Cap-and-Trade Handouts

"The largest corporate welfare program ever enacted in the history of the United States"

Two major climate change-related events happened in Congress last week. First, Rep. Henry Waxman (D-Calif.) and Rep. Edward Markey (D-Mass.) introduced the American Clean Energy and Security Act, which aims to cut U.S. emissions of greenhouse gases by imposing a cap-and-trade scheme. Under a cap-and-trade program, in order to emit greenhouse gases a company—say an electric utility or an oil company—would need to have permits equal to the number of tons of carbon dioxide they want to emit. The federal government would then reduce greenhouse gas emissions by issuing fewer and fewer permits each year. The goal is to encourage energy producers and manufacturers to find new ways to produce goods and services using less energy derived from carbon-rich fuels like coal, natural gas, and oil.

Once allocated, the permits could be bought and sold on an open market. Producers or manufacturers that cheaply abate their emissions can then sell their extra permits to other emitters that find the process more expensive. In this way, a market in pollution permits ideally finds the cheapest way to cut emissions.

The Waxman-Markey bill would mandate that U.S. emissions be cut by 20 percent below 2005 levels by 2020, 42 percent by 2030, and 83 percent by 2050. This is a faster pace in greenhouse gas reductions than that proposed by President Barack Obama, who seeks a 15 percent reduction by 2020.

The Obama administration's proposed cap-and-auction scheme would yield an estimated $646 billion in additional federal revenues between 2012 and 2020. Each year, $65 billion of that revenue would support the Making Work Pay tax credit for lower income workers while another $15 billion would be disbursed for clean energy research and development projects. To raise that revenue, the Obama administration wants to auction off all of the emissions permits.

Crucially, the Waxman-Markey bill ducked the issue of just how emissions permits would be allocated, although Waxman and Markey have apparently agreed to allocate 15 percent of the allowances for industries considered particularly vulnerable to international competition, including iron and steel, aluminum, cement, glass, ceramics, chemicals, and paper. These allocations are clearly in line with the desires of the leading climate lobby group, U.S. Climate Action Project (USCAP), which consists of 25 big emitters and five big environmental groups. USCAP members want a significant proportion of the permits to be given away to emitters for free.

But should emissions permits be given away or should they be auctioned? (Another alternative is a carbon tax, but let's set that aside for now.) Consider the example of the European Union's Emissions Trading Scheme (ETS). Launched in 2005, the ETS cap-and-trade scheme handed out nearly all of its emissions permits gratis. The result was windfall profits for emitters and higher energy prices for consumers, and, until the advent of the global economic recession, almost no reduction in carbon dioxide emissions.

But if the emitters are getting permits for free, why don't they pass along the lower costs to consumers? Think of it in terms of an analogy put forward by liberal economists James Barrett and Kristen Sheeran: Tickets from scalpers for last night's NCAA basketball championship game were going for more than $1,000. Would the price have been lower if a scalper had found them on the ground? No. "The supply and demand for tickets is the same no matter how much the scalper paid for them, and so the price he charges you will also be the same no matter how he got them," note Sheeran and Barrett. The same thing is true of carbon dioxide emissions permits.

A 2007 Congressional Budget Office (CBO) study reported the results of a hypothetical 23 percent cut in carbon dioxide emissions (the Waxman-Markey bill proposes a 20 percent cut by 2020). The CBO found that "giving away allowances could yield windfall profits for the producers that received them by effectively transferring income from consumers to firms' owners and shareholders." And how big would the windfall be? "If all of the allowances were distributed for free to producers in the oil, natural gas, and coal sectors, stock values would double for oil and gas producers and increase more than sevenfold for coal producers, compared with projected values in the absence of a cap," concluded the CBO report.

In 2007 Congressional testimony, then-CBO Director Peter Orszag explained, "The government could either raise $100 by selling allowances and then give that amount in cash to particular businesses and individuals, or it could simply give $100 worth of allowances to those businesses and individuals, who could immediately and easily transform the allowances into cash through the secondary market." More recently, in his March testimony before the House Budget Committee, Orszag, who is now President Obama's budget director declared, "If you didn't auction the permits it would represent the largest corporate welfare program that has ever been enacted in the history of the United States. All of the evidence suggests that what would occur is that corporate profits would increase by approximately the value of the permits."

