Legislation on Clean Energy-Becker

In late June the House of Representatives approved The American Clean Energy and Security Act. If the Senate approves a similar version, this would constitute the most important American legislation on overall control of carbon-emitting gases. The main provision of the bill is a cap and trade system, to begin in 2012, which would provide allowances for emissions of carbon dioxide and other greenhouse gases. The goal of the bill is to reduce the carbon emitted by American industries to 17 % below 2005 levels by the year 2020, and to reach more than 83% below 2005 levels by 2050. Some environmentalists have criticized the 2020 energy-reduction goal as too little and too late. However, I believe that the optimal greenhouse gas policy is to go slow initially until greater evidence on the severity of global warming becomes more apparent. The main threat to the world from global warming is an as yet unknown probability of quite severe warming that would cause considerable harm-the world could adjust at relatively little cost to a moderate degree of global warming. The additional evidence accrued during the next decade will provide more information about the likelihood of the severe warming that would merit more drastic steps. If such steps become warranted, then the rate of carbon reduction and carbon storage should be speeded up beyond that envisioned in the House bill. On the other hand, if milder versions look likely, the 2050 goal of a more than 80% reduction in carbon emissions could be relaxed. Another reason for going slowly at first is to determine how much will be done on global warming not by EuropThese and other developing countries, along with the US, will be the major contributors to greenhouse gas emissions during the next decade. If the BRICs cannot be bribed or threatened into taking steps to reduce their carbon emissions, the US might rethink how much it wants to do. Rethinking American policy would be especially urgent if the more the US did, the greater the migration of industries from America to developing countries. While accumulating information during the coming decade on the severity of the global warming problem, the US should greatly invest in trying to achieve breakthrough technologies in advanced carbon control and storage. The aim would be to acquire technological knowledge that could be quickly implemented without enormous cost if the evidence warranted imposing major carbon controls and storage in a short period of time. The House bill allocates about $1 billion annually to the Carbon Storage Research Corp for further research. This is probably not enough, given the possible need to act quickly and decisively to combat global warming. Under the House bill during the first decade or so, almost all carbon allowances will be given away, mainly to companies, rather than sold to the highest bidders. Over time the fraction sold would continue to increase until the vast majority of allowances would be sold. Many economists have criticized this giving away of allowances during the next couple of decades as a missed opportunity to raise revenue for the federal government through the sale of allowances. In light of the pending massive federal deficits during the next several years, auctions might seem the best approach. However, the political reality is that significant cap and trade legislation might not gain enough political support if the government sold energy emission allowances rather than giving the majority to the industries most affected. For energy-intensive industries are well organized politically, and they would strongly oppose a carbon tax-which is what an auction of emission allowances amounts to- since such a tax would reduce profits in these industries. On the other hand, energy-intensive industries might support, or only weakly oppose, a cap and trade system where most allowances were given to them since that system could increase their profits, or only reduce them by a little. Economists typically assume that when a new tax, like a carbon tax, is introduced, government spending is held fixed, so that other taxes can be reduced. That assumption is often useful for analysis, but may not be realistic politically. The revenue from a new tax may be mainly used to increase government spending rather than to reduce other taxes. The case for selling emissions through auctions rather than giving them away is a lot weaker if the government wasted much of the additional revenue, or if the additional spending itself distorts behavior by households and firms. Empirically, the most common response to "new" tax sources, like a carbon tax, is a combination of reduced other taxes and greater government spending (see Becker, Gary S., and Casey B. Mulligan, "Deadweight Costs and the Size of Government." Journal of Law and Economics, October 2003). This typical response makes the case for selling cap and trade allowances considerably weaker than if government spending were held fixed after new tax revenues were collected.

Comments

[Anonymous]

I have heard the arguments that cap and trade is more politically feasible because the giveaway approach allows large carbon emitters, who have large political power, to obtain a large allotment of valuable credits in the government giveaway. However, I recently heard that ExxonMobil opposes cap and trade and prefers a carbon tax. Why is this? Is it because they have relatively less political clout with Democrats in power? Is the government planning to give "green" energy producers more credits than they need and traditional producers like ExxonMobil less than they need?

