that greatly reduced the amount of livestock? (Note that livestock supposedly are responsible for half of the global warming gases.) Well, such a substitute may well be coming. (Link via Michael Greenspan.) What if batteries become substantially more efficient and cheaper, such that solar and wind power become viable substitutes for carbon? That may well be coming, too.
In short, I think pro-market scholars haven't forgotten Coase and they do understand what the implications of his paper are. I think market skeptics would do well to better acquaint themselves with government-in-practice and markets-in-practice before throwing stones at us.