Weekend reading links

1. Case study of US toy maker, Learning Resources, on the challenge of diversifying away from China.

While you can move your manufacturing out of China, it’s much harder to move China out of your manufacturing.

Some snippets highlighting the point above. 

The toymaker offers about 2,000 products; a few years ago more than 80% of them were produced in China by companies that tapped into the country’s countless vendors of plastic resins, paint pigments, computer boards and other materials... China has about 10,000 toy manufacturers, versus roughly 100 factories in Vietnam skilled enough to produce for export... This lack of scale means less competition to bring down prices, crucial for toys, where margins typically stand in the single digits. Learning Resources is moving batches of about two dozen products at a time to Vietnam, a time-consuming and costly process. Each toy requires as many as a half-dozen heavy steel molds, which are mostly made in China. Ruffman estimates it will cost about $5,000 to move each mold to Vietnam—adding millions of dollars in expenses that contribute nothing to the bottom line... Vietnam’s output per employee is as much as 40% lower. That’s because Chinese factories have invested heavily in automation and can rely on an experienced workforce... China’s combination of expertise and infrastructure “doesn’t exist anywhere else”.

2. Avocado farming comes to India. It can generate annual income of about Rs 4 lakh per acre, net of all expenses. 

Currently, demand within India is met largely by imports which are doubling every year. In FY24, India imported 5,040 tonnes which climbed to nearly 12,000 tonnes in FY25. This year, the imports are likely to cross 20,000 tonnes (the imports during the first quarter of FY26 was nearly 7,400 tonnes). Come to think of it, a few years back, in FY21, imports were a mere 234 tonnes... Despite the growing popularity of avocados among farmers, it’s only the well-off who are getting into it. The reason is simple: for orchards to yield a remunerative return, it takes 4-5 years from planting. The costs range from ₹4-5 lakh per acre (apart from the land cost). Just one sapling of avocado can cost anywhere between ₹800 to ₹2,500 (about 150 saplings can be planted in an acre) depending on the variety and rootstock... As per a June 2025 estimate from Rabobank, the global avocado market is around $20.5 billion. The report estimated that global avocado exports are likely to touch 3 million tonnes by 2026-27, from one million tonnes in 2012-13. Today, India imports about 90% of the avocados it consumes from Tanzania (as the produce is duty free), with smaller volumes coming from Australia and Kenya, among others.

3. For all the talk of China competing with the US on AI, the latter dominates VC funding in the field.

And AI computing power too is concentrated in the US

4. FT has a graphic which shows that Germany, the centre of capital goods manufacturing, has now become a net capital goods importer from China!

For about two decades up to the pandemic, Chinese demand for German engineering goods and cars was seemingly insatiable, fuelling the Merkel-era growth in corporate profits, employment and economic activity. Since the pandemic, however, China is “increasingly beating Germany at its own game”, says Spyros Andreopoulos, founder of Frankfurt-based consulting firm Thin Ice Macroeconomics. On average, Chinese capital goods are 30 per cent cheaper than those of Europeans. Crucially, manufacturers in the Asian superpower have also closed the quality gap. Since the start of 2025, Germany is now running a trade deficit in capital goods with China over a rolling 12-month period. That is a first since records began in 2008. Chinese machinery exports to Europe roughly doubled to around €40bn in over six years and may reach €50bn this year, according to industry association VDMA. While German premium car brands like Audi, Porsche and Mercedes-Benz were the first to feel the pain, capital goods makers have started to get similarly pounded... 

Goods coming out of China are no longer cheaply made, lower-quality knock-offs, if they ever were... When it comes to speed, they have surpassed Western rivals by a mile, needing half the time to turn a new idea into a finished product. Shorter product cycles mean quicker learning... Philipp Bayat, chair of Munich-based compressor maker Bauer Kompressoren Group, gives a striking example. He needs a new wire-processing machine for one of Bauer’s European plants. A quote from a Swiss-based European company stands at €130,000, compared with one from a firm based in China’s Zhejiang province for less than €28,000.

4. Sander Tordoir makes the case for Buy European policy to counter the rising imports of Chinese automobiles that threaten to destroy Europe's automotive industry.

Europe’s car industry employs more than 10 million people and accounts for a larger share of private R&D spending than any other industry... Thanks to widespread subsidisation and genuine innovation, China’s global car exports are exploding, and European exports are being squeezed out of global export markets, starting with China. EU car exports to the United States (US) almost doubled between 2019 and 2024, but President Trump’s 15 per cent tariffs and his rollback of EV subsidies will deal another blow. EU domestic demand, meanwhile, is weak... Rather than tampering with regulations, EU policy-makers should ensure that demand from Europe’s huge single market, with 450 million consumers and a vast corporate sector, spurs European production. That primarily means supporting demand through consumer subsidies, with a buy-European clause co-ordinated across member-states... 

To align demand-support schemes across the EU, the Union should Europeanise the French eco-bonus. The French model, with its carbon-based scoring system, is the most practical template to adopt across member-states. It effectively steers demand toward European-made EVs and filters out Chinese production, because it limits subsidy to EV models produced in low-emission supply chains... To support its car sector, Germany has just committed to reintroducing EV subsidies. Equipping them with the eco-bonus would align Germany with France and support a buy-European policy. Italy and Spain, which are reviewing their subsidies next year, could then follow suit... 

Household EV purchases backed by subsidies would cover only 40 per cent of the total European car market. Over 60 per cent of EU new registrations are company cars which already benefit from sizeable subsidies. Support schemes for corporate EVs should also be conditional on European content requirements. Ensuring that buy-European subsidies apply to both markets would also allow Germany to secure demand for premium models, common in corporate car fleets, while France, Spain and Italy gain scale in the smaller cars which are more common in the household market... because buy-European clauses would be open to producers across the EU, the policy would not require policy-makers to pick ‘winners’. German tax incentives would also help French producers, and vice versa. A harmonised EU framework could avoid subsidy fragmentation, foster competition in the European market, and level the playing field with China, which excludes foreign vehicles from its own subsidy schemes.

5. Top Chinese companies are training their AI models overseas to skirt the US ban on the sale of Nvidia chips.

Alibaba and ByteDance are among the tech groups training their latest large language models in data centres across south-east Asia... there had been a steady increase in training in offshore locations after the Trump administration moved in April to restrict sales of the H20, Nvidia’s China-only semiconductors... Over the past year, Alibaba’s Qwen and ByteDance’s Doubao models have become among the top-performing LLMs worldwide. Qwen has also become widely adopted outside China by developers as it is a freely available “open” model.Data centre clusters have boomed in Singapore and Malaysia, fuelled by Chinese demand. Many of these data centres are equipped with high-end Nvidia products, similar to those used by US Big Tech groups to train LLMs. According to those familiar with the practice, Chinese companies typically sign a lease agreement to use overseas data centres owned and operated by non-Chinese entities. This is compliant with US export controls as the Biden-era “diffusion rule” designed to close this loophole was scrapped by US President Donald Trump earlier this year.

