How not to inform readers about cap-and-trade
Washington Post columnist Robert Samuelson has long impressed me as one of the most hackish economic columnists not associated with the Wall Street Journal and not named Ben Stein, but today’s piece on cap-and-trade is dismally, embarrassingly stupid. Its essential premise is that consumers and producers of energy don’t respond to price signals, something so incredibly, obviously wrong that even the dolt editors of the Post opinion section should have wondered what was up. Samuelson should be ashamed of himself.
Let’s go to the videotape:
Carbon-based fuels (oil, coal, natural gas) provide about 85 percent of U.S. energy and generate most greenhouse gases. So, the simplest way to stop these emissions is to regulate them out of existence. Naturally, that’s what cap-and-trade does. Companies could emit greenhouse gases only if they had annual “allowances” — quotas — issued by the government. The allowances would gradually decline. That’s the “cap.” Companies (utilities, oil refineries) that needed extra allowances could buy them from companies willing to sell. That’s the “trade.” In one bill, the 2030 cap on greenhouse gases would be 35 percent below the 2005 level and 44 percent below the level projected without any restrictions. By 2050, U.S. greenhouse gases would be rapidly vanishing. Even better, their disappearance would allegedly be painless. Reviewing five economic models, the Environmental Defense Fund asserts that the cuts can be achieved “without significant adverse consequences to the economy.” Fuel prices would rise, but because people would use less energy, the impact on household budgets would be modest.
This is mostly make-believe. If we suppress emissions, we also suppress today’s energy sources, and because the economy needs energy, we suppress the economy. The models magically assume smooth transitions. If coal is reduced, then conservation or non-fossil-fuel sources will take its place. But in the real world, if coal-fired power plants are canceled (as many were last year), wind or nuclear won’t automatically substitute. If the supply of electricity doesn’t keep pace with demand, brownouts or blackouts will result. The models don’t predict real-world consequences. Of course, they didn’t forecast $135-a-barrel oil.
As emission cuts deepened, the danger of disruptions would mount. Population increases alone raise energy demand. From 2006 to 2030, the U.S. population will grow 22 percent (to 366 million) and the number of housing units 25 percent (to 141 million), the Energy Information Administration projects. The idea that higher fuel prices will be offset mostly by lower consumption is, at best, optimistic. The Congressional Budget Office has estimated that a 15 percent cut of emissions would raise average household energy costs by almost $1,300 a year.
This is just a fundamental misreading of the intent and probable effect of a cap-and-trade system. At base, cap-and-trade is about establishing a price for the right to emit carbon because unpriced emissions have huge social costs. The effect of a carbon price will then be to make alternatives competitive and to induce investments in efficiency. I don’t know anyone who believes that a transition away from fossil fuels will be painless, but there is wide agreement that the market mechanisms embodied in a carbon pricing scheme are the least painless way to achieve reductions.
Now, Samuelson may not have realized it, but 2030 is a long way away. While there won’t be “automatic” substitution away from coal, two decades in an environment where cap-and-trade has made alternatives profitable is more than enough time to allow industries to do what they need to do. And there will only be shortages of energy if consumers don’t feel the cost of the carbon price, which they will. Maybe that additional cost will be painful, or maybe households will save themselves money by simply buying more efficient appliances, and opting for the 2,500-square-foot home rather than the 3,500-square-foot home.
But really, this is just laying the groundwork for the big stupid conclusion:
Unless we find cost-effective ways of reducing the role of fossil fuels, a cap-and-trade system will ultimately break down. It wouldn’t permit satisfactory economic growth. But if we’re going to try to stimulate new technologies through price, let’s do it honestly. A straightforward tax on carbon would favor alternative fuels and conservation just as much as cap-and-trade but without the rigid emission limits. A tax is more visible and understandable. If environmentalists still prefer an allowance system, let’s call it by its proper name: cap-and-tax.
Yowza. As any economist worth his or her salt will tell you, a cap-and-trade plan with auctioned permits is essentially identical to a carbon tax. That also happens to be exactly what Barack Obama is proposing. So, another way for Samuelson to have written this column would have been to title it “Barack Obama has a good plan to reduce carbon emissions.”
I’ll give Samuelson some credit — he’s right to worry about government handouts, of either permits themselves or of revenues from the sale of the permits. But that’s a concern with either plan (and a much bigger concern in conservative plans to forgo pricing altogether in favor of large research subsidies). And he fails to mention the big advantage of a cap-and-trade plan, which is that it allows us to target an emissions level (and adjust it easily) rather than guessing at a carbon price.
But apparently Samuelson thought the best way to inform his readers was to significantly misrepresent the details of a cap-and-trade plan, en route to advocating a different solution which is nearly identical and in some ways inferior to cap-and-trade. His readers are now dumber for his efforts.