Posts tagged ‘cap-and-trade’

Is The Carbon Tax A Pricing Signal To Reduce CO2, Or A Funding Mechanism for a Patronage System to Feed Various Constituencies?

This is an absolutely fascinating article at Vox on efforts by green forces and the Left to defeat a carbon tax ballot initiative in Washington State.  The ballot initiative was written very similarly to my proposed plan, where a carbon tax would be made revenue neutral by offsetting other taxes, particularly regressive ones.

Apparently, the Left is opposing the initiative in part because

  1. It turns out the carbon tax, for many on the Left, is more about increasing the size of government rather than really (or at least solely) for climate policy, and thus they do not like the revenue neutrality aspects.  They see carbon taxes as one of the last new frontiers in new government revenue generation, and feel like it would be wasted to make it revenue neutral
  2. The Greens have made common cause with the social justice warrior types, so they dislike the Washington initiative because it fails to allow various social justice and ethnic groups cash in.
  3. Apparently, folks on both the Left and the Right actually like government picking winners and tinkering in individual subsidies and programs, such as funding various green energy and conservation initiatives.  To me, that stuff is all a total waste and made irrelevant by a carbon tax, whose whole point is to allow markets to make the most efficient CO2 reduction choices, but looking at this election it would not be the first time the electorate was ignorant on basic economics.

There is a real disconnect here that it is important to understand.  I don't think I really understood how many of us could use the term "carbon tax" but understand its operation in fundamentally different ways, but I think that is the case.

The authors of the law, like me, see the carbon tax as a pricing signal to efficiently change behaviors in the market around use of carbon-based fuels.  The whole point of a carbon tax is to let individual actions and market forces shape how solutions are created.  But the Left seems to see the carbon tax totally differently.  They don't understand, or don't accept, the power of the pricing signal in the market, or else they would not say things like they want a "put a fee on emissions and reinvest that revenue in clean energy" -- the latter is a redundant and pointless government action if one accepts the power of the tax, since individuals will already be responding by making such investments.  The Left instead sees the carbon tax as the source of a new kitty of money that then must be fought over in some sort of political process.

Check out this passage, and consider whether these folks are thinking of the carbon tax as a pricing signal or a source of new money to be spread around:

Either way, state social justice groups did not feel consulted. "Rather than engaging with these communities," wrote Rich Stolz and De'Sean Quinn of environmental justice group OneAmerica, "I-732 organizers patronized and ignored concerns raised by these stakeholders."

White people who work with other white people — and the white people who write about them — tend to slough off this critique. What matters, they insist, is the effect of the policy, not the historical accident of who wrote it down.

Bauman points to a set of policy demands posted by Black Lives Matter. Among them: "shift from sales taxes to taxing externalities such as environmental damage." Also: "Expand the earned income tax credit."

"Well," Bauman says, "we did both those things, right?"

But communities of color want more than for mostly white environmental groups to take their welfare into account. Most of all, affected groups want some say in what constitutes their welfare. "All of us want to be included from the beginning of any decision," says Schaefer. "We don't want to be told after the fact, ‘Hey, by the way, we decided all this stuff for you.’"

This tension within the climate movement has played out most recently in California, where low-income and minority groups have won substantial changes to the state’s climate law, ensuring that a larger portion of cap-and-trade revenue is directed to their communities. Given demographic changes sweeping the country — and climate funders’ newfound attention to building up the capacity of those groups — those tensions are unlikely to remain confined to the West Coast.

These folks see the carbon tax as a pool of money to fund a patronage system, and are thus scared that any groups not involved in crafting the legislation will be left out of the benefits of the patronage -- after all, that is how most programs from the Left are put together.  The Obama stimulus program back in 2009 was such a patronage project, and those who were in on crafting it got windfalls, and those who were left out of the process had to pay for it all.  Either the Left assume that everything works this way, even when it does not, or they want everything to work this way -- I don't know which.

One thing I do know is that I fear I am going to lose this argument in the future.  Here is one way to look at it -- are more people graduating from college looking at the world through the lens of markets and economics and incentives or are more graduating structuring issues in terms of social justice and government authority?


Willful Blindness

I am on the road today (off to London).  This is reprinted from Climate Skeptic:

Paul Krugman writes in the NY Times:

And as I watched the deniers make their arguments, I couldn't help thinking that I was watching a form of treason "” treason against the planet.

To fully appreciate the irresponsibility and immorality of climate-change denial, you need to know about the grim turn taken by the latest climate research"¦.

Well, sometimes even the most authoritative analyses get things wrong. And if dissenting opinion-makers and politicians based their dissent on hard work and hard thinking "” if they had carefully studied the issue, consulted with experts and concluded that the overwhelming scientific consensus was misguided "” they could at least claim to be acting responsibly.

But if you watched the debate on Friday, you didn't see people who've thought hard about a crucial issue, and are trying to do the right thing. What you saw, instead, were people who show no sign of being interested in the truth. They don't like the political and policy implications of climate change, so they've decided not to believe in it "” and they'll grab any argument, no matter how disreputable, that feeds their denial"¦.

Still, is it fair to call climate denial a form of treason? Isn't it politics as usual?

Yes, it is "” and that's why it's unforgivable.

