The Senate is this week debating what would be the most far-reaching environmental legislation in US history, the Lieberman-Warner Climate Security Act (S. 3036). A regional US advocacy group, the Southern Alliance for Clean Energy (SACE), has distributed a “Cap and Trade Economist Statement” which would imply that economists favor the bill.
The Statement is interesting on several levels. First, it never mentions the bill being debated. Second, it focuses solely on one narrow (but politically important) aspect — whether carbon emission permits would be given way or auctioned. Third, the principles that SACE wants economists to agree with are fundamentally incompatible with elementary economics. Finally, SACE says that a number of distinguished economists have signed the Statement anyway.
The Cap and Trade Economist Statement consists of the following text:
As Congress addresses the challenges of global warming, the undersigned economists support market-based solutions for reducing carbon and other
greenhouse gas emissions.
If Congress pursues a carbon cap-and-trade program, we believe 100 percent of the credits should be sold at auction to help ensure the most efficient and equitable outcome.
Conversely, the free allocation of carbon credits to emitting industries under a cap-and-trade program would undermine the program’s long-term success:Free allocations will do little or nothing to protect families and businesses from higher energy costs.
Free allocations will represent a significant and undeserved windfall to utilities and other greenhouse gas producers.
Free allocations will deny the government the necessary resources to reduce the economic cost of combating climate change, and will thus
generate needlessly high costs of achieving any reduction target.
For these reasons, we oppose the free allocation of credits to emitting industries under a carbon cap and trade program and support auctioning 100 percent of the credits immediately.
Two months ago, Venn Strategies, the group’s public relations firm, asked Neutral Source managing editor Richard Belzer to be a signatory. On April 3, the following response was sent by email:
With respect to your petition, no, I won’t sign. The position you and your client are taking is economically illiterate. I cannot imagine that any economist who reads this carefully would sign, either. It’s embarrassing.
First, auctioning permits will not “protect families and businesses from higher energy costs.” It would increase those costs, because permit buyers are going to recover the cost of the permits they buy. Moreover, the entire purpose of cap and trade is to increase the cost of carbon-based energy. That is the very mechanism by which permits reduce GHG emissions. There is no point having a cap and trade regime that fails to result in a huge increase in the price of carbon-based energy.
Second, the creation of a cap and trade regime must create a significant windfall for someone. It’s a matter of opinion, not economics, whether that windfall is “undeserved” by whoever receives it. Economics has nothing to say with respect to what anyone “deserves.” That’s politics, not economics.
Third, the point of a market-based incentive is to relieve the government of the burden of figuring out how best to reduce GHG emissions. So why does the government need the money from auctions? The only way the government could “reduce the economic costs of combating climate change” is by offsetting the proceeds from a permit auction with reductions in other federal taxes. However, your statement says nothing about the auctions being revenue neutral. So I must assume that, under your proposal, the government would keep the proceeds. What would the government do with these tens of billions of dollars in new revenue?
Any serious program to mitigate climate change must dramatically increase the price of carbon-based energy. $100 per barrel oil is a good start, but it’s only a start. But that’s the purpose of the program — to dramatically raise the cost of carbon-based energy. For a cap and trade program to avoid imposing huge economic costs, it must auction the permits and reduce income and other taxes dollar for dollar. Otherwise, cap and trade takes a weak economy teetering on recession and sends it headlong into a decades long depression. (No economist would recommend raising taxes during a recession, but that’s the practical effect of auctioning permits and keeping the money.)
You might want to think this through a bit more carefully. As I said, this statement is economically illiterate. So any real economist who signs it isn’t paying attention to its contents. You also run the risk of making your client look foolish.
Richard B. Belzer PhD
Today, Venn Strategies sent a new invitation to join as a signatory on behalf of SACE:
As Congress debates capping our nations greenhouse gas emissions, perhaps the most critical decision will be how the credits under the program are allocatedwill they be given free to emitting industries or will they be sold at auction?
The attached open statement to Congress makes the case for auctions and has been signed by hundreds of economists, including:
o Greg Mankiw and Oliver Hart, Harvard University
o Charles Schultze, Brookings Institution
o Franklin Fisher, Massachusetts Institute of Technology
o Burton Malkiel, Princeton University
o Robert Hall and Paul Milgrom, Stanford University
o David Romer, University of California at Berkeley
o Bruce Meyer, Northwestern University
Getting the allocation question right is a critical component of a successful cap and trade program. Freely allocating credits to emitting industries will not protect energy consumers from higher prices, and it will prevent the government from collecting the resources necessary to offset the economic implications of capping our nations greenhouse gas emissions.
The Senate is preparing to debate this important issue this month. The proposed bill, however, would grant windfalls of more than half a trillion dollars to emitting industries. Please reply to me at email@example.com to add your name to the following statement and help ensure that Congress fully understands the implications of the current plan.
For additional information, please visit our website at www.cleanenergy.org.
Stephen A. Smith, DVM
Executive Director, Southern Alliance for Clean Energy
It would be interesting to learn what economic arguments these distinguished economists used to justify giving this Statement their support. (It’s not clear that they do; SACE does not post a list of signatories.)
The most obvious discrepancy is Harvard professor Gregory Mankiw, formerly the chairman of the Council of Economic Advisers for George W. Bush. Mankiw has been on record since at least October 2006 advocating a carbon tax and generally opposing cap-and trade. Mankiw supports auctioning carbon permits if “the revenue [is] used to reduce government debt, fund public programs, or reduce distortionary taxation.” We read that (and one additional post) to imply that his support for either program requires revenue neutrality.
Revenue neutrality is a crucial element in the list of objections presented to SACE’s public relations consultant. Because it is missing from the SACE Economists Statement, a reasonable inference is that SACE opposes reducing distortionary taxes on capital and labor and wants the federal government to spend what the Congressional Budget Office estimates would be trillions of dollars in new revenue. SACE’s website does not clearly reveal what the organization wants the government to do with all this new money.
SACE’s Economist Statement asserts that auctioning all carbon allowances would “help ensure the most efficient and equitable outcome.” How they would know this is mysterious. It’s impossible for any economist to say whether auctioning carbon permits would be superior to free allocation until it is precisely specified what the government would do with auction proceeds. if economic efficiency is the yardstick for comparing alternatives, it is virtually certain that a carbon tax would be superior to any cap-and-trade program. Unlike a carbon tax, cap-and-trade is susceptible to a host of administrative problems, paperwork burdens, and opportunities for corruption and rent-seeking.
SACE seems to be an unusual organization to be trying to play a significant role advancing climate change legislation. It is a regional group whose advocacy has historically focused on opposing nuclear power and achieving more stringent regulation of emissions of conventional pollutants from power plants, such as sulfur dioxide. SACE also supports solar, wind, and biofuels, as well as energy efficiency (i.e., reduced energy consumption), though there is no evidence these technologies could replace but a small fraction of the energy now supplied by fossil fuels.
Adopting these alternatives also would make energy much more expensive, not less. So SACE is out of step with the first principle of its own Economist Statement — “protect families and businesses from higher energy costs.”