When it comes to the environment, I am a tree hugger.  I believe man’s carbon imprint on God’s Earth is both immoral and unsustainable. I also happen to be, however, a fiscal conservative. I am skeptical whenever government tries to meddle with my pocketbook or interfere with the market equilibrium, as they have a reliable record of being inefficient, wasteful and just plain stupid. Having these beliefs has led me to a conclusion: Cap and Trade will not work – but that doesn’t mean we can’t save the environment.

The idea behind Cap and Trade is that the government sets a price for a carbon permit to be traded on a market.  The government would limit the amount of permits issued and the permits would be traded among companies. Tax revenues would be collected by the government, where the geniuses in Washington would supposedly figure out how to fund the next green innovation. So by definition, the key problem with Cap and Trade is that it relies on government’s judgment, not a scientist or engineer’s ingenuity.

It seems reasonable at first that government would be funding specific areas of the energy sector – wind, solar, or bio-fuels –  from this tax revenue collected from Cap and Trade.  But how would Washington figure out which alternative energy source makes the best sense to reward tax breaks?  The way they figure everything out — by listening to the most influential special interest.

The company that has the loudest lobbyist that writes the fattest check to senators working on this legislation will win tax benefits, not the company that deserves it. Hence, government will defer real, logical change when it comes to helping the environment, and that’s a problem.

Apart from the debacle of government choosing our energy sources, the idea of Cap and Trade itself is flaw(sxc.hu)ed. The MIT report that came out a few months ago said that Cap and Trade would cost the average family thousands in yearly expenses. The report stated that jobs would be cut, if not shipped overseas to some extent.

Not to mention, it’s Global Warming that’s the problem, not American Warming.  Even if we conserve 10% of carbon emissions by this taxation, the flood of people who will be driving new cars and opening coal mines in India and China will counteract these reductions.  That’s the problem with conservation – it doesn’t fundamentally change our energy needs from fossil fuels to energies that do not hurt the environment.  It’s just a redistribution of wealth.  Understanding all of this, I propose an alternate route.

Instead of taxing carbon or hoping Congress can figure out which alternative energy will replace fossil fuels, I propose tax benefits for research in this field – big ones.  Let the free market work by giving it an incentive to shift in the direction of clean energies.  I promise with enough research money, someone from Harvard or Princeton will figure out how to run a car on maple syrup.  Some scientist will figure out how to make the energy grid gather wind energy and solar energy together efficiently.  Engineers will be able to test and innovate these discoveries to solve our energy needs.

Then, when these research efforts yield results as to which alternative energy to invest in, give the free market a reason to produce it. Give the victor of this research effort massive tax breaks, and the market will take advantage of it. All that government will need to do is create broad conditions for these tax subsidies.  Congress would only have to mandate that the new green technologies vying for tax breaks would only produce a certain amount of carbon emissions.  This way, politicians would not be choosing our energy needs, the market would.

I think this approach would work a lot better than the Cap and Trade proposals coming out of Washington.  It cuts government out of the process as much as possible, while embracing basic Supply-Side principles that have proven to work.  I think our best bet at solving Global Warming is to give the free market a nudge in the green direction, in the form of tax relief.

And realistically, in order for there to be real green effort it needs to be profitable.  The economy will not turn green unless fuel efficient cars, solar panels and wind turbines are profitable. Just mindlessly funding an alternative energy source the government picks cannot fundamentally change how we use energy — scientists and business leaders need to be a part of the effort as well.  It has to be a long term and comprehensive plan, not one based in short term, political motives.

The transition may take a few years to implement, but I think the process of funding research and then acting on that research can work.  In doing so, we can create sustainable growth while saving the planet.  Not a bad deal.

4 thoughts on “Why Cap and Trade Won’t Work”

  1. Mr Sodhi is not well informed on what cap and trade is and how it works. He confuses terms and concepts so much that his opion piece is of little value to careful consideration of the issue. I will drop a more detailed explanation of these faults at a future date, but suffice to say only one thing — I also come to a conclusion: Cap and Trade does work – and that means it is the best way to save the environment.

    The US has been using a cap and trade system for SOx and NOx mitigation under the Clean Air Act regulation for 20 years. It is a market-oriented pollution control mechanism that has been proven to reduced the cost of abatement by 2 orders of magnitude over any other alternative means. Dont take my word for it, read the economists, such as Sandor or Stavins.

