Time for a Fresh Debate Over Americas Climate Policy
Politics and baseball have a great deal in common. In that respect, its only appropriate to quote one of Americas legendary ballplayers as the 111th Congress and President Barack Obama pledge to take bold steps to combat climate change. American voters have heard this before. The Clinton/Gore administration made the same promise but, in the end, looked at the consequences and blinked. [IMGCAP(1)]
In the words of Yogi Berra, This is like déjà vu all over again.
More than a decade ago, the United Nations, with strong support from Vice President Al Gore, drafted the Kyoto Protocol. The treaty imposed deep cuts in emissions for developed countries, proposing a 2012 target for the U.S. that was 7 percent below 1990 levels. But the Clinton administration never even sent the Kyoto treaty to the Senate for approval.
Given its impact on the European Union, voters should be thankful we passed.
Eleven years have elapsed, and in that time almost all EU nations, the major Kyoto signatories, have failed to meet their targets. Between 2000 and 2006, while Americas carbon dioxide emissions only increased 2.3 percent, the EU emissions jumped by 3.5 percent. (Thats even more significant when you account for the fact that our economic growth was much stronger.) Not only have the EU emissions policies missed their objectives, they have increased energy costs, stunted economic growth and spawned cheating in the carbon trading system.
Despite all of these environmental and economic failings of the EU cap-and-trade system, some U.S. legislators are currently pushing to impose a similar emissions scheme here in the States.
Going forward, Washington has three options. One, continue the present approach that relies on higher efficiency standards, new auto technology and lower emission technology. Two, mandate a cap-and-trade system. Three, impose a carbon tax. And since its unlikely that politicians will opt to maintain the status quo, the debate will largely boil down to the last two choices.
The Democratic Congressional leadership supports cap-and-trade, a system that sets a limit on emissions, reduces that limit over time, issues emission permits to covered industries and creates a market for trading permits. Though both policies will raise the price of energy, the increased costs under cap-and-trade will be hidden in the added costs of goods and services.
In reality, its a stealth tax. It requires an elaborate bureaucracy to operate, administer and enforce it. And unlike a direct tax, cap-and-trade spawns vested interests that will lobby hard to protect their interests and preserve the system. In theory, cap-and-trade is intended to stabilize energy prices and provide incentives to develop new technologies.
There are serious doubts whether it will accomplish either.
A carbon tax, the option favored by an increasing number of economists and analysts, places a price on carbon and then allows the market to respond. These taxes add to the cost of emission-producing energies and, as such, create incentives to find alternatives without enriching traders and promoting the kind of lobbying thats inevitable with cap-and-trade.
In contrast to a CO2 trading market, the government policies responsible for higher prices under a carbon tax are clearly visible to consumers. On top of that, the resulting increased prices could be offset by reducing the payroll tax, putting more money into the hands of workers. That means this policy will advantage average Americans rather than Wall Street traders while still discouraging carbon emissions.
Given the current economic pain and disruption generated by the financial sector meltdown, its difficult to understand why so many continue to favor a more complex, opaque system over a simpler, more transparent one. Without transparency, theres less chance of accountability, leaving voters vulnerable to further exploitation of financial instruments.
In his inaugural address, Obama indicated he would oppose government programs that dont work. And to date, theres no convincing evidence that cap-and-trade will work or that it would work as well as a carbon tax.
So before Americas leaders drag the public through a decade-old debate all over again, Congress should take a fresh, objective, and careful look at all of our policy options.
Good public policy makes for good politics. And the advantages of a carbon tax are good public policy.
William OKeefe, chief executive officer of the Marshall Institute, is president of Solutions Consulting Inc.