[Greg Mankiw] McCain vs Obama: Carbon Auctions

http://online.wsj.com/article/SB121063565248086701.html?mod=googlenews_wsj

McCain's Climate 'Market'
May 13, 2008; Page A16

The latest stop on John McCain's policy tour came at an Oregon wind-turbine manufacturer, where the topic was – what else? – the Senator's plan to address climate change. This is one of those issues where Mr. McCain indulges his "maverick" tendencies, which usually means taking the liberal line. That was the case yesterday, no matter how frequently he claimed his approach was "market based."

In fact, if "the market" is your favored mechanism, Mr. McCain's endorsement of a "cap and trade" system is the worst choice for reducing greenhouse-gas emissions. The Bush Administration has pursued one option, which combines voluntary measures with subsidies for "clean" alternatives. Since 2001 under this approach, U.S. net carbon emissions have fallen by 3% – that is, by more than all but four countries in cap-and-trade-bound Europe.

At the other end of the market spectrum is a straight carbon tax, which would at least distribute costs more efficiently. It would also force politicians to be honest about – and take responsibility for – the true price of their global-warming posturing.

Then there's cap and trade, which Mr. McCain has backed for years and would, as he put it with some understatement, "change the dynamic of our energy economy." He noted that Americans have a genius for problem-solving but continued, "The federal government can't just summon these talents by command – only the free market can draw them out." To translate: His plan is "market based" insofar as it requires an expensive, invasive government bureaucracy to interfere with the market.

Mr. McCain's proposed targets and policy instruments more or less mesh with the global-warming bill sponsored by Senators Joe Lieberman and John Warner that may come up for debate next month. The McCain plan would aim to return emissions to 2005 levels by 2012, and to 1990 levels by 2020. Barack Obama supports similar reductions.

In theory, this would be achieved by imposing emission ceilings on electric power, transportation fuels, commercial business and industries. If a company produced less carbon than it was allowed under the cap, it could sell -- i.e., trade – its extra allowances to other businesses. Under the McCain plan, permits would be given away to industries, at least initially. Mr. Obama prefers to "auction" the permits, meaning businesses would be taxed at the outset. So Mr. McCain's plan would help mitigate the transition costs of putting "the age of fossil fuels behind us."

The problem is that once government creates an artificial scarcity of carbon, how the credits are allocated creates a huge new venue for political rent-seeking and more subsidies for favored industries. Some businesses will benefit more than others, in proportion to their lobbying influence and how well they're able to game the Beltway. Congress itself will probably take the largest revenue grab, offering itself a few more bites out of the economy and soaking politically unpopular businesses.

Then there's the question of whether any of this will even reduce greenhouse gasses. The McCain plan would allow businesses unlimited use of domestic and international offsets to comply with the carbon cap. So a chemical manufacturer, say, would pay an industry not covered by the program – most notably, agriculture – to reduce its emissions. Or it could pay a coal plant in China for plucking low-hanging efficiency fruit, like installing smokestack scrubbers. In other words, U.S. consumers would be paying higher prices for energy in return for making Chinese industries more efficient and competitive. Europe is in the midst of that experience now under the Kyoto Protocol, and most of its reductions so far have been illusory.

The compliance bookkeeping for this new "market" is vastly complex, and a McCain Administration would create a public-private "Climate Change Credit Corporation" to oversee it all. This new regulatory body is likely to morph over time into an "Energy Fed," similar to the one Warner-Lieberman would create. Such an agency would set the price of energy indirectly by fiddling with carbon levies, which will undoubtedly lead to economy-wide distortions.

Given the distance between Mr. McCain's rhetoric and the policy reality, we wonder if he even knows what he's proposing. This is of a piece with his approach to many domestic issues, where the policy contradictions and cul-de-sacs overwhelm his professed political convictions. The McCain campaign believes his global-warming plan will appeal to independents and young people, as well as separate the Senator from President Bush.

But he will never be green enough for the climate-change fundamentalists. The Obama campaign and Democrats were already dinging Mr. McCain yesterday for half-measures. His concessions won't help him much in November, but they will make his governing decisions in 2009 that much more difficult if by some chance he does win.

 

Carbon credits are just a stupid idea.

 

Why is that? Don't like reducing CO2 emissions?

None of this matters unless China takes action, anyway

 

Carbon tax is shooting the economy in the knees. Cap-and-trade is putting it on a leash and handing it over to which ever bureaucracy or corporation will control the credits.