[Anonymous]

Is there any research into the subject on whether or not the issuance of government debt is deflationary?

[Anonymous]

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[Anonymous]

The earth's temperature is currently declining. Let's wait to see where this latest trend goes before we tax carbon. There is not consensus on the problem right now, so legislating anything is premature to say the least.

Science does not fully understand the relationship between CO2 and Temp. It is very possible this relationship is the exact opposite of what Al Gore thinks. It is possible CO2 levels follow Temp. and Solar Activity drives Temp. We could be doing absolutely NOTHING other than penalizing our economy by going after CO2.

[Anonymous]

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[Anonymous]

This post is unrelated to the article, but I am using it as a means of suggesting a future topic.

Recently, my work has led me to consider the extent to which a combination of pragmatism and populism is replacing ideology in western politics. Your posts in May of this year discussed extensively the ideological irreconcilability of many of modern conservatism's tenets with those of classical conservatism.
Could the positions of modern conservatism originate from misguided populism? Are they pragmatic? Is there a broad trend worldwide, such as the 'third way'?

Thanks,
GEPU

[Anonymous]

One day bankruptcy is not an option in Detroit, the next day Obama is organizing a bankruptcy at Chrysler, neglecting bankruptcy law, screwing a Teacher's pension fund, and giving the UAW 55% ownership. Obama calls this pragmatism. I call it BS. It is any means to an end. Obama will do anything to empower his campaign donors even if it requires squandering taxpayer's wealth and stealing property. The Chrysler deal made Hugo Chavez proud...!

Democrats promise everything and anything to make a populist pitch to the American people. They then use excuse-making (code word: pragmatism) to disguise their socialism, or Third Way (essentially the same thing). It really is this simple. This is a party that is based entirely on deception and it is intent on destroying our founding principles in favor of an ideology that has destroyed many great civilizations throughout history. America is going down just like the Roman Empire, just a matter of time before the socialist takes it too far.

[Anonymous]

@ Anon 2:46 PM

Agreed

"Bread and circuses" and the entitlement of Roman citizens were great parts of the downfall of Rome. It is an awful tragedy we have forgotten these lessons. Continued American entitlement and politically motivated economic central planning at the expense of market forces will surely ensure our demise. We are on the road to ruin as our politicians squabble over meaningless partisan issues. Both sides are to blame, but none are more to blame than Barney Frank. That he has been thus far to able escape culpability is a testament to the ignorance of the electorate.

Until our legislative and executive branch is free from the influence of monied interests and partisan lobbies there will be no reform, there will be no recovery.

[Anonymous]

Anon 2:46 and Anon 6:24

What a crock ...! Go find another soapbox. The subject was and is, "Global Warming and Cap and Trade Policies".

Get with the program or get lost.

[Anonymous]

You guys don't consider alternative viewpoints on man-made global warming, and you want me to get lost...?

Cap and Tax is the dumbest idea I've ever seen from Washington, not just because it is a tax on energy for the middle class in the middle of a recession, but because the scientific community doesn't even know the relationship between carbon and temperature.

http://www.petitionproject.org

http://www.ac.wwu.edu/~dbunny/research/global/glocool_summary.pdf

[Anonymous]

Anon. 8:16

That's better!

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[Anonymous]

As Becker says, the US should invest in carbon capture and storage (CCS) technologies which could potentially provide huge benefits in reducing the amount of CO2 in the atmosphere. But the research grants included in the bill –albeit significant sums-- are probably not enough to quickly overcome the formidable technological challenges that such systems currently face.

The best way to stimulate technological development in this area is to combine the price mechanism of the marketplace with a tax scheme bent on punishing CO2 emissions. The price of using hydrocarbons should be higher IF we assume that there is a potentially huge negative externality from emitting CO2. Taxes on consumption could in the short term replace some of income taxation, for example, making non-CO2-emitting consumption cheaper in relative terms. The ultimate goal would of course be to gradually reduce the CO2 tax base and thus revenues from that source. Alternatively, the tax rate could be raised to catch up with technological advances IF CO2 emissions would at that time still represent a major threat to the environment.

