Pope Francis didn’t win many friends among mainstream climate economists when his recent environmental encyclical Laudato Si’ condemned the notion of buying and selling carbon credits, suggesting that it could “lead to a new form of speculation which would not help reduce the emission of polluting gases worldwide” (¶ 171). That was seen by many economists as a direct swipe at the “cap-and-trade” systems underway or planned in places like California, Canada, Europe and (soon) China. Cap and trade works by setting limits — which get stricter over time — on the total amount of greenhouse gases that can be emitted, and then issuing pollution permits that add up to that total amount. Those who want to exceed their limits can buy permits on the open market from those who have extra permits they don’t want to use themselves. The encyclical’s policy stance received harsh reviews from such top climate economists as William Nordhaus and Robert Stavins. In a blog post here, Stavins concluded, “although there is much about the encyclical that is commendable, where it drifts into matters of public policy it is — unfortunately — not helpful.” With the news that 2015 will likely turn out to have been the hottest year on record, and the critical Paris climate talks only a week away, climate change and climate policy are back in the public eye. It seems an opportune moment to review the case for market-based climate policies and to examine the Pope’s critique: Does he mean what his critics think he means? If so, is he right?
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