Do you remember the days when Bush administration officials claimed that terrorism posed an "existential threat" to America, a threat in whose face normal rules no longer applied? That was hyperbole "” but the existential threat from climate change is all too real.

Yet the deniers are choosing, willfully, to ignore that threat, placing future generations of Americans in grave danger, simply because it's in their political interest to pretend that there's nothing to worry about. If that's not betrayal, I don't know what is.

So is it fair to call it willful blindness when Krugman ignores principled arguments against catastrophic anthropogenic global warming theory in favor of painting all skeptics as unthinking robots driven by political goals? Yes it is.

I am not entirely sure how Krugman manages to get into the head of all 212 "no" voters, as well as all the rest of us skeptics he tars with the same brush, to know so much about our motivations.  He gives one example of excessive rhetoric on the floor of Congress by a skeptic "” and certainly we would never catch a global warming alarmist using excessive rhetoric, would we?

Mr. Krugman, that paragon of thinking all of us stupid brutes should look up to, buys in to a warming forecast as high as 9 degrees (Celsius I think, but the scientist Mr. Krugman cannot be bothered to actually specify units).  In other words, he believes there will be about 1 degree per decade warming, where we saw exactly zero over the last decade.  Even in the panicky warming times of the eighties and nineties we never saw more than about 0.2C per decade.  Mr. Krugman by implication believes the the Earth's climate is driven by strong positive feedback (a must to accept such a high forecast) "” quite an odd assumption to make about a long-term stable stystem without any good study showing such feedback and many showing the opposite.

But, more interestingly, Mr. Krugman also used to be a very good, Nobel-prize winning economist before he entered his current career as political hack.  (By the way, this makes for extreme irony - Mr. Krugman is accusing others of ignoring science in favor of political motivations.  But he is enormously guilty of doing the same in his own scientific field).   It is odd that Mr. Krugman would write

But in addition to rejecting climate science, the opponents of the climate bill made a point of misrepresenting the results of studies of the bill's economic impact, which all suggest that the cost will be relatively low.

Taking this statement at face value, a good economist would know that if the costs of a cap-and-trade system are low, then the benefits will be low as well.  Cap-and-trade systems or more direct carbon taxes only work if they are economically painful for energy consumers.  It is this pain that changes behaviors and reduces emissions.  A pain-free emissions reduction plan is also a useless one.  And in fact, the same studies that show the bill would have little economic impact also show it will have little emissions impact.  And thus it is particularly amazing Krugman can play the "traitor" card on 212 people who voted against a bill nearly everyone on the planet (including the ones who voted for the bill) know will not be effective.

I remember the good old days when Democrats thought it was bad when Republicans called folks who did not agree with them on Iraq "traitors."  After agreeing with Democrats at the time, I am disapointed that they have adopted the same tactic now that they are in power.

You Can't Have It Both Ways

I cannot believe I actually have to write this, but apparently there are a number of folks in Washington and the media for which this will be a surprise.  Specifically:  A carbon tax or a cap-and-trade bill must either greatly increase prices of fossil fuels and the products of their combustion, or else they will have no impact on CO2 emissions.   Placing a high cost on emissions, and then giving everyone with a modicum of lobbying power an exemption is not going to move the meter either.  All the absurd talk of stimulation from new green jobs not-withstanding, either a climate bill imposes huge new costs or it has no real impact on emissions.  One simply cannot get to an end point of obsoleting the entire US electrical generation and transportation infrastructures for free.

As someone who thinks the threat from Co2 is greatly exaggerated, this is why I have never worried overly much about American legislative efforts.  Congress will mandate something or other that will not have much effect and will impose a lot of cost, but politicians will stop way short of the draconian legislation that would be necessary to achieve their stated carbon goals (e.g. 80% reduction).  European politicians are way more committed than ours are to Co2 reductino, and Europe hasn't really done much at all either.  A legislative body that continues passing costs to our kids in the Social Security ponzi scheme and an administration that plans already to add 10 trillion to the national debt doesn't really care about future generations.  If they are unwilling to bear current pain for future benefits in fiscal policy, they certainly aren't going to do it in the much more uncertain arena of climate policy.

Postscript: Note that the costs can show up in other ways.  For example, if one puts carbon caps in place as well as price controls, the cost would appear in the form of massive shortages, lines, and blackouts.  If one tried to address the problem via command and control solutions, the cost appears in massive capital spending requirements that cannibalize from economic growth  (which are likely to be made all the worse given that the commanders will probably not mandate the best solutions -- in fact, given variations from individual to individual, they simply cannot mandate the best solution for everyone).

So Why Are We Even Bothering with Cap and Trade?

The whole point of a pollution control regime driven by a carbon tax or cap-and-trade is to acknowledge that 300 million people making trade-off and investment decisions can do a better job reducing pollution than 300 people in Washington commanding solutions.   Give individuals an emissions cap (or raise the price of emissions) and people will make their own decisions how best to handle the response.  One household in Arizona might put in solar, while the Seattle household would see solar as a waste and might get the same reductions via conservation.

So why does the current cap-and-trade bill have so much command and control embedded in it?

In fact, the bill also contains regulations on everything from light bulb standards to the specs on hot tubs, and it will reshape America's economy in dozens of ways that many don't realize.

