Externality markets

Do you have a "cause"? If I do, it'd have to be conservation/environmental issues. Now don't get me wrong, I'm not one of those the sky is falling, Club of Rome, Paul Ehrlich types. Nothing annoys me more than listening to someone preaching the "progress is bad" line while ensconced in the comforts born of centuries of economic progress. It pisses me off. Still, I care about conservation and environmental issues.

As an economist these issues fascinate me because they are perfect examples of market failures. [Read any textbook treatment of externalities if you're curious.] What really excites me, though, is that they are market failures that often can be improved through markets. Huh? If it's a market failure, then how can markets fix the problem? There's a lot of debate about just how to do that, but the tradeable permits option is the most popular approach today. Though they aren't perfect, I think this approach offers wonderful opportunities, but the environmental community needs to stop vilifying emissions trading as a license to pollute. Yes, technically that's what emissions trading creates, but it also eliminates polluting without a license. Anyway I'm not trying to sell you on the wisdom of tradeable permits today. No, today, I'm talking about the opportunity to move economic theory out of the classroom and into the real world.

See, I always tell my students that one of the nicest features of emissions trading schemes is that they allow an individual to express his own intensity of preference above and beyond the dictates of society. If you still think there's too much pollution, then get off your hip, pony up the jack, and buy up some of those "pollution licenses" and let them go unused. To an economist this is a much better approach than just whining that, "Someone ought to do something." As I said, I always emphasize this an additional attraction of tradeable permits, but I've never gone beyond the this could happen. Now, though, I've found a couple of opportunities to walk the walk.

First, there is TerraPass. This is the brainchild of the MBA program at Wharton. Basically, you can enter specifics about the type of car you drive and your annual mileage and TerraPass sort of figures out the cost of your vehicle's annual emissions. You then pay that amount to TerraPass and they use the money to buy up pollution permits, invest in clean energy, etc. In a sense, you are paying the cost your emissions impose on society. You get a warm fuzzy feeling from this and they send you some decals, certificates, etc. to show you are a good person.

Another group that does pretty much the same thing is Carbonfund. The setup seems to be very similar, though Carbonfund's people claim they operate more efficiently than TerraPass and Carbonfund does have the advantage of being tax deductible. My gut feeling is that they probably are a little less "wasteful" and I'm inherently skeptical of anything coming out of an MBA class project (I've seen too many of them in operation), but their approach doesn't seem as "sexy" as TerraPass and Carbonfund's method of computing your carbon cost seems a little more complicated. Hence, I get the feeling TerraPass has a better shot of garnering mainstream momentum.

End result: I haven't yet decided which of these two approaches I like best, but one of them is going to get a contribution from St. Caffeine. My PSA for the day -- check them out and consider a contribution of your own. It seems like a better use of charity dollars than just giving money for lobbying purposes. That's sort of the same reason I prefer The Nature Conservancy to most other conservation groups.

Anyway, just my thoughts.