6. This is important for China to remember as tensions between it and Japan rise. 

“The more pressure China exerts on Japan, the more Japan feels compelled to prepare, recognizing the growing danger — Prime Minister Takaichi’s approval ratings are rising, and the Japanese people’s sense of crisis is also increasing,” said Ichiro Korogi, a professor of international studies at Kanda University of International Studies.

7. Is there anything China wants to import from rest of the world?

There is nothing that China wants to import, nothing it does not believe it can make better and cheaper, nothing for which it wants to rely on foreigners a single day longer than it has to. For now, to be sure, China is still a customer for semiconductors, software, commercial aircraft and the most sophisticated kinds of production machinery. But it is a customer like a resident doctor is a student. China is developing all of these goods. Soon it will make them, and export them, itself. “Well, how can you blame us,” the conversation usually continued, after agreeing on China’s desire for self-sufficiency, “when you see how the US uses export controls as a weapon to contain us and keep us down? You need to understand the deep sense of insecurity that China feels.” That is reasonable enough and blame does not come into it. But it leads to the following point, which I put to my interlocutors and put to you now: if China does not want to buy anything from us in trade, then how can we trade with China?

In the circumstances, what can China do?

Beijing could take action to overcome deflation in its own economy, to remove structural barriers to domestic consumption, to let its exchange rate appreciate and to halt the billions in subsidies and loans it directs towards industry. That would be good for the Chinese people, too, whose living standards are sacrificed to make the country more competitive.

8. Europe's CBAM makes India's steel less competitive compared to China's.

Over one-third of India’s 6.4mn metric tonnes of annual steel exports go to Europe, which will implement its divisive carbon border adjustment mechanism (CBAM) on January 1, a tax on polluting overseas producers aimed at protecting EU industry from being undercut by cheaper but dirtier imports. India’s European exports are expected to be disproportionately affected by the new rules, with Chinese steel imports subjected to an average tariff of 7.75 per cent compared with India’s 16 per cent levy, according to the Net Zero Industrial Policy Lab at Johns Hopkins University... India is “less efficient” compared with other major steel-producing nations, with an emissions intensity of 2.5 tonnes of CO₂ per tonne of crude steel compared with the global average of 1.9 tonnes.

9. The rise of psychiatric disorders in the US is disturbing. 

A diagnosis of attention deficit hyperactivity disorder is practically a rite of passage in American boyhood, with nearly one in four 17-year-old boys bearing the diagnosis. The numbers have only gone up, and vertiginously: One million more children were diagnosed with A.D.H.D. in 2022 than in 2016. The numbers on autism are so shocking that they are worth repeating. In the early 1980s, one in 2,500 children had an autism diagnosis. That figure is now one in 31. Nearly 32 percent of adolescents have been diagnosed at some point with anxiety; the median age of “onset” is 6 years old. More than one in 10 adolescents have experienced a major depressive disorder, according to some estimates.

10. Alan Beattie calls peak Trump tariffs, even as affordability and cost of living become a rising issue in US politics. 

The meeting in October with Chinese President Xi Jinping, in which Trump backed down after threatening a massive escalation of tariffs, now looks a lot like an inflection point. Last week, having remained composed in the face of Trumpian invective against the criminal prosecution of his coup-fomenting predecessor, Brazil’s President Luiz Inácio Lula da Silva, was rewarded with massive cuts in US tariffs on food. Fellow Central and South American countries Argentina, Ecuador, Guatemala and El Salvador got similar relief, and so probably will the EU. Canada has yet to be clobbered with the additional 10 per cent tariffs Trump threatened for the heinous crime of accurately quoting Ronald Reagan in a TV ad. Reports suggest he will soften or shelve forthcoming tariffs on semiconductors.

Gillian Tett writes

Four months ago, US President Donald Trump announced 40 per cent additional tariffs on Brazilian imports (creating 50 per cent total levies), because he was furious about the country’s legal investigation into Jair Bolsonaro, its former president, and its clampdown on US Big Tech. But President Luiz Inácio Lula da Silva defiantly hit back at the bullying — boosting his domestic popularity — and defended the courts. A Brazilian judge has now sent Bolsonaro to jail. And those tariffs? Last week, Trump declared that “certain agricultural imports from Brazil should no longer be subject to the additional [40 per cent surcharge]”. In plain English: Lula won.

India remains the only country to have not benefited from the Trump retreat.

Weekend reading links

1. The Economist on whether India can outcompete Bangladesh in textile exports 

Since building its first export-orientated apparel factory in 1978, a joint venture with a South Korean firm, Bangladesh has turned its economy into a clothes-exporting powerhouse. The sector employs some 4m people, mostly women, and contributes 10% of the country’s GDP. Last year Bangladesh shipped $54bn-worth of garments, second only to China... India does not have the capacity to compete with Bangladesh at this stage, according to one industry insider. Too much policy attention is directed towards boosting capital-intensive sectors, such as electronics, instead of labour-intensive textiles, he says. Between 2016 and 2023 the value of Indian apparel exports fell by 15%, whereas Bangladesh’s increased by 63%. A recent World Bank report points to India’s protectionist policies as the culprit. Average import tariffs on textiles and apparel, including on intermediate inputs used by local manufacturers, have increased by 13 percentage points since 2017, raising prices for producers.

2. Some data on India's services-led growth

Over the last decade, India has added close to $1.7 trillion to its nominal GDP, 52% of which came from the services sector, compared to 11% from manufacturing. Services are far less capital intensive, as they do not require heavy machinery and large factories . Thus, the capital intensity of Indian growth has fallen in tandem... A booming services sector also leads to a concentration of the economic surplus. The backward linkages of this sector happen to be relatively weak. For each additional dollar worth of output by it, only 30 cents reflects the inputs it absorbs from other sectors in the economy. For the manufacturing sector, in contrast, this proportion is much higher at 73 cents... Industrial production data shows sectors (mostly low-tech) that account for 15% of manufacturing output have still not reclaimed their pre-pandemic output. In some of these, such as leather and apparel, production is still down by more a fifth from their pre-pandemic levels.