Here is just one: The bill would give the federal government power over local building codes. It requires that by 2012 codes must require that new buildings be 30 percent more efficient than they would have been under current regulations. By 2016, that figure rises to 50 percent, with increases scheduled for years after that. With those targets in mind, the bill expects organizations that develop model codes for states and localities to fill in the details, creating a national code. If they don't, the bill commands the Energy Department to draft a national code itself.

States, meanwhile, would have to adopt the national code or one that achieves the same efficiency targets. Those that refuse will see their codes overwritten automatically, and they will be docked federal funds and carbon "allowances" -- valuable securities created elsewhere in the bill that give the holder the right to pollute and can be sold. The Energy Department also could enforce its code itself. Among other things, the policy would demonstrate the new leverage of allocation of allowances as a sort of carbon currency -- leverage this bill would be giving to Congress to direct state behavior.

The reason, of course, is that Congress may nominally support cap-and-trade (mainly because it is hip and trendy, not because they really understand it) but they most certainly do not buy into the philosophy behind it -- that millions of individuals can make better decisions collectively than a few planners in Washington.  Because Congress most certainly thinks they are smarter than everyone else and can make better decisions.

Of course, this is absurd.  Has anyone tested these mandates above and seen if they are a less costly way to reduce emissions than other steps?  Of course not, just as they did not for the new CAFE standards.  In fact, I can prove it -- Do making massive investments in insulation and air conditioning efficiency make any sense in San Diego?  Of course not -- in that mild climate, these are near useless investments.  Does making me buy a more fuel efficient car to drive my 1.5 mile commute make sense?  Of course not.  But this is exactly what is happening, because Congress can only regulate to the mean, and the result is that in many cases its commands make no sense.  Which is exactly why cap-and-trade was invented, ironically.

Jeff Flake is Freaking Brilliant

The Republicans have lost the knack for being a minority party in opposition.  Nowadays, they waste tremendous time and effort playing he-said-she-said with Nancy Pelosi or Jon Edwards, while blithely voting for more pork and trillions in new spending.  Obama, after all, wouldn't have his favorite and best tool (TARP) for building a Mussolini-style corporate state without Republican votes.

While it strikes me that a capable opposition would certainly know how to turn a knife in a political scandal, it also should be ready to introduce principled alternatives to key legislation.   The best such proposals are ones that attempt to achieve the stated goals of the majority party better and faster than the majority's own legislative efforts.

Which brings us to Jeff Flake, who is becoming a master of this.   When Nancy Pelosi and Barack Obama spouted platitudes about openness in government (without really taking any steps to achieve it) Flake came along and introduced bill after bill challenging the Democrats put their money where their mouth is on earmarks and transparency.  I have always been a big fan of Congressman Jeff Flake, who represents a district not far away from my home.  Though we don't agree on every issue, there are few, if any, politicians whose judgment I trust more.

Flake's most recent initiative is one close to my heart.  As readers know, I have good scientific reasons for believing the threat of CO2 emissions has been grossly overstated.  However, if we are going to commit to reducing CO2, we might as well do it intelligently, and Flake's proposal is very close to one I have been pushing for some time:

Conservative House members Jeff Flake (R-AZ) and Bob Inglis (R-SC), along with Rep. Dan Lipinski (D-IL), have introduced an alternative to the cap-and-trade proposal developed by House Democrats: HR 2380, the "Raise Wages, Cut Carbon" Act of 2009. Their proposal is for a carbon tax that will gradually increase over time, offset by a reduction in payroll taxes.

Of course I think this is brilliant, because it is my idea as well.  But it is also a brilliant opposition strategy.  Flake's approach is far better than the cap-and-trade mess the Democrats have gotten themselves in  -- not just because it would work better, but because it actually hits key supposedly liberal objectives better than does the Democrat's bill.  Specifically:

  • Fairness. Sure, everyone is correct that a carbon tax can be politicized, but I do not think it can be gamed nearly as much as cap-and-trade.  For evidence, I turn to California.  California has both a cap-and-trade legislation, rule-making for which has been thrown to the California Air Resources Board (CARB); and it has carbon-tax-like excise taxes, which we generally call sales taxes.  Sure, there are some special case sales tax categories aimed a politically connected groups, but in general the sales tax system in California is simple and mostly fair.  More importantly, it is a layup to administer.  Contrast that to CARB, which has been slogging away in cap-and-trade related rule-making for years, and has everybody both pissed off and panicked.  Should cow flatulence be counted?  Should National Forests be able to sell offsets?  How do you create any kind of fair offset accounting given the shenanigans in Europe?  Should we allow Californians to have black cars? (seriously)  This is a perfect A-B test, as the legislators are the same in both cases -- sales taxes are simple and fair, cap-and-trade is a mess.
  • Openness and transparency. It is clear that Obama's stated commitment to openness and transparency was all so much BS.  But why not nail him to that cross anyway?  Few if any of the general public understand cap-and-trade.  It is a tax, but it is inherently hidden from view, and passed through to consumers buried in rates in a way that offers politicians maximum deniability.  Everyone understands a sales tax, or the gas tax.  The system and its costs will be right out front (which is exactly what Democrats secretly DON'T want, which is what makes this a clever opposition tactic).
  • Progressiveness. For all their talks about the common man and being progressives, the advocates of cap-and-trade are pushing what is possibly the most regressive tax increase of all time.  Again, there is a kind of political money laundering that hides the tax, but it is a tax none-the-less, and will hit the poor the hardest when electricity and fuel prices inevitably increase.  Flake's proposal to take the proceeds of the tax and use them to reduce the payroll tax is a great one -- offset one regressive tax with another, while at the same time putting in place incentives for job creation.

