Posted by Jonathan Adler:
Climate Policy as Sausage Making:
http://volokh.com/archives/archive_2009_05_17-2009_05_23.shtml#1242653024
The NYT has an [1]interesting article this morning on how
cap-and-trade became the greenhouse gas emission-control strategy of
choice.
How did cap and trade, hatched as an academic theory in obscure
economic journals half a century ago, become the policy of choice
in the debate over how to slow the heating of the planet? And how
did it come to eclipse the idea of simply slapping a tax on energy
consumption that befouls the public square or leaves the nation
hostage to foreign oil producers?
The answer is not to be found in the study of economics or
environmental science, but in the realm where most policy debates
are ultimately settled: politics.
Many members of Congress remember the painful political lesson of
1993, when President Bill Clinton proposed a tax on all forms of
energy, a plan that went down to defeat and helped take the
Democratic majority in Congress down with it a year later.
Cap and trade, by contrast, is almost perfectly designed for the
buying and selling of political support through the granting of
valuable emissions permits to favor specific industries and even
specific Congressional districts. That is precisely what is taking
place now in the House Energy and Commerce Committee, which has
used such concessions to patch together a Democratic majority to
pass a far-reaching bill to regulate carbon emissions through a
cap-and-trade plan.
Yet the same things that make cap-and-trade politically viable -- the
ability to buy off special interests -- also makes it particularly
vulnerable to [2]rent-seeking and interest group manipulation. In
politics this may be a feature, but for sound policy it is a bug. Rent
seeking may grease the skids for a law's enactment (and [3]help the
sausage get made), it can also compromise the law's ultimate
effectiveness (as Europe has discovered). And the more complex and
comprehensive a cap-and-trade system becomes, the greater its
vulnerabilities. The compromises in the House bill go beyond doling
out free credits, and therein lies the larger policy risk. And insofar
as cap-and-trade, in theory, can resemble a carbon tax -- it's really
a [4]carbon tax plus corporate welfare.
[5]Paul Krugman weighs whether the current House climate bill is "good
enough" to merit liberal support. To some, a leaky cap-and-trade bill
is still a major leap forward. In the short run, creating the
regulatory architecture for carbon control is more important than
precise emission limits. Yet Krugman goes farther, arguing that
cap-and-trade would be superior to a cabron tax even if the latter
were politically viable.
One objection � the claim that carbon taxes are better than cap and
trade � is, in my view, just wrong. In principle, emission taxes
and tradable emission permits are equally effective at limiting
pollution. In practice, cap and trade has some major advantages,
especially for achieving effective international cooperation.
Not to put too fine a point on it, think about how hard it would be
to verify whether China was really implementing a promise to tax
carbon emissions, as opposed to letting factory owners with the
right connections off the hook. By contrast, it would be fairly
easy to determine whether China was holding its total emissions
below agreed-upon levels.
In my view, Krugman is just wrong. The idea that monitoring China's
emission levels is "fairly easy" is, well, ludicrous. It's difficult
to do in the United States and Europe -- where annual emission
inventories are [6]regularly revised to incorporate new knowledge
about emission sources and sinks -- but Krugman thinks it will be
"easy" to do in China?!? Even assuming we could monitor China's major
industry, this does not account for all China's emissions. And if
we're interested in monitoring net carbon impacts -- and awarding
offsets -- the enterprise becomes vastly more complex. Measuring
offsets would be tricky in the U.S., but impossible over there. In
this regard, the relative simplicity of the carbon tax is [7]a virtue,
not a vice, even if it would be more difficult to enact. Add the fact
that a carbon tax could be adopted without increasing the total tax
burden on the economy, by [8]offsetting it with reductions in other
taxes, and I remain firmly in the carbon tax camp.
References
1. http://www.nytimes.com/2009/05/17/us/politics/17cap.html
2. http://www.cato.org/pubs/regulation/regv19n4/v19n4-4.pdf
3.
http://www.marginalrevolution.com/marginalrevolution/2009/05/the-politics-of-cap-and-trade.html
4.
http://gregmankiw.blogspot.com/2007/08/fundamental-theorem-of-carbon-taxation.html
5. http://www.nytimes.com/2009/05/18/opinion/18krugman.html
6.
http://epa.gov/climatechange/emissions/downloads09/RecalculationsImprovements.pdf
7.
http://meganmcardle.theatlantic.com/archives/2009/05/putting_the_trade_in_cap_and_t.php
8. http://volokh.com/posts/1242276380.shtml
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