Bastiat's Bastions

Last January, I wrote in this post about how Mubarak’s hold on Egypt was lost, in part, due to food riots, riots over the rising prices of food.  The problem was that the government in Egypt, to placate its citizens, had created programs to keep food prices down, at least to some, creating “program addiction,” a situation that results in uprisings if the program is cut, and that is what happened in Egypt.

The problem with such programs that give something away is that people come to depend on the program, and then, more and more become attracted to the giveaway.  With increasing numbers of people depending on the program, spending goes up and up and the taxpayers are asked to assume a heavier and heavier burden.  The ranks of the dependent swell while the number of those providing the payments shrinks. 

Now it looks as if a similar problem is occurring.  Take a look at this recent report from Andrew Breitbart about the reported gasoline shortages in Egypt.  Prices of gasoline have been held down through the Egyptian government’s subsidies, but such subsidies look to be unaffordable, leaving the government but little choice to end them, meaning prices will rise.  How do you think the Egyptians will respond to a government that causes gasoline prices to double?  The new leaders of Egypt have not yet solidified their power.  Just like Mubarak, they may soon be out of a job.

As you can read in the Breitbart article, the authorities blame speculators and smugglers.  Hmm? Maybe.  What needs to be asked is “why is smuggling going on in the first place?  Could it be that the policy that keeps prices of gasoline at half of the price in a neighboring country CREATES the opportunity for someone clever to buy in one market at a low price and sells in another at a higher price?  Here is an excellent analysis of what is going on with subsidized oil in Indonesia Price differences create profit opportunities for smugglers.  They create even larger opportunities for thieves. 

So, are the smugglers causing the shortages, or are they just taking advantage of a situation that politicians set up to build and maintain support?

What we will see this term is that when it takes government edicts to keep prices low, the amount buyers want becomes high compared to the amount that sellers want to sell—the textbook definition of a shortage.

-MC

This New York Times article describes the federal government’s huge subsidy program in renewable energy as a gold rush.  Perhaps, a better analogy is a land rush, like the competition to get land when the Oklahoma territory was opened up.  There, something was being given away, and there really wasn’t anything new being created, as that land in Oklahoma had been there for a long time.  The Solyndras in these government giveaways are not developing new technologies, but investing in existing technologies.  The question is ”why don’t investors sink their money into these deals, risk their own money, if these firms are so wonderful?”  Instead, we see companies rush to compete for the government handouts instead of competing for investors by providing sound investments.  And isn’t is just amazing that these firms getting the handounts all happen to be big political supporters of President Obama.  This is rent-seeking waste, just as we have discussed in class.  Rent seeking and promoting wasteful rent-seeking behavior, special favors, remains somewhere between blatantly unethical to blatantly corrupt. 

-MC

No electricity becomes no gasoline?  In this news story from NBC Connecticut’s Leanne Gendreau and Brynn Gingras, we see that the snowstorm in the Northeast this weekend has left many gas station pumps without power to pump, and so, has left those residents a way to get gasoline in their towns.  Now, these stores could power their pumps and their cash registers with generators, but that is not happening.  Instead, residents are driving to nearby towns, lining up at the pumps, with some lines reaching a half mile long.  The extra demand at these nearby towns has drained the gas from these stations, and so, these folks without power are having to drive even further in search for gas (remember “search costs?”).

Aren’t prices supposed to increase when shortages appear, causing the shortage to disappear?  Well, if you read the whole article, you will see why that did not happen in Connecticut, and will not happen until November 7th.  The authors state in the story,  “Attorney General George Jepsen put pricing controls in effect Monday to keep people from being gouged at the pump, according to Malloy.  The price controls will remain in effect until Nov. 7.”

John Stossel, in this video, asks “what is price gouging?” in this video.

What is price gouging, really?  It is keeping people from starving, dying, freezing after a snowstorm or running out of everything after a hurricane.

-MC

Solyndra, the company that has recently drawn so much attention to policies of the Obama administration because of its failure after receiving a half a $ BILLION in a federal loan, epitomizes why the federal government should not make such loans to businesses.   Not only has the federal government handed $528 million to Solyndra, but they were ready to give the company another $ 469 million, almost a full $ 1 billion, shortly before the company declared bankruptcy.
David Baker with the San Francisco Chronicle writes about the controversy here  and here noting that California companies got the most of these “green energy” dollars, totaling about $6 billion in loans and loan guarantees, while another 4.2 billion in federal loan dollars went to companies outside of California for green energy facilities in California.