The problem is that under heavy carbon taxation, the current way of life of numerous interest groups –consumer and corporate-- would become a lot more costly. Therefore the most efficient way to change the situation is politically hazardous as long as there is no proof of causally clear threat from CO2 emissions, something which may be hard to achieve because of the complexity of atmospherical phenomena. Lacking a palpable threat of catastrophe with a strong causal link to the CO2 emissions, the change in public opinion towards favouring strong tax based incentive tweaking will be slow at best.

[Anonymous]

I hope that bill gets through. With this new democratic administration there's a lot of opportunity for change, Obama's already started to do so, too.

[Anonymous]

Environmentalists may indeed criticize this effort as too little, too late, but it's still better than standing around and not doing anything. We have to try somehow.

[Anonymous]

Should this tax scam pass....don't look for our economy to rebound in our life times

[Anonymous]

I think that the carpon entitlements should be given to the people. Every citizen would get an entitlement. All entitlments would be the same size.

Companies that need an entitlement would rent the entitlement from the citizen for 1 year. Each year a new rent price would be negotiated.

Citizens must keep part of their entitlement so that they can be allowed to exhale, and own pets who exhale, and own things that generate CO2. People without permits will be executed.

I expect that companied will be formed that aggregate carbon allotments so that companies can rent them.

Every year individual allotments will be recalculated to adjust for population changes and for environmental goals.

I like this plan because the money goes directly to the people rather than to the ruling class.

[Anonymous]

http://www.youtube.com/watch?v=sfCFZ7zNWbs

CO2 does not drive temperature.

[Anonymous]

Let's look more at the method of taxation, since it's a more interesting topic than endlessly butting heads over what leads what on a graph.

Assuming that some sort of regulation is going to be passed, cap and trade would be one of the most effective methods. It's worked for Acid Rain before and harnesses the power of the free market to make industries that can easily reduce emissions get rid of them while still allowing companies that absolutely have to emit CO2 to do so, at a somewhat higher cost.

The real question is who profits from this. Philosophically, the emission of CO2 is a negative externality against some people on Earth and a positive externality for others, after all, there are plenty of people who would have new waterfront property or suddenly arable land with a rise in sea levels. Ergo, the proper action of the government is to mitigate the externality by making whoever caused the externality compensate those who are hurt by it. This makes even more sense if you assume that there will be effects no matter what regulations we pass and it is only a matter of degree.

Here the government's plan fails, though. The purpose of their regulation should be to mitigate the externality by forcing the responsible party to compensate those hurt. The government is not in any way the party that deserves compensation. Certainly all the proceeds from the tax or auction will be fed into other projects or paying down debt or reducing taxes- not compensating people who loose their homes to rising sea levels.

This is unethical by any standard. The government is effectively profiting from the negative effects of global warming while taking no action to help those hurt. The government should not be profiting from attempting to mitigate an externality.

[Anonymous]

Forgot my signature.

The above "Anonymous" comment at July 22, 12:42 AM.

James G
Florida

[Anonymous]

"Certainly all the proceeds from the tax or auction will be fed into other projects or paying down debt or reducing taxes- not compensating people who loose their homes to rising sea levels."

Wasn't the lottery supposed to fund education? How about the tax on cigaretts funding education?

Once government steals our money, it NEVER goes where they promised. This is a ponzi scheme to grow government.

Worst of all.... CO2 does not even influence temperature...! If you listen to the scientific community, they are changing tunes. Most realize CO2 is a complete misdiagnosis of the problem. Only partisan power seekers looking to grow government are continuing this scam.

The earth's temperature is not driven by CO2 emissions, so why are we wasting time with this scam?

[Anonymous]

Very interesting site. Hope it will always be alive!

[Anonymous]

Perfect work!