The Folly of Unilateral Carbon Rationing


cap and spend

Last month, the House Energy and Commerce Committee issued the American Clean Energy and Security (ACES) Act which would impose a cap-and-trade carbon rationing scheme on the United States. The aim of ACES is to reduce the emissions of carbon dioxide (CO2) from burning fossil fuels that are thought to be contributing to man-made global warming. Under ACES, the U.S. would emit 17 percent less CO2 in 2020 than it did in 2005. Congressional Democrats and President Barack Obama hope to get ACES enacted into law before the United Nation's next climate change conference convenes in Copenhagen this coming December.

In today's Washington Post, Harvard University economist Martin Feldstein advises against any rush to enact ACES before the Copenhagen conference.Why?

The Congressional Budget Office recently estimated that the resulting increases in consumer prices needed to achieve a 15 percent CO2 reduction—slightly less than the Waxman-Markey target—would raise the cost of living of a typical household by $1,600 a year. Some expert studies estimate that the cost to households could be substantially higher. The future cost to the typical household would rise significantly as the government reduces the total allowable amount of CO2.

Americans should ask themselves whether this annual tax of $1,600-plus per family is justified by the very small resulting decline in global CO2. Since the U.S. share of global CO2 production is now less than 25 percent (and is projected to decline as China and other developing nations grow), a 15 percent fall in U.S. CO2 output would lower global CO2 output by less than 4 percent. Its impact on global warming would be virtually unnoticeable. The U.S. should wait until there is a global agreement on CO2 that includes China and India before committing to costly reductions in the United States. 

In a smart artcle over at National Review, Manhattan Institute fellow Jim Manzi also points out the folly of unilaterally cutting American greenhouse gas emissions:

Whenever one nation sacrifices economic growth in order to reduce emissions, the whole world can expect to benefit, because future temperature should decrease for the entire globe. Every nation's incentive, therefore, is to free ride on everybody else. Our most obvious leverage with other emitting nations would be to offer to reduce our emissions if they reduced theirs. Giving up this leverage and hoping that our unilateral reductions would put moral pressure on China, Russia, Brazil, and similar countries to reduce their emissions reveals a touchingly sunny view of human nature, but it is a poor negotiating strategy.

Basically, under ACES, the U.S. would be imposing an energy price increase on its producers and consumers making the country less competitive compared to countries that would still be using cheaper fossil fuels. In an attempt to counteract this problem, the Federal government under ACES can award a portion of its emissions permits as a subsidy to energy intensive U.S. companies that are disadvantaged by the cap-and-trade scheme. Although the proposal was dropped in the current ACES bill, it is very likely that a countervailing carbon tariff will be included in future cap-and-trade legislation. Such subsidy and tariff provisions will likely provoke carbon trade wars. 

See whole Feldstein column here and Manzi article here