It is misguided to think that the government can do a better job in investing in businesses than those in the private sector.  The White House has come under increased scrutiny in its loan decision regarding this company, both because it ignored advisors who pointed to the company’s likely failure because its costs were not competitive and also because one of the company’s key investors was a major financier of the President’s election campaign, who had repeatedly visited the White House while the company’s loan was being considered.

The problem with the Solyndra fiasco is not that the deal involved  corruption, with heavy political donors receiving taxpayer loans that never get repaid because of the company’s failure (here, I am reminded of Mel Brooks’ great comedic film “The Producers,” a film remade in 2005), nor even the appearance of corruption or even the potential for corruption, though we should make notes about this in our memories.  The problem is that the bureaucrats approving such loans have very little to gain if the companies they invest in succeed and nothing to lose if the companies fail.  Instead of being careful stewards of taxpayer funds, the bureaucrats tend to use taxpayer funds for projects that are supported by their ideology, whether that ideology be radical or conservative.

While GE’s CEO, Jeff Immelt defends the role of the government in providing as venture capital, even if some of them fail, there is a great argument against this activity provided in a classic discussion by Milton Friedman, one of the greatest economists of the 20^th century, about why people are more careful with their own money than the government is with taxpayer or “other people’s” money in this video on doing good with other people’s money, noting that people are seldom as careful spending other people’s money than they are in spending their own.

-MC

Contrasting to gas prices seen earlier this month, I saw the lowest gas prices I have seen in a while as I drove to New Orleans tonight.  I saw gas prices around $3.32 in Boutte, and then down to $3.29 by Avondale and then down to as low as $3.19 in Westwego.  I wondered why, but quickly remembered seeing stories like this one from Reuters that the Obama administration has released a part of the US strategic oil reserve and will continue to release oil from our reserves over the next month, as part of an international effort to increase the supply of oil to counter the reductions in supply because of the war in Libya.

How long can we count on these lower prices?  My bet is that these reserves will be used up and prices will be back up long before Gadaffi is forced from office.  And then, we will have high prices and a big hole in our strategic reserves, that we would be wise to replenish.  Then, we will have sold our reserve oil at low prices and will have to replace it at higher prices.  “Sell low, buy high” is the strategy of fools.

-MC

Unless you have been laid up in bed, you are sure to have noticed that the price for gasoline has skyrocketed in the last few days, rising by about $0.25 a gallon here in south Louisiana, or about 8%.  For extra credit only to the first of my students to correctly post the right answer, explain to me, in terms of supply and demand and the factors that affect them, why gasoline prices have gone up so much so fast.

Now, gasoline prices have been trending up a bit over a much longer period, peaking finally in the summer of 2008, and then the price for fuel plummeted. 

Researchers with the International Monetary Fund, the IMF, have noticed a peculiar correlation, as reported here at the Public Radio Program, Market Watch—the very high correlation of the price of oil and the price of fine wine, like the wine from the French wine region on Bordeaux.  These two prices move closely up and down together (see also this Wall Street Journal article ), and not for the reason one might suspect–it is not because of transportation costs, as transportation does not make up as much of the price of expensive wine as it would, say, for cheap wine. 

Again, for extra credit, but only for the first to answer this correctly, explain to me, in terms of supply and demand and the factors that affect them, why oil and wine prices move so closely together, that is, why are they strongly, positively correlated?

-MC

Economists recognize a limit on government spending due to the sources for the spending for those dollars to be spent.  Economists call this limitation the “government budget constraint.”  We recognize that there is a tax to be paid one way or the other, different ways of raising the funds implies different taxes.  Some of these are up front taxes, where we know we are being taxed, while others are hidden taxes that we pay, nonetheless.

Indulge me to some simple math.  Let’s use “G” for Government Spending, ”T” for Taxes, and “D” for Deficit.  The Deficit, D, is, of course, just G-T, so D = G-T.  That part is obvious:  the part of government spending that exceeds the taxes raised to pay for that spending is the deficit (government debt on the other hand, is the deficit accumulated over the years minus the few surpluses we have had).

So, the excess of government spending over above the taxes to pay for that spending is the deficit.  A hallmark of Keynesian economics has been the idea that deficits are ok, that they are even a good thing during recessionary periods.  This approval of deficit spending by the federal government removed the moral constraint to not run deficits that had been in play for years.

