Is GOP Opposition to Cap-and-Trade Self-Contradictory?
By Marlo Lewis -- August 17, 2010Barring the trickery of a lame duck conference committee, cap-and-trade is dead in the 111th Congress. Some blame President Obama for not taking a more hands-on role. Others blame environmental groups for waging a $100 million lobbying campaign without winning a single GOP convert to the Kerry-Lieberman bill. Others blame the allegedly “well-funded denial machine,” even though proponents, who include major corporations like BP as well as Big Green, must have outspent free-market and conservative advocacy groups by more than 100 to 1.
The August 11 edition of Climatewire (subscription required) featured interviews with Exelon Corp. VP Betsy Moler and Resources for the Future President Phil Sharp, who lament that Republican lawmakers, the “inventors” of “market-based” environmental policy, turned against their own “invention.” Moler and Sharp are trying to spin GOP opposition to cap-and-trade as self-contradictory, hence as unstable, hence as reversible. As Climatewire reports, Moler is not ready to “throw in the towel” and Sharp entertains the hope that a “new kind of coalition” will emerge in the next Congress.
Now, let’s look at this notion, peddled by Moler and Sharp, that Republicans flip-flopped and trashed their own legacy by nixing cap-and-trade.
Climatewire offers the following account:
In an interview, Moler said that her deep disappointment was the rejection by Republican leaders in Congress of a market-based strategy for raising the price of carbon emissions, to speed transitions by power plants, industry and consumers to cleaner energy.
The Democrats called it “cap and trade.” Republicans labeled it “cap and tax,” and the change in one word proved lethal.
“The thing that just amazes me, confounds me, surprises me is how successfully the Republican leadership and a lot of the people who would be potentially negatively impacted have been in vilifying what have historically been market-based solutions,” Moler said.
Inventors Turn on Invention
“Cap and trade is really a Republican instrument that grew out of a lot of the Republican thought leaders as a market-sensitive, market-friendly, anti-command-and-control mechanism” to reduce sulfur- and nitrogen-based air pollution in the 1990 Clean Air Act amendments. “Now, some of the same people who invented it have turned on it as an energy tax,” she said. “It’s a huge missed opportunity. I don’t know where you go next.”
Moler’s regret is seconded by Philip Sharp, president of Resources for the Future, who, as a Democratic House member from Indiana, stood with Moler in the 1990s in the energy deregulation campaign. Sharp was a pivotal factor in Congress’ adoption of the 1990 Clean Air Act amendments and the 1992 Energy Policy Act, which opened the way for FERC’s electricity market orders four years later.
“I’m not here to say cap and trade is the only way to do this,” Sharp said in an interview. “It worked magnificently with SO2 and a couple of other instances.” Scaling it up massively to deal with economywide carbon emissions is another question. “We don’t know we can manage it as effectively,” he said.
“But what is really unfortunate in the public debate is that the current Republican leadership has overthrown one of the great Republican successes in this country [under President George H.W. Bush], to capitalize on the flexibility of the marketplace” in achieving regulatory change, Sharp said.
“I don’t think people appreciate the extraordinary challenge that represented and the difficulty of getting it done” in the 1990s, he said. Now, with the demise of that approach, Congress has invited U.S. EPA to step in on the climate front “and regulate the living [daylights] out of everything and see how well a modern economy works doing that.”
Moler and Sharp miss several key points.
Price Volatility
The cap-and-trade programs enacted under President George H.W. Bush are not “magnificent” successes, if predictable compliance costs, which businesses need for long-term planning, are a criterion of success. As Yale University economist William Nordhaus points out in Life After Kyoto: Alternative Approaches to Global Warming Policies (Dec. 2005), sulfur dioxide (SO2) allowance prices have been highly volatile: “SO2 trading prices have varied from a low of $70 per ton in 1996 to $1500 per ton in late 2005. SO2 allowances have a monthly volatility of 10 percent and an annual volatility of 43 percent over the last decade.” For perspective, Nordhaus notes that, during 1994-2005, SO2 permit prices were more volatile than either crude oil prices or stock-market prices.
Source: Nordhaus, Life After Kyoto (Dec. 2005)
In Economic Issues in Designing a Global Agreement on Global Warming (Mar. 2009), drawing on more recent experience, Nordhaus reiterates that “quantitative limits [i.e. cap-and-trade schemes] have proven to produce severe volatility in the market price of carbon under an emissions-targeting approach. The volatility arises because of the inelasticity of both supply and demand for permits.” He continues:
I have reviewed the history of the market prices of tradable permits for both the SO2 trading system in the U.S. and for the CO2 system in the EU. These prices have shown an extremely high level of volatility. I found that the prices of U.S. SO2 emission allowances have been approximately as volatile as oil prices . . . .The volatility of CO2 allowances in the EU ETS is similarly large: in the period from October 2008 to February 2009 alone, ETS carbon prices have varied between €9 and €24 per ton of CO2 . . . .