Postscript: My 2007 energy plan was as follows (assuming the need to do something about CO2)

  1. large federal carbon tax, offset by reduction in income and/or payroll taxes
  2. streamlined program for licensing new nuclear reactors
  3. get out of the way

How Does He Do This With A Straight Face?

I already in a previous post deconstructed Kevin Drum and Joe Romm's critique of the carbon tax.  One reason they don't like the carbon tax is:

Well, for one, it doesn't have mandatory targets and timetables.  Thus it doesn't guarantee specific emissions results and thus doesn't guarantee specific climate benefits.  Perhaps more important, it doesn't allow us to join the other nations of the world in setting science-based targets and timetables.  Also, a tax lacks all of the key complementary measures "” many of which are in Waxman-Markey "” that are essential to any rational climate policy, but which inherently complicate any comprehensive energy and climate bill.

What they are basically arguing is that a carbon tax works by hundreds of millions of individuals making decisions in reaction to higher prices, and chosing their own way to reduce carbon production.  They don't trust this kind of bottom up chaos, despite the fact this is how our entire economy and society works, except for a few corners where beltway guys live and breath in their own reality.  They want a few "scientific" guys at the top picking winners and subsidizing technologies and particular approaches.

I described why I disagreed with this  (or you could spend some time with Hayek to really understand why it is wrong) but I found it staggering that the very next post from Kevin Drum in my feed reader was this one:

Via the LA Times, this is the best news I've heard all day:

The Obama administration on Tuesday proposed renewable fuel standards that could reduce the $3 billion a year in federal tax breaks given to producers of corn-based ethanol. The move sets the stage for a major battle between Midwest grain producers and environmentalists who say the gasoline additive actually worsens global warming.

....While biofuels as a whole "” including grasses and even algae "” are considered promising alternatives to petroleum, some researchers have begun challenging the use of corn for this purpose.

In particular, they point to the "indirect land-use" effects of pulling corn out of the world food supply, which could force farmers in developing nations to clear rain forests "” and release massive amounts of carbon dioxide in the process "” in order to plant corn.

Please dump the corn ethanol subsidies.  Please, please, please.  Dollar for dollar, it might well be the stupidest use of taxpayer cash in the entire federal budget.

Since ethanol is the largest example of Congress's past attempts to set "rational climate policy," what in the hell gives Drum confidence things are going to be any different in the future?  It is yet another example of technocratic planners arguing that the failure is not top-down planning, just the particular individuals doing the planning.  If only my guys did the planning, things would be different.  Right.

Besides, it was a Democratic Congress that passed the last round of ethanol subsidy increases and a Democratic Congress that is upping them again.  So it is Drum's guys doing the planning, and they are making a hash out of it, as all planners do.

For the record, I don't want my guys in DC doing the planning.  I want 300 million people making their own damn choices.  When did this ever stop being a liberal value?

A Helpful Primer on the Politics of a Carbon Tax

Kevin Drum and Joe Romm offer a helpful primer on the politics of a carbon tax.  Unfortunately, they are a little shy in coming out with exactly what they mean, so I will add in a few helpful explanations.

1. A carbon tax, particularly one capable of deep emissions reductions quickly, is a political dead end....

What they are referring to is that though both are approximately equally costly, the government imposed costs of a cap and trade are better hidden from the consumer than those of a carbon tax, thus making it a more palatable plan for politicians.  By raising costs to producers, and then having the producers inevitably raise prices to the consumer, wily politicians can blame the producers,  not themselves, for the price increases.

2. A carbon tax that could pass Congress would not be simple. Advocates of a tax argue that simplicity is one of its biggest benefits.  Again, those advocates seem bizarrely unfamiliar with the tax code in spite of the fact that they pay taxes every year....

Basically, they are arguing that Congress is incapable of producing a simple, clean law.  Politicians used to be able to do this (the US Constitution will fit on the back of a cereal box -- the new EU proposed constitution barely fits in a large 3-ring binder) but have obviously lost the knack.  Or, more likely, as public choice theory tells us, as the dollar stakes have been raised, politicians are incapable of resisting the pressure of huge sums of money at stake for targeted tweaks and overrides for politically favored groups.

By the way, the comparison he is making to the US income tax code is a false one.  The carbon tax is much more like a sales tax, and many state governments in the US (though not all) maintain very simple and easy to administer sales tax systems with single rates and little complexity.  Our sales tax return in New Mexico, for example, consists of three numbers and a signature on a form about the size of a 3x5 card.

3. A carbon tax is woefully inadequate and incomplete as a climate strategy. Why?  Well, for one, it doesn't have mandatory targets and timetables.  Thus it doesn't guarantee specific emissions results and thus doesn't guarantee specific climate benefits.  Perhaps more important, it doesn't allow us to join the other nations of the world in setting science-based targets and timetables.  Also, a tax lacks all of the key complementary measures "” many of which are in Waxman-Markey "” that are essential to any rational climate policy, but which inherently complicate any comprehensive energy and climate bill.

