Congress’ Cap-and-Trade Folly
Legislation would transfer ever more money and power to Washington, while doing little to affect global warming.
Robert P. Murphy, author of “The Politically Incorrect Guide to the Great Depression and the New Deal,” is a member of the board of scholars of the Virginia Institute for Public Policy.
Back in June, the House of Representatives narrowly passed H.R. 2454, the Waxman-Markey American Clean Energy and Security Act. Last month, a comparable bill was passed by the Environment and Public Works Committee, chaired by Sen. Barbara Boxer. It will now go to the full Senate.
The cornerstone of both bills is a cap-and-trade proposal that would sharply reduce U.S. emissions of greenhouse gases. Yet the legislation would transfer ever more money and power to Washington, while doing little to affect global warming.
Although the two bills differ in details, the broad cap-and-trade proposal is the same: Relative to 2005 levels, U.S. emissions of greenhouse gases would be cut 83 percent by 2050. To give some perspective, Steve Hayward of the American Enterprise Institute has calculated that the 2050 target would bring U.S. emissions back to the level of 1910. Once we factor in the huge growth of population, the 2050 target would reduce per capita U.S. emissions back to the level of 1875.
Cap and trade works like this:
Each year, the federal government issues a certain number of permits or carbon allowances, entitling businesses to emit the stated amount of greenhouse gases. This is the cap.
The permits could then be bought and sold on a market. This is the trade.
Over time, the government would steadily shrink the overall cap. This in turn would raise the market price of each permit, leading businesses to reduce their carbon footprint as a way of minimizing expenses.
Proponents call cap and trade a market solution because it relies on price incentives rather than top-down mandates. Under cap and trade, individual firms would reduce their emissions until the point at which further cuts would cost more than the going market price for buying emission allowances. In theory, it allows the economy to achieve the desired total emissions target at the lowest possible cost.
Yet does the theory stand up in reality? There are many clues suggesting the answer is no.
For one thing, most economists, including the Congressional Budget Office analysts who favor some form of carbon legislation, think a straightforward carbon tax makes more sense than cap and trade.
An explicit tax on greenhouse gas emissions is more predictable than the fluctuating market price of carbon allowances, making it easier for businesses to plan their future operations and thus lower total compliance costs.
This raises a puzzle. If Congress is simply trying to stop harmful global warming, why is it relying on a policy that will have higher compliance costs than other options? The answer is simple. No politician wants to vote for a tax on energy, especially in the middle of a recession.
From the politicians’ viewpoint, another virtue of cap and trade is that it allows them to shovel billions of dollars to their favorite constituencies without upsetting the voters.
This is another example of how politicians aren’t following expert advice to solve the alleged problem.
Environmental economists, who are worried about global warming, suggest that the government could auction off 100 percent of the allowances under a cap-and-trade system and then use the collected receipts to reduce other taxes. In this way, the government could allegedly deal with the threat of global warming without the need for extracting additional taxes from the economy.
Politicians aren’t doing what the economists recommend. Instead, they are using the rhetoric of global warming to suck more and more resources from the private sector.
Yet again, we see that in practice politicians aren’t pursuing the least-cost strategy. Instead, the provisions in the enormous House and Senate bills offer complicated handout schemes by which various groups, such as state and local governments, receive emission allowances for free.
Because these allowances will have market value, it is equivalent to the government handing out cash to these favored groups. Poor and middle-class consumers won’t realize that they are paying higher prices in order to put billions into the pockets of shareholders of politically connected corporations receiving allowance handouts.
Even if we concede the basic premise that greenhouse gas emissions contribute to harmful global warming, the government is not implementing the solutions that environmental economists recommend. Instead, the actual legislation has far more to do with widening Washington’s control over the economy. “Saving the planet” is just an excuse for another power grab in D.C.
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