Source: Nordhaus, Economic Issues (Mar. 2009)
Note also that, according to Nordhaus, “the volatility of allowances is not due to policy errors. It is inherent in this kind of instrument. The high level of volatility is economically costly and provides inconsistent signals to private-sector decision makers.”
Federal Energy Regulatory Commission (FERC) data also reveal high price volatility under cap-and-trade. SO2 permit prices fell from about $500 per ton in January 2008 to about $100 per ton in July. NOx allowance prices jumped from about $800 per ton in June 2008 to about $1,400 per ton in August, then declined to less than $100 per ton in late 2009.
In short, if predictable costs are a criterion of success, then it is hype to describe the SO2 and NOx trading programs as “magnificent.”
CO2 Is Different
However successful the SO2 trading program may have been, it is a dubious model for climate policy, because SO2 and CO2 are different. Utilities participating in the SO2 emissions trading program could meet all or part of their obligations by purchasing low-sulfur coal and/or installing scrubbers, a commercially-proven emission control technology. In contrast, as Kenneth Green, Steven Hayward, and Kevin Hassett of the American Enterprise Institute point out, there is no low-carbon coal, and no commercial technology to “scrub” carbon dioxide (CO2) emissions out of power plant exhaust streams. Thus, unlike an SO2 trading program, a carbon cap-and-trade program has a high potential to become a job-killing energy-rationing scheme.
The greater economic risk of carbon cap-and-trade schemes derives from another key difference as well. Unlike sulfur, which is an impurity in coal and oil, carbon is intrinsic to the chemistry of fossil fuels. Consequently, whereas capping SO2 does not logically entail an unlimited agenda aiming at the abolition of fossil fuels, capping CO2 does imply total suppression as an ultimate objective. The abolitionist impulse is audible in the apocalyptic rhetoric of the global warming movement, in petitions demanding that EPA establish national ambient air quality standards (NAAQS) for CO2 at 350 parts per million (not even a global depression lasting several decades would be sufficient to attain such standards), and in Al Gore’s campaign to “repower America” with “zero-carbon energy” within “ten years.” Triggers for pull-out-the-stops, sky-is-the-limit regulation also lurk in the Waxman-Markey and Kerry-Lieberman bills’ escalator clauses, which all but ensure that the explicit emission reduction target (83% below 2005 levels by 2050) would be superseded by more aggressive requirements.
Climate Change Is Not Air Pollution
The health effects of SO2 and other air quality contaminants depend on short-term — annual, monthly, or even daily — emission levels. Thus, in theory, setting quantitative targets and timetables (caps) can produce significant, measurable public health benefits, making it reasonable to accept price volatility as an unavoidable risk. The same does not hold for climate “forcing” agents such CO2. The health effects of greenhouse gas emissions (if any) depend on the total stock of greenhouse gases in the atmosphere, not annual emissions. Thus, observes Willaim Pizer of Resources for the Future, “It cannot matter whether a ton of CO2 is emitted this year, next year or ten years in the future if all we care about is the total amount in the atmosphere.”
Indeed, not only is there no plausible public health rationale for capping annual greenhouse gas emissions, the costs would likely far exceed any public health benefits. As Chip Knappenberger shows, based on IPCC climate sensitivity assumptions, reducing U.S. greenhouse gas emissions 83% below 2005 levels — the Waxman-Markey bill target — would have a negligible impact on global climate change, averting a mere 0.05°C of global warming by 2050. Even if one considers global warming to be a serious problem, the benefits of capping emissions are too paltry to justify the risks, which in addition to volatile compliance costs include rampant opportunities for corruption, creative accounting, and rent-seeking.
Unsurprisingly, Pizer, Nordhaus, Green, Hayward, and Hasset all argue that carbon taxes (price-based constraints) are more efficient than cap-and-trade (quantity-based constraints) as a method for limiting the total stock of emissions over time. Carbon taxes are administratively simpler, the costs are more transparent to the public, there is less opportunity for corruption and rent-seeking, and, most importantly, the costs are fixed and therefore entirely predictable. Of course, nobody would accuse Republicans of being inconsistent for opposing energy taxes. A greenhouse cap-and-trade program, however, is just a sneaky, implicit, less efficient form of taxing carbon-based energy.