3. Some important findings from the Annual Survey of Unincorporated Sector Enterprises (ASUSE) of 2021-22 and 2022-23.

Presently, there are 14.6 million active taxpayers, of which nearly 10.4 million have come in the post-GST regime and are therefore new registrations. They represent a formalization of the economy... Over the two surveys, from 2021 till 2023, the number of enterprises rose from 59.7 to 65.4 million, and the corresponding employment from 97.9 million to 109.6 million. The employment numbers include single person-owned enterprises and are lower than in the 2016 survey... Of the 65.4 million enterprises, 82.6% have an annual turnover of less than ₹5 lakh. Almost 99% of the unincorporated enterprises have turnover of less than ₹50 lakhs, and merely 0.3% have more than ₹1 crore. More tellingly, only 2% are registered for GST. Two-thirds of all unincorporated enterprises are not registered under any act or authority. Note, a lot of the benefits to small businesses are linked to their registration on UDYAM. These include collateral free loans under schemes like the Credit Guarantee Fund Trust for Micro and Small Enterprises... A large section of informal small businesses involves sales of products and services directly to the end customer at wafer thin margins. These could be, for instance, selling vegetables or carrying out shoe repair, and often are single-person enterprises. For them, entering the GST net has a disincentive, even if they grow above the exemption threshold, since they do not derive any input tax credit, nor can they pass on the burden to their customer due to a competitive market.

4. Official data has shown that the net financial assets of Indian households declined precipitously from 11.5% of GDP in 2020-21 to 5.1% of GDP in 2022-23, a five-decade low and a fall of over Rs 9 trillion. 

The article says that the decline cannot be explained by the rise in physical assets. 

This trend has been accompanied by a trend of growing non-housing loan share.

The report informs that while the share of vehicle loans has remained stable at aroubg 9-10% since 2018-19, the other loans to finance consumption (medical loans, credit card loans, consumer durable loans etc.) has risen sharply from 14% to 19%. India's non-housing debt is around 30% of GDP, easily higher than peers and in fact higher than those even in advanced countries. The housing debt stands at a low 10-11% of GDP. 

5. The declining venture capital in India.

A longer series is below.

6. China's National People's Congress, the rubberstamp Parliament, has finally announced its long-awaited fiscal stimulus plan. But in a disappointment to investors, the plan avoided targeting the flagging household consumption and was aimed at bailing out local governments. 

As part of the bailout, Beijing would authorise local governments to issue bonds over three to five years to restructure most of an estimated Rmb14tn in “hidden” or “implicit” debts, finance minister Lan Fo’an said in a rare press briefing at the Great Hall of the People in Beijing. These debts are mostly held by thousands of off-balance sheet finance vehicles that local governments used to invest in infrastructure and property-related sectors. Many of these bets went sour when China’s real estate market entered a deep slowdown three years ago, sinking local government finances and undermining the broader economy... Lan said Beijing would authorise local governments to issue Rmb6tn in new bonds over three years for the debt restructuring and would reallocate a further Rmb4tn in previously planned bonds over five years for the same purpose... Local governments would be able to swap these bonds for those of their finance vehicles, bringing the debts on to their own balance sheets. This would lead to lower financing costs, saving Rmb600bn in total, Lan said. Lan estimated that “hidden debts” would be reduced to Rmb2.3tn once the swaps and another debt programme related to slum redevelopment were in place. This would free up resources previously “constrained” by the debt problems and allow local governments to refocus spending on “development and public welfare improvement”, he said. On additional stimulus measures, Lan said officials were “studying” extra steps to recapitalise big banks, buy unfinished properties and strengthen consumption.

This massive fiscal stimulus essentially allows local governments to issue bonds to take on their balance sheets a large proportion of the off-balance sheet debts. It's hard to say this is fiscal stimulus. It's more like monetary stimulus.

This is a longer article. Fundamentally, the debt restructuring of Rmb 10 trillion will allow local governments to convert off-balance sheet loans of LGFVs to longer-maturity, lower-interest liabilities, thereby saving Rmb 600 bn in interest payments over five years and reduce such debt to about Rmb 2 trillion by 2028. However, independent estimates put the LGFV hidden debt at Rmb 60 trillion and not Rmb 14 trillion as claimed by the government. 

7. Veterinary care has become the latest in the sectors dominated by independent businesses to fall to private equity investments. 

Private equity groups Silver Lake and Shore Capital Partners have struck a deal to create one of the biggest US veterinary care groups valued at $8.6bn, with ambitions to further consolidate a sector historically dominated by independently-owned businesses, said people briefed on the matter. The merger between Southern Veterinary Partners and Mission Veterinary Partners, both of which were part-owned by Shore, will create a network of vet hospitals and clinics spanning more than 750 locations and generating $580mn in yearly earnings before interest, taxes, depreciation and amortisation. The veterinary sector is benefiting from a surge in demand as people seek care for their animals following a pandemic boom in ownership... As part of the deal, Silver Lake and Shore Capital will make a $4bn fresh equity investment split evenly between them. The newly combined company has raised roughly $3bn of debt, said people briefed on the matter. Southern and Mission’s founders and employees will have shareholdings worth almost $1.5bn rolled over, and a syndicate of large co-investors will fund a few hundred million dollars of extra equity. The new company will carry less leverage than prior to the recapitalisation... People briefed on it said the combined company is likely to pursue more deals to roll up vet clinics and hospitals, as private equity groups play an increasingly dominant role in consolidation sweeping the petcare industry... Bloomberg previously reported that the two private equity groups were in talks over a deal to combine Southern and Mission. Rival company IVC Evidensia is owned by Sweden-based buyout group EQT, while PetVet is owned by KKR. Among the other biggest petcare clinic networks are AEA-backed AmeriVet Veterinary Partners and the veterinary health division of family-owned consumer group Mars, which operates more than 3,000 clinics worldwide. Southern, in which Shore has been an investor since 2014, operates more than 420 locations across the US, while Mission, which Shore helped to found in 2017, operates more than 330 vet hospitals nationwide.

8. Livemint writes on single or super-specialty hospitals becoming an attractive takeover option for PE firms.

Many private investors have been increasingly showing a preference for single-speciality hospitals, especially since 2022, with deals and fundraising taking place at a brisk pace... This year, in one of the bigger deals so far, Quadria Capital acquired a minority stake in dialysis chain NephroPlus in May for $102 million. In 2022, the healthcare-focused private equity (PE) firm had invested $159 million in eye-care hospital Maxvision... Last year, funding deals worth $5.5 billion were inked by hospitals in India, of which 20% went to single-speciality facilities, according to consulting firm Bain. Among the most prominent deals were Asia Healthcare Holding (AHH)s’ acquisition of Asian Institute of Nephrology and Urology for ₹600 crore ($75 million) and PE firm EQT buying a majority stake in Indira IVF, India’s largest fertility chain, reportedly at a ₹9,000 crore valuation...

