Why Politicians Favor Cap and Trade over a Carbon Tax

There are a lot of incredibly good reasons to favor a carbon tax over cap-and-trade if we simply most reduce CO2 emissions.  Even a minor inspection of the inner workings of the California Air Resources Board under their AB32 cap-and-trade style program provides lists of examples of abuses, rent-seeking, inefficiency, etc. under cap-and-trade.  But Joe Nation, one of the California legislators who authored AB32, told me that he could not get even a 5-cent gasoline tax through a legislature that enthusiastically embraced the 100x (or more) expensive AB32.  Why?  Silly rabbit, because public costs of cap-and-trade can be fudged, hidden, ignored, and, when they absolutely have to be recognized, blamed on private companies.

Via a reader, here is our Arizona governor discussing the costs of cap-and-trade in Arizona:

Napolitano brushed aside questions of what effect the plan will have on utility rates.

"First of all, that it may increase electric bills doesn't mean it will increase them now," Napolitano said.

Brave, isn't she?  They are already preparing the story line to blame private industry for future price increases:

Napolitano said there is "lots of data" to suggest that utilities
eventually will be able to save money "by moving to a system of 'green'

Fox said that, on a long-term basis, there may be cost savings.

You get that?  We smart government guys conducted a lot of really high-power circle jerks among graduate students and the consensus was that forcing the electrical industry to obsolete much of its current capacity and rebuild with some other uproven but more expensive technology would save them money in the long term.  If utilities raise prices, it's because they were not smart enough to figure out what we already know and they are just greedy capitalist pigs so blame them for the price increases, not use faithful public servants.  You see?  Cap-and-trade is like money laundering for taxes.  The tax is there, but its hidden well enough that a lazy media will not bother to trace it back to its owner.

But I wouldn't want you to take my assertion on faith (as Obama does with his 5 million green jobs promise), so lets look at what will have to happen.

The exact goals are hazy, but it appears our governor has committed the state to cutting CO2 emissions by 15% over the next 10 years.  One of the main ways that calling CO2 "pollution" is misleading is to imply it is some kind of combustion by-product, like soot or SO2, that could be scrubbed out.  But it is not.  It is fundamental to combustion.  So a 15% cut in CO2 emissions is 10-15% cut in power generation  (we likely get numbers lower than 15% by assuming cuts in production are preferentially from higher carbon sources like coal plants). 

So, basically this law requires the state's electrical utilities to obsolete 10% of its installed capacity, and either a) have tons of rolling blackouts; b) raise prices enough to force a large cut in demand  (remember, demand must be cut 10% AND all future growth must be halted); or c) the industry must spend hundreds of billions of dollars to build a ton of capacity in some other technology.  Option a will never fly politically.  Option c is almost sure to fail as well.  The permitting and construction processes can take decades.  From a cold start, I don't think its possible to rebuild 10+% of the states generation capacity in 10 years, either in nuclear or some other not-yet-ready technology.  The numbers simply don't work.  The only possible way I can imagine is maybe to install a zillion natural gas turbines, but to make the CO2 balance work out, you probably would have to rebuild 15% or more of the capacity, not just 10%, because there would still be some carbon emissions. 

Really, realistically, one is left with option b.  Prices are going to go up (just they would have to in option c to pay for replacement production capacity).  The price increases would be about as much as the carbon tax would have had to be to get the same effect, but price increases are corporation's fault while taxes are politicians' fault.  See?  The only good news is that the price increase will go to private players rather than the government.  That is until someone thinks to put in a windfall profits tax on utilities that are making lots of money on the government-enforced shortage.


  1. nicole:

    So sad, so true. "Money laundering for taxes" is great—and of course the worst part is that the laundered tax dollars won't even end up available to provide government services once the initial carbon emission permits have been auctioned.

  2. MK:

    Sadly, given that federal carbon legislation is inevitable regardless of who wins in November, it may be time to give up hope and personally profit from it. Calpine Corporation (NYSE: CPN) owns a fleet of 60 natural gas-fired power plants and 17 geothermal power plants yet has been completely hammered in the current market.... just look at who's buying: http://finance.yahoo.com/q/it?s=CPN

  3. gadfly:

    How can an upstanding Libertarian blog seriously discuss the alternatives of Cap n Trade vs Carbon Tax? Carbon dioxide is necessary for life and global warming is not a function of increases in this gas; rather, Sol's warming of the atmosphere creates an uptick in CO2. Water vapor which comprises 23% of our atmosphere (while C02 is less than 0.4%) is far more likely to create a greenhouse effect. Shall we outlaw water? Liberals and junk science for fun and profit! Bah!

  4. tomw:

    Hope this shows. Read this about nuclear power and the possibility that any will come on line.


    The governor has no idea. The eco-philes have no idea. The "no carbon energy" (BP?) who run the ads on FOX have no idea.
    The infrastructure and absolute enormity of the cost to change it, or even the cost to keep up with demand are ignored by all of the above.
    As they say, "we is in trouble"

  5. Spruance:

    "If utilities raise prices, it's because they were not smart enough to figure out what we already know and they are just greedy capitalist pigs so blame them for the price increases, not use faithful public servants."

    This is exactly what happened in Germany. Politics tried to unload their part of responsibility for the rising energy costs on "the greedy multinational companies". And, to tell you the truth, they came pretty far with that.

  6. K:

    To answer the original question:

    They prefer cap-and-trade because it is not called a tax. A carbon tax is called a tax.

    Cap and trade is simpler to administer and offers a totally new way to tell people what to do.

    The writer has this right:

    Silly rabbit, because public costs of cap-and-trade can be fudged, hidden, ignored, and, when they absolutely have to be recognized, blamed on private companies."

  7. Mesa Econoguy:

    Janet Napolitano doesn't understand jack shit about anything, much less trading something she has no clue about hoping to understand some day in the future…

  8. Lawrence:

    McCain's proposal for 45 new nuclear plants starts looking a whole lot better in such a crazy cap-and-trade environment.

    The only way to simulataneously decrease carbon output from electric utilities (assuming this is necessary) and not wreck the economy is to pump up the % of electricity production from nuclear plants now at 20% to like 60% or even 80% -like France. France doesn't do much right in the economic area, but in electricity production the frogs are spot on.

  9. K:

    As Lawrence said, the French have this right. Some parts of an economy can respond well to central planning. Electricity production is one.

    The drawback is that the central planning must be done well.

    I can't figure out how critics conclude that nuclear is so bad that they will spread any lie and falsify any number to stop it. Around 500 reactors will be generating soon around the world. The US has about 100 generating 20% of our power. And the industry has been operating for fifty years. The number of military reactors isn't precisely known.

    The facts are pretty simple. The present reactors are going to be running a long time. The way to have a safer nuclear industry is to replace the oldest designs. Stopping all construction will just guarantee that the old plants will run far longer.