Why McCain's "Cap-and-Trade" Won't Work Nearly as Well as Obama's
With McCain now on board for a “cap-and-trade” system, it's a certainty that we'll have a president next year who wants to address global warming by imposing an overall cap on U.S. carbon emissions, which will drop annually. The “trade” part of the equation is that companies finding efficient ways to cut emissions can sell the unused portions of their permits to others.
But look more closely and you see a big difference between McCain and Obama (and HRC, for that matter)on how the permits are allocated. McCain’s proposal would give the lion’s share to companies that are now the biggest polluters. This does have some logic to it: after all, as the overall cap tightens each year, the biggest polluters face the largest challenges in cutting emissions.
By contrast, Senators Obama and Clinton have both proposed allocating permits through an auction. Under this system, every company – large or small - would have to buy rights to pollute. As a result, the biggest polluters would have to pay the most - thereby providing them with the greatest incentive to cut emissions right from the start. This makes more sense.
Remember, our atmosphere belongs to all of us. It seems only reasonable that polluters should have to pay to use it. The citizens of Alaska and Alberta, Canada get yearly dividends from the oil companies that take away their natural resources. Why shouldn’t the same principle apply when industries use the biggest common resource of all? The money they pay for permits could be returned as yearly dividends to every American family.
Of course, if polluters have to pay for the right to pollute, some of these costs might be passed on to consumers in the form of higher prices. But the yearly dividend checks would offset any price increases.
So next time you hear about cap-and-trade, ask the all-important question: How are the permits allocated? A carbon auction gets my bid.
But look more closely and you see a big difference between McCain and Obama (and HRC, for that matter)on how the permits are allocated. McCain’s proposal would give the lion’s share to companies that are now the biggest polluters. This does have some logic to it: after all, as the overall cap tightens each year, the biggest polluters face the largest challenges in cutting emissions.
By contrast, Senators Obama and Clinton have both proposed allocating permits through an auction. Under this system, every company – large or small - would have to buy rights to pollute. As a result, the biggest polluters would have to pay the most - thereby providing them with the greatest incentive to cut emissions right from the start. This makes more sense.
Remember, our atmosphere belongs to all of us. It seems only reasonable that polluters should have to pay to use it. The citizens of Alaska and Alberta, Canada get yearly dividends from the oil companies that take away their natural resources. Why shouldn’t the same principle apply when industries use the biggest common resource of all? The money they pay for permits could be returned as yearly dividends to every American family.
Of course, if polluters have to pay for the right to pollute, some of these costs might be passed on to consumers in the form of higher prices. But the yearly dividend checks would offset any price increases.
So next time you hear about cap-and-trade, ask the all-important question: How are the permits allocated? A carbon auction gets my bid.
posted by Robert Reich | 5:07 PM
40 Comments:
Of course that makes sense, but one of the problems in the US economy of late is unintended consequences (e.g. solving the credit crunch leading to runaway food prices). Under the respective policies, it seems that the Obama/Clinton approach does provide greater incentive to pollute less, but it also provides greater incentive to say "screw it, let's just move to China where there is little regulation." Combine this with the increase in the corporate tax rate, then the expatriation becomes more likely.
Ah... but there's no way to tell in advance is there...
The unintended consequences could be quite interesting.
A foreign company (or cartel?) could bid up carbon permits in order to raise the cost to competitors whose plants are in the U.S. That would probably be bad for our economy in the short term, although it might also hasten whatever "green dividends" can be reached.
On the other hand, allowing Greanpeace and Sierra Club to take donations and use them to buy and "retire" carbon permits seems entirely legitimate to me.
And what about the large plume of pollution that blows into the US from Asia? My bet is on protectionist legislation masquerading as "fairness" with respect to U.S. companies paying carbon taxes that Asian manufacturers don't..
rberlin wrote:
"A foreign company (or cartel?) could bid up carbon permits in order to raise the cost to competitors whose plants are in the U.S. That would probably be bad for our economy in the short term, although it might also hasten whatever "green dividends" can be reached."