Nothing matters more to a PE firm or a similarly aggressive buyer than scaling up a business quickly. Compared to elephantine multispeciality hospitals, single-speciality chains offer a more attractive turnaround time. A multispeciality hospital opening with more than 300 beds in a location can take up to five years to break even... With relatively fewer beds (or none in some cases), these individual hospitals tend to be smaller, making it easier to open many of them in dense urban centres in a short period of time. Smaller spaces also mean a hospital has plenty of existing hospitals and clinics to choose from for a brownfield acquisition... Investors find the single-speciality model attractive because it needs less investment, less space, can be expanded into a chain faster, and tends to have higher prices... That helps the single-speciality-chain model, whose strength is in offering higher-priced, higher-margin procedures at lower fixed costs than those in a multispeciality model... Globally, single speciality hospitals trade at a premium to multispeciality hospitals for several reasons, including higher ROEs... This is because single-speciality chains don’t need to store expensive machinery for multiple diseases, and can use their machinery more than a multispeciality hospital can, leading to a higher asset utilisation and higher margins.

9.  Telecommunications sector comes full-cycle.

The details of how telecom was liberalised in India are much more complicated, and frankly, some of it has repercussions to this day. In 2001, one of the things that the Indian telecommunication did to ease things was that it allowed players who had a “basic service licence” to offer limited mobility services. I don’t want to get too deep into this, but essentially, this allowed players who offered something called WLL (wireless local loop technology) to expand and offer mobile services to Indians... Existing telecom players complained that this was tantamount to a “backdoor entry”, because it let WLL players become mobile telecom players without having to pay the higher fees that they were paying for spectrum, entry, or revenue share. This made existing Indian telecom companies—Bharti, Hutch, Idea, BPL, and a few others—quite upset... In January, 2001 when the government approved the use of CDMA (Code Division Multiple Access) based Wireless in Local Loop (will) platforms by basic telephony companies to provide ‘limited mobile’ services (within a single Short Distance Charging Area, approximately 250 square km), Reliance made its move. It bid for, and won 17 new licences, to go with the one for Gujarat that it had acquired in 1997...

This specific ruling was the basis on which Reliance stormed into telecom, and changed India forever. Mukesh Ambani, who had just taken over as the head of Reliance Infocomm, countered all claims by saying, “If anyone thinks this is a backdoor entry (into cellular telephony), well, it is a backdoor that was open to all”. In just a couple of years, Reliance launched the now famous ‘Monsoon Hungama’ offer, giving away handsets for free to consumers, offering rock-bottom prices, and driving up adoption of mobile services across the length and breadth of the country. Competitors were forced to respond in kind, and well, the rest is history. And it all began with India’s telecom regulator letting the wireless loop players use their technology to disrupt existing telecom players.

Starlink now threatens to reprise the scenario!

10. On America's envious economy, The Economist writes.

In 1990 America accounted for about two-fifths of the overall gdp of the G7 group of advanced countries; today it is up to about half (see chart). On a per-person basis, American economic output is now about 40% higher than in western Europe and Canada, and 60% higher than in Japan—roughly twice as large as the gaps between them in 1990. Average wages in America’s poorest state, Mississippi, are higher than the averages in Britain, Canada and Germany... Since the start of 2020, just before the covid-19 pandemic, America’s real growth has been 10%, three times the average for the rest of the g7 countries. Among the g20 group, which includes large emerging markets, America is the only one whose output and employment are above pre-pandemic expectations, according to the International Monetary Fund... A decade ago many analysts thought that China would, by now, have overtaken America as the world’s biggest economy at current exchange rates. Instead its gdp has been slipping of late, from about 75% of America’s in 2021 to 65% now.

On productivity

This year the average American worker will generate about $171,000 in economic output, compared with (on purchasing-parity terms) $120,000 in the euro area, $118,000 in Britain and $96,000 in Japan. That represents a 70% increase in labour productivity in America since 1990, well ahead of the increases elsewhere: 29% in Europe, 46% in Britain and 25% in Japan... when assessed on a per-hour basis the gap remains sizeable: 73% productivity growth for American workers since 1990 versus 39% in the euro area, 55% in Britain and 55% in Japan.

The churn rate among US companies is 20% (half being new businesses created and other half being those that stop operating), compared to 15% in Europe. Similarly, over any three-month period, about 5% of American workers change jobs, whereas in Italy it takes a year to get the same level of labour turnover.

11. India derivative markets fact of the day.

Four-fifths of equity futures and options trades in the world now take place in India.

On the positive side, India’s capital markets should be counted as perhaps the most impressive economic policy successes of the country. 

India generates only 3% of the world’s GDP, but has been home to nearly a third of all public listings so far this year, which accounts for a tenth of the capital raised in ipos globally. Unusually among emerging economies, India has successfully translated economic growth into shareholder returns, letting ordinary investors benefit. Stocks there have roared since 2019, even as those in China have fallen by 15%. Analysts at Franklin Templeton, an asset manager, reckon that the correlation between Indian company earnings and gdp growth is closer than in any other emerging market. 

The Economist has another article that hails the introduction of the new Rs 250 monthly contribution Mutual Fund.

One in five households today holds shares, up from one in 14 just five years ago. The number is set to rise further... In dollar terms, Indian stocks have risen in price by 80% over the past five years, compared with a 6% rise across emerging markets as a whole... As investment habits have shifted, the share of household assets held in bank deposits has fallen below half...

In August the number of mutual-fund accounts reached 205m, up from 73m in 2021. Most are small: the average holding is under $4,000. The growth is facilitated by a wave of new electronic brokers... Much of the growth has been driven by products available to humbler investors. The number of Systematic Investment Plans (SIPs), a way to invest in mutual funds, has risen from 10m to 99m in the past eight years, with contributions increasing to $24bn in 2023. The funds take monthly instalments from investors. In August they received $2.8bn, continuing a run of record monthly inflows that has, with only rare interruptions, extended back to 2016.

There has also been an explosion in “demat” accounts, short for the dematerialised form in which shares are held. In August their number reached 171m, up by 54% from January last year. But the most extreme aspect of the investment boom is in derivatives trading: India now accounts for 80% of global turnover, and retail investors count for 40% of Indian trading, up from 2% in 2018... In the first three quarters of this year, India’s 258 IPOs accounted for 30% of the global total by number and 12% by the amount of money raised, in an economy that makes up just over 3% of global GDP.  

