* cap-and-trade
Topics: Regulation
04 Jun 2008
From: Ervan Darnell
The current cap-and-trade bill before the Senate would apparently tax for every ton of CO2 emitted [1]. The "trade" part is explicit, but it's not clear where the "cap" is. Even though this smells like a free market solution, Republicans want more explicit regulation one industry at a time [2], which obviously has its own problems. The reason is that the cap-and-trade bill represents a huge real increase in taxes.
The current bill, best I understand it now, has lots of problems. Here are two:
1) Again, the tax increase. This has no obvious relation to the objective, but is rather a backdoor mechanism to grow government again.
2) Granting the government this tax will lead to horrendous rent seeking behavior for various exceptions to the tax. There was an article in Scientific American last year (sorry I cannot find the reference) that said Europe was missing Kyoto targets because various governments kept granting exemptions to "special" industries and that destroyed the CO2 market since pricing wasn't meaningful.
There is a fix for these problems: the government should have buy CO2 credits on the same market as emitters. The difference is it merely ceases to emit with the ones it buys. You object that's more expensive? It's not. It's the same economic cost as pushing the burden onto emitters. The difference is the money winds up in the pocket of somebody productive instead of the government. You object the government cannot afford it? Okay, if that's so, then we cannot afford to stop CO2 emissions merely by pushing the cost off on someone else. I don't think that's the case, and I'm not trying to arrange that outcome, I'm only saying that the actual costs should be made clear and then the decision process is better informed. This also looks a bit more constitutional in that the government is no longer engaging in a taking, which the current cap-and-trade plan is. Instead, it's buying away an emissions privilege someone already had and compensating them for their future lost
income they bet on when manufacturing their plant. This also provides a smooth way to continue lowering CO2 production in the future, at an economically sensible rate.
There are still problems (with both cap-and-trade and my proposal):
0) This assumes we actually know what the right target is and we can measure how much people are actually producing.
1) I cannot tell where the baseline is set in the current proposal (possibly at 0), but there is a moral hazard in this. The more talk there is about cap-and-trade, the more emitters are encouraged to emit extra CO2 now so they get a higher base level. Even if one were to lock in the formula at say 2004 emission levels, that only encourages other polluting industries to start emitting more now before their base line for their emission is set.
2) On could instead say the baseline is 0 emissions, but that's going to create substantial dislocation for emitters that have in some sense already bought the privilege of emission. Let me put that another way, if we simply transfer, based on existing production, $100G from coal plants to welfare recipients, trial lawyers, and other Democrats, that's hardly an efficient pricing strategy for producing electricity (though it could be an efficient _marginal_ increase production strategy). The industry by industry approach of basing it on economic "need" is nonsensical right out of the box.
I don't have a fix to this dilemma either. I only have a compromise: give every citizen a share of the total emission the U.S. currently has proportional to that person's income (as a rough proxy of the amount of CO2 they now emit). Now, you can either give (some fraction of) your share to the power company and keep your current electric bill, or get a higher electric bill to represent their cost of buying emissions credits, and then sell your existing share. The shares are obviously market tradable to anyone, and the total amount can be brought down as above. This is just a way to initially distribute the resource. It's not perfect, but I'm relying on the idea that it doesn't matter too much who has a given property right to start with, only that it be tradeable. In the long run, it will wind up in the right place.
[1] http://www.pbs.org/newshour/news_summaries/2008/06/summary_02.html
[2] http://www.pbs.org/newshour/bb/politics/jan-june08/carbon_06-02.html
====================================================
Ervan Darnell
ervan@kelvinist.com http://www.kelvinist.com
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