A US marketplace (Chicago Climate Exchange) has already been set up to trade these credits; hopefully, somebody will regulate it. As you rightly mention, a corporation, hedge fund, or sovereign wealth fund could basically bid the prices for the credits to the stratosphere, which hastens expatriation. So we walk a fine line between regulating pollution here or forcing manufacturing overseas, in which case we'll get killed by pollution drift or toxic products that we have no ability to regulate.
The game is about to change if Venter has his way. Using a synthetic methogen which would use anaerobic respiration to convert carbon dioxide to methane which is a feedstock for various chemicals, the global warming issue could go away quite rapidly along with the petrochemical industry if Venter and his microreactors come into play. Venter is known for getting things done and being right. See this talk: http://www.ted.com/index.php/talks/view/id/227 .
Venter plans to shake things up and give hope where there was none. He mentions Davos in his talk. Carbon permits are old thinking. In biology, one organism's waste is another's food. Venter knows this. Come to your own conclusions, but this is a scientist who left NIH when they didn't believe that one could sequence the human genome via shotgun sequencing. He proved them wrong.
I have lived in Calgary, Alberta, Canada since the 1950's. We do not get yearly dividends from the provincial or federal governments or the oil companies (unless shareholders).
A better approach is the revenue neutral carbon tax.
http://www.carbontax.org/
Dear Robert Reich,
I hope you are listening to the comments on your post.
Of course, there is a benefit to "auction" rather than giving away allowances.
But the problems are so clear and so deep with the "free-marketing" of these allowances that is hard to believe that you cannot see the advantages of a carbon tax over the cap-and-trade system.
The CBO found the carbon tax to be the "most efficient" means of achieving our climate change objectves.
This means it is the cheapest and quickest way to get there.
The only excuse for having consumers pay Billions, if not Trillions, more than is necessary to achieve our goals is the lack of political will by the Democrats you defend.
Let's get on with the carbon tax and solve the climate change problem as quickly and cheaply as possible.
Joe Bongiovanni
Harborton, Virginia
I think, as you point out, that it is great to have both presumptive nominees willing to put caps on pollution. However, I am not sure that I like the dividend idea you suggest, only because I imagine it would be a one-time, lump sum sort of thing that is not likely to be of much help to consumer dealing with the higher costs throughout the year.
Perhaps a better alternative would be to provide an income tax reduction, in lieu of a dividend. This would seemingly help the average consumer more than a lump sum dividend. Wouldn't this also be more likely to be approved by Congress?
As is probably clear from this suggestion, I don't have formal training in tax policy, but I am wondering what your thoughts on this alternative approach might be--pros and cons.
Wrong. As Coase demonstrated, the allocation of emission rights makes no difference to the outcome. If firms are allocated emission rights and use them, they forego the income that they could receive by selling/auctioning them, so their incentive is the same. Moreover, since such polluters do not currently pay, sudden imposition of extra costs might put them out of business. Perhaps the best solution might be an allocation that starts in favour of firms and gradually shifts to the government on behalf of all citizens.
Dr. Reich:
Admittedly this subject gets far afield from any knowledge I have of the issue. There are visitors to your blog that would suggest just about any subject achieves that threshhold.
Call me paranoid but Cap & Trade theories get me thinking CDOs and tranches. Given that our financial wizards are more into gimmicks that produce gain than to improving anything beyond fatter bank accounts, I fear some sort of quan methods approach will create a market for the permits that will leave carbon reductions in the dust.
Today's paradigm is never let progress get in the way of profits.
So far it sounds like your readers have a good handle on the issues.
hahaha
ml
"Cap and trade" is, at best, simply a sham designed to show progress while the underlying realities do not change. At worst, it is another modern incarnation of indulgences from the church of environmentalism, just like "carbon offsets", where money moves around, from the pockets of the gullible into the pockets of the politically connected, with nothing actually happening.
"A US marketplace (Chicago Climate Exchange) has already been set up to trade these credits . . . "
Exactly. And who controls that marketplace, and who will be profiting from it?
That this is being touted as a global solution to a global problem is simply ridiculous. Any politician who actually believes that China, India, Brazil, et al. will honestly follow a "cap and trade" system is not competent enough for public office.