12. Robert Lighthizer makes a very important point

Economists’ free trade prescriptions fail because they do not reflect modern reality... what we have seen in recent decades is countries adopting industrial policies that are designed not to raise their standard of living but to increase exports — in order both to accumulate assets abroad and to establish their advantage in leading edge industries. These are not the market forces of Smith and Ricardo. These are the beggar-thy-neighbour policies that were condemned early in the last century. Countries that run consistently large surpluses are the protectionists in the global economy. Others, like the US, that run perennial huge trade deficits are the victims. They end up trading their assets and the future income from those assets for current consumption. Many economists will say this is all the fault of the victim, and that the US has too low a savings rate. Of course the trade deficit is equal to the difference between a country’s investment and its savings, but the causation runs the other way. Foreign industrial policy creates the deficits and with investment being set by demand for domestic investment, savings must go down. The problem is not the concomitant savings rate. It is the predatory industrial policies.

13. Rana Faroohar writes on the Trump victory

... the market reaction that greeted Trump’s victory, when stocks and risky assets rose while bond prices fell. This is a man who has promised across-the-board import tariffs and support for the US manufacturing sector. That would argue for lower US share prices and a weaker dollar, to make exports more competitive; investors are betting on just the opposite... America Inc under our brand new CEO Trump feels less like a blue-chip and more like a private equity firm: it’s a highly leveraged, short-term play with an average hold time of around four years. Like Trump, private equity is able to strip assets for immediate profit — no matter how important... If Trump is our CEO, is America now a distressed asset? One has to wonder.

14. Is Mumbai's economic growth choking?

Despite being the country’s financial and entertainment hub, Mumbai, accounting for about 20 per cent of the state’s economy, failed to lead the growth charge. Maximum City real GDP grew at 5.9 per cent between 1994 and 2020, significantly slower than the state, with financial services growing at a paltry 3.6 per cent (2005-20). Mumbai suffers mainly from two main challenges — expensive housing and weak transport. The price-to-income ratio (the median price of a 90 square metre apartment relative to median familial disposable income) in Mumbai is around 40, making it one of the most expensive real estate centres in the world. Likewise, road density in the poshest part of Mumbai, the Island City, is around 7 km per square km as against 10 km for Delhi. Furthermore, Mumbai started developing its metro network relatively late. While Delhi has around 400 km of metro network operational, it is close to 50 km in Mumbai, with about 150 km under construction.

15. In one stroke President elect Trump may have neturalised Elon Musk and Vivek Ramaswamy! Both have been tied-up together (it's very unlikely that they will be able to work together and come up with something coherent). It'll "provide advice and guidance from outside the government", thereby ensuring that its role will be purely advisory with little or no teeth in actual implementation. Finally, by giving it time only till July 4, 2026, there's a sunset for this experiment.  

16. KP Krishnan has a very good oped on how the structure of Statutory Regulatory Authorities in India, with their delegated power to make and amend laws, detract from federalism.

Urban local bodies (ULBs) require the approval of their respective state governments for borrowing money. With the growth of bond markets, increasingly municipal bonds are replacing institutional borrowings as the mechanism for providing debt to ULBs. Sebi’s regulation of municipal bonds implies that the regulatory arm of the Union Ministry of Finance is exercising control over a subject in the state list. So, the deficit is also material in its impact.

Unintended consequences of carbon credit trades

Consider the parable of a child who is prone to occasional misbehavior. To encourage him to change this bad habit, every time he misbehaves the parents offer a small cash reward if the child behaves well for a week afterwards. The child soon realizes the benefit from misbehaving as frequently as possible so as to maximize his reward payouts. The net result is that, far from reducing bad behavior, the cash reward actually ends up worsening the child's behavior.

In a similar context, Times has an interesting story that highlights how carbon trading to mitigate ozone-depleting greenhouse gas emissions (used in refrigeration and air conditioning) has had the unintended effect of actually increasing emissions. It shows how this has distorted the incentives of manufacturers of such gases

The more dangerous the gas, the more that manufacturers in developing nations would be compensated as they reduced their emissions... they could earn one carbon credit by eliminating one ton of carbon dioxide, but could earn more than 11,000 credits by simply destroying a ton of an obscure waste gas normally released in the manufacturing of a widely used coolant gas...That incentive has driven plants in the developing world not only to increase production of the coolant gas but also to keep it high...

Since 2005 the 19 plants receiving the waste gas payments have profited handsomely from an unlikely business: churning out more harmful coolant gas so they can be paid to destroy its waste byproduct. The high output keeps the prices of the coolant gas irresistibly low, discouraging air-conditioning companies from switching to less-damaging alternative gases. That means, critics say, that United Nations subsidies intended to improve the environment are instead creating their own damage...

The production of coolants was so driven by the lure of carbon credits for waste gas that in the first few years more than half of the plants operated only until they had produced the maximum amount of gas eligible for the carbon credit subsidy, then shut down until the next year... The manufacturers have grown accustomed to an income stream that in some years accounted for half their profits... Some Chinese producers have said that if the payments were to end, they would vent gas skyward.

In fact, these 19 plants producing HFC-23 have taken 46% of all carbon credits issued by the United Nations Environment Program.

This is yet another example of the challenge associated with effective enforcement of any emissions trading scheme. I have blogged earlier here, here, and here, about how carbon tax, being very simple, is a more realistic and therefore implementable strategy to reduce carbon emissions.

Carbon price Vs government funded research - climate change debates

The failure of the US Congress to arrive at an agreement on a climate change bill, has generated another debate about the way ahead with addressing the problem.

The dominant consensus approach to combat climate change have revolved around putting a price to carbon, through carbon tax or cap-and-trade, that would encourage people and businesses into embracing cleaner energy technologies. They advocate this in view of the impossibility of internalizing the significant amount of negative externalities generated by carbon fuels and the prevailing higher prices of cleaner energies.

However, a recent proposal by Michael Shellenberger and Ted Nordhaus of the Breakthrough Institute, takes a different path and argue in favor of greater government funding for clean-energy research. They make three points in support of their claim. One, as the US Climate Change Bill shows, the political economy of raising the price of carbon is difficult, even impossible. Second, the results of the biggest experiment with increasing the price of carbon, the European Union Emission Trading System (EU ETS), have been disappointing. Third, given the impossibility of privately capturing all the benefits of any major innovation, history shows that major technological breakthroughs in all sectors have come through government support for research. They call for

"...increasing federal innovation investment from roughly $4 today to $25 billion annually, and using military procurement, new, disciplined deployment incentives, and public-private hubs to achieve both incremental improvements and breakthroughs in clean energy technologies."