Congress' second significant action dealing with climate change last week was to pass a $3.5 trillion budget resolution for 2010 which did not include the $646 billion in climate change revenues that the Obama administration is counting on to finance tax credits and renewable energy R&D. In addition, the Senate included in the budget resolution, by a vote of 67 to 31, an amendment that ensures that any future climate change legislation mandating emissions cuts would need 60 votes to pass in that body. Supporters of emission reductions had hoped that Congress would adopt a parliamentary procedure called reconciliation, which allows legislation to be fast tracked and passed by only a simple majority. Requiring a Senatorial super-majority means that it will be a lot harder to get any climate change legislation passed.

The Supreme Court's decision last year that the Environmental Protection Agency (EPA) has the authority to regulate carbon dioxide under the Clean Air Act and the EPA's ruling in March that carbon dioxide threatens the public's health and welfare, have put considerable pressure on Congress to act. Naturally, when the federal government puts hundreds of billions of dollars in play, it attracts a lot of rent-seekers. "The special interests that seek to derail, blunt, or tailor any new climate policy to their narrow agendas have already gathered in staggering numbers," declared The Climate Change Lobby, a study conducted by Center for Public Integrity. In 2008, more than 770 companies and interest groups spent an estimated $90 million funding 2,340 climate change lobbyists in Washington, DC.

The prospects of carbon rationing and permanently higher fuel prices are going to produce far-reaching changes in the ways companies do business and hit consumers hard in their pocketbooks. In March 2008, House Energy and Air Quality Subcommittee member Rep. Mike Doyle (D-Penn.) told the Capitol Hill newspaper Roll Call, "You are either at the table or on the menu." Mixing his metaphors, Doyle added, "This train is leaving the station." Now it's largely a question of whom it's going to run over.

Ronald Bailey is Reason magazine's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • ||

    Maldovans f up praetorian guards, ransack parlament

    I guess they are getting tired of the BS.

  • ||

    Ron,
    Why did you change your mind? a year or two ago you started sounding like Al Gore on this issue.

  • ||

    An admission that you were almost herded like a domesticated farm animal would be sufficient.

  • High Every Body||

    Ron,

    ap-and-trade? Looks like your organic keyboard missed a c :)

    They are handouts now, no a hand?

  • ||

    Gabe,

    Ron Bailey's position has been that, if something needs to be done, a carbon tax is preferable to cap-and-trade because the latter is so much more open to political gaming.

  • ||

    The Obama administration's proposed cap-and-auction scheme would yield an estimated $646 billion in additional federal revenues between 2012 and 2020.

    So it's a tax scheme. Nothing more. Like taxing alcohol or cigarettes, but in this case, it is a direct tax on productive endeavors (which is different to taxing income or profits). This is bull excrement - this is not going to do anything except increase the cost of doing business and lining the pockets of the traders.

  • ||

    The prospects of carbon rationing and permanently higher fuel prices are going to produce far-reaching changes in the ways companies do business and hit consumers hard in their pocketbooks.

    What's going to happen is that the dumbasses that legislate this travesty will be voted out after people realize the cost is too high to achieve a totally subjective result.

  • ||

    Ron Bailey's position has been that, if something needs to be done, a carbon tax is preferable to cap-and-trade because the latter is so much more open to political gaming.

    They are BOTH tax schemes. Both are also ridiculously impossible to enforce correctly, since the "emissions" are going to be based on estimates and guesswork anyway.

  • High Every Body||

    Forget about this stuff. I just found out from Obama that the Austrians actually speak Austrian!

  • ||

    Now you know why Conoco, General Electric, Duke Energy, and other large energy producers/suppliers support this program.

    The low-info AM radio conservatives call Carbon Trading a "Marxist" program. Like usual, Fat Rush doesn't know his ass from a blimp.