    I get the strong sense that Mr. Sodhi wants to make this issue into a polemical red state – blue state rant rather than an informed discussion, and I sense that he believes his is the proper position to take by any self-respecting red-stater. Thus, it is ironic that he fails to know that Cap-and-Trade was first devised and implemented by the Reagan Administration, developed by one of President Reagan’s chief advisors, Boyden Gray in the 1980s. At that time the term of art was “emissions trading,” which is still the proper term for this approach. And even then some people called it “morally bankrupt” or even “a license to kill.” But Reagan was correct and it has worked extremely well since then.

  2. OK, so here is a more detailed response to Mr. Sodhi’s op-ed piece. Lets start with what cap and trade is, or perhaps what it is not. Cap and trade, or emissions trading, does not involve a tax. The older conventional wisdom for pollution mitigation was focused on “end-of-pipe” control, or command and control with heavy government involvement. This approach made all polluters pay a fine, or tax, for emissions. It allowed no opportunity to let market adjustments play a role. So, for instance, if a company was not yet ready to invest in re-capitalization for new low emission equipment, that was just too bad. Tough cookies. Government said to do it or pay a fine, so you did it.

    Now, cap and trade, or emissions trading, on the other hand, allows for the gradual introduction of an ever lowering limit on the amount of allowable emissions. This amount, called an allowance, is appplied across a sector. The aim is for the sector, rather than individual emitters, to meet the target emission reduction. Those that reduce below the cap can sell their “excess allowances” to those emitters that cannot reduce to the cap. To some emitters this could make good business sense while they make their own adjustments to new technologies or processes over time and accoring to their own business planning.

    Mr. Sodhi misunderstands the cap and trade approach at this point. The government does NOT set a price on permits to pollute. Rather a market, with a trading platform, sets a price on the excess allowances (ie those amounts from an emitter below the cap). An emitter can only sell excess allowances. Mr. Sodhi suggests emitters can sell any of their permits. They cannot.

    Mr Sodhi also states that the government would collect tax revenues from the sale of permits. Not true again. The trading administration, which might not be a government entity, may or may not auction the allowances. Its not a tax. Current legislation calls for a gradual phasing in of allowance auctioning. Many economists (cf. Stavins) show that it does not matter much whether allowances are auctioned or not. Indeed the current SOx allowances are auctioned as part of the twenty year old emission trading scheme already in place. But an effective mechanism does not have to have allowance auctioning.

    The next part of Mr Sodhi’s logic is hard to follow. He claims that with cap and trade the government would decide what fuels replace fossil fuels, and argues that the government is ill-equiped to make that judgement. But later he suggests government should do that very thing when it decides what research to fund or what tax breaks to give to a range of new technologies. The fact of the matter is that the revenues from the allowance auctioning would do just what Mr. Sodhi wants — they are normally used to invest in technology R and D. And it is important to note that the technology R and D is NOT focused on types of fuels or the fuel mix, but rather across the board on a range of technologies, some of which are focused on energy production but also on energy efficiency and other areas as well. Thus the auction receipts do indeed go directly to a range of engineers and scientists just like he wants them to be distributed.

    Lastly it is difficult to understand his concept of tax breaks for green energy companies. In this new and emerging field of what is called Clean Tech, most companies are looking for investments, not tax breaks. In fact start up companies in new fields like this are usually running in the red. They have no tax liabilities. What they need is start up or mezzanine level investments. Thats why revenues from allowance auctioning is more important to stimulating new investments and tax breaks are a thing of the past. The cap and trade system boot-straps investments in the private sector and green jobs.

    Mr Sodhi also discounts the cost of climate change. He forgets that there is a cost to inaction. Its clear to many of us that these costs are far more damaging than the minor costs of mitigation, and indeed mitigation brings considerable opportunities. He makes the case that studies show that cap and trade will cost consumers thousands of dollars based on results from an MIT study. That is not true.

    This thousands of dollars cost per household is something that has been widely touted by the GOP but has been refuted by the MIT study authors themselves. Indeed Politifact, declared the GOP figure of $3,100 per household was a “Pants on Fire” falsehood. The GOP claim is “just wrong,” MIT professor John Reilly told Politifact. “It’s wrong in so many ways it’s hard to begin.” A more accurate estimate has been produced by the CBO and EPA and suggests something on the oder of $150 per household.

    I find the tendency for members of the university community to resort to ideological and political rhetoric rather than critical rigor discouraging. Too many people want to make this issue a red-state/blue-state battle. And some, I fear want to use the climate issue as a means to reverse the election. Please lets here in the academy resort to reason instead.

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