Is there a comparable argument to be made for greenhouse-gas emissions? My initial reaction, which I suspect most economists would share, is that the very scale and complexity of the situation requires a market-based solution, whether cap and trade or an emissions tax. After all, greenhouse gases are a direct or indirect byproduct of almost everything produced in a modern economy, from the houses we live in to the cars we drive. Reducing emissions of those gases will require getting people to change their behavior in many different ways, some of them impossible to identify until we have a much better grasp of green technology. So can we really make meaningful progress by telling people specifically what will or will not be permitted? Econ 101 tells us — probably correctly — that the only way to get people to change their behavior appropriately is to put a price on emissions so this cost in turn gets incorporated into everything else in a way that reflects ultimate environmental impacts.

When shoppers go to the grocery store, for example, they will find that fruits and vegetables from farther away have higher prices than local produce, reflecting in part the cost of emission licenses or taxes paid to ship that produce. When businesses decide how much to spend on insulation, they will take into account the costs of heating and air-conditioning that include the price of emissions licenses or taxes for electricity generation. When electric utilities have to choose among energy sources, they will have to take into account the higher license fees or taxes associated with fossil-fuel consumption. And so on down the line. A market-based system would create decentralized incentives to do the right thing, and that’s the only way it can be done.

That said, some specific rules may be required. James Hansen, the renowned climate scientist who deserves much of the credit for making global warming an issue in the first place, has argued forcefully that most of the climate-change problem comes down to just one thing, burning coal, and that whatever else we do, we have to shut down coal burning over the next couple decades. My economist’s reaction is that a stiff license fee would strongly discourage coal use anyway. But a market-based system might turn out to have loopholes — and their consequences could be dire. So I would advocate supplementing market-based disincentives with direct controls on coal burning.

What about the case for an emissions tax rather than cap and trade? There’s no question that a straightforward tax would have many advantages over legislation like Waxman-Markey, which is full of exceptions and special situations. But that’s not really a useful comparison: of course an idealized emissions tax looks better than a cap-and-trade system that has already passed the House with all its attendant compromises. The question is whether the emissions tax that could actually be put in place is better than cap and trade. There is no reason to believe that it would be — indeed, there is no reason to believe that a broad-based emissions tax would make it through Congress.

To be fair, Hansen has made an interesting moral argument against cap and trade, one that’s much more sophisticated than the old view that it’s wrong to let polluters buy the right to pollute. What Hansen draws attention to is the fact that in a cap-and-trade world, acts of individual virtue do not contribute to social goals. If you choose to drive a hybrid car or buy a house with a small carbon footprint, all you are doing is freeing up emissions permits for someone else, which means that you have done nothing to reduce the threat of climate change. He has a point. But altruism cannot effectively deal with climate change. Any serious solution must rely mainly on creating a system that gives everyone a self-interested reason to produce fewer emissions. It’s a shame, but climate altruism must take a back seat to the task of getting such a system in place.

The bottom line, then, is that while climate change may be a vastly bigger problem than acid rain, the logic of how to respond to it is much the same. What we need are market incentives for reducing greenhouse-gas emissions — along with some direct controls over coal use — and cap and trade is a reasonable way to create those incentives.

But can we afford to do that? Equally important, can we afford not to?

The Cost of Action

Just as there is a rough consensus among climate modelers about the likely trajectory of temperatures if we do not act to cut the emissions of greenhouse gases, there is a rough consensus among economic modelers about the costs of action. That general opinion may be summed up as follows: Restricting emissions would slow economic growth — but not by much. The Congressional Budget Office, relying on a survey of models, has concluded that Waxman-Markey “would reduce the projected average annual rate of growth of gross domestic product between 2010 and 2050 by 0.03 to 0.09 percentage points.” That is, it would trim average annual growth to 2.31 percent, at worst, from 2.4 percent. Over all, the Budget Office concludes, strong climate-change policy would leave the American economy between 1.1 percent and 3.4 percent smaller in 2050 than it would be otherwise.