  • High Every Body||

    shrike,

    I did not hear the show today but I will make sure to listen on the intertubz tonight.

    I do not see his name mentioned in the article either, so I really am not sure what you are commenting on.

    But thanks for reminding me to listen to the show!

  • ||

    Hi all: As for my "position," I think that the science suggests that man-made global warming could pose a big problem. If so, what's the least economically damaging way to handle the problem--a carbon tax that's rebated entirely back to the public (say by cutting the payroll tax). Eliminate ALL subsidies and let inventors and entrepreneurs figure out the best way to produce low-carbon energy. As I've said many times before, I think Yale economist William Nordhaus' approach makes a lot of sense.

  • ||

    Ron's just shilling for Big Problem.

  • ||

    And Big Revenue Neutral.

    Ron, your neutrality sickens me.

  • High Every Body||

    Neutrality will do in a clutch.

  • Warty||

    "It's coming right for us, Your Neutralness!"

    "Tell my wife hello."

  • ||

    Cap and Trade or carbon taxes, it's all the sam to me. Right after China, India, su-sharan Africa and the rest of the energy impoverished world sign on, count me in.

    Until then, let's continue to despoil the commons.

    A rational and fair method of taxing CO2 emissions is possible but would require that all nations play. Good luck with that.

  • ||

    It's a beige alert!

  • EJM||

  • ||

    I'm fine with a revenue neutral carbon tax. I can avoid using carbon if it means keeping my money out of the hands of the damn Revenuers!

  • ||

    raivo pommer-www.google.ee
    raimo1@hot.ee

    EUROZONE

    Die Talfahrt der Wirtschaft in der Eurozone hat sich nach Einschätzung von Wirtschaftsforschern aus Deutschland, Frankreich und Italien zum Jahresstart beschleunigt.

    «Die Aussichten für die wirtschaftliche Entwicklung bleiben trotz der Umsetzung der staatlichen Konjunkturpakete düster», heißt es in einer am Dienstag veröffentlichten gemeinsamen Konjunkturprognose des Münchner ifo- Instituts, der französischen Statistikbehörde Insee und des italienischen Wirtschaftsforschungsinstituts ISAE.

    Die Eurozone befinde sich in einer schweren Rezession. Der Rückgang des Bruttoinlandsprodukts (BIP) in der Eurozone werde sich im ersten Quartal auf 1,9 (4. Quartal 2008: minus 1,6) Prozent beschleunigen, ehe die Wirtschaftsleistung im zweiten Quartal um 0,6 Prozent und im dritten Quartal um 0,2 Prozent sinke.

    Der private Konsum werde abnehmen, insbesondere, da sich die Entwicklung der real verfügbaren Einkommen spürbar verschlechtern dürfte, heißt es in der Studie. Auch die Investitionen dürften nach ihrem Einbruch gegen Ende des Jahres 2008 weiter kräftig fallen. Zum einen bleibe die Lage auf den Finanzmärkten unverändert angespannt; zum anderen dürfte die Unterauslastung der Kapazitäten stark belastend wirken.

    Die Inflationsrate werde unter der Annahme, dass der Ölpreis um 45 Dollar schwanke und sich der Wechselkurs bei 1,35 Dollar je Euro stabilisiere, im Juni und September 2009 bei je minus 0,2 Prozent liegen. Die Gefahr einer Deflation bestehe momentan nicht, da die Kerninflationsrate deutlich positiv bleibe.

  • ||

    "Brannigan's Law is like Brannigan's love: hard and fast."

  • ||

    I hereby declare raivo-spammer: LoneVerrückter!

  • EJM||

    I hereby declare raivo-spammer: LoneVerrückter!

    Just in case, read more here.

  • ||

    Ron Bailey,
    Hi all: As for my "position," I think that the science suggests that man-made global warming could pose a big problem.


    Ron, you seem not to see the problem with this statement. What the hell is "a big problem"? A problem for whom? You? The scientists? Those that have front beach property? I have heard so many of those "problems" mentioned since 1990, and NONE have happened, not even close.