In the circumstances, I cannot but agree completely with David Leonhardt that "in the long term, a carbon price and more research funding are both important parts of the response to climate change". Or to quote Prof Robert Stavins,

"Carbon-pricing – whether carbon taxes or cap-and-trade – will be an essential part of any truly meaningful national climate policy. Likewise, to address the "R&D market failure", direct technology innovation policies will also be required. Both are necessary. Neither is sufficient. These are complements, not substitutes."

Or from Michael Shellenberger and Ted Nordhaus themselves,

"A technology-first strategy is not a technology-only strategy. Cheaper and better clean energy technologies are not a substitute for pricing, regulatory, public procurement or other policies that will be necessary to make a full transition from fossil fuel based technologies to low carbon technologies."

As an aside, the new report points out that, after accounting for macro-economic factors, the trends in European emissions are nearly indistinguishable from business-as-usual emissions. They use this to question the efficacy of carbon pricing strategies to addressing climate change. Two observations on this

1. Like the case with the debate surrounding the economic impact of the fiscal and monetary expansion in the US (the austerians point to the high unemployment rate and weak economy to claim that it had no impact), the results of the EU ETS cannot be easily isolated. Given the difficulty of accurately measuring emissions, there are several questions that have to be answered before we can make the claim that EU ETS has had no impact. For example, it is very much possible that without the EU ETS, the emissions would have been even higher.

2. A failure of EU ETS cannot be extrapolated to declare the failure of all carbon-pricing, even all cap-and-trade, systems. It is now well-established that the EU ETS contained several distortions, including the initial generous allocations of allowances and the liberal standards for evaluating projects eligible to receive carbon permits.

Such claims are an example of a cognitive bias called representativeness heuristic - people judge the probability or frequency of a hypothesis by considering how much the hypothesis resembles available data as opposed to using a Bayesian calculation. The high-profile nature of the EU ETS and it close attachment with the cap-and-trade movement meant that its failure (or even allegations) naturally led to questions being raised about the movement itself.

Is the cap-and-trade moment over?

The recent reports that carbon emitting companies in Europe are awash with a huge excess of permits to emit carbon dioxide has again raised questions on the ability of European Union's Emissions Trading System (EUETS) in particular and cap-and-trade mechanisms in general to achieve carbon emission abatement.

In view of its market-driven approach, cap-and-trade had emerged as the preferred option (over carbon taxes) to reduce greenhouse gas emissions, and this was manifested in the Waxman-Markey Energy and Climate Change Act proposals which have been passed by the House of Reps in the US. However, as John Broder wrote in a recent op-ed, it appears to have fallen out of favor as an instrument to combat climate change, especially in the US, due to the weak economy, the Wall Street meltdown (and the general suspicion about markets in general and in particular about trading in intangible assets such as emission allowances), determined industry opposition and its own complexity.

The main idea behind carbon trading was to give companies the incentive to reduce emissions by requiring the heaviest polluters to buy additional pollution permits. As a cap on the number of permits steadily tightened, companies that invested in greener production would be best placed to continue competing in a low-carbon economy of the future. However, as cap-and-trade schemes got implemented across the world, the extent of dilution in its implementation brought considerable disrepute to the approach itself.

It has been argued that the initial free allocations of permits under the EUETS in 2005 was so generous that it left polluting industries with enough cushion to survive and even make some money trading their excess allowances. The Waxman Markey Bill too had proposed giving away pollution allowances to industry rather than allocated based on past emissions, giving the impression that it was another example of corporate welfare than contributing to any meaningful reduction plan.

Adding to these, the Great Recession with its resultant idling factories, declines in production, and postponed investments have driven down the prices of carbon permits, making them too cheap to achieve any meaningful emission reductions. It is estimated that because of recession, emissions from industries covered by the EUETS have dipped by as much as 11%. They have been languishing at around €13/tonne of CO2 ($17.60) for some months now, a price "that experts have said is far too low to result in a significant change in the way companies generate and use energy".



Robert Stavins argues that the opposition to cap-and-trade approach is understandable since "any climate policy approach — if it was meaningful in its objectives and had any chance of being enacted — would have become the prime target of political skepticism and scorn". He also points to how cap-and-trade continues to remain the dominant instrument to address the carbon emission challenge in many countries like Australia, New Zealand, South Korea, and Japan.

I am fully with Robert Stavins in arguing that it is incorrect to proclaim the death of cap-and-trade. This blog has consistently maintained that carbon taxes are easier to administer than cap-and-trade. However, any politically acceptable carbon mitigation plan will have to include cap-and-trade to complement the carbon taxes.

Update 1 (11/4/2010)
James Kanter does not think that the cap-and-trade moment is not over.

Update 2 (30/8/2010)

The CDM also approves carbon offsets for destroying the gas, HFC-23, that is a byproduct from the manufacture of refrigerant gases. HFC-23 has several thousand times the potential of carbon dioxide — the most common greenhouse gas — to trap heat in Earth’s atmosphere. HFC-23 credits also make up about half the supply of international offsets approved by the United Nations to date.

A nonprofit organization, CDM Watch, has recently raised allegations with the United Nations’ climate office that some plants were producing more refrigerant than they needed to meet market demand to cash in on credits for HFC-23.

Update 3 (31/10/2011)

Excellent summary of the carbon pricing debate. See this paper by Robert Stavins and Joseph Aldy. See also this essay by William Nordhaus.

Costs of greenhouse gas emission reductions

The build-up to the much awaited UN Convention on Climate Change at Copenhagen in December has re-ignited with much greater vigour, the classic debate between those who feel that emission reduction policies will impose unacceptable burdens on economic growth and those who feel that countries can cut emission without hurting economic growth. In a Wall Street Journal Report on Environment, Steven Hayward makes the case that carbon energy use is central to the world economic prospects and emission reductions are too expensive, while Robert Stavins argues that gradual reductions are both possible and affordable. Paul Krugman has elaborated on why the costs of achieving emission reductions are not as scary as opponents project and very much affordable.

Though I am inclined to side with Professors Stavins and Krugman, there are important issues to be addressed before developing countries like India can take the plunge and embrace the emission reductions bandwagon.

While it is true that developed economies have been responsible for most of the damage inflicted on the environment by way of carbon emissions, it cannot be denied that it is only a matter of time before the rapidly growing emerging economies catch up. In the circumstances, if is a foregone conclusion that the developing countries have to be active partners in any effort to control greenhouse gas emissions. The only question remains what should be the extent of their initial commitments.

Though carbon taxes, emission fees, cap-and-trade in emission permits coupled with carbon off-sets, and carbon sequestration are the favored means of emission reductions, there are sharp differences among experts about their relative effectiveness.



