Amid the public outrage surrounding health care reform, another
issue of equal importance for the average American has been
nearly forgotten: the upcoming Senate debate on the Waxman-Markey
“cap and trade” bill. This bill attempts to “cap” — that is cut
— U.S. emissions of greenhouse gases by forcing all energy
producers to pay for expensive emissions permits, which can be
traded on the basis of need and cost. The idea is that making
fossil fuel-based energy less affordable create incentives for
investment in low-carbon energy supplies, or energy-efficient
equipment, that otherwise would be prohibitively expensive.
Before the Senate vote, politicians and the public alike should
consider the experience of the strikingly similar “emissions
trading system” (ETS) in place in the European Union since 2005.
The European version has succeeded only in raising energy costs
to consumers, even as emissions continued to rise. Its entire
approach is fundamentally flawed and even self-defeating for two
main reasons. First, it is extremely difficult to judge how many
permits should be created. Second, by initially allocating
permits free of charge instead of by auction, both the European
and the proposed American versions of ETS fail to impose the
supposedly necessary costs on polluters, and thereby create
perverse incentives for industry leaders and government
bureaucrats alike.
To begin with, to judge how many permits should be created in
order to achieve targeted cuts in carbon dioxide (CO2) emissions,
regulators must make a series of projections about future
economic growth and possible changes in technology. In Europe,
they got their sums wrong. The number of permits created exceeded
the amount of CO2 emissions, causing the price of carbon to
collapse. Far from meeting target cuts, emissions within
the EU actually rose during the first phase of ETS
(2005-2007) by 0.8 percent. On the other hand, if too few permits
are created, skyrocketing energy prices would bring the economy
grinding to a halt, putting thousands out of work. Politicians
are therefore more likely to err on the side of caution by
speaking boldly but creating too many permits. This is what has
happened in Europe.
The European ETS’s biggest flaw is that individual governments
were allowed to give away permits as they chose. The free
allocation of permits essentially amounts to the
distribution of subsidies to businesses, which gives bureaucrats
the power to pick winners and losers. Those bureaucrats, in turn,
become prone to “capture” by rent-seeking interest groups. In
Europe, the companies that won the most permits were those with
the best connections and lobbying teams, rather than those that
needed them the most. Smaller distributors, such as hospital
trusts, were forced to buy permits from bigger utilities. The
price fluctuations inherent in such a politically-created market
have also led to a great deal of uncertainty and a decrease in
infrastructure investment, with the result that, as the
Economist noted recently, for example, Britain is likely
to experience blackouts in just a few years.
Moreover, the EU approach created a perverse incentive for
businesses to lobby for more permits than they needed so that
they could profit by reselling them to those that lost out in the
wheeling and dealing of the allocation process. As long as
permits are allocated free of charge instead of auctioned, the
market logic of the ETS is fatally undermined. As the legislation
now stands, under Waxman-Markey, 85 percent of the permits are to
be given away for free. This is unlikely to change (for the
better); for this bill would never have been passed in the first
place if not for the myriad give-aways (e.g. free permits,
subsidies) lavishly bestowed upon so-called “stakeholders.”
To sum up, the failure of the European ETS should give pause to
Senators considering a similar system for the U.S. Cap-and-trade
will not result in emissions cuts. It will, however, greatly
enhance the power of the government to regulate the economy. And
it will lead to higher energy costs, as the costs of trading
permits add to utilities’ cost of doing business.
Given these facts, why the strong push for cap-and-trade? The sad
fact is that both President Obama and the Democratic Congress are
misleading the public. Alternative measures such as a carbon tax
have not been considered precisely because their costs are
transparent and obvious to the public. By contrast, cap-and-trade
allows the President and Congress to claim credit for “taking
action” on global warming without acknowledging the real costs
that entails — costs which the public, when informed of the
facts, is rightly unwilling to accept.
