15 Mar 2009

Cap and Trade Sucks

Ben Stein points out the dangers of Cap and Trade:
Both ideas have merit, but there is a tricky little history to “cap and trade,” which seems to be President Obama’s favored approach. Because the credits would be traded on an exchange, or somewhere else, their prices would fluctuate. They could even fluctuate wildly, as prices of traded items often do. (See the stock, bond and commodity markets if you’re looking for examples.)

The European system of cap and trade has seen large fluctuations. Right now, because of the recession in European manufacturing, the cost of these carbon credits has fallen fantastically, rendering the cost of carbon emissions low. That doesn’t do much for reducing emissions.

Why add another element of uncertainty to energy production, especially if the goal of suppressing carbon-based fuel burning can be accomplished by another means? Energy companies have enough problems as it is — including reduced supplies, political risks and wildly changing prices for raw materials.

Of course, the new system would be a great benefit to the people who traded the credits. But how about the rest of us? Haven’t we just had a big lesson in what happens when we put traders ahead of producers and consumers? Have we forgotten that lesson already?

Why not do what governments usually do to reduce consumption — namely, impose a tax that punishes the production of carbon emissions? That would also be much less sensitive to manipulation by speculators — and the types of extremes that have led to our country’s recent undoing.
Bottom Line: He's right. C&T would help traders, politicians and corrupt businesses. They would (at BEST) be no better than carbon taxes for consumers and honest businesses. They would cost more to administer and be worse for businesses trying to avoid price uncertainty.


dWj said...

I'm still in the corner of carbon taxes on this one, but it's worth noting that the price of a fixed cap would be countercyclical; it would operate to some extent as an automatic stabilizer. I also think C&T would fly better politically, and if it were proposed with almost all permits to be auctioned from the beginning (rather than given away to reward past pollution), I would support it as better than doing nothing for another several years.

Brian said...

There are good arguments to be made for both approaches, but what's your ultimate goal? To cut carbon emissions, or to implement the lowest-cost program? With C&T the quantity of carbon emissions is set. With carbon taxes, an educated guess is made as to how high to set the carbon tax followed by how to offset that tax increase with cuts to income (or other) taxes. My guess is that after a few years, the carbon tax would have to be revisited because carbon emissions wouldn't be declining at sufficient rates. Doubling the gas price from $2 to $4 caused US consumption to fall, what, 2%? Granted, that was just a decline in the short-term, but I doubt the long-term would have looked that much different. Regardless, there would also have to be periodic re-tuning of those tax rates as carbon tax revenues declined. Finally, remember who your messenger is here. Ben Stein is not a fan of science, particularly not climate change. See http://www.freedomslighthouse.com/2009/03/ben-stein-talks-with-glenn-beck-about.html

In addition to his science denial, he's a big economic Polyanna, declaring as recently as July 2008 that it's a good time to get into real estate. Despite his not knowing a bubble from a hole in the ground, one has to question someone who suddenly points out how flawed markets are when he spends 98% of his time talking about how great markets are.

David Zetland said...

Brian -- I understand the allure of the "firm" cap in C&T, but I fear more opaque political intervention into C&T wulud make that cap not-so-firm.

Further, it would be easy to set (and explain) a tax that would move up or down as carbon indicators fluctuated. The same could happen for permits, except that they are designed to be "good" for years...

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