Recently, the US House of Representatives passed the Waxman Markey Bill, HR 2454, on climate change that seeks to cut emissions to 80% below 2005 levels by 2050 by following a cap-and-trade regime. The emission allowances, which would start with more liberal allocations, would grow tighter over the years, pushing up the price of emissions and presumably driving industry to find cleaner ways of making energy. The reduction target envisaged would seek to stabilize atmospheric concentrations at 450 ppm in CO2 equivalent terms, as against the growth trend of potentially catastrophic (would lead to rise in temperature of atleast 6 degrees Celsius and output loss worth 2-5% of global GDP every year) 1000 ppm by the end of the century.

Formidable as they are, these targets are not as insurmountable as they appear. For a start, Prof Stavins points to the fact that "from 1990 to 2007, while world emissions rose 38%, world economic growth soared 75% — emissions per unit of economic activity fell by more than 20%". Interestingly, this was despite the fact that most of the economic growth during this time, especially in China and emerging Asia, was environmentally irresponsible and damaging.

Prof Stavins advocates internationally co-ordinated efforts at emission reductions and immediate action to move towards cleaner technologies in the newer plants and activities in energy intensive industrial activity and power generation. The public good nature of such reductions, in so far as the costs are borne by the emission reducing industry while benefits are diffused across the society, means that no one country will come forward to incur the costs of emission reductions with reciprocating efforts from all others. And, since plants built today will determine emissions for a generation, there is need for immediate action to adopt clean technologies for the new plants in high emission industrial sectors - steel, cement and manufacturing plants - and power generators.

The effectiveness of cap and trade, especially on the monitoring of adherence to the emission reduction targets, has been the subject of some controversy. Both the EU ETS and the US emissions reporting have been the target of attacks on these grounds. Apart from the initial problem of arriving at the most efficient allocation of allowances (permissible emissions) among emitters, there is the much bigger challenge of monitoring emission reductions. This becomes an all the more greater challenge in developing countries where even enforcement of basic environmental safeguards are doubtful. Therefore, any emission reduction trade, involving the sale of emission reduction commitments by industries in developing countries, will be extremely difficult to monitor.

Also, cap-and-trade regimes are vulnerable to mis-directed subsidies. Under this, projects in developing countries, which use clean technologies and practices, become eligible to avail Certified Emission Reduction (CER) permits, which can then be sold in exchanges like the EU's Emission Trading System (ETS) to those who have exceeded their emission allocations. In other words, the ETS ends up subsidizing such projects. The problem with this arrangement is that it fails to discriminate between those green projects which require these subsidies (to incentivize the developers to adopt clean technologies, like say a scientific landfill) and those which would have any way come up on its own.

Further, global co-ordination of policies, at best a very difficult and complex challenge, may be even more difficult to achieve with a complicated cap-and-trade regime. In view of the vast variations among nations in their respective stages of economic development and costs of emission reductions, it is impossible to have a uniform policy on initial emission allowances and targets for reductions. In the circumstances, carbon taxes emerge as an effective and more practical approach towards emission reductions. It is both easier to co-ordinate such policies across nations and effectively implement and monitor their compliance. And also, carbon taxes generates revenues for the government, which in turn can be used to fund the research and development efforts to develop cleaner technologies.

There are two suggestions on the way forward. Since the primary requirement for emission reductions is the use of cleaner and environment friendly technologies, it is imperative that the access barriers to these technologies are lowered. This means that, for example, emissions generating steel or cement or power plants being set up across the world have access to these cleaner technologies. In other words, these technologies should become some sort of public good, made readily available for all such investments across the world. This presents an opportunity for the developed countries to assuage and overcome the deep suspicion among developing countries to binding emission targets.

The Economist points to a suggestion by the World Economic Forum about how private investments from developed countries in green technologies in developing countries could be protected against currency and political risk. It proposes that development banks — the World Bank or regional ones like the Asian Development Bank — would use public funds from the rich world to guarantee investors against these sorts of country risks. There are also proposals for government-guaranteed bonds for climate-related investment, as well as more direct public support for specific green funds, in the form of loss-sharing agreements and debt guarantees.

It is therefore appropriate that the developed economies, being responsible for most of the greenhouse gas emissions and damage inflicted on the environment, finance the development of clean technologies in industrial activity, manufacturing, transportation and other carbon emitting activities and share them with developing countries. A global clean technologies exchange can be established under the aegis of the UN Framework for Climate Change (UNFCC) which can collect such knowledge from across developed world. This exchange can purchase such technologies from private firms and developers on payment of a mutually beneficial and negotiated royalty.

In order to ensure that the costs of the transition are staggered over the entire transition period and thereby made affordable for all the stakeholders, it may be more effective to declare up-front gradually tightening emission standards on various emission sources like automobile, construction and industrial activities. This would save firms and investors the uncertainty and steep costs associated with sudden and one-time interventions and policy changes. This would also go a long way towards easing the opposition to emission reduction targets arising from the fear that it would impose unacceptably high costs on the economy.

Mostly Economics points attention to an speech by William Nordhaus who too feels that a "harmonized international carbon tax is likely to be a more effective" instrument to address climate change. Paul Krugman has this excellent post (and this) explaining why cap-and-trade keeps the Harberger triangles small and the net economic benefits to the society at large are considerable. See this Times article outlining the problems associated with calculating carbon emissions.

Update 1
Ed Glaeser feels that China and India holds the key on climate change reduction efforts.

Update 2
Under the Kyoto Protocol, members of the EU-15 had agreed to cut their greenhouse-gas emissions 8 percent below 1990 levels by 2012, and to get there, the EU set up its Emissions Trading System, which first got underway in 2005. Now, the EU-15, on the whole, is expected to cut emissions 13% (and 8.5% excluding all suspect measures in allowance allocations etc) below 1990 levels by 2012 just through existing and planned energy measures — including the cap-and-trade system. According to new data from the European Environment Agency (EEA), all of the EU-15 members except Austria are now on track to exceed their Kyoto obligations. See also this graphic from Economist



Update 2
Arvind Subramanian and Nancy Birdsall advocates that the developed countries abandon, or at least postpone, the primacy accorded to emissions reduction targets by developing countries, and help them obtain those at the lowest possible cost in the greenest possible way. In return, China, India and other developing countries should adopt, and be encouraged to adopt, internationally verifiable national targets for emissions-intensity, which could also be the basis for technology and other transfers from industrial to developing countries.