 

Weslinder is correct. Both methods have serious issues. It would be far more beneficial to invest in carbon free alternatives from the standpoint of long-term sense.

 

But isn't the whole idea that having a cap-and-trade system will encourage innovation and get people off of carbon emissions? It makes it profitable to find alternatives, as you can then sell your emission-allotment to other businesses and turn a profit off of them.

 

Yes. But talk about cumbersome and easy to abuse!

 

Little solutions that I think help greatly, and are generally consistent with free-market principles:

Reduce crude oil consumption:

1. Repeal the ethanol mandate immediately. It is a failed policy.

2. Return more of the gas tax to the states (Reduce the overhead). Ideally, the states will spend that on mass transit and/or roads to reduce congestion.

3. Convert the gas tax to a percentage tax instead of a per-gallon tax. A 40-mpg car wears down the road slower than a 20-mpg truck, but not half as fast. If fuel prices continue to rise and drive more people to drive more fuel efficient cars, this will be necessary for maintenance.

4. Railroads complain that trucks are "subsidized" because they are taxed less than the damage to roads than they do. If this is true, raise the tax on diesel accordingly.

Reduce gas/coal consumption:

5. Start issuing permits to the backlog of Nuclear plants. It is the most sensible "alternative energy".

6. Continue the tax-breaks for wind/solar energy. Maybe even consider subsidies. (I know this is out of character for me, but I think it's worth it for national security.)

Increase energy independence (does not reduce energy consumption):

7. Stream-line permitting for new refineries. The consolidation of oil companies is due to government-erected barriers. Reducing some of those would increase competition.

8. Allow more drilling off the coasts.

9. Allow drilling in ANWR. I stand by my trade tundra in Alaska for wetlands in Louisiana proposal.

10. Consider allowing Coal-to-Liquid technologies. It is now commercially viable, and the United States has the world's largest coal supplies.

 

It all depends on who is issuing the permits and how they are calculated. It gives a ton of control to a single agency or corporation, and that's something I'm not comfortable with.

 

All sensible solutions. The problem is all 3 candidates seem to be opposed to most of them. Hell, Congress just the other day once again voted down drilling in ANWR(along party lines as usual). One of the Dem Senators defended his vote saying it wouldn't increase supply. For once I'd love for someone in the media to ask these a-holes how they do plan to increase the supply.

 

It's not just upkeep. It's that our roads in many urban areas are inadequate for the demand. There's only three ways to fix this: reduce demand by diverting those in cars to mass transit, build new roads, or expand existing roads. States recognize this, but they need more money, and often they are being forced by the Federal Highway Administration to put money on dumb projects like widening I-10 to 6 lanes coast-to-coast.

Dubious claim. Corn Ethanol consumption is an energy hog, some of which comes from crude oil.

We currently pay fuel taxes on a per-gallon basis. I'm suggesting we convert to a per-dollar basis. If there is a decrease in fuel demand due to increased efficiency, we will still need the fuel tax money for roads. A percentage tax will attempt to sustain that fuel tax money.

I know. Those proposals aren't intended to reduce energy consumption or emission of CO2. They are intended to reduce our reliance on the Middle East, and possibly reduce the impact on the consumer.

 

Yes, it is an assinine policy. But arguing that repealing ethanol will reduce crude consumption is a bit odd. Perhaps you meant to imply a different biofuel alternative such as switchgrass?

No issues.

Psychotic unless you can either solve the waste problem (not bloody likely), or navigate the political hellhole that is a national depository (not bloody likely). I am a fan of nuclear energy and I get quite agitated when people fear monger about it - but charging ahead with no waste plan is flat out nuts.

Concur. Add geothermal to the list. It's INSANELY cheap. 0.09/kwh, IIRC. Bonus to this plan - the US can become the new technological leader...and make $$$.

I don't think it's a bad thing to keep this a bit challenging. If nothing else it adds further incentive to your point 6.

No issues.

I understand the principle, but the benefits are pitiful. And at what cost? I cannot get behind this plan while we continue to waste enormous sums of money that could be used to build an alternative energy industry.

I'd argue again the emphasis should be on getting OFF fossil fuels, not finding new ways to burn them...

 

Many of the proposals are for setting up the same kind of private-public partnership corporation that we currently have in the Federal Reserve, Fannie Mae, and Freddie Mac. Regardless of whether it's done by them or by a bureaucy is irrelevant. There are solutions out there that don't concentrate so much power.