Borrowing to pay deficits and taxes on capital and labor

The next question is “how do we pay for this deficit?” Well, of course, we borrow the money–we choose to increase our debt by borrowing from anyone who thinks that we are credit worthy, better risks than others at the interest rate we are paying.   We simply put IOUs (or treasury bills) up for sale. Some of the creditors or buyers of these IOUs are our own citizens, and some are not.

If we only sell our IOUs only to our own citizens, we soon have to lower the price of our IOUs in order to sell more, as there will be a point where the our citizens will start to have to take their funds from investment projects in which they are willing to invest and keep those funds in treasuries, or government IOUs.  While I will not go into the explanation in this post, interest rates and the prices of IOUs go in opposite directions, but here is a sufficient explanation from About.com.

As we drop our price to sell more, our interest expense increases.   So, as we increase the size of our debt with deficits year after year, we also drive up interest expenses for most of the debt we owe, as much of it is in short-term securities.  Since interest payments amount to part of our G, government spending, the deficit goes up at an even faster rate.

Of course, we sell our IOUs not only to our own citizens, but to all those around the world.   By selling them to those outside our borders we are able to raise more funds at the same interest rate as compared to only selling them domestically.  Still, as our debt creeps upward, we have a larger proportion of our spending going to pay the interest on this debt.  Since so much of our current debt obligations are in short-term obligations, new debt from additional deficit spending raises our interest expense on most of our debt.   As more borrowing to finance new deficits begin to push interest rates up as the default risk on these funds increases (just like a lender runs a higher risk of not getting his funds back from someone who owes ten times what they make in a year compared to someone who is now debt free, but once had a mortgage), and so, lenders must get higher rates to take the risk of making the loan.

Interest rates start to edge upward as it becomes more difficult to sell our IOUs.  Higher interest rates mean fewer business investments in machinery, equipment, factories, etc. will be worth making and less of these tools will be available for workers to use.  Less capital per worker means lower productivity for workers and less pay, as workers are ultimately paid because they are productive.  If the worker does not produce as much, the worker cannot be paid as much.

So, increased borrowing is a tax on workers and owners alike, as lower wages for workers and less capital held by owners harms both of these producer groups.  This tax is hidden from immediate view, as it is not obvious that excessive government spending is immediately coming out of their pockets.  The tag line for our blog, “what is seen and what is unseen” becomes important here, as people usually perceive taxes that they get a bill for as a tax, but they don’t see deficits as taxing them.  As Louisiana Sen. Russell Long was noted for saying, voters really mean “Don’t tax me and don’t tax thee, tax the man behind the tree.”  We are the men behind the tree.  Or, when it comes to taxation, as Walt Kelly’s Pogo said “We have met the enemy and he is us.”

Printing money to pay the deficit and the inflation tax

Now one of the tricks that governments have used in the past is to have its central bank (our Federal Reserve) become one of the creditors and buy up these IOUs.  In an earlier day, we would simply have some institution print or coin money.  Increases in the supply of money in an economy usually or eventually results in raising prices, in inflation.  If the increased money supply causes people to reduce their acceptance of the money involve as they expect the money to have a declining value,

The unstable Weimar Republic, the post-WWI German government, did exactly that, resulting in inflation rates that boggle the mind, reaching a rate of 100% every 2 days.  In other words, prices were doubling every two days for a while.

Another way of thinking about that is that a person’s savings in money fell in half every two days.  There is an often-repeated story of someone choosing between a huge prize and a penny payment that doubled every day for a month (30 days—we won’t get greedy here).  Imagine getting a million dollars in 30 days or the penny payment doubling every 30 days.  Here is a little article on that choice.   The doubling penny ends up being $5,368,709.12 in just 30 days.