The cap and trade Vs carbon taxes debate revisited

Outside the mainstream of economic policy making, dominated as it is by the more glamorous issues like financial market regulation and macroeconomic policy making, one of the biggest areas of ideological and academic divide is over policies on greenhouse gas emissions reductions to address the climate change challenge. While everyone agrees that fundamental to addressing this issue is raising the price of carbon and ensuring universal participation, there is a sharp divide over which of the two alternatives - cap-and-trade and carbon taxes - is superior.

One group of environmental economists, led by the likes of Robert Stavins of Harvard, favor cap-and-trade, while the other group, led by William Nordhaus of Yale, pump for globally harmonized carbon taxes to combat carbon emissions. While conceding the relative superiority of cap-and-trade on grounds of economic efficiency, this blog has consistently argued in favor of carbon taxes as a superior alternative, only on the basis of its ease of administration and implementation. The fact that any meaningful emission reduction plan has to involve all the countries of the world, gives added importance to harmonization of policies across nations. Carbon content based taxes may be easier to harmonize than cap-and-trade.

This debate also carries relevance on a deeper public policy making canvas, on the issue of trade-off between policies which generate the greatest economic efficiency but face implementation challenges on the one hand, and those that are slightly less efficient but are easier to implement on the other hand. Cap-and-trade appears to be belonging to the former camp while carbon taxes to the latter.

Cap-and-trade permits those who can reduce their emissions at the least cost to sell their saved carbon credits (or certified emission reductions, CERs) to those facing higher marginal costs, and thereby achieves economic efficiency - lowest cost and least distortions. Unlike any other form of emission reduction policy, as Robert Stavins points out, cap-and-trade differentiates among emission sources and confers a compliance flexibility which can be used to cut emissions at the lowest cost.

The economics of both are captured in the two graphs below. First, Paul Krugman models the deadweight loss to emitting businesses and the economic benefits to both emitters and consumers of their products.



The carbon tax imposes a deadweight loss indicated by the red triangle.



Here is a list of possible implementation problems associated with cap-and-trade that can come in the way of achieving the desirable objectives.

1. Difficulty in selection of projects eligible for issuance of carbon credits by the UNFCC. Projects which use clean technologies or those which reduce greenhouse gas emissions cannot become the sole criterion, since there are many such projects which would in any case have come up because of their lower life-cycle costs. Even these projects now become eligible for carbon credits and the resultant subsidy.

To take just one example, all solid waste management projects or lighting energy saving projects, which would have come up in any case, are now eligible for carbon credits. These CERs are a straight subsidy to these projects. The only reason why there has not bee a flood of such projects from developing countries is lack of awareness and the bureaucratic barriers to entry (hiring of consultant, host government certification, and then approval by the UNFCC, and then finding a buyer).

2. In developing countries, where adherence to even basic and visible environmental safeguards are at a premium, it may be extremely difficult, well-neigh impossible, to monitor greenhouse gas emissions. Therefore, it will be difficult to monitor the compliance of projects eligible to sell carbon credits. And enforcement will be an even bigger challenge.

3. National governments, especially from developing countries, have a greater incentive in imposing carbon taxes, in view of its assured revenue stream, whereas the cap-and-trade regime, will provide any substantial revenues only many years latter.

4. Increasingly, CER sales have become an important source of financing such projects. In fact, they have become a sort of viability gap funding source for these projects. In other words, project promoters see CERs as part of a project financing option and less part of an emission reduction plan. This results in incentive distortions by way of efforts to game the achievement of emission targets.

Further, the market volatility associated with the prices of CERs leads to uncertainty in revenue streams for these projects and increases the risks associated with them.

5. National governments in many developing countries cannot be relied upon to effectively administer a cap-and-trade regime. Such regulatory interventions are likely to spawn corruption and defeat the purpose. An international bureaucracy can be of limited utility in monitoring adherence to standards which require invasive inspections.

6. The politics of formulating an internationally acceptable cap-and-trade regime may make it a non-starter. How do we harmonize cap-and-trade policies across nations states - the emission reduction targets, initial allocations of emission allowances and the details of tightening standards? Will the old bogey of "why should we pay for the costs of your pollution with our economic prospects" not derail any effort to impose meaningful emission caps?

7. Cap-and-trade does not address emissions from sectors like transportation and usage of electronic devices. Transportation in particular is an increasingly dominant source of greenhouse gas emissions and cannot be kept out of the ambit of any serious policy proposal to reduce greenhouse gas emissions.

8. In developing countries, the politics and lobbying surrounding the issue will ensure that the initial allocations will be very liberal and the standards will be kept deliberately loose to minimize the costs on the domestic industries.

Prof Stavins may be right in claiming that "the best (and most likely) approach for the short to medium term in the United States is a cap-and-trade system", where the monitoring and enforcement costs may be manageable. However, if we are looking at an internationally applicable uniform policy for lowering emissions, then carbon tax looks more attractive for all the aforementioned issues of the real world.

It may also be possible to have an international climate change policy that draws both approaches and standardizes them to arrive at an acceptable mix of emission reduction policies. And as this Hamilton Project paper, pointed out by Prof Stavins, indicates, governments should be presented with both alternatives, and left to choose that policy option which generates the least political opposition and which imposes the least short and medium-term costs on the economy (or that which has the least painful transition costs).

Update 1
See this graphical analysis of the Waxman Markey Bill's cap and trade proposals.

Update 2
See this chronological sequence of the evolution of the concept of cap-and-trade.

Update 3 (18/6/2010)

Report on the success of the 1990 Clean Air Act Amendments in the US to contain sulphur-di-oxide emissions from coal-fired power plants that caused acid rain. See also this video on cap-and-trade and this article on the Climate Change Bill before US Congress.

Update 4 (22/6/2010)

Free Exchange lays out the case here and here for carbon taxes over cap-and-trade.

Carbon sequestration in power plants

Amidst all focus on carbon taxes and cap-and-trade approaches to control carbon emissions, carbon sequestration has hitherto taken a back-seat. Now the Virginia based Mountaineer power plant in the US is all set to become the world’s first coal-fired power plant to capture and bury deep inside earth some of the carbon dioxide it churns out. The hope is that the gas will stay deep underground (around 8000 ft), squeezed into tiny pores in the rock by displacing the salty water there, for millennia rather than entering the atmosphere as a heat-trapping pollutant.



The success of this experiment assumes significance in view of the fact that the overwhelming majority of power plants are coal or fossil-fuel based and retrofitting them could prove far more feasible than building brand new, cleaner ones.

Opponents claim that the cure could turn out far worse than the disease. They point to the possibility of pollution of water suplies (the carbon dioxide could mix with water underground and form carbonic acid which could leach poisonous materials from rock deep underground that could then seep out) and the substantial energy consumption in the process ofcapture and sequestration itself.

Update 1
See also this post.