Means Are Not Ends
Fourth, just because “market-based” approaches are more efficient, in principle, than command-and-control regulation does obligate Republicans to support Waxman-Markey or Kerry-Lieberman. Moler and Sharp confuse ends and means. Only if Republicans want government to raise energy prices, make coal uneconomical as an electricity fuel, or, more broadly, restrict Americans’ access to carbon-based energy would they be inconsistent to oppose a “market-based” strategy to accomplish those objectives. But those are the environmental movement’s goals, not the GOP’s.
Moler and Sharp overlook the obvious — most Republicans oppose both market-based and command-and-control climate change mitigation strategies. For example, all 41 Senate Republicans voted for the Murkowski resolution to block EPA regulation of greenhouse gases via the Clean Air Act. Of the 154 co-sponsors of Rep. Marsha Blackburn’s legislation (H.R. 391) to preclude greenhouse gas regulation via the Clean Air Act, only one (Dan Boren of Oklahoma) is a Democrat. More tellingly, of the 125 House Members who have signed the discharge petition to allow a floor vote on the Blackburn bill, not one is a Democrat.
So it’s silly to say that Republicans “invited U.S. EPA to step in on the climate front ‘and regulate the living [daylights] out of everything. . .'” President Obama threatened to veto both the Murkowski resolution and the much weaker Rockefeller bill, which would merely postpone EPA regulation of stationary sources of greenhouse gases for two years. It’s the Democratic leadership, not the GOP, that has “invited” EPA to make climate policy through the regulatory back door.
The Dumb Party Ain’t that Dumb
Finally, Republicans betray themselves (ask former President George “Read My Lips; No New Taxes” Bush) when they advocate raising taxes. Because carbon is intrinsic to the chemistry of fossil fuels, a carbon cap-and-trade scheme is a virtual broad-based energy tax. The same cannot be said of the SO2 program, which was merely a virtual pollution tax.
Moler and Sharp would like GOP lawmakers to believe they can win elections by becoming the Party of Energy Taxes. Fortunately, most Republicans don’t need much coaching to realize that is complete bunk.
Perhaps a few more fundamental observations would be in order.
First, if increasing atmospheric CO2 concentrations were a health issue, neither a new law nor new EPA regulation could resolve the issue, since either approach can affect only ~20% of global emissions of what is a well mixed trace gas. Actually, ceteris paribus, atmospheric CO2 concentrations would continue to increase, even if the US placed itself on the “83% by 2050” track. Interestingly, it has been Democrats who have failed against “unilateralism”, even in situations where it could have been effective if it had been occurring.
Second, W-M and K-B and K-L all included a specific tax in the form of sales or auctions of emissions allowances. The various bills intended to raise on the order of $65 billion per year from these sales. These funds were variously supposed to be used for RDD&D, or to be rebated to affected consumers, or to reduce the national debt, or for the personal aggrandizement of legislators.
Previous cap & trade programs did not include this overt tax.
Third, Sharp and Moler appear to assume that everyone understands that US CO2 emissions must be drastically reduced as rapidly as possible; or, the participate in intentional misdirection. Many Republicans are far from convinced that such a course is necessary.
Fourth, cap & trade is not a market-based mechanism. Trade is a market-based mechanism. A cap is a command and control mechanism. It is the trade capability which allows those for whom CO2 emissions reductions are more expensive, or require longer lead times, or require technology which is not commercially available to “buy time” to achieve their emissions reductions. However, having said that, a cap is the only approach which is sure to achieve the required reductions, regardless of the investment required to achieve the reductions and the operating costs required to assure that the reductions actually occur.
Fifth, many Republicans might well have been concerned about the “squishy” offsets permitted by each of the bills in question. From my perspective, these offsets represent a unique opportunity for fraud and abuse, particularly since they would likely be administered by the same folks who ran the highly effective and totally honest Iraq “Oil for Palaces, Payloads and Payoffs” program.
While Republicans (conservatives?) might well be inclined to prefer cap & trade as the approach to solve an emissions problem, there is little reason for them to support such a program to NOT solve a NON-problem, especially when it is combined with ~2000 pages of other progressive “goodies”.
Much of the discussion regarding the bills in question focused early on the “tax” component and the things it might be used to accomplish. Almost no attention was focused on the investments which would be required to actually achieve the emissions reductions, or the incremental operating costs associated with them. The investments, in my judgement, would have been an order of magnitude greater than the tax, or ~$700 billion per year over the period from 2010 – 2050.
I suspect Republicans (conservatives?) might also have been concerned about the “global governance” aspects of the whole AGW discussion. I have commented here previously about the “three-legged stool” of AGW:
Leg 1) zero global annual carbon emissions;
Leg 2) global veganism;
Leg 3) population controls; and,
Seat = global governance.