Basically, their argument here is that they don't like the fact that the success of a carbon tax relies on the unmanaged, bottom up responses to higher prices by 300 million Americans acting in their own best interests and finding their own individual solutions to carbon reduction.  The authors instead prefer a few people in Washington, heavily influenced by a number of special interest lobbyists, setting policy and picking winners.  "Complementary measures" is shorthand for government picking of winners and subsidizing of ... whatever the hell Congress chooses to subsidize.  It is a great way to wrap pork in a nifty new green wrapper.

I think most folks who are not naive understand that what the authors are advocating for here is doomed to be hopelessly politicized -- this is, after all, how we got massive ethanol subsidies that do zero for carbon emissions.  But even if one believes the politicians in charge are monks of public service making purely science-based decisions, these guys still are advocating for at most a few hundred people making the major carbon reduction priority decisions from the top rather than 300 million making them from the bottom up.

Besides, isn't this argument deeply contradictory.  In points 1 and 2, they basically argued that the legislative process is deeply politicized and it is naive to think otherwise.   But then, in point 3, they make an argument for top down planning over bottom up response to planning that can only be even marginally valid if the process is not politicized and science, and not political pull, rule decisions.

Postscript: A couple of related stories, first from the Washington Times:

House Speaker Nancy Pelosi and House Energy and Commerce Committee Chairman Henry A. Waxman, both of California, were among the Democrats -- then in the minority -- who slammed Vice President Dick Cheney for holding closed-door meetings to draft energy policy early in the Bush administration.

Republicans "invited energy lobbyists to write the energy bill that gouges consumers with big payoffs to Big Gas and Big Oil," Mrs. Pelosi said in 2005. "They have turned Washington, D.C., into an oil and gas town when it is supposed to be the city of innovation, of new, of fresh ideas about our energy policy."

But the sweeping climate bill Mr. Waxman and Rep. Edward J. Markey, Massachusetts Democrat and chairman of the panel's key environmental subcommittee, introduced at the end of March includes a provision that benefits Duke Energy Corp., a founding member of the U.S. Climate Action Partnership (USCAP), whose climate plan released in January the lawmakers have frequently called a "blueprint" for their climate legislation.

The exemption would save Duke Energy -- along with other firms now building new coal power plants -- from having to spend millions of dollars outfitting its Cliffside, N.C., power plant currently under construction with "clean coal" technology.

"The USCAP companies must be delirious over the freebies that they've received after writing the blueprint for [the House draft bill]," said Larry Neal, deputy Republican staff director for the House Energy and Commerce Committee.

The second is from the Washington Examiner via Watts Up With That

In exchange for votes to pass a controversial global warming package, Democratic leaders are offering some lawmakers generous emission "allowances" to protect their districts from the economic pain of pollution restrictions.

Rep. Gene Green, D-Texas, represents a district with several oil refineries, a huge source of greenhouse gas emissions. He also serves on the House Energy and Commerce Committee, which must approve the global warming plan backed by President Barack Obama.

Green says Rep. Henry Waxman, D-Calif., who heads the panel, is trying to entice him into voting for the bill by giving some refineries favorable treatment in the administration's "cap and trade" system, which is expected to generate hundreds of billions of dollars over the coming years. Under the plan, companies would pay for the right to emit carbon dioxide, but Green and other lawmakers are angling to get a free pass for refineries in their districts.

"We've been talking," Green said, referring to a meeting he had with Waxman on Tuesday night. "To put together a bill that passes, they have to get our votes, and I'm not going to vote for a bill without refinery allowances."

It's Supposed to be Painful

Megan McArdle points out the real problem that carbon taxes and other CO2-abatement approaches have -- they only really work if it they are painful.  I mean, the whole point is not supposed to be to raise government revenue or just arbitrarily raise prices.  The whole point is to change behaviors, and the most powerful tool for behavior change is price changes.

Global warming activists are talking about 80% CO2 reductions.  This is an enormous number, especially since the relative cut has to be even higher to account for future growth, as reductions are generally pegged to current (or as in Kyoto, past) CO2 emissions levels.

A 40-cent gas tax is not going to do it.  Or, looking at how much behaviors changed when gas prices recently went up to $4, a $2.00 gas tax is not going to do it.  The Europeans have $6+ gas taxes and that is not enough to reach the levels activists want for this country.   It is likely going to take $10+ gas to even start to get the reductions in use and the shifts to much more expensive carbon-less technologies that would be required to hit 80% type goals.

All this means that we are NEVER going to have a carbon tax that really reflects the necessary rates to hit the emissions targets Obama and the alarmists claim to be committed to.  That is why we will get backdoor taxes that try to hide the tax and shift the blame away from Congress.    But none of these schemes, including cap and trade, will have any meaningful impact unless they lead to consumer price increases that change behaviors of the end users**.  But these approaches are preferable to lawmakers, as they somewhat disguise the relationship between legislation and prices, and give them some ability to blame private companies for the price increase, even where these increases are the inevitable result of carbon caps.

