Newsweek  [Printer-friendly version]
June 9, 2008

LET'S JUST CALL IT 'CAP AND TAX'

By Robert Samuelson

We'll have to discard the adage "everyone talks about the weather, but
no one does anything about it." In this era of global warming, it is
inoperative, because the whole point of controlling greenhouse-gas
emissions is to do something about the weather. This promises to be
hard and perhaps futile, but there are good and bad ways of attempting
it. One of the BAD ways is "CAP and TRADE." Unfortunately, it's the
DARLING OF ENVIROMENTAL GROUPS and their POLITICAL ALLIES.

The chief political virtue of cap-and-trade -- a hugely complex scheme
to reduce greenhouse gases -- is its very complexity. This allows its
environmental supporters to shape public perceptions in ways that are
essentially deceptive. Cap-and-trade would act as a tax, but it's not
described as a tax. It would directly regulate economic activity, but
it is promoted as a "free market" mechanism. Finally, cap-and-trade
would quickly become a bonanza for lobbyists, who would scramble to
exploit the system for different industries, venture capitalists,
localities and others. All the influence peddling would undermine the
system's abstract advantages.

The Senate is scheduled to debate a cap-and-trade proposal this week,
and although it's unlikely to pass, it will undoubtedly return because
all the major presidential candidates support the concept. Cap-and-
trade extends the long government tradition of proclaiming lofty goals
that are, in practice, difficult or impossible to achieve. We've had
"wars" against poverty, cancer and drugs to eradicate obvious societal
ills, but poverty, cancer and drugs remain. President Bush called his
landmark education law "No Child Left Behind" rather than the more
plausible "Fewer Children Left Behind."

Carbon-based fuels (oil, coal, natural gas) provide about 85 percent
of U.S. energy needs and generate most greenhouse gases. So, the
simplest way to stop these emissions is to outlaw them. Naturally,
that's what cap-and-trade does. Under the bill passed by the Senate
Environment and Public Works Committee, companies could emit
greenhouse gases only if they had annual "allowances" -- quotas issued
by the government. The amount of allowances would gradually decline.
That's the "cap." Companies (utilities, oil refineries, steel
companies) that needed extra allowances could buy them from companies
that wanted to sell. That's the "trade."

Consider one version of the bill. In 2012, the cap on greenhouse gases
would be 3 percent below their 2005 level and 6 percent below the
level projected without any restrictions. By 2030, the cuts would be
35 percent and 44 percent, respectively. By 2050, U.S. greenhouse
gases would be rapidly vanishing. Even better, their disappearance
would be allegedly painless. Reviewing five economic models, the
Environmental Defense Fund, an advocacy group, finds that the cuts can
be achieved without "significant adverse consequences to the economy."
Fuel prices would rise, but because people would use less energy, the
impact on household budgets would be modest.

This is mostly make-believe. If we suppress emissions, we also
suppress today's energy sources, and because the economy needs energy,
we suppress the economy. The models magically assume smooth
transitions. If coal is reduced, then conservation or non-fossil-fuel
sources will take its place. But in the real world, if coal-fired
power plants are canceled (as many were last year), wind or nuclear
power don't automatically substitute. If the supply of electricity
doesn't keep pace with demand, brownouts or blackouts will result. The
models don't predict real-world consequences. Of course, they didn't
forecast $135-a-barrel oil or the disastrous effects of corn-based
ethanol on food prices.

As mandated emissions cuts go deeper, the danger of disruptions would
mount. Population increases alone raise energy demand. From 2006 to
2030, the population will grow by 22 percent (to 366 million), the
number of housing units by 25 percent (to 141 million) and the amount
of commercial business space by 35 percent (to 101 billion square
feet), projects the Energy Information Administration. The idea that
higher fuel prices will be offset mostly by lower consumption is
optimistic. The Congressional Budget Office estimates that a 15
percent cut in emissions from a base year would raise annual average
household energy costs by almost $1,300 (in 2006 "constant" dollars),
or roughly 3 percent of income for the bottom four fifths of the
population.

That's how cap-and-trade would tax most Americans. As allowances
become scarcer, their price would rise, and the extra cost would be
passed along to customers. For the government, issuing the scarce
emissions allowances would vastly expand its power. The government
could sell the allowances and spend the proceeds, or it could give
them away, providing a windfall to recipients. The Senate proposal
does both, to the tune of about $1 trillion from 2012 to 2018.
Beneficiaries would include farmers, Indian tribes, new technology
companies, utilities, states and mass-transit systems. Call this
"environmental pork," and it would just be a start. The program's
potential to confer subsidies and preferential treatment would
stimulate a lobbying frenzy. Think of today's farm programs -- and
multiply by 10.

Unless we find cost-effective ways of reducing the role of fossil
fuels, a cap-and-trade system would ultimately break down. It wouldn't
permit satisfactory economic growth. Nor would it work
internationally. Developing countries, the largest source of new
emissions, won't abandon fossil fuels unless there are competitive
alternatives. If we're going to use price to try to stimulate those
new technologies, let's at least do it honestly. Most economists think
that a straightforward tax on carbon would have the same incentive
effects for alternative fuels and conservation as cap-and-trade
without the rigidities and uncertainties of emission limits. A tax is
more visible, understandable and democratic. If environmental groups
still prefer an allowance system, let's call it by its proper name:
"cap and tax."