I believe this would be the ugliest piece of furniture ever assembled by man, as well as the most expensive in terms of finance and human freedom.
There is much more than simple cap & trade which has been rejected here. However, it apparently was not rejected by “democrats”. This aspect of the discussion should be a lingering concern.
The cap and tax provisions (in all their manifestations) may be market LIKE, but certainly are not market BASED. That’s where Moler et.al. lose credibility. Faux demand is not a “market.”
Would those bemoaning failure of “cap and trade” call a national requirement that every familiy purchase a black verlvet painting of Elvis a “market based” solution to the lack of demand for such paintings?
Where energy policy is concerned these days, there’s little to choose between the two political parties, since both use the politics of mendacity to fleece taxpayers in support of silly technological fixes and pork barrel projects. That Congress may be on the verge of passing a national renewable portfolio standards law, where the so-called renewables would be required to do no work (except for looking pretty) in exchange for massive public subsidies, would make the most craven welfare queens blush. There seems to be no shame about–or accountability for–these dukes and dolphins of energy….
Tom Tanton,
ROTFLOL. Answer: probably. It certainly has been the answer for a lot of other “unsaleable” art, much of which has appeared in the courtyards in front of government buildings. Why else would we have a National Endowment for the Arts? 😉
Jon Boone,
Are you suggesting, perhaps, that shamelessness is not next to Godliness? It is certainly a characteristic of “demigods”. 😉
Although like some others I could name, David Victor regards my good self as an academic nonenity or troublemaker or both, and probably something worse. Poor me. But even so I have some positive things to say in the new edition of my energy economics textbook about his position on the absurdity known as cap-and-trade. Someone else who shares my opinion on that topic is Ruth Greenspan Bell. For people who know something about computers – which I don’t – it should be easy to access their work.
I seem to remember disagreeing with Jon Boone about something, but where this topic is concerned, I like a word in his comment: that word is “silly”. I won’t ask why even intelligent people have been taken in by the silliness known as cap-and-trade, but academic economists must definitely share the blame.
Ed:
The great demigods of lore and yore, from Achilles to Hercules, from Alexander to Hitler, were neither self reflective nor had any sense of shame. Their common fate, after dragging the world through hell, was hubris and–nemesis.
One hopes that in Dante’s Inferno, current politicians are sent far below the third tier, where lawyers are consigned, and lower than circle 6, where certain popes were sent.
“a national requirement that every family purchase a black velvet painting of Elvis”
Finally a cap and trade proposal that I can get behind!
As an Elvis fan, my wife has insisted that her prized velvet Elvis hang in the entryway to our house.
A national requirement would 1) make us look less odd, and/or 2) greatly increase the value of her flea-market find.
Either sounds good to me!
-Chip
“Cap and trade is really a Republican instrument that grew out of a lot of the Republican thought leaders as a market-sensitive, market-friendly, anti-command-and-control mechanism”
Uh. Excuse me. Government creation of a market in a commodity that everyone makes and nobody wants; from which a rent-seeking few will gain a windfall; and from which the rest of us will suffer economic pain is what??? Another blow for Orwellian double talk.
Terrific summary, N.O. I would only add in your chain of froms–from which ubiquitous commodity no real change will occur, since those making the windfalls will be mainly the ones doing the accounting. Nice work if you can get it, even in Dystopia.
Again there is no mention of the long term studies of acid rain. That was the scare story that justified SO2 trading in first place. It turned out to be a scam. It maybe that we are better off without SO2 but the forests are indifferent.
Judging from all these comments, I should somewhere have stated the obvious: Cap-and-trade is politics-based, not market-based. As Tom Tanton noted, demand for the commodity traded (the emission allowances) is entirely a creature of the cap, which arises not from the market but from government meddling in the market. I suggest we popularize the following formulation. Cap-and-trade: Government creation of a market in a commodity that everyone makes and nobody wants; from which a rent-seeking few will gain a windfall; from which the rest of us will suffer economic pain; and in which opportunities for corruption abound because those making the windfalls will be mainly the ones doing the accounting.
[…] Republicans will be gulled by this line of chatter, but just to make sure, I posted a column debunking the Moler-Sharp argument on MasterResource.Org, the free-market energy […]
“Cap-and-trade: Government creation of a market in a commodity that everyone makes and nobody wants; from which a rent-seeking few will gain a windfall; from which the rest of us will suffer economic pain; and in which opportunities for corruption abound because those making the windfalls will be mainly the ones doing the accounting.”
Marlo,
I have a problem with your formulation.
There is no argument that the cap is a political / legislative device which is pure command and control.
