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Monday, June 2, 2008

Cap and Trade = Mandate and Regulate

This week the Senate will debate a bill co sponsored by Joe Liberman along with Republican John Warner. The bill will attempt to tackle the issue of global warming. The bill would work something like this. There would be longer term cuts in total fossil fuel carbons that any company could use. Companies could then buy credits for extra carbon use from companies that don't use much and thus have some to spare. Of course, gradually the carbon usage would be dropped so that by 2030 it would 35% below what it is now. In other words, under this bill we would be mandated to use 35% less carbon based energy by 2030 even though we would also have a significant increase.

The logic behind it is that the forced reduction in carbon would spawn companies to use alternative energy sources. Of course, mandates almost never work like that. In fact, what they almost always do is create an imbalance between supply and demand for for a good or service, in this case energy. All this would really do is create an increase in energy costs. Here is how Robert Samuelson described the problem.

As emission cuts deepened, the danger of disruptions would mount. Population increases alone raise energy demand. From 2006 to 2030, the U.S. population will grow by 22 percent (to 366 million) and the number of housing units by 25 percent (to 141 million), projects the Energy Information Administration. The idea that higher fuel prices will be offset mostly by lower consumption is, at best, optimistic. The Congressional Budget Office has estimated that a 15 percent cut of emissions would raise average household energy costs by almost $1,300.

That's how cap-and-trade would tax most Americans. As "allowances" became scarcer, their price would rise, and the extra cost would be passed along to customers. Meanwhile, government would expand enormously. It could sell the allowances and spend the proceeds; or it could give them away, providing a windfall to recipients. The Senate proposal does both to the tune of about $1 trillion from 2012 to 2018. Beneficiaries would include farmers, Indian tribes, new technology companies, utilities and states. Call this "environmental pork," and it would just be a start. The program's potential to confer subsidies and preferential treatment would stimulate a lobbying frenzy. Think today's farm programs -- and multiply by 10.

As with all mandates, it is frought with unintended consequences. Last year, the government mandated an increase in corn ethanol fuel. This contributed to the crisis of increasing food costs because farmers were using fields normally set aside for food for corn ethanol. Similarly, this bill has its own set of unintended consequences. Furthermore, this will bill would create massive new government bureaucracy.

Lieberman's legislation also would create a Carbon Market Efficiency Board empowered to "provide allowances and alter demands" in response to "an impact that is much more onerous" than expected. And Lieberman says that if a foreign company selling a product in America "enjoys a price advantage over an American competitor" because the American firm has had to comply with the cap-and-trade regime, "we will impose a fee" on the foreign company "to equalize the price." Protectionism-masquerading-as-environmentalism will thicken the unsavory entanglement of commercial life and political life.

The problem with this bill is much the same as the problem with any mandate. Just because you force business off something doesn't mean they are ready, willing or able to find something else. The feds seem to think that if you limit the use of carbon that will mean business will find alternatives. That isn't how business works. They don't find innovation because they have to but because they want to. We didn't have a technological revolution in the eighties because the government mandated it as such. We had it because the economic growth in the eighties set the stage for it.

Rarely if ever has technological innovation been created at the gun of mandates. A much better way to spawn innovation is through encouragement. For instance, I proposed a plan for energy independence that centered on a series of tax cuts. If you encourage business to innovate, like with tax cuts, then they will simply move faster to where they would have gone anyway. If you force business to move somewhere before they are ready, all you will do is increase prices. That's exactly what happened with the ethanol mandates. That's exactly what would happen with cap and trade.

Unfortunately, this bill is being supported by each of the Presidential candidates including John McCain. I recently saw an opportunity for McCain to drive the global warming debate by presenting market based solutions. It appears that he thinks that cap and trade is a "market based solution". It isn't. It is a regulatory and mandate solution. Increasing rules, regulations, and the size of government is the worst way to solve any problem, and that's exactly what cap and trade is. John McCain had an opportunity to propose legislation that would have cut taxes in order to combat global warming. Had he done that, the conservatives would have cheered because they like tax cuts no matter what their intention. Instead, he has proposed a regulatory solution cloaked as a "market based solution", however we conservatives are not fooled.

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