Cap and trade -- the meandering path of an idea to curb pollution

First of two parts.

In 1968, John H. Dales, an obscure Canadian economics professor, came back from a sabbatical determined to write a book that would lay out a new approach to solve the problems of pollution.

He was weary of industries arguing how their emissions did very little harm to the environment. He was equally weary of environmental groups presenting themselves as the forces of good in a battle against greed and evil.

Dales, a modest, soft-spoken man, started out his book, "Pollution, Property & Prices," by saying it contained "virtually no factual information and very little in the way of outraged denunciation of evil."


It was a purely academic exercise for Dales, who died in 2007 after a lengthy illness. As far as he knew in 1968, when his book was first published by the University of Toronto Press, the ideas he presented were not likely to go very far. Friends describe Dales as a thinker, definitely not a promoter.

Yet this was not a modest proposition. It was the beginning of what we now call "cap and trade." Dales invented a market where companies traded government-issued permits granting them rights to emit a certain amount of pollutant, permits that gradually declined over time. While few people recall the paternity of this idea, 43 years later cap and trade is rapidly spreading around the world as a useful and politically palatable tool to limit emissions of gases that cause climate change.

The European Union's economywide Emissions Trading System covers more than 11,500 factories and utilities in 30 nations and generates trading volumes worth more than $300 million a year. California is about to launch its version of a cap-and-trade system for greenhouse gases. Utilities in the upper East Coast are operating their form of it. Twenty-three Midwestern and Eastern states trade permits that reduce nitrogen oxides. Another 29 states trade credits that promote the use of renewable energy.

Then there is China, which has pilot trading programs under way and aims at a national program somewhere around 2015. New Zealand started its program last summer, and Australia's Parliament just signaled approval for its plan. South Korea, Brazil, Japan and Switzerland are moving ahead with theirs.

Republicans get whiplash

The oddest turn in this twisting tale of policy formation is that it was the United States that first introduced cap and trade on an international level. It did that after two Republican administrations led by Ronald Reagan and George H.W. Bush successfully used cap-and-trade schemes to get the lead out of gasoline and to rid the air of unhealthy sulfur pollutants that caused acid rain.

But now the United States stands as an outlier. The rapid turnabout has given several Republican presidential candidates political whiplash, forcing them to admit that they once supported the idea, but now they don't. One of the biggest former enthusiasts was former Minnesota Gov. Tim Pawlenty, who was bludgeoned out of the race by Rep. Michele Bachmann (Minn.). "When it came to cap and trade, I fought it with everything that was in me," she remarked during a recent debate.

The ferocity over his issue would have shocked Dales, whose idea was that a gradually shrinking number of permits to pollute would change the political game. Companies that invested in cleaner technology and reduced their emissions would have excess permits to sell to help them pay for it. Companies that simply wanted to hang on could, as long they bought more permits.

As for environmental groups, Dales reasoned they could simply put their money where their mouths were and buy permits and retire them. That would accelerate the shrinkage of pollutants. Thus, Dales concluded, "at least part of the guerrilla warfare between conservationists and polluters could be transferred into a civilized 'war with dollars'; both groups would, I think, learn something in the process."

The adventures of a non-promoter

The fact that his father's idea has spun around the world still shocks Dales' son, John Robert Dales, now an importer and wholesaler in Toronto. "That book just sat there for quite a while. Father was a pure academic in the sense that he was never going to be promoting the idea."

His father wrote the book, then took early retirement and went back to his other pursuits, which included "bird watching and plant watching," his son recalls. "He was a man who lived in his mind more than anywhere else."

Dales, who earned his Ph.D. at Harvard University, was no shrinking violet when it came to defending his ideas, though. "He could be rough on anyone whose logic was fuzzy," his son recalled.

Don Dewees, a fellow economics professor at the University of Toronto in the 1970s, remembers Dales spent a lot of his time on campus talking with engineering and science experts to learn more about pollution. In seminars and meetings, when the subject came up, Dales had a tendency to take over the discussion.

"He had a clear vision of the problem and the solution," recalled Dewees. "John had his own starting point, and he would begin there and carry on through. With an audience who were not economists, he would expect them to catch up quickly."

In 2002, after cap and trade had been used in the United States to get the lead out of gasoline and remove sulfur dioxide from the air, the decision was made to republish Dales' slim (111-page), elegantly written book. The reason for that was that cap and trade was now being discussed as the world's solution to the problem of climate change.

While Dales wrote mostly about water and air pollution. He -- like the rest of the world in 1968 -- appears to have had only a vague notion of how carbon dioxide and other accumulating forms of man-made greenhouse gases in the atmosphere might damage the planet.

Success finds many 'fathers'

In the final pages of "Pollution, Property & Prices," he mentions "the possibility that the exhausts of high-flying supersonic aircraft may lead to an increasing carbon-dioxide cloud over the world, and a consequent rise in temperature sufficient to melt polar ice caps and flood coastal populations."

There was a private celebration at the university when the second edition was published. Dales was there, but by then he may not have fully known what all the fuss was about. "At that point, he'd been retired for quite some time. His health was not wonderful," recalled Dewees.

In 2005, Dales' idea had become still more popular. "We'd go to a conference on emissions trading, and it was astonishing the number of people who would just stand up and claim they invented emissions trading," remembered Thaddeus Heutteman, who operates an Atlanta-based company that does market analysis of emissions trading.

To clarify matters, Heutteman and other members of the fledgling Environmental Markets Association created the John H. Dales Memorial award, an annual prize that is given to people who best carried on Dales' dream of using natural market forces to curb pollution.

John Robert Dales, who does business with Chinese companies in his importing business, was there to accept the first award on behalf of his father. According to his notes of his talk, he told the assembled traders that the time would come when China would seize the idea.

"Then the deep cultural penchant for trading in China will take over. I would expect rapid innovation in the field of pollution control once China gets at it," he predicted.

Tomorrow: the winding road to China.

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