    If so, what's the least economically damaging way to handle the problem--a carbon tax that's rebated entirely back to the public (say by cutting the payroll tax).

    That is NOT the "least" economically damaging way to handle the so-called problem, because of two reasons:

    1) How do you measure carbon emission?
    2) What makes you think the measurements would be accurate?

    Where I work we have been measuring carbon emissions for the Air District, and we know that our measurements are based on sensors with resolutions that are good enough for reporting levels, but I would never, EVER consider them to be good enough to measure something we would be paying TAXES on.

    Eliminate ALL subsidies and let inventors and entrepreneurs figure out the best way to produce low-carbon energy.

    Awww, how sweet.


    As I've said many times before, I think Yale economist William Nordhaus' approach makes a lot of sense.

    Bob Murphy already debunks Nordhaus' "reluctantly accepted" carbon tax.

  • ||

    Here's the paper that debunks Nordhaus' assumptions (and Bailey's as well):

    http://www.instituteforenergyresearch.org/wp-content/uploads/2008/06/2008-06_rolling_the_dice_murphy.pdf

  • Chris Hayes||

    Naturally, when the federal government puts hundreds of billions of dollars in play, it attracts a lot of rent-seekers.

    Apparently, I agree with this statement, yet find no trouble resulting from it as long as everyone does their rent-seeking with the best of intentions.

  • ||

    1) How do you measure carbon emission?
    2) What makes you think the measurements would be accurate?


    Carbon emission is a stoichiometric result of whatever it is that the producer is selling. You don't measure it with sensors. You measure it by realizing that you sold so many billion gallons of gasoline and assuming it all got burned.

    Measuring CO2 net emission or net sequestration from other sources such as agriculture is more difficult, but fossil fuels -- the principal target of most of the efforts -- are easy.

  • ||

    Carbon emission is a stoichiometric result of whatever it is that the producer is selling. You don't measure it with sensors.

    You just proved my point - that the carbon tax is NOT a tax on carbon emissions, it is a tax on energy, pure and simple.

  • Chad||



    Eliminate ALL subsidies and let inventors and entrepreneurs figure out the best way to produce low-carbon energy.


    Is it fair to assume that by ALL subsidies, you are including the free-public-garbage-dump subsidies that fossil fuels receive? Strip them of that subsidy by charging them a fair price for all the CO2, SOx, NOx, particulates, ozone, smog, mercury, radioactives, etc that they are dumping into our property, and they would be out of business tomorrow.



    You just proved my point - that the carbon tax is NOT a tax on carbon emissions, it is a tax on energy, pure and simple.


    Wrong. It is a tax on emissions. This is almost exactly proportional to the amount of fossil energy one uses as an input, so we can measure at either point. It is much easier to measure tons of coal or barrels of oil than it is to measure the emissions directly.

  • ||

    FTG

    It would be sweet to eliminate all green energy subsidies and mandates.

    Environmentally friendly too when one considers the massive environmental damage, habitat destruction and increase in GHG emissions things like green policy mandated biofuels cause.

  • ||

    Chad

    If you want to make an externalities argument kindly compare the positive attributes of the energy source and the negative externalities. There are two sides to that equation not one.

    Furthermore, there is zero chance fossil fuels are going out of business absent a game changing technology development.

    Outside of nuclear power there is no other source of energy that even comes close to providing the amount of energy society needs to function.

  • Dan ||

    Cap and Trade = Cap growth and trade ALL manufacturing jobs for those high paying food service positions. All to solve a non-problem. CO2 driven global warming is the BIG lie of our life time. Of course earlier it was the population bomb brought to you by gore 'hero, roll model and inspiration" Paul Erlich. look him up on this site. The man is a clown as is Gore and I fear Obama.

  • Justen||

    @Duracomm: who said anything about "outside of nuclear"? Advancements in nuclear energy are improving scalability and reducing waste. Mass-production of town and small-city scaled nuclear power plants could be a reality in the next decade, and is probably going to be. $500/household/year is a pretty damn good prospect, if you look at that first link - deployment cost $2500/household, 5 year lifespan before needing fuel change.

