Is Cap-And-Trade Just Political Posturing? If Not, It Could Mean Economic Suicide

President Obama’s climate change legislation, the so-called “clean energy” bill, has passed the House of Representatives and is now being debated in the Senate. The president claims the bill will “spark a clear energy transformation that will reduce our dependence on foreign oil and confront the carbon pollution that threatens our planet.”

In reality, the bill will have no impact whatsoever on global warming.

If global warming is in fact real and man-made, the bill’s imposition of a “cap-and-trade” permitting system on heavy emitters and the oil and gas industries will have only one consequence: the creation of a huge environmental bureaucracy in charge of implementing it. Europe’s experience with a similar cap-and-trade system since 2005 makes this clear.

In theory, cap-and-trade appears to be a smart synthesis between government regulation and free-market principles. On the one hand, the government grants each factory a specific amount of polluting rights. On the other, factories that go beyond their allotted cap are allowed to buy pollution credits from those still below their cap.

Halting Acid Rain

Cap-and-trade was successfully applied in the 1990s in North America and Western Europe to eliminate sulfur dioxide, which provoked acid rain. Factories shifted to nonpolluting technologies, and acid rain disappeared in 10 years.

That success, however, is irrelevant for global warming. Acid rain was a local phenomenon, caused by a limited number of polluting industries; an alternative, nonpolluting technology happened to be readily available and cheap. This is not the case with global warming which, as its name indicates, is worldwide.

Therefore, any local effort, whether by well-meaning individuals or governments, makes no sense. When the U.S. or Western Europe takes steps to reduce carbon emissions, the impact on the climate will be negligible unless the whole world follows suit.

The next European or American cap-and-trade system thus confronts a paradox. If the cap imposed for each factory is low — meaning a more stringent requirement, as the low threshold will be exceeded sooner — the factory will have to choose between buying polluting rights, adopting new technology or moving its operations out of the country.

In most cases, leaving the country would be the most rational option when alternative energy still does not exist and buying polluting rights would be too expensive.

Third Option

If the U.S. follows the European model, though, the caps will be very high, in the interest of keeping factories from moving abroad. With high pollution caps, the pollution-rights trading market would not be vigorous; nor would there be much need to search for alternative energy.

On the other hand, the U.S. might devise a third way, a middle ground between the ineffective European model and a more punitive (and economically destructive) cap-and-trade system.

This third way would require a huge bureaucracy, however, to conduct a census of all polluting factories and evaluate the proper caps for each — high enough to keep them at home, but low enough to motivate them toward technological innovation. Yet even if such a “smart” bureaucracy worked, the impact on global warming would remain negligible.

Cap-and-trade, then, is either a political posture — to curry favor with the green movement and assuage popular concerns that we “do something” about climate change — or economic suicide, in that a stringent program, done locally but not globally, will bankrupt the nations that practice it.

Should we conclude that nothing can be done to stabilize the climate, then, without disrupting the economy? No: There is an approach, in fact, on which most economists agree. We might call it the global warming consensus.

Most economists and many climatologists admit that we have entered a global warming period. Human activities probably play a part, but how great, no one knows for sure. It may well be that carbon dioxide plays a significant role. As we do not know enough about global warming and its origins, the best approach is to act with caution, neither dismissing it nor overreacting.

In the name of caution, nuclear energy, the cleanest of all energy sources, should be strongly encouraged. France pollutes less because all of its electricity is nuclear-powered. China, with its high usage of fossil fuels, is at the other end of the spectrum, polluting heavily.

The U.S. is closer to China than France. Beyond nuclear energy, which is immediately available, energy innovations could be encouraged through a modest carbon tax. The carbon tax should encompass all activities from business to personal use.

It should be high enough to encourage the development of energy alternatives but small enough not to disrupt the economy: $3 per ton seems about right. In order not to increase the economy’s total tax burden, the carbon tax should replace other existing business taxes.

Value-Added Tax On Carbon

How could a carbon tax in just one country impact global warming when other countries don’t use it? Carbon-taxing nations could impose on foreign trade a value-added tax on carbon: Exports would be exempt, but imports would be taxed in such a way as to incorporate the cost of imported carbon.

Such a system would be easier to manage than the currently envisioned cap-and-trade proposals, because it would require only simple declaration and random control like any other tax system. By contrast, cap-and-trade requires a complete new administration to count all relevant factories, attribute quotas and control for fraud .

Why might governments avoid such policies? Perhaps they care less about the climate than they do about their images: to look green is more important than anything else.

If global warming is a real threat, such political posturing is deeply irresponsible. If it is not, then such postures can be safely ignored. In either case, however, in the name of global warming, it appears that we’ll have to pay for a bureaucratic army of green zealots in charge of useless regulation.

This piece originally appeared in Investor's Business Daily

This piece originally appeared in Investor's Business Daily