"Whence Cometh the Carbon Tax? The Economic and Business History of “Market-Based Regulation” "

This paper tracks the development of two regulatory instruments, the Pigouvian tax and the emissions trading market, which in the 1970s and 80s together came to be known as “market-based regulation.” The economics of market intervention to affect the environment originated in the 19th Century and developed in the environmental era of the 1960s, evolved in response to the implementation of environmental laws in the 1970s-90s, and became a movement in a critique called “regulatory reform” that reached resolution around 2000. In this process the economic doctrines that developed in support of these instruments were highly influenced by both the industries and the environmental advocates. The legacy of this process is a set of doctrines that has made it possible in the U.S. to defeat every proposal for control of greenhouse gases so far. The paper concludes that the critical reason behind our inability to protect ourselves from climate-destroying emissions is not the absence of science, the high cost of the remedy, or human nature/psychology; the reason is doctrinal – that we have trapped ourselves in our own belief system. The paper demonstrates this with a critique of the carbon tax, showing (1) that the recent emergence of the carbon tax as the accepted remedy is the prize won in the battle of regulatory reform, (2) that in treating the carbon tax as the prize analysts have ignored the diagnostic step of defining the climate problem, (3) that by skipping the diagnostic step they failed to realize that the carbon tax had become obsolete as a remedy, and (4) that given the nature of the climate problem now a different remedy is called for, which can be achieved by recognizing that inaction on climate is the product of human decision processes and therefore correctable. The historical approach thus identifies our current failure not as an intractable economic dilemma but as a product of self-interested doctrinal control.