Now imagine the reverse, where you start off with cash holdings of $5,368,709.12, and you face inflation of 100% every two days.  In only 60 days the buying power of your cash holdings is reduced to a single penny.  In those short 60 days, the government’s inflation policy, turning its debt into money, has taxed away over $5 million of your savings.  “My father was a lawyer,” says Walter Levy, a German-born oil consultant in New York, “and he had taken out an insurance policy in 1903, and every month he had made the payments faithfully. It was a 20-year policy, and when it came due, he cashed it in and bought a single loaf of bread.” (From the PBS series, Commanding Heights )

While everyone may try to rid their portfolios of money assets, it cannot be done for the whole economy, and so, wealth held in dollar assets falls, making us all poorer, but also making the inflation tax even higher.   As people try to protect their portfolios by buying real assets (not money or dollar denominated IOUs), we end up in a game of “who gets stuck with the worthless money.”  We spend that money at a faster and faster rate.  For instance, the German hyperinflation mentioned above led to retailers raising their prices several times a day.  Workers and their spouses soon started demanding to get paid several times a day so that the same marks were going around the economy at faster and faster rates.  A very old and well known relationship in economics is that the price level (think CPI) times the output of real goods and services produced (think real GDP) equals the Money in the system times the speed at which money circulates (something called Velocity).  Or, put another way, the growth rate in the Money Supply times the growth in Velocity divided by the growth in the economy is the growth in prices better known as inflation.  Either more money or faster circulating money will drive up prices if we don’t increase our output.

We see store owners and farmers raising prices and seldom think that it is really the government and the central bank behind these price increases, making inflation amount to an invisible tax eroding away at the cash savings we worked years to build up.

I should point out that economists recognition of a government budget constraint, that we are taxed one way or the other for all of our spending is noted in the acronym “TANSTAAFL,” standing for “There Ain’t No Such Thing as a Free Lunch,” coined by Robert Heinlein in his science fiction book, “The Moon is a Harsh Mistress.” Still earlier, David Ricardo noted the equivalence of taxing and borrowing in his 1820 “Essay on the Funding System.”

Why Do Deficits Matter?

If we are taxed one way or the other as has been shown, why do deficits matter, why should we care about deficits and running up big national debts?

Well, just as Ricardo noted the monetary equivalence between borrowing and taxing to pay for some large government expense, such as a war (Ricardo’s example), Ricardo also suggested ways that these were not the same, noting that people often fail to perceive the full costs of government spending when it is financed by borrowing, noting what has been called by one of my professors, James Buchanan, “Fiscal Illusion.”  The problem is that the taxpayer-voter seldom notices the perpetual interest payment the government must make as the same as the immediate tax increase to avoid a deficit.

Another way of putting this is that not all taxes are seen as such.  People seldom connect the inflation that they face because of government services that they receive while refusing to pay higher taxes.   People also do not notice that they have less equipment and tools at work and fewer sellers in each industry because investments were not made at some earlier time because interest rates were too high.

Taxes out of their own pockets are seen and kept to a minimum, while government benefits they get are seen and kept to a maximum.  On the other hand, stealth taxes on capital and on money holdings are not seen as payments for their government benefits or the reductions in taxes for which they themselves are liable.

So, voters ask for lower taxes and higher benefits, more spending, and their representatives oblige.  The cost of government is perceived as being very low.  When we do not see the full cost of something, we usually ask for more, just as the consumer who does not pay for the environmental costs of the products they consumer want more to be produced.

Deficits matter because they misrepresent the true costs of decisions to voters.  Voters who benefit from the spending vote for it, as it is clear that they benefit.  Voters who pay the inflation tax or the capital tax (higher interest rates) do not perceive their liabilities and do not try to block passage.  The most popular legislation, then, raises deficits.  Fiscal Illusion that plagues us, especially when we employ deficit financing of government spending, makes continued deficits more likely, as voters, more than Twist, find it easy to ask for “More, please.”

-MC

In posts as early as July of 2007, I have bemoaned the misallocation of resources as a result of poorly conceived policies by politicians to help special interests line their pockets.  For humorous effect, I have pointed out that the ethanol subsidy increases the use of corn as fuel instead of as food, and that land used for other crops, such as barley, gets transferred into land to produce corn. For instance, read these two posts: “John Barleycorn must die” and “A misallocation of agricultural resources.”

Al Gore, who has had an enormous effect of U.S. energy policy, admits in this article from Reuters http://af.reuters.com/article/energyOilNews/idAFLDE6AL0YT20101122?sp=true

that he was wrong in promoting ethanol subsidies, and that those subsidies have proven disastrous in raising food prices.  He also states that the subsidy created rent-seeking and rent-protecting lobbies that will make it difficult to eliminate the subsidy.

