A Questionable Defence of Malarkey

Posted by Deepish Thinker on August 14, 2009
Economics, Environment, US Politics

Mark Thoma has published a detailed rebuttal of the idea that the the Waxman-Markey (carbon permits) bill is a massive corporate giveaway.  Mr Thoma’s reasoning is that:

The split over the entire period from 2012 to 2050 is 53.4% for consumers and public purposes, and 20.1% for private industry.

Assuming you believe Mr Thoma’s math, Waxman-Markey is actually a massive giveaway to consumers, special interests and private industry.  This is not exactly a compelling defense.

The problem with the bill is not the manner in which the giveaways are divided.  It’s the existence of giveaways.

The whole point of a cap and trade system is to price carbon emissions and thus incorporate the cost of CO2 emissions into the price of everything those emissions produce. Price signals can then drive innovation to minimize the carbon use and ensure that maximum economic benefit comes from the level of emission we believe is acceptable.   If carbon permits are given away, regardless of who exactly the giveaways are intended to benefit, this price mechanism is undermined.

The fundamental problem here is that American public would apparently like to believe that the transition to a low carbon economy can somehow be achieved without carbon based energy becoming significantly more expensive.   Unfortunately, there is no free lunch to be had here.  A major restructuring of the US economy isn’t going to occur unless the financial incentives surrounding energy use are significantly realigned.

What Congress should have done is create a fully auctioned cap and trade system, then used the resulting revenue to lower and simplify income taxes.  This would have shifted the burden of taxation from a earned income (generally considered a social positive) to a negative externality without increasing the overall tax burden on the economy.  Energy would get more expensive while labor gets cheaper.  It would also likely have created a broad base of political support for cap and trade.

Tragically, this is not what happened.  The administration, somewhat naively, expected their fully auctioned program to become a new and fruitful source of revenue to fund its ambitious spending plans.  When this proved politically unfeasible, the congressional leadership was allowed to use carbon credits giveaways to buy off opposition to the bill.  In its desperation to achieve legislative success, congress has not flinched at undermining the bill’s original objectives.  The revised bill is more politically palatable in that it apparently won’t really affect energy costs.  Of course, if energy costs aren’t affected there is very little chance the thing will actually work.

It is revealing that Congress choose to lard the bill with energy use regulations.  If the bill were going to effectively price CO2 emissions the regulations would be redundant.  Market forces would drive change without the need for mandates from Washington.  Clearly, even Congress doesn’t really believe that the cap and trade portion of the bill will drive change.

To be fair, the successful SO2 cap and trade scheme, on which the bill is based, gave away rather than auctioned SO2 emission rights.  The prospect of selling surplus SO2 credits, or the threat of having to buy extra credits, encouraged enough companies to find ways to limit SO2 output.  So Waxman-Markey may not be completely hopeless.

However, SO2 was a relatively minor problem that could be minimized without a wholesale restructuring of the US economy.  It is extremely difficult to believe that a similarly low key approach will yield the changes required to move us towards a low carbon economy.  For those of us who believe in harnessing the power of markets to solve environmental issues Waxman-Markey is a profound disappointment.