NAEP

K-12 choice programs began as a proposal by a Nobel Prize-winning economist to improve K-12 outcomes. Could other mechanisms devised by economists in other policy areas, such as cap-and-trade policies to reduce air pollution, also improve K-12 outcomes?

The answer might be yes in theory, but in practice, probably not.

In a cap-and-trade system designed to reduce pollution, the government sets an emissions cap and issues a quantity of emission allowances consistent with that cap. Emitters must hold allowances for every ton of greenhouse gas they emit. Companies may buy and sell allowances, and this market establishes an emissions price. Companies that can reduce their emissions at a lower cost may sell any excess allowances for companies facing higher costs to buy.

Under a cap-and-trade regime, firms get an allowance for the amount of pollution they can emit, and when they reduce their pollution above and beyond their goal, they benefit by being able to sell some of their “pollution allowance.” This creates a financial incentive for all firms to reduce pollution. Those who exceed their goals receive payments; those who do not reduce pollution must either get used to paying other firms or figure out a way to their own pollution down.

Andrew McAfee of the Massachusetts Institute of Technology notes in his book More From Less that cap and trade has been a huge success. While it takes some time to wrap one’s head around the idea of allowing companies to sell the right to pollute the atmosphere (a notion that one’s instinct naturally seeks to reject), cap and trade has been enormously more successful at reducing pollution than clumsy top-down fiats.

A cap-and-trade mechanism can create an incentive for all polluters to become innovators and to seek the lowest cost methods for reducing as much pollution as possible. McAffee reports a 2009 Smithsonian summary that found a cap-and-trade program cost only a fraction of an initial estimate ($3 billion instead of $25 billion) and generated an estimated $122 billion in health and environmental benefits. If one assumes the actual benefits were only half that amount, it still represents an impressive 20 to 1 return on investment.

Cap and trade in effect creates a quasi-market for pollution reduction. Could state lawmakers create such a scheme to reduce, say, early childhood illiteracy?

The technical challenges would be considerable, perhaps insurmountable. Cap-and-trade schemes must lay out their scope (what exactly is to be reduced), create an overall target for reduction, figure out the gritty details of exchange and ensure market integrity. The details matter in each case: How do you set the cap, how do you measure, over what period do you measure?

We will lay out a theoretical example in which Florida lawmakers set a cap for third-grade illiteracy below.

Market integrity would represent a large challenge. The incentive to pretend to reduce pollution under a cap-and-trade scheme is even stronger than the incentive to reduce pollution if firms can get away with it. If the goal were to reduce illiteracy, something much more credible and secure than a set of self-administered exams would be entirely necessary. Let us assume a set of third-party administered exams like the SAT and ACT could be worked out.

In 1998, 48 percent of Florida fourth graders scored “Below Basic” on the NAEP fourth-grade reading test. On the most recent exam, 30 percent scored “Below Basic.” That is an impressive reduction compared to other states, but it will not be hitting single digits anytime soon.

If market integrity could be assured, the state could set a fourth-grade illiteracy cap of 25 percent and make assignments to either schools or LEAs consistent with that goal based upon their previous performance and let the educators figure out how to get it done. Those who succeed in exceeding their target would be rewarded. Those failing to meet their cap would need to buy credits with their set-aside funds from schools or LEAs that exceeded their credits.

How would they do it?

If the cap-and-trade market were established, we cannot know in advance what methods might arise to reduce illiteracy. Some might make much greater use of Reading Scholarship Accounts, others virtual education, but there is just no telling what Florida educators might come up with.

Should we give it a try?

No, I do not think so. While cap and trade is a fascinating institution to harness market forces for social goals, education policy is fashioned democratically rather than technocratically. Given the delicacy of a whole series of decision points under cap and trade, it is hard to imagine that opponents of the policy would find easy work in fouling the gears even if it were in fact attempted. Unlike education choice policies, which develop a constituency, many of the families attending schools selling illiteracy credits in a cap-and-trade scheme would likely remain unaware of the fact. Meanwhile, schools lacking confidence in their ability to hit targets likely would quickly organize into a seek-and-destroy cap and trade faction.

The handful of districts that have attempted portfolio models struggle with similar challenges. While in theory any district in America could conduct a competition for the right to run their schools from groups of educators, few have done so in practice, and fewer still have persisted in it. It is not impossible, just very difficult politically.

K-12 cap and trade would be even more difficult. Education choice policies have the virtue of developing a supportive constituency to defend new freedom, which makes it the most politically plausible method for utilizing voluntary exchange and association to better serve public purposes.