Sunday, December 7, 2008

So I'm Agreeing with Ralph Nader of all People... Sort Of

So putting aside the debate of to what extent global warming exists, to what extent human carbon emissions are causing it and to what extent mitigation of carbon emissions will lessen temperature change, I am going to assume for the sake of argument that we should indeed implement some kind of national system to reduce carbon emissions. I do this because this is the political reality we are currently in. With the current complying Congress, as soon as Obama and McCain were both nominated, this debate effectively came to an end, as both of these men are in favor of such a system.

With that said though now comes the debate over exactly how to go about doing this. On this topic, Ralph Nader has a very solid piece in the Wall Street Journal earlier this week in which I generally agree. There are essentially two big issues to still deal with in creating a system:

1.Unilateral Action vs a Global Scheme

One of the major problems with the Kyoto Protocol was that it only affected industrialized nations and exempted countries such as China, India and Brazil, the nations with the fastest growing output of emissions. In China’s case, it may actually outtake the US this year for the largest total emissions as well. So why was this bad? Is not getting some nations on board better then none? The problem is that any system that tries to mitigate carbon emissions does so by making the output of carbon more expensive or carbon producing activities more expensive. Therefore there is a substitution effect where firms that emit a lot of carbon simply move their facilities to a country like China that does not have restrictions. The end effect is no global reduction, just substitution, while at the same time deepening the trade deficit and destroying jobs in the developed nations. As Nader states:
Cap-and-traders assume, without much justification, that one country can put a price on carbon emissions while another doesn't without affecting trade or investment decisions. This is a bad assumption… Good intentions to limit big polluters in some countries but not others will turn any meaningful cap into Swiss cheese. It can be avoided by relocating existing and new production of various kinds of CO2-emitting industries to jurisdictions with no or virtually no limits…Because of the sheer scale of the challenge and the state of the hyperglobalized economy, we will need the same price on carbon everywhere, or it won't work anywhere.

This was one of the reasons why the US never signed onto Kyoto and up until last year, Australia didn't either. Doing so may have made a bunch of greens on the west and east coasts feel good about themselves that the US would be emitting less carbon, but all we would have done is export our carbon to other nations and destroy many Midwest factory jobs while we were at it. If there is going to be a carbon limiting system, it must be done on a global scale where virtually every country is on board and must include all the major industrial powers, including China, India, etc. The incoming administration and Congress would be unwise to rush a system into place in order to fulfill a campaign pledge if it is not done in tandem with some type of global arrangement.

2.Cap and Trade or Carbon Tax?

The vogue idea right now is to place a cap and trade system into place. The government will set some cap on the total amount of carbon allowed to be emitted across the economy and will give out or sell credits to various firms. The firms are then allowed to sell them to each other with the theory being that firms that can easily reduce emissions would rather sell the extra credits where firms were it is difficult to do so, will buy extra. This is designed to limit the economic damage of such proposals.

In theory this should work, but is has a tremendous amount of practical problems, that make a carbon tax more appealing. First, this will require a gigantic regulatory scheme and bureaucracy in order to orchestrate this massive planning endeavor. It would likely be very complicated and the cost burden both to the government and to private firms in implementing this would be heavy. As Senator McConnell stated, “This proposes to be the largest restructuring of the American economy since the New Deal.” A carbon tax is a lot more simplistic, applied at a few key areas of production, say at natural gas hubs, or refiners, etc, and then the tax cost will be passed down through the system.

Second, a cap and trade system would become a lobbyist’s paradise as every special interest will want some type of adjustment credit, exemptions, etc. Furthermore, members of Congress with given industries in their states will want exemptions for these firms and will be very happy to oblige to their lobbying power. Because the effective measuring of carbon output at virtually every stage of production is required for this to work, there will be tremendous wiggle room for special interest to effect how this is done so that it is done in their favor. Nader states:
…administering billions of dollars of carbon credits in a cap-and-trade system in an already chaotic regulatory environment would invite a civil war between interest groups seeking billions in carbon credit handouts and the regulator holding the kitty. By contrast, a uniform tax on CO2 emissions levied at a small number of large sites would be relatively clear-cut.

Lastly, a carbon tax is a lot more intellectually honest and straight forward to voters and consumers. Any restriction on emissions will increase the cost of goods to some extent. Whether this is done directly through a tax, or indirectly through cap and trade, it still has the effect of being a consumption tax. Lets then call it for what it is.. a tax. Just as we tax cigarettes in order to dissuade that behavior, but it makes that behavior more expensive for those who still indulge, taxing carbon works in the same manner.

