Coyote Blog

A month or two back, I was participating in the California Regional Council of Rural Counties annual meeting.  At this conference, I was there to have a sort of informal debate on climate change with Joe Nation, a former California State legislator and currently a private consultant on climate issues.

To some extent my role was frustrating for the audience, because they were already stuck with complying with California's AB32 (a sort of state CO2 cap and trade system) and arguing that such legislation was pointless only served to upset them  (my presentation, both in powerpoint and video is here).  By the way, we often lump "government" together, but I can tell you that while the governor and the legislature of California may be 100% behind CO2 alarmism, the county commissioners were very sympathetic to the skeptic position.

Anyway, towards the end of my presentation I made a plea for a carbon tax over cap-and-trade, and said in fact that California's AB32 was living proof of my argument.  The California Air Resources Board (CARB), which is tasked with implementing the plan, has already added hundreds of people to its staff and worked for over two years, is still no where near finished with rule-making.  The complexity, and the battling political constituencies, is simply mind-boggling.  It is already clear that the result is going to be a Byzantine, Rube Goldberg structure of detailed industry-specific reporting and permitting rules.  Nearly 100% of CARB's time is taken up today with various groups running to them begging for some sort of special treatment (think "carbon bailout" and you will get the idea).  No one thinks the process is fair or rational.

Under cap-and-trade, every single industry will report greenhouse gasses, have industry and firm-specific limits, myriads of permits, etc.  For example, we had detailed discussions that day of how cattle flatulence will be treated and measured.  The alternative is a carbon tax, which is dead simple.  There is one single rate to set - the tax per weight of carbon in fuel.  Fuels with more carbon per BTU, like coal, thereby get higher taxes.  The system works like a sales tax, and could be administered by the BOE (who runs the California sales tax system) in its sleep.

The cap-and-trade system is far more expensive than a carbon tax.  By the basic laws of supply and demand, both systems have to raise the cost of burning certain fuels by about the same amount to get about the same reduction in use.  But the cap-and-trade system brings a huge overhead burden, both in government bureaucracy as well as compliance costs, that make it far, far more expensive for the same amount of benefit.  Until he started sitting on the boards of companies who depend on these inefficiencies in the cap and trade system to make money, Al Gore advocated a straight carbon tax over cap-and-trade.

But we had an opportunity that day.  Because the man who claims to be the author of AB32 is none other than Joe Nation, who was right there in the room.  So we asked him why he took this approach.  Here is what he said, really a civics lesson in one sentence:

I tried pass a carbon tax first, but there was absolutely no support for it among legislators [the same ones who overwhelmingly supported AB32]

If you can understand why this is, you can understand a lot about government.   Because all these concerns that you and I might have about crafting rational public policy are not important to legislators.  Here is how they think about it:

• Private implementation and compliance costs are meaningless to legislators.  There is no public measurement or accountability for these costs, and most of these costs fall on businesses, who can be ignored as unsympathetic in political discourse.  I operate in Mono County, California, and they put out a new set of reporting requirements driven, they said, by the needs to save a few hours a year of their auditors' time.  But compliance with these new rules costs our company 10-20 hours, at least, a year.  And we are just one of many, many companies reporting.  I complained that it was crazy for them to ask taxpayers to spend hundreds of hours of labor to save them just a few, but they could not have cared less.

• For legislators, particularly in California, creating large new bureaucracies is good.  It creates a patronage relationship between the legislators and these new government employees that is almost quasi-feudal.  Public employees are an enormous source of support for incumbent politicians, and these bureaucracies also offer future employment opportunities for legislators once they leave office (nice article here).

• First, last, and always, the vast majority of politicians are gutless.  That means if they can pass the same tax in a way that is more hidden (ie cap-and-trade vs. carbon tax) they will prefer this approach, even if it means the tax is substantially less efficient.  In the case of cap-and-trade, since costs are hidden and spread around like peanut butter rather than easily identifiable, they can pretend the costs don't exist and, if someone starts worrying about rising electricity costs that result, simply blame the rising costs on the evil power/oil/coal/etc companies.  Obama has brilliantly taken this one step further, by outrageously claiming, in the broken windows fallacy of all time, that cap-and-trade will actually boost the economy through green job creation.

• A carbon tax gives politicians very little room to extract personal value from the electorate.  Really, there is only one number for everyone to argue over.  But cap-and-trade is a Disneyland for lobbyists.  There can be special exemptions, industry specific caps, firm-specific caps, geography-specific caps.  Once everyone sees the first few guys giving campaign donations and parading into CARB for special treatment, everyone feels like they have to in order to avoid being the one guy left out.  My guess is that cap-and-trade will spawn more lobbying than any other legislation in US history.  And politicians, no matter what their public stance, love lobbying, because everyone who comes to ask them for something knows there has to be a quid pro quo.

Update:  A number of related thoughts and posts here, at Reason.

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'
energy."...

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.