As cap and trade legislation gets debated in Oregon and Washington, a worrisome lightbulb seems be going off for a number of folks. (Congressman DeFazio from Oregon, for example.) It goes like this: instead of “cap and trade” how about just “a cap without the trade?”
Under this idea, we’d meet the terms of the cap through command and control regulation. There wouldn’t be permits or a trading system (and hence no auctioning). To be sure, this will reduce emissions, which is a very good thing.
But in terms of fairness and inexpensiveness, let me be completely clear: this is a horrible idea.
For consumers and businesses who are already struggling to pay their energy bills, cap without the trade is actually worse than the very worst form of cap and trade. Plus, it misses out on almost all of the updsides of cap and trade done right.
In the worst form of cap and trade—a “grandfathered’ system, in which the government gives out permits to polluters for free—consumers wind up paying massive windfalls to the big energy companies that get free permits. [Click here to learn why]. That’s why we favor auctioned cap and trade, since it makes polluters pay for their permits—and the public keeps the money. Auctioned cap and trade is fair, effective, and efficient.
But if you can believe it, cap and no-trade would actually be worse for consumers and businesses than a grandfathered system. Families would pay even more for energy, while Exxon and other big energy companies would get even bigger windfalls!
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Think Econ 101 for a second: price is determined by supply and demand. If the the supply of something—say, fossil fuels — goes down, then the price goes up. This means that capping the amount of fossil fuels that get burned will automatically raise the price of those fuels. Consumers will face higher energy prices.
The way to make things right is to auction of the permission to pollute (aka, the carbon permits). If we auction off the permits the result is that the extra money from the higher energy prices will flow back to the public. In fact, the money can even be rebated directly to citizens. That’s good news.
By contrast, if we give away the rights to pollute, the extra money from higher energy prices will go to private companies and their shareholders. That’s not so good. And cap and no-trade does exactly that: in essence, it gives away the right to pollute, even while it ensures that prices will go up.
Actually, it’s worse than that. Because there’s no trading the pollution permits won’t get distributed “efficiently” (i.e. inexpensively) across the economy. Officials will pick and choose who gets what and how much—and their choices will probably have more to do with who’s got the best lobbyists than with genuine need. (Even if officials never made mistakes, the absence of trading would mean that companies can’t respond to changing conditions; and they’d have diminished incentive to upgrade to cleaner technologies.) The inevitable inefficiency will raise the price of carbon, which will mean even bigger windfalls for polluters and even greater harm to consumers and businesses who rely on energy.
Look, I get it. I understand why cap and no-trade is appealing. Markets are a four-letter word right now. People are freaked out by the recent shenanigans. But there’s a pretty obvious solution: regulate the carbon markets. Subject them to commonsense oversight. I’m not saying it’s child’s play, but it’s definitely not rocket science either.
Despite Congressman DeFazio’s displeasure with cap and trade, there is absolutely no reason to believe that cap and trade would necessarily involve “unregulated” markets. (And, no, saying the word “unregulated” over and over again doesn’t actually mean that something will in fact be unregulated.) Regulation is a choice we get to make. Let’s choose to regulate the carbon markets. Problem solved!
In fact, one of the best ways to begin to regulate the carbon markets is to auction the permits. Auction them publicly, transparently, and frequently. In other words, do what RGGI does. And there’s been zero evidence of gaming in the RGGI carbon market.
Even in Europe’s cap and trade program, which has hit a few bumps,there’s been no evidence of Enron-style gaming and price manipulation. In fact, the problems are mostly political in nature, as polluters jostle to get free carbon rights behind the scenes. We can fix most of Europe’s mistakes simply by auctioning the permits.
Yes, the price of carbon in Europe has gone up and down. That’s exactly what we’d expect from a market. It’s not a sign of failure, it’s a sign that the system is working just right.
Postscript 1: I admit it, the title of this post is an intentional exaggeration. Cap and no trade isn’t the worst idea I’ve ever heard, it’s just a bad one from a fairness perspective. The worst idea would be electing not to put a cap on carbon.
Postscript 2: To clarify, the idea I’m objecting to in this post is a cap where the cap is met with command and control regulation. I’m not objecting to a cap where permits are auctioned but trading on the secondary market is forbidden. This form of cap, auction, and no-trade could be an okay idea, though it’s probably less good than allowing trading.
Postcript 3: I turned down the boil on some of the writing throughout the post.
Really now, “Unhinged rantings”? there’s more than just the title, “Worst Idea EVAH”, to ruefully admit in the postscript as an “intentional exaggeration”. I read the article by DeFazio and breathed a huge sigh of relief that a greater awareness was emerging in Congress, despite the full-court press by industry to inundate the mainstream media with cap and trade pseudo-solutions that make and maintain more millionaires. The advocates of free market excesses which are singularly responsible for our present economic crises apparently need all the help they can get. Such help as this article attempts to contribute is transparent as to the real “environmental” objectives of its author, Eric de Place.Although, on a completely different environmental issue, the following quote by Dr.Paul Paquet has amazing resonance with de Place’s position on cap and trade:”…de Place confuses economic hypotheses for facts, using new terms that describe old ideas, which history shows all failed on application.” (from: http://gristmill.grist.org/story/2005/12/20/10221/351)
This article is way off the mark. Trying to defend old ideas that are proven failures.I’m very glad to see new improved rethinking to succeed the cap and trade mantra now that its vast shortcomings are becoming apparent.Cap and trade is based on the proven failed hypothesis of the inevitable good of free market forces.We need a better idea that gets the results we all want without relying on a failed economic hypothesis.
A much simpler idea is to have the “higher energy prices flow back to the public” in the form of a direct tax on CO2 emissions. Everybody understands that and there’s less room for shenagins.Buster
Eric—Well, you overdid the hyperbole. But the gist of what you are saying is correct. By imposing a tax only, we are separating the allocations from the price, and that means that we are not working the emissions reduction problem on an economy wide basis. It means that those w/o political muscle will bear the burden of society’s need to reduce emissions, and those with money will be spared. It means that allocations become a political football. Large corporations will gladly pay a tax for any and all allocations they can get. And they can flex their politico-economic muscle to get those allocations, shouldering aside the smaller businesses which collectively make the greatest contributions to our economic growth. In addition, if you are simply handed your allocation (through political arm twisting), you are less likely to actually try to reduce your emissions. It’s easer to work the politics. The burden of reducing society’s emissions will fall, again, on the smaller businesses which will be stuck with short allocations. No, a carbon tax should be a non-starter unless you represent a large firm. I’m with you. A regulated cap-and-auction is the only sane and fair path.
This dialoge needs cleared vocabulary, perhaps these terms or something similar would clarify things:Cap & Auction – If the primary price setting mechanism is an action, it should be in the name. Cap & Grant – If the majority of permits are granted to corporations without charge, or below market price, this should be in the name. It seem that this post is a critique of a cap and grant system without trade.As to ‘Trade’, this could mean carefully regulated exchange or a wild west speculative market. There is a big difference.