Postscript: This is further complicated because the major technologies the government is attempting to subsidize as part of meeting these goals are virtually useless.  Two in the transportation sector - ethanol and electric vehicles - are of questionable merit.  Ethanol has about zero efficacy in reducing Co2, and may actually increase it (but it is essential if one wants to win the Iowa caucuses).  Electric vehicles have some potential, but their impact is dependent on how electricity is generated.  Based on the current mix, shifts to electric vehicles just shift emissions from one place to another without much net reduction.  If someone were to propose a massive nuclear and electric vehicle program, they might convince me they were on to something.

**PS#2: I suppose you could reach these goals without fuel price increases.   Two alternatives:

  • Mandate certain transportation and other technology solutions, as well as certain limits (e.g. maximum house size, maximum number of TV's, etc).  This still has cost, though, in terms of enormous losses in personal liberty as well as likely enforced higher costs of major purchases, like cars.  So this is still likely a price increase, it just shows up in a different place.  Also, this may well not work -- there is very good evidence that without price changes in fuel, consumers react to higher MPG in their cars by driving more, thus sibstantially dilluting the carbon effect.
  • Enforce carbon limits combined with price caps on fuel and electricity.  This would be effective, probably, but of course would result in massive shortages of gas and electricity.  The rationing challenge would be enormous.

A Federal Tax on Market Share Changes

It is a recurring theme on this blog:  Large corporations who currently dominate their industries generally accept, even encourage, government regulation.  Generally, as industry leaders, they have the opportunity to shape regulation to their liking, and most regulations preferentially help the large corporations over the small, and help incumbents over new entrants.

And here is yet another example, though it is one many of us have been expecting.  Contrary to campaign rhetoric, it appears that Obama's proposed cap-and-trade system will give CO2 certificates to current incumbents for free.  Only new entrants to the market, or those who wish to grow, will have to pay for them.  This in effect makes the system a federal tax on market share changes.  Laws like this are supported by industry leaders in the same way that sitting Congressmen always love campaign speech restrictions.

The next thing to watch for is whether there are provisions for carbon offsets.  Such offsets are an accounting nightmare, and a virtual Disneyland for rent-seeking.  More on cap-and-trade vs. carbon tax here.  More on offsets here.  And more on why this is all silly in the first place here.

The Amount Almost Doesn't Matter, Because it HAS to Go Higher

Apparently there is some debate about the true cost of Obama's proposed cap-and-trade system - is it $646 billion?  it is $2 trillion.  My sense is that it doesn't matter, because these costs are to the total cost of a full Co2 abatement program what shooting the first monkey into space was to the moon-landing program.

Just to get this out of the way, it is absurd to argue this is anything but a tax on individuals.  It HAS to result in a price increase to individuals, for things like electricity, or it is not working.  Price increases are a core feature of the program, not a bug.  The whole point is to reduce fossil fuel use, and in the near term, with infrastructure fairly fixed, this can only be achieved via reduced electricity consumption.  And, unless you are a fan of rolling brown-outs, this in turn will only be achieved by raising the price.   Long-term this reduction might come from shifts in the mix of electricity producing facilities (ie from coal to gas or nukes) but this takes time, and never-the-less the wholesale replacement of perfectly serviceable electrical generation infrastructure will certainly have a cost as well.

Further, now matter what the initial cost is, the costs will almost certainly have to increase by orders of magnitude over the next decades, if the programs is to have its desired benefits of substantially reducing CO2 production  (currently targeted by the administration as an 80-85% reduction).  How much of a price increase is it going to take for you to reduce your home's electrical use by 80%?  We have examples of parts of the country where electricity rates have doubled in a short period of time, and electrical consumption changed by far less than 80%  (the EPA apparently uses near-term price elasticities around 16%, meaning that a doubling of prices might result in a 16% reduction in demand).

It is probably easier to think about gasoline use (though this initial system will not apply to most transportation uses).  Last year, gas prices doubled.  Did your driving go down by 80%?  Probably not, since a doubling of gas prices reduced driving and demand by about 5-10%.  How high would the price of gas have to go to get you to really cut back your driving by 80%?  Europeans have $8-$9 a gallon gas, and much more onerous regulations on fuel economy in cars, and their per capita consumption has not fallen 80%  over the last decades  (Germany's per capita gas consumption, for example, has dropped about 20% since 1990).  How high will our gas prices have to go?

According to climate alarmists, Co2 levels in the atmosphere have already passed a point of no return leading us to a tipping point and rapidly accelerating temperatures.  As a result, again according to alarmists, incremental reduction steps that slightly slow the rate of increase of Co2 are useless -- only enormous reductions in Co2 output that result in declining world Co2 levels will suffice to save us from doom.

What this means is that Obama's cap-and-trade scheme as currently configured is both expensive AND useless, as it will, by almost any estimation, make only a trivial dent in Co2 growth  (similar to the Kyoto treaty, where even supporters admit that full compliance would have made an immeasurably small difference in global temperatures).   A real plan that would actually hit the goals he has set for us would be so expensive as to make even $2 trillion seem cheap.  This is just a toe in the water, to set up the infrastructure -- the real cost increases come later.  Using a fairly crude analogy, Obama is merely grabbing the waistband of our underwear now -- he won't start to pull and twist until later.

Who Do You Know Who Has Said All This?

