As economist Bruce Yandle explained more than 25 years ago, sometimes Baptists and bootleggers find it their mutual interests to cooperate in advocating regulations, e.g., Blue Laws banning the sale of liquor on Sundays. Baptists want to outlaw booze because its from the devil and promotes sinful activities. Bootleggers favor them too because they cut out their legal competitors and enhance their profits.
The U.S. Climate Action Partnership (USCAP) is just such a Baptist and bootlegger coalition and its representatives are going up to Capitol Hill today to testify in favor of a cap-and-trade proposal to lower greenhouse gas emissions. Its 31 members include such leading producers and users of energy (bootleggers) as General Motors, Duke Energy, ConocoPhillips, Ford, General Electric PG&E Corporation, and Shell. The Baptists in the coalition include the Natural Resources Defense Council, the Pew Center for Global Climate Change, and the World Resources Institute. Both sides claim that they want to do something about the pressing issue of man-made global warming. To that end, they are promoting a cap-and-trade system:
In a cap-and-trade system, one allowance would be created for each ton of GHG emissions allowed under the declining economy-wide emission reduction targets (the "cap"). Emitters would be required to turn in one allowance for each ton of GHG they emit. Those emitters who can reduce their emissions at the lowest cost would have to buy fewer allowances and may have extra allowances to sell to remaining emitters for whom purchasing allowances is their most cost-effective way of meeting their compliance obligation. This allows the economy-wide emission reduction target to be achieved at the lowest possible cost.
It's pretty clear what's in it for the environmental lobbyists–if the system works, the U.S. will progressively emit ever lower amounts of greenhouse gases like the carbon dioxide produced by burning fossil fuels. But what's in it for the users and producers of energy? One benign interpretation is that they are just bowing to the inevitable and want a predictable, stable regulatory regime so that they can get on with their long-range energy and technology planning. Hmmm. Perhaps. But just in case that's not enough, there's a big sweetener.
As USCAP acknowledges:
Emission allowances in an economy-wide cap-and-trade system will represent trillions of dollars in value over the life of the program.
So how to divvy up these trillions of dollars? Well, USCAP wants to give away a sizeable portion for free:
USCAP recommends that a significant portion of allowances should be initially distributed free to capped entities and economic sectors particularly disadvantaged by the secondary price effects of a cap and that free distribution of allowances be phased out over time.
Make no mistake, issuing emissions allowances is like coining money. Handing them out to companies for free is adding directly to their bottom lines. How this would work was explained in a 2007 Congressional Budget Office report. It's a bit lengthy but well worth reading:
A common misconception is that freely distributing emission allowances to producers would prevent consumer prices from rising as a result of the cap. Although producers would not bear out-of-pocket costs for allowances they were given, using those allowances would create an "opportunity cost" for them because it would mean forgoing the income that they could earn by selling the allowances. Producers would pass that opportunity cost on to their customers in the same way that they would pass along actual expenses. That result was borne out in the cap-and-trade programs for sulfur dioxide in the United States and for CO2 in Europe, where consumer prices rose even though producers were given allowances for free.
Thus, giving away allowances could yield windfall profits for the producers that received them by effectively transferring income from consumers to firms' owners andshareholders. The study of the hypothetical 23 percent cut in CO2 emissions concluded, for example, that 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.
Stock prices doubling? Seven-fold? What climate bootlegger could resist? And consumers will just love higher utility and gas prices!
I suspect that the USCAP Baptists have agreed to this because they see it as a bribe to get the bootleggers on board with carbon rationing.
Interestingly, President-elect Barack Obama has proposed that all of the emissions permits would be auctioned off. It would function like a variable carbon tax, which would mean no profits for bootleggers. Ah, such charming political naivete!
Go here for my analysis of carbon cap-and-trade vs. carbon taxes. Hint: If we must ration carbon, carbon taxes are better, especially if they are used to offset and lower income and payroll taxes.