‘Cap-and-Trade’ Programs

Won’t Slow Global Warming

I am a pessimist on global warming. Despite its best efforts, no country has been able to reduce its level of carbon dioxide emissions, and prospects for the future do not look any better. The root cause of this failure is the fact that energy consumption is so interwoven with basic human aspirations and with existing behavioral patterns that its reduction defies painless solutions. The current love affair with cap-and-trade proposals is a case in point.

The two best known cap-and-trade systems are the United Nation´s Clean Development Mechanism and the European Union´s Trading System. The former trades carbon credits between countries, and the latter is based upon government-issued permits. Under these mechanisms, a new coal-fired, electric-generating plant could be built in the United States if the owner were able to purchase either enough off-setting carbon credits from a ¨clean¨ enterprise elsewhere in the world or a government-issued carbon-credit permit.

Since their inception these two programs have traded credits and created transferable permits valued at more than $50 billion. But they have failed to decrease carbon emissions. What they have achieved are windfall profits, amounting to billions of dollars, for those companies that have received these government permits or have promised to create carbon credits in the future.

In the United States, cap-and-trade is the latest, post-ethanol political fad. Without examining the results of either the UN or EU systems, the Senate recently proposed its own market-based system, whereby the government would auction off carbon-credit permits to the highest bidders. Under this proposal, the winning bidders could use the permits, trade them, or hoard them for future use, speculation, or sale.

Imagine the politics and self-interests involved here. First is the concern that placing an additional cost on industry for purchasing these permits will decrease our nation´s economic competitiveness and its potential for job growth. Business interests therefore argue for making the permits plentiful in number and cheap in price, thus undercutting the program´s intent.

Second, the regulation of the number and distribution of permits, the monitoring of their use, and the enforcement against their abuse will require regulators and investigators. Over the long term, Congress is not apt to fund adequately such an expansion of bureaucracy, and its failure to do so will open the door to all kinds of compliance loopholes and program failures.

Third, since the approach is market-based, it must be profit-producing. Hence, those who buy, invest in, and seek to benefit from the permits must be exempted from financial and legal liability should a permit´s ultimate end-user not meet the anticipated carbon-reduction requirement. With that exemption comes a breakdown in accountability and responsibility for the program´s results.

Given these complexities, the only sure thing that will emerge from Congress is a bill that industry and Wall Street will like and that the taxpayer will eventually have to pay for. Cap-and-trade falsely promises a result that it cannot deliver and will instead only cause the construction of more coal-fired generating plants that will further contribute to global warming, over the next 40 to 50 years. Cap-and-trade, then, is a snare and a delusion.

While politicians love the cap-and-trade concept, most economists see it as fundamentally flawed. They favor the simplicity and directness of a carbon tax.

Determining the carbon content of a unit of coal, oil, or gas is very straightforward. Under a carbon tax, everybody pays for only the amount of carbon they actually consume by heating and cooling their homes, by driving their vehicles, and by running electric appliances. In addition, since the tax on carbon used in manufacturing consumer goods—such as clothing, cars, and computers—will be passed on, purchasers will tend to favor products that are produced and operate efficiently.

The only decision that politicians need to make is how much to tax each unit of carbon. And therein lies the problem: it is a tax. And like all tax ideas, it is considered ¨dead-on-arrival¨ by politicians, including Sens. McCain and Obama. So instead of the easily-understood and economically-sound carbon tax approach to combating global warming, Washington will give us a market-based cap-and-trade solution whose complexities and potential for chicanery virtually assure its failure.

Outside of the developed world, the rapidly growing economies of Brazil, China, and India pose a different problem. In these countries the challenge to global warming is not current consumption but the basic human aspiration to achieve what others already have. They consider it presumptuous for anyone in the developed world to tell their two billion people that they cannot have the same refrigerators, air conditioners, and cars that Americans and Europeans enjoy.

So in the absence of a political will to confront consumption and with cap-and-trade the best we can expect from Washington, I am pessimistic about humans´ ability to reverse the global warming trend. Am I wrong?