Via Reason:

Obama has promised that no family earning less than $250,000 per year will pay one dime in higher taxes. But the companies that have to pay for permits will pass that cost on to consumers in the form of higher prices for electricity and other products. So these families will pay $645 billion, only some of which will be returned in the form of lower income taxes, for a system that is terribly inefficient.

The solution, of course, would be a straight-forward tax on carbon, the proceeds to be refunded through the payroll tax system. But unlike the hidden tax of cap-and-trade, a carbon tax is out there for the voters to see. And given the choice between a stealthy tax and a visible tax, politicians will pick the former every time.

The Big Lie

I try to never use "lie" or "liar" when discussing politics.  They have become perhaps the most abused and overused words in political discourse, and seldom do they add much to a discussion.

But I simply have no other way to reconcile Obama's promise that he is not raising taxes on 98% of Americans with his imposition of a cap-and-trade system for CO2.

For years, Al Gore supported a carbon tax on fuels as a way to fight CO2.  As I have written a number of times, if one really feels the need to reduce CO2 emissions (which I don't), then a carbon tax is far, far more efficient, fair, and effective than a cap-and-trade system.  There are only two advantages to a cap-and-trade system over a carbon tax, and neither has anything to do with Co2 mitigation or program effectiveness:

  1. The tax is hidden, so politicians can pretend the did not really impose a tax.  The author of California's AB32 cap-and-trade system admitted as much to me in a face-to-face debate we had last year
  2. There are numerous opportunities for politically favored companies to create dubious offset and measurement systems under cap-and-trade which don't exist under a more straight-forward carbon tax.  Which may explain why Al Gore, who sits on the board of over $2 billion in investments in such companies peddling various offset quackery, now supports cap-and-trade over the carbon tax

Here is the basic economics, a topic on which it is rapidly becoming clear that Obama is completely ignorant**.   First, we have to assume that whatever cap-and-trade system that is implemented is actually effective at reducing CO2 emissions.   This is far from an absolute given, as it can be argued that the European system has done all of about nothing to reduce Co2 emissions (they will claim that it has been effective, but the majority of European CO2 emissions have come from a) British coal-replacement strategy, initiated for reasons other than Co2; b) fall of the inefficient Soviet economies and the shut down of their worst polluting industries; and c) unification of Germany.

But, assuming that cap-and-trade actually reduces CO2, then it HAS to increase costs for consumers.  There is no way around it.  It will do one or both of the following:

  1. Raise prices due to increased producer costs.  An example is electricity generated from any sort of fossil fuel will simply have to be more expensive
  2. Raise prices due to increased scarcity.  In industries where the supply and demand dynamics do not allow cost increases to be passed to consumers, then reduced production and scarcity will result.  In the electrical industry, older coal plants that can't afford to pay for the Co2 permits may need to shut down.

Recognize that this HAS to occur, especially #2, or the cap-and-trade system won't be working.  Another way to put it is 1 and 2 above are what designers of the system want and expect to occur.

So how is this not a tax?  Well, this is an old, old strategy.  Rather than tax consumers directly, the government taxes business.  When companies inevitably pass the cost on, it is not the government at fault, it is the business for being greedy and raising prices.  Politicians insulate themselves from criticism.

Further, Obama and the environmental crowd have been laying the groundwork over this for years by arguing that such "green" initiatives actually help the economy and improve efficiency.  They have no proof of this, but they repeat it A LOT.  Repeat something enough, and some people believe it.  This despite the fact that there is no way in the world that obsoleting perfectly good production capacity and requiring its replacement (e.g. coal plants) is a net positive for the economy.  (It can be a net positive for human well-being, but to say it is net positive for the economy is to fall into the broken windows fallacy).

So expect that when power companies inevitably raise prices due to cap-and-trade, politicians will respond by saying that the companies are being greedy and simple minded, and if they were really smart, the cap-and-trade system would not have cost them anything.  It would have made them more efficient.  it would have been a net positive.  And that this failure of theirs to see this probably will drive calls on the left for more government oversight and regulation of these industries.

Don't believe me?  Think this last paragraph is exaggerated?  Well, here are two things to think about.  The first is from our former Arizona governor, arguing that she got a bunch of government employees into a bull session in a conference room for an hour or so, and they all decided that cap-and-trade would be a net benefit to the power industry:

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...

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' energy.""¦

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

So if utilities raise their rates, its obviously because they are greedy profiteers, because all of us here in government think it's obvious that paying for carbon allowances should result in cost savings.  If it doesn't, well, maybe we are smarter than they are, and have to provide more government leadership of the industry.

They would never go that far, you say?  So why has Obama created a government commission to restructure the auto industry on the implicit assumption that a couple of smart government guys in a room can do what the industry itself has not been able to do for 30 years?

** This is not to say that Obama does not have highly educated economic ad visors.  But the President's own knowledge, assumptions, comfort-level and outlook on a subject are critical, no matter what the quality of his advisers.  For example, even if I were crazy enough to want the job, I would never run for President because I know, by outlook and knowledge, I am not qualified to manage foreign policy or be commander-in-chief of the military.  Sure, I could surround myself with advisers, but there are proven limits to the "rely on advisers" approach.  I might argue that Bush's foreign policy is an example of such limits.

