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Cap-and-Trade Offers Political Cover

By Robert Robb

The debate this week over the Lieberman-Warner cap-and-trade bill will be depicted as a fight between those who believe in man-made global warming and those who don't. And to a large extent, that will be the case.

It shouldn't be. There is a long stretch between the premise that there is a significant anthropogenic contribution to global warming and the conclusion that cap-and-trade is the best approach to mitigating it.

There are three harsh realities about cap-and-trade that are likely to receive short shrift this week. The first is that the conundrum over how to allocate emission allowances is irresolvable.

Under cap-and-trade, the government decides how much aggregate greenhouse gases can be emitted. Rights to emit are distributed. Those rights can then be traded.

The problem is in deciding who gets the rights initially.

In Europe, the rights were distributed roughly proportional to what producers were previously emitting. There are several objections to this.

First, it gives existing polluters something of value for free. That hardly seems fair.

Second, it disadvantages new entrants, who generally have cleaner production processes. They either have to petition the government for emission rights or purchase them from competitors.

The other approach is to auction off the emission rights to the highest bidder. Cap-and-trade for greenhouse gases, however, would apply to a vast expanse of the American economy. Auctioning off emission rights would engender huge economic uncertainty. Producers wouldn't know whether they could obtain sufficient rights to continue production or at what cost.

Lieberman-Warner splits the baby. Initially, some of the emission rights would be distributed to producers without charge, some would be auctioned.

Over time, the free permits would be phased out, and producers would have to purchase all their emissions rights.
Most of these equity and uncertainty problems would go away with a straight-forward carbon tax. No pollution would be free and polluters wouldn't get something of value for nothing. New entrants with cleaner production processes would be advantaged.

Yet producers would know they could produce and roughly what their emissions would cost. The tax could be calibrated to induce the increments of reduced greenhouse gases desired.

The only advantage of cap-and-trade over a carbon tax is political. With a carbon tax, politicians would be
increasing energy prices directly. With cap-and-trade, they are increasing energy prices indirectly through business regulation while creating greater economic unfairness and uncertainty.

Cap-and-trade is a refuge for politicians who don't want to own up to what they are doing.

The second harsh reality of a cap-and-trade program is that policing international offsets will be impossible.

Allowing international offsets reduces compliance costs considerably, since greenhouse gas reductions can be accomplished much less expensively in other parts of the world. As it emerged from committee, Lieberman-Warner allows producers to obtain 15 percent of their emission rights through international offsets.

However, the world is a big place and governance standards in developing countries often leave a lot to be desired, to put it mildly. Policing supposed greenhouse reduction projects in developing countries to ensure validity is simply not doable. A U.N. program intended to do so has bogged down, not that U.N. certification would be any more reassuring.

The greenhouse gas reductions contemplated by Lieberman-Warner -- 33 percent by 2030, 70 percent by 2050 - are doubtful to begin with. Without reliable international offsets, they are highly improbable.

Which leads to the third harsh reality. Even if global-warming is real, adaptation is the more sure and fruitful course.

To the extent global warming is human-caused, reductions in the developed world won't make much of a difference if those reductions are swamped by increases in developing countries. It's hard, without major technological breakthroughs, to fathom how that won't be the case.

It is also possible that global warming is real but to a significant extent is naturally occurring. To the extent global warming is a natural phenomenon, adaptation is the only possible approach.

Adaptation involves programs to better cope with some of the possible consequences of global warming, such as higher incidences of malaria, effects on food and water production, coastal flooding and loss of habitat.

Meaningful adaptation costs a fraction of what it costs to reduce emissions.

A carbon tax, to reduce emissions and prod technological breakthroughs, and adaptation are the way to go. But cap-and-trade, which gives the politicians cover, will rule the floor of the Senate.

Robert Robb is a columnist for the Arizona Republic and a RealClearPolitics contributor. Reach him at robert.robb@arizonarepublic.com. Read more of his work at robertrobb.com.

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