There is no argument that a “tax” component of a cap, whether through sale or auction of allowances, would provide a windfall to a rent-seeking group of 535 spendthrifts.
The “trade” component is market-based, though there would certainly be no market in the absence of the cap.
Assuming that the number of allowances available in year 1 is equal to the number of allowances required by ongoing businesses in year 1, there is no need for a market in year 1, except to make allowances available under the cap to new businesses. However, in year 2 there would be a market because there would be ~2% fewer allowances than would be required by those same ongoing business, including any new businesses started in year 1.
There need not be any requirement that there be a “trader” between the buyer and the seller of allowances, though the parties might well choose to use a trader, or “market maker”, to facilitate transactions. (FYI, the US Department of the Treasury relies on market makers to facilitate trading of government securities, because their involvement makes the market more efficient.)
However, adding the potential for “squishy” offsets into the mix opens the potential for massive rent-seeking, along with fraud and abuse.
I appreciate your concerns, but I believe you have painted with too broad a brush.
Ed, I think you agree with my formulation, you just don’t want to! As you say, the cap is political. The trading is based on the cap. Therefore, cap-and-trade is not market-based. It is politics-based. As Tom Tanton said, cap-and-trade is “market-like.” Or, as some have said, it is “market-oriented.” But the basis is not the market. The basis is politics.
Of course all this misses the point that we don’t need to restrict emission of CO2. Entertaining a debate about the “nature” of a cap and trade “market” or whether it is or is not analogous to the SO2 so-called solution implies some legitimacy to the notion of de-carbonization for the “good of the planet”.
There no evidence to indicate any reduction of CO2 emissions has any impact on climate, temperature or weather – so the best strategy to beat Cap and Tax schemes is to state the fact – CO2 is not a driver of climate.
But, Mark. That argument would be wrong.
It is true that U.S. efforts, in and of themselves, to limit CO2 emissions will have no meaningful impact on the course of future climate, but it is not true that CO2 is not an integral part of the earth’s climate system and thus has a role as a climate “driver.” Admittedly, that role may be exaggerated, but it exists nevertheless.
-Chip
Hi Chip – I’ll cede the point that CO2 is an integral part of the climate system (as is, so some extent, just about everything else in the physical world). I’ll also agree there is evidence that some, albeit a small amount, of warming can be attributed to radiative energy being absorbed/”reflected” by CO2 in the atmosphere.
However the impact on climate of CO2 would appear to be rendered negligible by the other feedbacks. As such the role of CO2 as climate driver is debatable (and exaggerated, as you say).
So the argument may be wrong in absolute terms. The notion that reducing atmospheric CO2 through any means proposed will have any impact on climate is delusional – because, as a driver of climate, atmospheric CO2 isn’t the issue.
I guess my point is that spending time discussing the finer points of the economic models and impacts of various CO2 reduction schemes implies CO2 is the issue, and legitimizes the specious notion that we can somehow “manage” climate through taxation and regulation of CO2 emissions.
We are in a dangerous period. At a time more and more people recognize AGW as the scare it is, too many political entrepreneurs, big energy and financial concerns have become significantly invested in being green. There is a lot of money at stake. Politicians of all persuasions have been co-opted and the CO2 reduction legislation is either in place, or coming – and it is not clear anything can stop it.
Suggesting it’s “not the right time economically” implies there is a right time, and debating the nuances of these CO2 reduction schemes implies agreement that there is a problem.
The message needs to be that atmospheric CO2 is not a problem and schemes to reduce it are, for all intents and purposes, scams.
Cheers
Mark,
Agreed.
-Chip
Very nice distillation, Mark. Thanks.
Everything that is made by human can harm the nature. For this statement I do not need a scientific research (it is already visible…). That “something is happening” with the Climate we already can see and feel. No matter what kind of taxation and reduction of any kind of emission we set up, the impact on nature and then following on humans has already started. Once we had started to tune economical and environmental procedure we shouldn’t stop now.
“Market-based” is just another way of saying “manipulation of the market from it’s natural course to achieve a political end”. Manipulation is more subtle than out right control. But it doesn’t matter if Republicans came up with the bad idea to replace command and control with manipulate and incentivize, it still is not something proponents of Free Markets should get behind. If the GOP really is serious about it’s principles now, then it only makes sense that they would shun such a gross error. The Democrats never want to accept their party’s history, and would like us to believe that they aren’t the same party as the segregationists. So they say “we’ve changed, they are the racists now” “Sure Majority Leader LBJ opposed Eisenhower’s Civil Rights Act, but President LBJ signed such an Act”…But Republicans must own all their past mistakes, or in this case “successes”. They don’t get to change.