A carbon tax will help, but the real solution, for better or for worse, is the high price of energy we are currently experiencing, which will push us toward real solutions faster than the corruption- and cheating-prone redistribution schemes currently being envisioned.
RR: So next time you hear about cap-and-trade, ask the all-important question: How are the permits allocated? A carbon auction gets my bid.
Duh! Hell, let's go one step further! Today's lowest polluters are yesterdays best investors in pollution reduction. What better way to reward them than to offer them discount rates for their permits on their much-reduced carbon footprint. Then they could buy up permits and resell them at a profit to those polluters who refused to act earlier.
That's not just morally right, it helps to make the right behavior more profitable; the essence of free market economics.
No thanks!
Auctioning off our planets future on some mega-corporate Ebay doesn't solve the problem. There are so many problems with Cap-and-Trade it's hard to begin. The XOM, COP, hedge funds... will bid up the prices so high, no small companies will be able to compete.
Give me a carbon tax with the money going to alternative energy development and incentives, in 5 years hard carbon reduction requirements, all accompanied by tariffs that adjust import prices to our carbon standards. If the rest of the world wants to sell to America, they should get serious about carbon reduction, not some cap-and-swap shell game.
toast:
Well hell, there goes free trade.
Peripheral Visionary said...
"Cap and trade" is, at best, simply a sham designed to show progress while the underlying realities do not change".
Amen. Well-said.
Commodifying emissions? You guys crack me up. That's nothing more than allowing the fox to guard the henhouse. lol A carbon tax would be slightly preferable but way short of the changes needed to actually preserve our natural world.
Dr. Reich,
I'm a Carbon Tax proponent. As posts herein have said, it's much SIMPLER to administer compared to other options which, due to their complexity, are clearly more vulnerable to gaming and manipulation by the parties involved.
I tend to agree with others that increasing the cost/price of a product is the best way to discourage consumption and emissions ... recognizing that wasted energy and intensive lifestyles are part of the problem. I know this is tough when a commodity like fuel is already at historical highs ... but maybe this is the added price that must be paid to more quickly change people's behavior, to encourage innovations in clean and efficient technology.
All options will likely lead to higher prices for consumers for the foreseeable future. But when alternate non-fossil fuels and more efficient energy practices take hold, the carbon tax (or cap-and-trade) effect on higher gasoline prices would undoubtedly decline.
Obviously, a carbon tax should be a progressive tax to protect low-income purchasers, as it would hurt the poor and middle-class the most. Thus, it would need to be directed at the more wealthy who consume vastly more fuel, gasoline and energy than the poor. This means it's necessary to get the tax rates right for this factor and, for example, to take into account the pollution difference between home heating oil versus home heating gas.
I like the idea advanced by some that a carbon tax be "Revenue Neutral." This is where revenues are placed in a fund and are returned as a subsidy or tax break as an incentive for fuel-efficient behavior (e.g., small cars, hybrid cars, non-fossil fuel driven cars, etc.).
In general, most experts believe a broad-based carbon tax is the fastest and simplest way (compared to cap-and trade or auction options) to reduce GHG with far fewer unintended consequences.
Contrary to what I said above, however, it appears the strong trend of rocketing fossil fuel prices at the pump might be even OBVIATING the necessity for any further tax incentives to change consumer and corporate behavior.
I leave this added complication to the merits of a carbon tax (or a cap-and-trade) system to better informed minds. But, in principle, I'm see many problems with McCain and Obama's complex options.
laymen
"Well hell, there goes free trade."
Free trade! Free trade! (this is my ranting voice) :)
Those who pray at the alter of unregulated "free trade" need to pull their heads out of the sand (or wherever their heads may be). China tightly controls it's currency, the oil companies get subsidies, ADM through it's political contributions gave us the folly of corn ethanol, 3rd world farmers live subsistence life's thanks to subsidies to American farmers for corn cotton sugar, try to sell a bottle of wine to France...
There is no such thing as "free markets". There are only manipulated markets. The only question is, do we manipulate a market to benefit a few powerful people at the expense of everyone else, or do we manipulate a market to benefit the whole of society for generations to come?
