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View related content: Environmental and Energy Economics
Kenneth P. Green
Common sense should tell us that good policies produce more in benefits than they cost us. Unfortunately, common sense has left the building when it comes to climate policy. Asserting (somewhat absurdly) that America’s economic and geopolitical competitors, such as China and India, are just waiting for “U.S. moral leadership,” several voices are renewing their call for domestic cap-and-trade legislation to control greenhouse gases.
But cap-and-trade schemes are fundamentally flawed, and particularly ill-suited to greenhouse gas control. The current poster child for cap and trade is the Warner-Lieberman Climate Security Act of 2007 (S. 2191). If enacted, Warner-Lieberman will cause economic harm without producing any environmental or climate-protective benefits. This is the hallmark of irrational policy.
First, let’s look at the likelihood that the legislation’s goals can be met. Economist Margo Thorning observed in Congressional testimony, “In order to meet the emission reduction targets in S. 2191, U.S. per capita emissions would have to fall by a total of 13.8 percent over the 2000-2012 period, an additional 20.2 percent from 2012 to 2020 and a further 27.6 from 2020 to 2030. In other words, the required reductions in per capita emissions are about 25 to 35 times greater than what occurred from 1990 to 2000. The technologies simply do not exist to reduce total (and per capita emissions) over the next 17 years by the amounts mandated in S. 2191. . .” Thorning is not alone in this belief: in a 2004 Science article, a team of 18 prestigious scientists observed that meeting projected growth in energy demand while sharply curbing greenhouse gas emissions requires carbon-free technologies that “do not exist operationally or as pilot plants.”
Cap-and-trade creates a perpetual group of rent-seekers who will call for ever-tighter caps, and who will staunchly oppose any other approach to dealing with greenhouse gas emissions.
Now, let’s look at the costs. Economist Anne Smith testified to Congress that her state-of-the-art economic modeling estimates that Warner-Lieberman would cause net reduction in 2015 GDP of 1.0% to 1.6% relative to the GDP that would otherwise occur. That loss rises to the range of 2% to 2.5% after 2015. Smith found that the annual loss in GDP would increase to the range of $800 billion to $1 trillion, which is serious money. By 2020, Smith estimates losses of 1.5 to 3.4 million jobs–and that is net jobs, after adjusting for the new “green” jobs that might be created by the bill.
None of this is surprising as experience has shown cap-and-trade schemes are fundamentally flawed. Here are four reasons. First, capping carbon essentially puts a regulatory drag on economic growth. When the economy grows, energy demand rises, which means the demand for the limited number of carbon permits would rise, strangling growth in its cradle.
Second, everyone involved in a cap-and-trade system has incentives to cheat. Companies have incentives both to overstate historical emissions, and to exaggerate the benefits of new technologies to generate bogus emissions that become ready cash. Experience in both the US and Europe shows that firms usually get away with it: validating historic emissions is nearly impossible. And governments won’t look very hard–wanting to appear green, they have strong incentives to turn their eyes away from carbon credit malfeasance.
Third, cap-and-trade creates a perpetual group of rent-seekers–those raking in profits in new carbon trading–who will call for ever-tighter caps, and who will staunchly oppose any other approach to dealing with greenhouse gas emissions. Once a company holds millions of dollars in carbon credits, they can be expected to spend large sums of money lobbying against anything that would devalue their new currency.
Finally, carbon cap-and-trade will raise the costs of energy, goods, and services. If that does not happen, there is no incentive for anyone to cut back on energy use, and the attendant emissions it produces. This could be offset, in theory, if the carbon permits were all auctioned off, and the revenues used to lower other taxes. But no emission trading system has ever auctioned off a majority of permits, and Warner-Lieberman is no exception: at first, it auctions only a trivial share of emission permits, and even when that ramps up decades hence, the revenues are used as a wealth-redistribution tool focused mainly on funding dubious energy research schemes rather than protecting the overall economy from the impact of higher energy prices.
The post-Bali refrain is that the US should “lead” by enacting carbon cap-and-trade. Apart from the silliness of assuming that our economic and political competitors are waiting on the US for “moral leadership,” carbon cap-and-trade is simply bad policy: its costs are high, and benefits non-existent. Rational climate policy would consist of a short-term focus on adaptation, and a longer-term effort to reduce greenhouse gas emissions via a modest revenue-neutral carbon tax.
Kenneth P. Green is a resident scholar at AEI.
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