Political Hay

A Maverick Climate Policy

Can we cap and trade McCain for a real free market candidate?

By 3.31.08

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Republican nominee for president John McCain recently returned from a whirlwind tour of Europe meant to promote his global statesmanship. In Europe, he met with leaders such as French President Nicolas Sarkozy and former British Prime Minister Tony Blair, and even published opinion pieces in major French and English newspapers that outlined his global vision.

Central to that vision is global warming. In his contribution to the French paper Le Monde, McCain gave the fight against climate change equal billing with the war on terror. He warned that Americans and Europeans "will hand over a much-diminished world to our grandchildren" if they do not "get serious" about climate change.

McCain, who once admitted that he "doesn't really understand economics," claimed the solution to the "looming threat" of climate change is to "unleash the power and innovation of the marketplace."

Unfortunately, McCain's plan fails to free anything. In fact, his big government climate policy would mitigate not global warming but economic growth.

Some background: Four years ago, Senator McCain co-sponsored -- with the then-Democratic Senator Joseph Lieberman of Connecticut -- the Climate Stewardship Act, a so-called "cap and trade" program to reduce greenhouse gas emissions. The Act was updated in 2007, and is now one of several cap and trade proposals being debated in Congress.

Like all cap and trade policies, this would require central planning of the economy. Starting in 2012, the government would assign emissions quotas (caps) to thousands of industrial users and suppliers of energy. Because emissions are synonymous with energy use, McCain's climate plan would be America's first energy rationing program since the oil crises of the early 1970s.

Businesses would receive part of their emissions rations free of charge, but they would have to purchase the rest from a government-run auction. Over time, emissions quotas would get smaller, until 2050, when aggregate emissions are capped at about a third of what they are now.

As the cap shrinks, companies would have to find new ways to cut their carbon footprint. In any given year, if a company's emissions exceed its quota, it could avoid a penalty by purchasing surplus emission rights from a business that beat its target.

McCAIN BRAGS ABOUT his "leadership" on the global warming issue, so he must believe that his Climate Stewardship Act makes for good politics. That's likely to change once voters learn more about the plan.

For one thing, evidence suggests that controlling billions of tons of greenhouse gas emissions from thousands of sources is too complex for government bureaucracies to handle. For example, in Phase I of the European Union's Emissions Trading Scheme, which started three years ago, a huge misallocation of emissions quotas led to a collapse in the price of carbon from $40 to 40 cents. At that price, there was no incentive to reduce emissions, which is why Phase I was an abject failure.

Even a functioning cap could have only a limited effect on emissions. Energy-intensive industries would have every incentive to move their operations to countries without carbon controls, like China. As a result, McCain's plan would cause a net reduction not of greenhouse gas emissions, but of American jobs.

Again, the European example is illustrative. Last month, the European Commission announced it will probably exempt Europe's steel, chemical, and power sectors from Phase II of the Emissions Trading Scheme because "it is not in the interest of the European Union that in the future production moves to countries with less strict emissions limits." But without those high-emission sectors, what possible good can come of a cap and trade scheme?

Or maybe we should ask whose good? The Arizona senator's plan might not shrink emissions, but it will surely grow government. Under the Climate Stewardship Act, companies must buy an increasing portion of their annual emissions allotment from a government-run auction that would raise billions of dollars.

McCain does not offset this increase in government revenue with tax cuts elsewhere in the budget, so government would get bigger. He has said that he wants to promote "green jobs," and indeed he would be doing so, by adding green bureaucrats.

Ultimately, the burden of the bill would fall upon American consumers. Industry cannot simply absorb the losses imposed upon it by McCain's energy rationing plan. Instead, as noted in a 2007 Congressional Budget Office study, "much of the cost of a cap and trade would be passed on to consumers in the form of higher prices for energy intensive goods."

In addition to mandatory emissions caps, McCain's bill would establish one of the largest ever government research programs, to develop clean energy technology. But government-funded research is unlikely to achieve a clean energy technological breakthrough because politicians are poor judges of which technologies show the most promise. If they were any good at picking winners, they would probably be venture capitalists.

Remember, government has a long history of failed energy initiatives. Synfuels have remained unaffordable for half a century, despite generous government support. The 1970s energy crisis prompted Congress to establish the Solar Energy Research Institute; a generation later, solar power is still far from competitive.

And just last month the White House shelved plans for FutureGen, a multi-billion-dollar clean-coal power plant prototype.

McCAIN CLAIMS THE Climate Stewardship Act is a market-based solution to global warming. It is anything but. He would have the government cap emissions; create the emissions market and rake off the profits; and control clean energy research.

If he really wants to put forward free market alternatives, they do exist. He could advocate the elimination of government market interventions that obstruct emission reductions and discourage the adoption of lower emission technologies.

To wit, the way the electricity market works now -- centralized electricity production transmitted over great distances to consumers -- is grossly inefficient. This wasteful model will persist only as long as government forbids competition in electricity transmission and distribution. Deregulation of the electricity grid would allow entrepreneurs to profit by making the system more energy efficient, and thus more environmentally friendly.

Then there's nuclear power. It leaves virtually no carbon footprint, but plant construction has slowed to a virtual halt because of the regulatory burden imposed on nuclear energy by local and federal governments. Lightening this burden would allow nuclear to compete properly with coal and natural gas, again to the benefit of the climate.

Another effective free market solution is expensing -- the removal of tax penalties on capital investment. By allowing companies to write off more of their investments sooner, expensing would encourage rapid turnover of plants and equipment. In general, newer facilities are more productive than older units, delivering more output per unit of input. Expensing would accelerate carbon intensity decline -- without dreaded energy rationing.

Natural gas has half the carbon footprint of coal. There is enough of it off the Gulf Coast to power American industry for 30 years, but it remains locked away because the federal government refuses to open it up to exploration. A certain someone could pressure his colleagues to do just that.

Congress is considering several climate bills, all of which include cap and trade schemes along the lines of McCain's American jobs killing proposal. If the Arizona senator wants to be a true maverick, he should buck the trend that he helped start -- by supporting free market solutions to global warming that might actually make a difference.

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About the Author

William Yeatman is an energy policy analyst at the Competitive Enterprise Institute.