This ain't rocket science! The clean water act and the clean air act are both examples of extremely successful laws. No cap-and-trades, no pollution taxes. They were simple; you're killing us!, and if you don't stop polluting we'll close your business! It worked, It worked very well.
Quit trying to appease a failed conservative illusion and do what works!
toast:
Is always good to unleash a brilliant mind. Certainly I am renown, perhaps disdained, for being argumentative to downright nasty, but my "free trade" remark was facetious.
Most of my postings, I would hope, argue for the welfare of the common man and while I realize and applaud the improvements to the lives of many of the world's less fortunate, I see and condemn the impact that "free trade", as oxymoronish as that term is, has had on our economy and our working class.
Keep up your ranting, scream louder, I'm in your corner, even though I keep an eye out for the nearest exit.
Laymen;
I took your "free trade" remark as facetious, thus my smiley face :) preceding my rant. I've read enough of your postings that I believe I know where you're coming from, and I meant no offense.
Conservatives tend to believe that "free trade" will cure half the problems of the world, "lower taxes" will cure a second half, and "getting government off our backs" will cure another half.
Whenever given the opportunity, I try to expose these misconceptions the best I can. This being one of the more civilized blogs on the net, I try to make my ranting approach light-hearted, although the content I take seriously.
I do enjoy reading the many well reasoned comments I find on a blog concerned more with thought than screams, and I hope Dr. Reich appreciates some of the attempts to help refine some potential reasoning flaws that might occur in his commentaries.
toast:
Not a problem. Being somewhat outspoken, I shed my thin skin years ago.
I do appreciate the math lesson. I've been struggling for years tying to get all the conservative pablum to add up.
I too, try to stay lighthearted in my rants, or shall we say reasoned expositions. Occasionally I succumb to temptation and fire back with, perhaps, less than decorum.
I enjoy this blog as well. I agree that for the most part the intellectual level of dialogue far surpasses many of the other blogs.
As much as I admire Dr. Reich, and I certainly consider him a very bright and accomplished man, I am not sure I get the feeling that he suffers disagreement gladly. If is often the nature of the highly educated, reasoned mind to abhor any attempts to modify or dispute its reasoning. Add to that the fact that he is a college professor and, although stereotyping, those of that venue tend to see reasoned difference, from less than their peers, as fallacious, uneducated thinking.
I never forget in an "Economics and Government", in the late 60s, a student expressed an opinion that, "labor unions were important at one time but they have outlived their usefulness", to which the professor replied, "That must be a flaw in your education". Not exactly a reflection of appreciation for reasoned debate.
Reading other bloggers' comments I am happy to realize that they have argued with your opinion. I don't like the idea of polluters paying money to pollute. This will just inflate prices for the general populace who with their dividends [you have to explain the dividends a little better perhaps] will have to pay the polluting companies: putting money back in the pockets of the original pollution instigators.
I didn't like the republican plan, but as a democrat I still find this plan unacceptable. I want change, starting with lower oil prices and I truly hope that Mr. Obama would step up and separate himself from Mrs. Clinton in situations such as these.
Thank you for an awesome blog though!
This post has been removed by the author.
Remember "acid rain?"
Does anyone know why it's no longer the huge problem that it was? I didn't, until quite recently.
The amendments to the 1990 Clean Air Act which produced the dramatic reduction established (gasp) a Cap-and-Trade system.
rberlin
Title IV of the clean air act amendment of 1990 did indeed implement a cap-and-trade sytem. But there were other ways to meet the tighter SO2 requirements, such as switching to lower sulfur coal or applying scrubber technology.
According to the DOE;
http://www.eia.doe.gov/cneaf/
electricity/clean_air_upd97/
exec_sum.html
"Most utilities (52 percent of Table 1 units) used fuel switching and blending in 1995. This method accounted for 59 percent of the reduction in SO2 emissions in 1995 compared to 1985." Only about 27% chose to obtain additional allowances.
Using this as an example; If you want to reduce CO2, you need more cap, and less trade.
Dear Mr. Reich,
Where are you on the most
important day of this
country's democracy?
