"It is a steel fist of regulation covered by a velvet glove of emission trading."

Ronald Bailey | May 18, 2009

Last week, House Energy and Commerce Committee chair Henry Waxman (D-Calif.) introduced the Democrats' Rube Goldbergian climate change cap-and-trade bill. On Sunday, (in a surprising front page article), the New York Times revealed why the denizens of Capitol Hill like cap-and-trade over other possible methods for reducing climate-warming greenhouse gas emissions:

And how did it come to eclipse the idea of simply slapping a tax on energy consumption that befouls the public square or leaves the nation hostage to foreign oil producers?

The answer is not to be found in the study of economics or environmental science, but in the realm where most policy debates are ultimately settled: politics.

Basically, cap-and-trade enables Congressoids to hand out favors (tax breaks and free permits) to corporations and thus garner campaign contributions. The Times continues: 

In 1971, W. David Montgomery, a Harvard graduate student in economics, fleshed out the idea of emissions trading in his doctoral thesis and has spent much of the last three decades trying to figure out how the marketplace can deal with environmental problems that are caused by relatively few actors but have consequences felt globally.

He supported the acid rain trading program, but said it was based on “unique historical and economic circumstances” that did not apply to the much more difficult problem of carbon dioxide emissions.

Mr. Montgomery, now a vice president at Charles River Associates International, a consulting firm, said Mr. Waxman’s proposal would ultimately act like a tax on carbon-producing industries, disguised by a complex cap-and-trade system.

“It is a steel fist of regulation covered by a velvet glove of emission trading,” Mr. Montgomery said. “Why not just impose a carbon tax?”

Good question.

Some of my thoughts on the merits of cap-and-trade versus a carbon tax can be found here. 

Comments

Naga Sadow|5.18.09 @ 11:07AM|#

Ron,

That title is full of win.

|5.18.09 @ 11:11AM|#

It is somewhat amusing that the two big differences I can remember from the Hillary vs. Obama debates-- Obama was against a mandate, and in favor of auctioning of pollution credits instead of giving them away-- will be reversed in the actual policy that comes out. Largely because Clinton's position represented the Democratic Party's position, and Obama seems to be as reluctant to challenge his party on domestic issues as Bush.

It would be more amusing if Obama's original positions didn't represent some of his few glimmers of sanity. Of course, they were just smart signaling by a politician indicating that he understood economics; it was always an open question of whether and when he was going to abandon them.

JB|5.18.09 @ 11:13AM|#

More power for ilk like Blago and Obama to reward their cronies and friends.

Sick.

hmm|5.18.09 @ 11:27AM|#

Congress in the middle of business will backfire as usual. I have an idea! Lets hand out for free something that can be sold for income to the people we like. I could swear they do something similar somewhere else and it's abused. Nothing like propping up crappy business models or supporting more companies like GE that rely on tax breaks and government money to survive. I guess it works out for the investors and people willing to get in on the trading, look a bright side.

|5.18.09 @ 11:57AM|#

"Pay no attention to the man behind the curtain."

mark|5.18.09 @ 11:57AM|#

Where are the actual examples of tit-for-tat favoritism by politicians for big business? Just asking, because when this whole cap-and-trade scheme passes, I want to know where to start looking for corruption, like backroom deals where a congressman offers carbon credits in exchange for campaign contributions. I know it's illegal but if it's as widespread as Congress's critics make it out to be, the corruption should be easy to catch.

So wtf is going on?

|5.18.09 @ 12:07PM|#

Where are the actual examples of tit-for-tat favoritism by politicians for big business?

Corn ethanol and Archer-Daniels-Midland is a good place to start.

Counting unions as big business, damn near everything the Obama administration has done since they took office isn't a bad place to look, either.

|5.18.09 @ 12:17PM|#

Henry nervously twirled his mustache as he watched the steel fist being unwrapped from it's velvet hood. The fist was plunged into a bucket of warm water to gently heat it. Nancy ran a coathanger down her cast to scratch her ruined leg. The bruises ran up into her bloomers. She farted and then let out a giggle tinged with hysteria.

The masked man raised the steel fist from the water by the sturdy three foot rod it was welded to. Henry chuffed as the fist was wiped dry and held up to gleam in the feeble sunlight trickling in though the boarded up window of his Rayburn office.

The phone rang in the hallway and an intern in ass-less chaps duck-walked to answer it. The bit in his mouth slurred the words, "Congethmah Wakmah's offith." A thin of line of spittle fell on the floor. The intern dropped the phone to wipe it up and then began to massage it into his scrotum.

Henry nodded to the masked figure. "Do it," he said, "Do it as many times as it takes me to learn." The steel fist smashed upwards into his crotch hard enough to lift him off his feet.

Nancy caught the fist on the laconic backswing and left a smeared kiss on the knuckle of the thumb.

stuartl|5.18.09 @ 12:27PM|#

Where are the actual examples of tit-for-tat favoritism by politicians for big business?

