Is this the face of 21st century conservatism?

I'm watching John Kerry and Newt Gingrich debate global climate change on CSPAN. I'm thrilled that Newt is on board that global warming is a problem and that drastic action is required. But I am absolutely stunned at the way he is packaging his proposals as the "conservative" solution to the problem. CNN has a story on the debate; I'm waiting with baited breath for a transcript to be posted so I can get the juicy quotes. But here's what I'm hearing.

Kerry supports cap and trade: the government imposes a limit on carbon emissions and creates a market by which permits to pollute are traded. This is how sulfur dioxide emissions were reduced in the Clean Air Act of 1990, a bill that Gingrich supported when he was in Congress. Gingrich now calls the cap and trade system as applied to carbon emissions "government regulation." He proposes an alternative, targeted tax credits to encourage businesses to adopt "green technologies" like carbon sequestration. From the CNN article:

But the former GOP speaker said he believes the best way to solve the problem is to unleash the spirit of American entrepreneurship, not the power of government. That means using tax credits and other incentives to encourage the development of technology to reduce carbon emissions, rather than capping them by government decree...

The former speaker also argued that government limits on carbon emissions would not work as well as incentives to reduce them.

"The morning you provide the incentives, there'll be 50,000 entrepreneurs figuring out how to get the money," he said. "The morning you try to do it by regulation, there'll be 50,000 entrepreneurs hiring a lawyer to fight you."

His characterization of cap and trade as "government decree" or regulation and his alternative as the entrepreneurial, market-based approach is beyond bizarre. What Gingrich is saying is, I, Newt Gingrich, know which technologies have the most promise for reducing carbon emissions. Therefore I will riddle the tax code with special credits targeted to these favored technologies. You want carbon sequestration? Yes, that's approved, you get a credit. You want to power cars by ethanol? Yes, I believe that will work, you may have your credit. You want to convert your coal burning plant to solar? No, my experts tell me that won't do the trick, you can't get your credit. You have a new, unproven technology you'd like me to finance? Not now, but hire some lobbyists and try to get a tax credit for that passed in the next Congress.

In the early 1990s, conservatives derided Democrats who proposed this kind of approach to developing new technologies to revive manufacturing in the face of competition from Japan (the code word was "industrial policy"). What, they said, you're going to have the government pick winners among competing industries and technologies, giving subsidies to some and not others? That's positively Stalinist! And they had a point, which is why some Democrats have been much more receptive to truly market-based policies since then.

Which brings us to cap and trade. Cap and trade is the market-based approach to carbon emissions reduction. It was developed by economists in the 1980s precisely as an alternative to the heavy handed regulatory approach that characterized most environmental policy at the time. Conservatives loved it, which is why cap and trade was made the centerpiece of the Clean Air Act legislation signed by Papa Bush.

Cap and trade is a response to an insight from the arch-conservative economist, A.C. Pigou, in the early part of the century: the presence of externalities (costs, in this case from pollution, arising from trade in a product that are not borne by the buyer or seller) is a form of market failure, and result in economic inefficiency. The solution is to make the price of the product equal to the marginal social cost. Pigou suggested a tax (Pigouvian tax) on the product - and indeed a carbon tax is the leading alternative to cap and trade - but cap and trade does essentially the same thing by forcing polluters to pay for the pollution they produce. It is consistent with the Coase Theorem, attributed to conservative Chicago University economist Ronald Coase. In a nutshell, the Coase Theorem says that an efficient alternative to government regulation of something like pollution is the establishment of property rights over the pollution. If we have a system where those harmed by pollution can force the polluter to pay for the right to pollute, the market will arrive at the efficient level of pollution without need for heavy handed government regulators. This is what cap and trade does: society creates property rights to pollution (the right to emit a certain quantity of carbon into the atmosphere), and these rights are traded among companies who want to pollute.

For Newt Gingrich to stand up before a live audience and declare that cap and trade constitutes heavy handed government intrusion into the market while targeted tax credits for specific technologies is a market-based approach is to stand common sense and history on its head. If this is where conservative thought is going, there is truly a crisis in conservatism. If this is where conservative thought is going, I'm not sure what conservatism is anymore.