This Rules and By-Laws farce of a Hillary theiving of our democracy needs your public scrutiny.
Sincerely,
Dismayed Voter
timmaaay!!!:
There is no thieving going on. It is a debate and Hillary's side, as well as the two states involved, seem to have the high ground and the better arguments.
No doubt Dr. Reich is either watching it or has it on DVR.
Cap and Trade? - icing politicoeconomic babble...
The United States Dollar's Quantum Valuation Pattern
Relative to other leading economic nations, America's governments, corporations, and citizens have borrowed proportionally more. Under this primary GNP growth through debt pushing on the proverbial string parameter and to a correlative and accompanying measure - under the conditions of inappropriately low interest rates and imprudent lending terms which fueled that borrowing - the US dollar has fallen - in a relatively precise fractal manner - against a basket summation of other leading currencies. While the dollar has fallen nearly 50 percent against basket currencies in the last 12/30/24/18 :: x/2.5x/2x/1.5x months, it has fallen to less than 15 percent below its lows from 1987 to 1994. The world requires inflation of all currencies for growth in order to service debt and population growth. in spite of the 2 percent US interbank lending rates and US treasury rates which directly foster malinvestment speculation in stocks and commodities, the latter of which is killing the pay check to pay check surviving middle class, a necessary saturation curve mathematical fractal correction of the US dollar to the summation basket fiats is now and will occur.
Just stop your credit now here is your right way for the credits.
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Loved watching you duke it out on CNBC! Isn't it obvious? "Cap and trade" is a market-based (i.e. "trade") solution, not a "soviet style" system as Kudlow put it.
You write,
"Why shouldn’t the same principle apply when industries use the biggest common resource of all?"
I suspect that an even bigger common resource than our environment is our urban land value. We permit corporations, trusts and individuals to privatize that, too, and we shouldn't.
We should treat it as our common treasure, and require those who seek to privatize it to pay us for that which they take.
Actually I am not inerested in pocitician blogs.But you are just like my father :)
Idiots all...........CO2 is NOT a pollutant. We cannot change the weather nor can we destroy the Earth. We can however, destroy the greatest country ever to exist. The USA is less than 100 years from falling, just as Rome did. "consensus blah, blah, blah..." Just the facts please! The facts seem to contrdict the GW arguement........in fact, they seem........inconvenient!
Ah, the last(?) great opportunity for Henry George to have an impact.
http://en.wikipedia.org/wiki/Henry_George
Perhaps we have to learn from the success of the SOX and NOx markets. We obvisously also have to learn from the ENRON melt down and market manipulation. As a former electricity system planner watching the nuclear power economics never achieve the suggested potetial and having all the waste to contend with, I now watch commercials suggesting that nuclear energy is CLEAN in both Canada where I live and now on CNN. The recent high costs of energy and peak oil position will probably provide significant incentives for renewable energy and waste energy recovery, demand response programs and other good economic reasons to create CHANGE. Both potetial president's will have to abide by the NAFTA and Trio environmental agreements since we share the continent.
Click the link and learn what peer reviewed science has to say:
================================
CO2 is Not a Problem
================================
Global Warming caused by CO2 is NONEXISTENT.
This is one of the greatest myths perpetuated by those that stand to profit the most (carbon traders).
Read http://icecap.us
Lets stop this insanity before it is too late!
You are f-ing suckers, it is just a new taxation system. Wake up and smell the taxes. The cavemen and their carbon-powered dinasours polluting the atmosphere, that is what brought us out of the ice age(whoooo, thank the carbon gods for that one) When you are paying your $400 electric bills, $500 gas/home heating oil bills, $8 gasoline, $9 diesel, higher consumer/wholesale goods, come back and talk about mother nature you f-ing hypocrites.
youtube.com
dannyamericanow
In more polite terms, I agree that this is being structured as a tax. To the end that the atmosphere belongs to all of us, then each person should be given a "chunk" of the atmospheric rights which they can sell in the market. The idea of the US government being given another handout seems a tad offensive.
Of course, as pointed out in yoru blog, India and China need to agree or the challenges are pretty large.
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