    Anyway, we'll see how it plays out, but I think technology is going to progress to the point that clean(er) energy and more energy efficiency makes the most economic sense without the help of any politician. There is a large amount of under-estimation when it comes to the power of technology and economic changes to drive a change in energy consumption. There are so many technologies that will reach the market within the next decade that will improve energy efficiency and reduce emissions in a cost-effective fashion that I doubt we'll even be talking about this as a big problem in the decade after. More efficient lithium-ion batteries, super/ultra-capacitors, lightweight construction materials, energy efficient appliances and electronics (remember voltage/flop decreases according to Moore's law, not to mention a plethora of breakthroughs in material science), changes in the way we distribute energy, etc. are all going to change the energy equation much more drastically than carbon taxes. Sort of like Dan mentions above in relation to the "population bomb", technology and social progress is successfully solving all the problems we've been scared about faster than we can find new things to fear.

  • Chad||

    duracomm | April 7, 2009, 10:51pm | #

    If you want to make an externalities argument kindly compare the positive attributes of the energy source and the negative externalities. There are two sides to that equation not one.


    What "positive externalities" do coal power or oil provide? I would be hard-pressed to find one, and if you did, it would be dwarfed by the negative environmental, health, and geopolitical ones.

    Furthermore, there is zero chance fossil fuels are going out of business absent a game changing technology development. Outside of nuclear power there is no other source of energy that even comes close to providing the amount of energy society needs to function.

    Simply false. There is far more renewable energy than we could ever need that is capturable with today's technology at a very reasonable price. I pay a whopping 1.6c / kwh for renewable energy from my local energy company. Yeah, that's about $6 per month. Anyone who says it is unaffordable is simply a liar or an ignoramous who has never bothered to look. The price premium will only drop with time because renewable prices are coming down and the technology still improving fairly rapidly. Fossil technologies are very mature and further improvements will be minimal, while fuel costs will continue to rise over the long term.

    Every day we delay only ensures that the problem gets worse, and that when we finally DO decide to get on board, it won't be our companies we have to buy all the wind generators and solar panels from.

  • Kreel Sarloo||

    "I pay a whopping 1.6c / kwh for renewable energy from my local energy company. Yeah, that's about $6 per month."

    Wait, so the market is working (assuming this is not massively subsidized)?

    Which leads to another question. Is the market working if it sometimes delivers ponies to some little girls, or has it failed if it doesn't deliver ponies to every single little girl in the world immediately and instantaneously?

  • Barry Loberfeld||

    From "Modern Liberalism at Wit's End":

    Indeed: a crafted mythology as official history; government growth as a declared inevitability; administration of the masses economically (professedly to benefit the lower classes, really to establish a political elite); the use of the term socialization to denote usurpation by the State of the institutions of society; the invocation of "wrecker" saboteurs ("reactionaries" and "conservatives") to prove that statism never fails, but is only failed; militarism in the service of "pacification." Corporate socialism and Communist socialism are of course not twin totalitarianisms, but they are kindred Orwellianisms: Fantasy is Reality -- reality, fantasy.

  • ||

    Launched in 2005, the ETS cap-and-trade scheme handed out nearly all of its emissions permits gratis. The result was windfall profits for emitters and higher energy prices for consumers, and, until the advent of the global economic recession, almost no reduction in carbon dioxide emissions.

    Ron,
    How did it result in windfall profits? Did all the emitters lower their emissions enough to have leftover credits? If everyone was given an excess of credits, their value would be near $0, true?.

  • ||

    I think we need to geo-engineer our planet to make it warmer. The benefits of giving the northern tundras a longer growing season far outweigh the costs.

  • nike shox||

    is good

  • Cele mai bune oferte de cazare||

    Obama administration's proposed cap-and-auction scheme would yield an estimated $646 billion in additional federal revenues between 2012 and 2020.

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