T. Boone Pickens is working hard to make sure his investment in wind and natural gas works out. A quote from Harry Reid is at the top of the page.

Mike Laursen|5.18.09 @ 12:43PM|#

Carbon taxes would have the favor-trading problems, too.

Plus, the carbon tax would become an income stream for government, eventually leading to an incentive for the government to set carbon emissions at the level that produces the most revenue without regard for the environment. Cap and trade could have that problem, too, depending on how it was implemented.

|5.18.09 @ 12:54PM|#

Carbon taxes would have the favor-trading problems, too.

This is unquestionably true, but at least a carbon tax, by virtue of being visible, might be slightly less susceptible. You will still have Congressional social engineering; I would expect an exemption for "agricultural use" for example.

On the whole, in the real world, I think a straight carbon tax paid by the end user is preferable to the carnival of rent-seeking promised by cap and trade.

Chad|5.18.09 @ 1:16PM|#

On the whole, in the real world, I think a straight carbon tax paid by the end user is preferable to the carnival of rent-seeking promised by cap and trade.

I agree. However, I would prefer an un-auctioned cap to nothing, and those are the only real choices on the table.

It still amazes me how many libertarians oppose putting a price on carbon, even though textbook economics indicated that this is the correct way to solve the problem.

|5.18.09 @ 1:31PM|#

It still amazes me how many libertarians oppose putting a price on carbon, even though textbook economics indicated that this is the correct way to solve the problem.

I'm not sure there are any economics textbooks that advocate the government creating an entirely artificial "shortage" via regulation in order to create a completely artificial "market" in the right to engage in economic activity. citation, please?

And, of course, any economic argument for cap-and-trade rests on an unproven assumption, namely, that carbon emissions are, in fact, a net externality.

Alex|5.18.09 @ 1:36PM|#

"Cap and trade" (otherwise known as a quota) has exactly the same economic effects as a tax, the only difference being that quantity, and not money, is the manipulated dimension.

All things being equal, if the intent here is to manipulate the total quantity of carbon emitted, then it does make a bit more sense to specify that dimension.

Of course, given the incentive system in which the actors are all operating, this will fail in spectacular and undefined ways, but I digress.

Alex|5.18.09 @ 1:46PM|#

I'm not sure there are any economics textbooks that advocate the government creating an entirely artificial "shortage" via regulation in order to create a completely artificial "market" in the right to engage in economic activity. citation, please?

I don't own one, so I can't really say for sure, but I have little doubt you could find such statements in one of Krugman's textbooks.

|5.18.09 @ 2:23PM|#

It's basically money laundering, except instead of disguising the source of a profit by breaking it up into smaller pieces and moving it around, the government will be disguising the source of a cost.

No Name Guy|5.18.09 @ 2:47PM|#

"Why not just impose a carbon tax?"

Why bother, unless the goal is to take money out of the private sector for govt use.

CO2 does diddly squat to the climate.

It's the sun, stupid.

Colin|5.18.09 @ 2:49PM|#

It's strange that I haven't seen any posts here about Jeff Flake's carbon tax proposal.

|5.18.09 @ 3:09PM|#

Tracking emissions, whether traded or taxed, is opening a can of worms which will either lead to a massive increase in government oversight or a collapse of the system. The only way to really tax carbon is to tax physical inputs (crude, gas, coal). These are measurable and quantifiable amounts of carbon. Now, there will be issues as to how to distribute the gathered cost,which I'm sure politicians will fumble, but to begin, government needs to give up on this rediculous cap and trade/emissions tax scheme which will inevitably fail.

stuartl|5.18.09 @ 3:17PM|#

LIT, the problem with taxing at the input side is that you provide no incentive for sequestration. There is no reason for me to create a fantastic device that turns the carbon exhaust from my car into .7 mm graphite rods for my mechanical pencil.

If we need the government involved, the can of worms is already open.

|5.18.09 @ 3:32PM|#

stuartl,

Its easier to make companies prove their reduction of total carbon through technologies of sequestration than to send someone out to each company and gather emissions data or simply have a company send in emissions data. Taxing output is frought with regulation nightmares. Taxing input and refunding based on proven reduction will reduce the ability to cheat the system.

|5.18.09 @ 3:34PM|#

Now, there will be issues as to how to distribute the gathered cost,

Not until you have some clue as to what the cost of carbon emission actually is.

Or are we just jumping right over that step?

|5.18.09 @ 3:47PM|#

RC Dean,

I've got an industry acronym for you

SWAG (scientific wild ass guess)

...and just because the first word is "scientific", that just means supposed "scientists" came up with the number, then politicians changed it in committee, then general concensus came to a completely different number and finally the bill typist missed a zero, no one read it during the voted and they passed it right before they went on vacation and finally industry howled about it and the government then "forgot" to enforce it, thus relegating that number back to ~0.

Mike Laursen|5.18.09 @ 3:51PM|#

It still amazes me how many libertarians oppose putting a price on carbon, even though textbook economics indicated that this is the correct way to solve the problem.

