Friday, November 2, 2007

Cap-and-Trade: Little Piggies Sniff out Teat

The Wall Street Journal's Washington Wire blog did a public service, putting the House Budget Committee testimony in PDF format and including them in Deborah Solomon's report.

Deborah Solomon
reports on the environment.

On one side of the Capitol, a Senate panel today voted to create a cap-and-trade system to limit the amount of greenhouse gases emitted by factories, power plants and transportation companies.

On the other side, the head of the Congressional Budget Office told the House Budget Committee that “a well-designed tax would yield higher net benefits than a cap-and-trade approach.”

...” How to allocate those allowances, he said, will have big effects. If allowances are given to fossil-fuel suppliers or big users, he said, those companies would reap windfall profits while consumer prices would rise, disproportionately hitting those with lower incomes.

More House testimony:
David Doniger, Natural Resources Defense Council
Robert Greenstein, Center on Budget and Policy Priorities
Anne E. Smith, Ph.D.

If you are short on time, the CBO testimony is the must read. That of Anne Smith got me wondering who, exactly, is the constituency she is speaking to (for)?. From Smith:

...The net cost of a carbon cap of the stringencies now being discussed in the Congress would be very substantial.

A large number of proposals have circulated in recent months that entail hard caps on US greenhouse gas emissions reaching reductions of about 75%to 90% from projected “business as usual” emissions by 2050. These current hard cap proposals vary in their specific timing and stringency, but all of them would impose significant costs on the US economy even in the near term, if implemented.

I have performed economic impact analyses of many different levels and types of emissions limits using CRA International’s general equilibrium model of the US economy called “MRN-NEEM.” My analyses indicate that the current set of proposals in the Congress for hard caps on greenhouse gas emissions would impose real resource costs to the US economy of the following general magnitude:

•Net losses in the average household’s real spending of $1000 to over $1500 per year by 2020.
•Net reductions in jobs by 2020 of 2 million to 4 million.
•Reductions in US gross domestic product (GDP) of $300 billion to $500 billion (i.e., a reduction of 1.5% to 2.5%) from a case with no carbon limits, by 2020.

And in the section:

Almost everybody considers it as a foregone conclusion that cap-and-trade is the only option for achieving cost-effective reductions in greenhouse gas emissions. However, in efforts to secure a greater share of the allowance values for non-industry interests, and in efforts to raise government funds for supporting research, and even in efforts to raise government revenues to reduce other taxes, there is growing pressure for a large share of the allowances to be auctioned.

In the limit, however, an auction works just like a tax – except that the level of the tax is unknown in advance of passing the legislation, and will probably remain highly variable over time even after implementation of the legislation. This price uncertainty is not a helpful element to achieving reductions at lowest possible cost to the economy.

If we find ourselves shifting into a world where auctions predominate, one must ask: why not simply apply a tax? All parties -- public and private – would benefit from the much greater price certainty, reduced administrative and strategic planning effort. Often expressed concerns with manipulation of allowance markets (for both the auction and the secondary markets) would also be eliminated. Further, as CBO has demonstrated in one of its issue briefs, the tax approach can outperform either a hard cap or a cap with a price ceiling in terms of cost-benefit outcomes.

Thus, it may be wise for policymakers to take time to consider more closely alternatives to the cap-and-trade approach for greenhouse gases. Cap-and-trade is not the only form of market-based policy option, and others may be more suitable for the challenge of reducing greenhouse gases to levels that are being proposed without excessive damages to our economy.

With those central points in mind, I want to close by noting that even a highly effective and efficient market-based approach for GHGs will have a serious limitation that should not be forgotten. An adequate national climate policy must consist of more than a system of efficient GHG controls.

Actual stabilization of climate change risks will require that GHGs be reduced to nearly zero levels. Although this goal may be possible to achieve at some point in the later part of this century, it can only be done through truly revolutionary technological progress and the resulting changes in the structure of how our energy systems.

Hoffert et al. report that “the most effective way to reduce CO2 emissions with economic growth and equity is to develop revolutionary changes in the technology of energy production, distribution, storage and conversion.”...