To effectively put in place a cap and trade system, it would require a gigantic federal bureaucracy and one that every political group will wish to fight over for its control, destroying the original intent of the program in the first place while just giving us more ineffective large government.



Let me begin by addressing the issue that EJB neatly puts aside in his first paragraph; I'd like to just briefly touch on the global warming idea because it is obvious that my colleague reserves some doubt regarding its truth. The problem, of course, is the idea behind a "consensus." The best way to criticize a position or theory, regardless of the substance of that theory, is to claim that there is no scientific consensus surrounding its validity. This is obviously because the scientific community is a very large group of people and, quite likely, there will be dissenters. Now, some have claimed that there is a consensus as to human exacerbation of global warming (but, as is clear, there are respected scientists who do not agree). My point though is that consensus should not be the standard by which we evaluate the legitimacy of certain claims. If we did, we would have to seriously doubt evolution and certain precepts of non-Newtonian physics (after all, there are people in the scientific community who would strenuously disagree with those theories). Asking for total agreement on an issue is simply too high a burden. But when the US National Academy of Science and the American Association for the Advancement of Science both claim a relative "consensus" on the issue, I am willing to lend them credence because they really have nothing to personally gain from public belief in those statements.

The Kyoto Protocol is a solid first step towards reducing global carbon emissions because it strengthened and legitimized (as a global concern) the idea that we can help reduce global climate change. EJB's point - that it will not sufficiently or efficiently reduce those emissions because major CO2 producing countries are omitted - is well taken; however, it might be asking too much to posit that the United States should not move forward with carbon reducing initiatives until the point at which everyone in the global community is similarly acting. Negotiating within the global community is extremely difficult because of the large number of nations we would be dealing with. The more parties you enter into negotiation with, the more transaction costs each party incurs. Thus, if we were to hold, as domestic policy, that we would not initiate CO2 reduction plans until the world decided to work in tandem with us, we would be waiting a very long time - not a good move for the world's leading CO2 emitter (though not for long, thank you China).

I would also point out that Nader's argument - as with any good economic argument - is valid only because he restricted the scope and frame of his inquiry. This is the key to winning any good economic or legal battle. While it is true that anti-climate change initiatives would increase operating costs for businesses, corporations are incentivized to relocate their factories elsewhere only if all other conditions are assumed to be equal. To argue, as Nader does, that Company X will simply move to China if we institute a CO2 tax because China does not have one and thus they will save money only makes sense if there are no other better reasons for staying in the United States. We do not hear much about this question and there is no empirical data that I can find which supports the theory that carbon taxes will significantly increase the outsourcing and relocation of American business.

As for the debate over cap-and-trade vs. a carbon tax, I must say I haven't had the opportunity to fully consider either option. EJB (sharing Nader's concerns) seems to argue that we should favor a carbon tax simply because the cap-and-trade method would necessitate the creation of a large bureaucratic system. Perhaps. However, there is reason to believe that cap-and-trade systems need not be plagued with the necessity of creating new bureaucratic institutions. Such a system already exists for the attempted control of acid-rain.

This interesting op-ed piece further suggests that cap-and-trade would work more efficiently than a carbon tax. The author notes the cap-and-trade system already in place within the US for controlling the creation of acid-rain - and that this system has worked astonishingly well. The author also responds to EJB's second argument (regarding the likelihood of special interest lobbying and hand-outs) by noting that taxes, too, are susceptible to exemptions and special treatment of certain groups. This seems patently obvious - interest groups are hard at work attempting to secure tax breaks and reductions for their clients. The major thrust of the argument, and the important policy difference illuminated by the juxtaposition of the two systems is this:
But the key difference between a carbon tax and the cap-and-trade approach comes down to the issue of certainty. A tax provides for cost certainty; the cost is fixed because of the tax. Cap and trade, on the other hand, provides for environmental certainty. What's fixed is the cap itself -- and it is based on an assessment of the level of emissions you need to get to in order to protect the climate.
While the carbon tax may be more "intellectually honest" - and by that I assume EJB means something along the lines of "easier for businesses to calculate and foresee their expenses" - the cap-and-trade system better works to protect the environment by definitively limiting the amount of carbon our country emits.