Nah, I totally support that a price should be somehow attached to any externalities caused by greenhouse gas emissions. But that's all in theory.

The problem is that I just don't see that our real-world Federal government has exhibited the competence or trustworthiness to implement a fair or workable carbon tax, cap and trade system, or any other scheme that someone comes up with -- even if someone came up with an idea that could work well, they'd screw it all up.

Chad|5.18.09 @ 4:09PM|#

R C Dean | May 18, 2009, 1:31pm | #

I'm not sure there are any economics textbooks that advocate the government creating an entirely artificial "shortage" via regulation in order to create a completely artificial "market" in the right to engage in economic activity. citation, please?

Uhh, whatever textbook is used in your local university's "Economics of Public Policy" course? For example, my class used Greer's "Business, Government and Society. See chapter 23. Yes, I kept all my textbooks.

Indeed, if you can find a textbook on such a topic that does NOT consider placing a price on pollution as a fundamental idea, I'll give you my lucky nickel.

Chad|5.18.09 @ 4:11PM|#

Mike Laursen | May 18, 2009, 3:51pm | #

The problem is that I just don't see that our real-world Federal government has exhibited the competence or trustworthiness to implement a fair or workable carbon tax, cap and trade system, or any other scheme that someone comes up with -- even if someone came up with an idea that could work well, they'd screw it all up.

Then you simply haven't looked. By all accounts, the cap-and-trade policy on SOx has been an amazing success.

mark|5.18.09 @ 4:24PM|#

Surely there's a difference between sulfur and carbon. Aside from the order of magnitude difference in size, the impact on the economy of intervention, and the probability of rent-seeking.

Mike Laursen|5.18.09 @ 5:18PM|#

Chad, I know about the success of the SOx cap-and-trade. mark's comment just about said anything I was going to say.

hmm|5.18.09 @ 5:19PM|#

I welcome yet another artificial market. As long as I can figure out a way to make a dollar off it bring it on. Wealth is wealth regardless of the back it's built on.

|5.18.09 @ 5:31PM|#

Uhh, whatever textbook is used in your local university's "Economics of Public Policy" course?

Righty-O. On the remainder table, next to the "Kama Sutra for Eunuchs" manual.

Indeed, if you can find a textbook on such a topic that does NOT consider placing a price on pollution as a fundamental idea,

And I'll bet you can't find one that considers realistically the impossibility of actually setting that price within an order of magnitude, either directly via tax or indirectly via setting caps.

I suspect that what the public policy wonks are confusing is "setting a [market] price" and "penalizing", which aren't the same at all, at all.

|5.18.09 @ 5:32PM|#

As long as I can figure out a way to make a dollar off it bring it on.

Step 1: Make massive political contributions.

Step 2: Profit!

Easy peasy.

|5.18.09 @ 5:44PM|#

And the kicker is that no matter what we do about our carbon emissions, it doesn't do anything about the greater and faster-growing emissions from China, India, etc.

Fun fact: the amount of CO2 emitted by all the cars and light trucks in the U.S. is roughly equal to the CO2 emissions from out-of-control coal mine fires in China. If the problem is global CO2, which do you think it would be more cost-effective to reduce?

Chad|5.18.09 @ 5:56PM|#

And I'll bet you can't find one that considers realistically the impossibility of actually setting that price within an order of magnitude, either directly via tax or indirectly via setting caps.

Really. Your response to uncertainty is to simply choose a price of ZERO, which is certainly wrong. That makes ZERO sense. How ironic. The best thing to do in the face of uncertainty is to take your best guess and go with it, not stick your head in the sand and do something that is clearly wrong.

|5.18.09 @ 6:19PM|#

The difference with SOx is that the problems of acid rain, while widespread, are more confined to the US, and the effects are rather immediate. CO2 effects are by their nature global, which creates problems for any significant non-global agreement, and take a long time to make their effects known. SOX cap and trade succeeded because it was attacking a problem whose externalities mostly lay in the US itself.

All things being equal, if the intent here is to manipulate the total quantity of carbon emitted, then it does make a bit more sense to specify that dimension.

But all things are not equal. It makes sense to target the quantity of carbon if:
1) There is a tipping point of emissions beyond which the marginal cost rapidly changes, and
2) We can tell where that is.

2) is, I think, the bigger problem. Small changes in models have a big effect. Do we really know exactly how much carbon to reduce?

hi|5.18.09 @ 10:29PM|#

First how about you environmentalist/communists prove to me that CO2 is going to be a problem for us, that ocean levels are rising, that the temperature is increasing. Once we've got some conclusive proof about that, and proof that these changes would cost more than carbon taxes, then we can think about "social engineering" or these communist ideas.

Chad|5.19.09 @ 12:12AM|#

2) is, I think, the bigger problem. Small changes in models have a big effect. Do we really know exactly how much carbon to reduce?

No, but we know it is larger than zero, which is the current policy. As I have said many times, the correct course of action in the face of uncertainty is to work with what data you have, not to do nothing.