Carbon Tax vs. Cap and Trade

Coyote, December 2007:

I can for a moment place myself in a position where I would imagine being worried about CO2 and dependence on fossil fuels.  For someone who really cares about these things, here is what a rational energy plan would look like:

  1. large federal carbon tax, offset by reduction in income and/or payroll taxes
  2. streamlined program for licensing new nuclear reactors
  3. get out of the way

Ronald Bailey, today:

Interestingly, Sen. Bob Corker (R-Tenn.) suggested to Gore during the hearing that a better proposal would be to impose an across-the-board carbon tax which would then be reimbursed entirely by cutting the payroll tax.

He has much more on problems of cap and trade in the article.  I have written many times on a carbon tax vs. cap-and-trade, indexed here.

Another Reason Why We'll Never See A Carbon Tax, But Instead Will Get A Crazy Cap-And-Trade Scheme

I have written enough on how much superior carbon taxes are to cap-and-trade as a CO2 reduction methodology (if we really are going to do "something," which I hope we don't).  An index of these articles is here.

In the title, I say "another" reason, becuase the number one reason we won't see a carbon tax is that politicians greatly prefer an indirect tax over a direct one, even if it is far more inefficient.  This was explained directly and clearly to me by the author of California's cap-and-trade program.

Close behind this, in second place, is the fact that cap-and-trade spawns a dizzying array of lobbying and special interest influence possibilities that carbon taxes do not, and all those lobbyists mean more power and campaign contributions for politicians.

But here is another reason why it will never happen:  Too many very influential Democrats have substantial investments in start-up companies whose entire existance depends on living in the cracks of cap-and-trade, particularly in generating various dubious offset schemes.  Al Gore is the most obvious example, but apparently Obama's new climate czar Carol Browner sits on boards of such companies as well.

I Have Been On-Board For A While

I don't think that anthropogenic global warming will be substantial enough to justify massive and expensive interventions to limit Co2.  I won't go into the reasons for this statement, as I have a whole other blog dedicated to climate.  If you are unfamiliar with the arguments that Co2 is likely warming the Earth, but not by nearly as much as alarmists claim, you might start with some of these videos.

However, it seems almost inevitable that the new Congress and Administration will do "something" on Co2, if for no other reason that it has become a self-image issue on the left  (i.e. I am a good person because I care about global warming).  We libertarians are seldom very good at engaging on issues of how such government interventions should be done best.  Every time people ask us our opinion of how to structure such a program to do the least harm, we get about 5 seconds into an answer before we just break down and start yelling, "this is crazy!  Do nothing!  Leave us alone!" (actually, emissions laws are one of the few areas where government regulation helps to protect private property rights).

Bryan Pick at Q&O points to a number of folks advocating an increase in carbon taxes offset by reductions in payroll taxes (Bryan's plan is more comprehensive than this, and is here).  I actually advocated something similar over a year ago.  Here is my logic chain:

  1. The carbon tax is a much, much better approach to reducing CO2 than cap-and-trade systems.  Cap-and-trade is bad for the same reason that politicians like it -- it offers a near infinite playing field for lobbying, special rules, influence-peddling, special exemptions, government chosen winners, etc. while hiding the fact that it is in fact a huge new tax.  My more detailed argument on this can be found here and here and here.
  2. A new carbon tax should be revenue neutral.  After all, the point in the first place is not to raise revenues, but to provide a pricing signal that Americans need to switch away from carbon-based fuels.
  3. A good place to offset revenues is the payroll tax.  Both fuel taxes and payroll taxes are criticized for being regressive, so it is an easy place to try to forge a compromise with the left.  Further, the payroll tax acts effectively as a tax on hiring, so a reduction would certainly be welcome any time, and particularly in a recession.
  4. We need to create a streamlined licensing program for nuclear reactors.  Utilities, particularly ones dependent on coal today, need a realistic option to continue to provide power at reasonable cost in their communities.  Solar and wind are just not reasonable alternatives today.  Nukes are the only carbon-free scalable generating technology we have.

Again, I don't think the dislocations required here are worth the effort, but this is the best way to do it if we must.

Postscript: By the way, here is one thing no one is telling you.  Folks in Congress have tossed around carbon and fuel tax ideas that might add, say 25 cents per gallon.  But if we are truly in thrall to the climate alarmists and take their recommendations, then Co2 outputs must be reduced 50-80% in this country.  We are talking about reducing Co2 output to levels before 1920!  To do this will require a truly massive tax.  Just to scale it, over the last year gas prices doubled by about $2 a gallon, and total miles driven fell by less than 5%.   Europe is at around $8-$9 gas and are nowhere near these climate goals.  I don't think it would be too much to say that gas prices would have to top $20 to reach these goals.

This is why I think the most likely case for climate regulation is that we will have some kind of tax or cap system but that this system will be far short of anything that will really reduce Co2 or even stop its growth.  The costs are just too high, and the benefits too shaky.  You can see that in Europe, as countries back off Kyoto goals  (and even Kyoto goals are far short of what alarmists think we need to be hitting).  And any progress they have made against Kyoto goals has mainly been accidents of changing enconomic and political structures rather than the result of any real targeted action.  What we will get is something that costs a lot without accomplishing much, but will make the left feel better about themselves.  Sound familiar?