Gore’s excuse for promoting a poorly thought-out policy was his political ambitions for the presidency and seeking the support of Tennessee (his home state) and Iowa farmers.   While the effect  political ambition on poorly conceived policy remains long after it is shown to be bad policy, the short-sighted rush for “change,” AKA, the quick fix, turns into wonder at why we have problems elsewhere in the society.  In the case of ethanol, the wonder is why we have such high food prices.  Inflation from our ineffective quick fixes for our recession are surely playing a huge part in food prices–but only part of the problem.  Let’s hope we give some more thought and more debate to fixing our high food prices.

-MC

The  U.S. Minerals Management Service (MMS) is the regulatory agency in charge of safe operations of our offshore oil industry.   Yes, these are the guys who were supposed to make sure that British Petroleum and others drilling for offshore oil follow procedures to keep our environment safe. This is just one example of what economists call “government failure.”  With the recent oil spill, as with Katrina, we often trust the government to keep us safe.  When we do, however, we are bound to not only be disappointed, but also to be anything but safe.

In class recently, I talked about how regulatory agencies are sometimes captured by the industry they are supposed to regulate.  According to recent news stories, the MMS has gotten very cozy with the oil industry.  Here is a story from Salon (warning: the relationships involved are sometimes sexual in nature, and the story mentions specific acts) about that cozy relationship.  The relationship between the MMS and the oil industry painted in the Salon story and elsewhere is one where the regulatory agency has become the agency’s, well, handmaiden.

Of course, the truth is that BP wasn’t trying to do something its managers thought was particularly risky.  This was the sort of event no one had any experience with.   BP did not think that their efforts would cause a major oil spill with a horrible loss of life of their employees and those of its contracted partners.

Still, the point is that we cannot rely on regulations to get firms or anyone else to do the right thing.   If firms cannot make money by getting around the reglations, they will try to do just that.   And if we cannot trust a firm’s management to have strong moral and ethical character, how can we be so sure that the regulators themselves will have strong moral and ethical character and will be above taking bribes?   If the profits from subverting the intent of regulations are enough to pay the regulators to look the other way, then we are deluded into thinking that the regulators are keeping us safe. 

MC

Many on the conservative side have had many negative things to say about the “Cap and Trade” system.  It should be pointed out that “cap and trade” itself, is not  the source of their ire.  Rather, many conservatives do not like limitations being placed on CO₂ emissions in the US. 

What is this “Cap and Trade” system that is being implemented in the new climate change bill?  Cap and Trade is merely an approach to regulating emissions, and it is one that efficiently reduces those emissions.  It contrasts with two other approaches: one that is called the “command and control” approach to regulation and the other is an approach that taxes emissions, such as the proposed “carbon tax” to regulate greenhouse gases a decade ago.  Before looking look at these regulatory systems, let’s look at the ideal environmental regulatory outcome.

At first glance, it would seem that no pollution would be the best regulatory outcome.  Think of what this would mean when we consider CO₂ as a pollutant.  We inhale oxygen, but if CO₂ is a pollutant and we want no pollution, then, we better hold that breath.  But we cannot.  Stopping all pollution is just too costly. Anything we do to reduce our pollution will cost us something. But, of course, pollution itself is costly, either health costs, or aesthetic costs, or costs in losses of biodiversity. The ideal, then, is really to keep the total costs of pollution and the costs of reducing that pollution to a minimum. 

Generally, each extra ton of emissions of CO₂ causes the added costs of pollution to increase.  Also, if we look to reducing CO₂ emissions, we can find some inexpensive ways to cut emissions, and after we cut emissions in those ways, to cut emissions further, we would have to employ costlier and costlier means.  To keep these total costs to a minimum, the added costs from cutting a ton of CO₂ emissions have to equal the added costs of the damage done by another ton of CO₂ emissions.  If the added costs are higher from the damage done from another ton of CO₂ than from cutting emissions, we could lower total costs by cutting emissions.  On the other hand, if the added costs of cutting emissions by a ton are higher than from the damage done from another ton, total costs could be lowered if we go ahead and pollute that ton.  The “right amount” of pollution, then, is the amount where another ton would cause costs of cutting pollution by the same amount as the costs of the damage done by another ton of pollution.

Of the three methods of pollution control to understand, the easiest to understand is the “command and control” system.  Here, the regulatory commission sets requirements for each source of pollution, monitors them for compliance, and then sets fines and punishments for those who fail to comply with the regulatory requirements.  Here, possible polluters just do what they are told or face extremely high fines or other punishments.  The “command and control” name for this regulatory type comes from the management form used in the military.  Historically, most of regulation of the EPA has been of this “command and control” type.  The best way of thinking about this approach is to recall the lines from Tennyson’s “Charge of the Light Brigade:”

Theirs not to make reply

 Theirs not the reason why

    Theirs but to do or die.

 This command and control system of regulation does not do a very good job of keeping costs of regulation down, nor does it do a good job of balancing the costs of damage with the costs of reducing emissions.  The regulatory authority just does not have information on all of the costs.  This information is mostly diffused throughout the society—various electric power generating companies have a good idea of what their costs of cutting emissions are like, so a lot of people have bits and pieces of this information, and no one knows it all. 

One of the earliest regulatory suggestions for reducing the costs of pollution control was made by A.C. Pigou in 1920 in his book, The Economics of Welfare (with the word “welfare” meaning “wellbeing”).  Pigou suggested that a tax could be levied on certain activities, such as pollution, that would give people an incentive to reduce those activities.  Economists in the 1960s and 1970s saw that such a tax would get polluters to reduce pollution in a least-cost way.  Any producer who could reduce emissions at a cost below the tax would do so, while those who could only cut their emissions at a higher cost would not.  Suppose the tax on emissions is $100 per ton.  All pollution reduction that costs more than $100 per ton will not take place, but pollution reduction that costs less than $100 per ton will take place.  Lower cost cleanup activities replace higher cost cleanup and costs cannot get any lower.

A little later on, economists came up with a slightly different approach.  The environmental regulatory authority would first decide how much emissions would be allowed, create “pollution rights” which would be tradable.  Polluters who could reduce pollution very cheaply could then reduce their emissions and sell their rights to those who could only cut their emissions at a very high cost.  If the price of a pollution permit were higher than the cost of cutting emissions, the producer could then reduce their emissions and sell off their permit.  If the emission permit sold for a price below the cost of cutting pollution, the emitter would buy up permits.  If you think that such a scheme is unworkable, think again.  We have been using tradable permits of this sort to control SO₂ emissions that cause acid rain since the 1990s, and these permits trade on the Chicago Board of Exchange, along with various commodities.

The Pigou tax on pollution, which we saw a decade ago called a carbon tax, gives polluters a constant price to respond to, and the total amount of emissions could be higher or lower and can change over time.  If the costs of cleaning up go up, we end up with higher levels of emissions.  On the other hand, the tradable permits system produces a constant level of emissions but with a price of pollution that varies.  Both of these methods minimizes the costs of cutting pollution because both produces a price for cleaning up so that those with costs of cutting a ton of emissions above that price do not cut their pollution and those with costs of cutting a ton of emissions below that price do cut emissions.  Only the low-cost emission cutters reduce their pollution while high-cost emission cutters do not, and face either taxes or having to pay for pollution permits. 

For global pollutants, such as greenhouse gases, there could be international trade in CO₂ permits.  This is the general idea behind “cap and trade.”  For this to work well, however, there would have to be a global monitoring agency that could monitor each source of CO₂  emissions and would be ready to punish those polluters who do so without a permit.  This is the part of “cap and trade” that faces the biggest difficulties.  Remember that real regulation is not done by Soloman-like regulators who are infinitely fair, but by actual people, like international soccer referees, so that various human biases rather than fairness would show through in international environmental regulation.  The problem of political bias and lack of information in regulation is seen in this warning from Pigou himself (Some Aspects of the Welfare State,” Diogenes 7:1-11 (1954), p. 10.):

It must be confessed, however, that we seldom know enough to decide in what fields and to what extent the State, on account of them could usefully interfere with individual freedom of choice. Moreover, even though economist were able to provide a perfect blueprint for beneficial State action, politicians are not philosopher kings and a blueprint might quickly yield place on their desks to the propaganda of competing pressure groups. “Fancy” finance, like a fancy franchise, whatever its theoretical attractions, has, at all events in a democracy, dim practical prospects.

“Cap and Trade,” itself is a good idea.  It is a market-based approach to efficiently reduce the amount of emission of CO₂.  The real difficulties are first, setting the right amount of emissions to allow and second, monitoring and regulating by a global authority, giving up sovereignty to regulators who are likely to want to tilt the playing field away from favoring Americans.  Before going down the road of regulating CO₂ through any approach, we should be very sure of what human reductions in CO₂ will actually accomplish and whether there are alternatives that might work better, such as re-forestation of large areas of the planet.

-MC