The US is progressiong its response to climate change slowly but steadily. Waxman-Markey is the first fruits of the process. It is not everything we hoped for, but it is considerably better than our EU version was when it started out; 30% auctioning of permits versus less than 5% in Europe. But where is the share or in the yankee version, the dividend that was at the heart of the original Obama promise? Krugman in the NewYork Times has this to say
If we’re going to get real action on climate change any time soon, it will be via some version of legislation proposed by Representatives Henry Waxman and Edward Markey. Their bill would limit greenhouse gases by requiring polluters to receive or buy emission permits, with the number of available permits — the “cap” in “cap and trade” — gradually falling over time.
It goes without saying that the usual suspects on the right have denounced Waxman-Markey: global warming isn’t real, emission limits will destroy the economy, yada yada. But the bill also faces opposition from some environmentalists, who are balking at the compromises the sponsors made to gain political support.
“So is Waxman-Markey — whose language was released last week — good enough?
Well, Al Gore has praised the bill, and plans to organize a grass-roots campaign on its behalf. A number of environmental organizations, ranging from the League of Conservation Voters to the Environmental Defense Fund, have also come out in strong support.
But Greenpeace has declared that it “cannot support this bill in its current state.” And some influential environmental figures — most notably James Hansen, the NASA scientist who first drew the public’s attention to global warming — oppose the whole idea of cap and trade, arguing for a carbon tax instead.
I’m with Mr. Gore. The legislation now on the table isn’t the bill we’d ideally want, but it’s the bill we can get — and it’s vastly better than no bill at all. Link to full article
Waxman-Markey is really a scam, just like the EU ETS.
These approaches involve the process of economic rent creation. It is the politicians formally who create and distribute the rents. The rents are then shared out between those interest groups which are playing the games (“insiders”). The political rents are maximised by separating out different fuel users and industries, which are then returned to the political classes through campaign contributions and “in kind” transfers paid in advance, on the spot, or in arrears (eg through paid speaking engagements after leaving office).
The political economics of tax versus Cap and Trade is reasonably well understood. Cap and Trade is vastly more expensive (figures of 2-6 times the cost mentioned here http://www.rff.org/rff/Documents/RFF-DP-97-18-REV.pdf ). The problems are obscured by comparing C&T (a self-contained policy) with Carbon Tax (a policy component). A Carbon Tax cannot stand alone! Is it coupled with tax cuts on high earners’ incomes? tax cuts on Sales Taxes? tax cuts on Property Tax or Land Tax? More government spending?
Economic theory on deadweight costs of taxes show transaction taxes (TransTaxes) on economic production are very expensive and damaging. Carbon Tax provides an efficient alternative way to collect tax.
An additional problem with schemes like the ETS and Waxman-Markey is the political and financial stability. Because the whole process is one of dishing out artificial rents to vested interests and politicians, the distribution and future of such rents is always under question. The market price for achieving defined targets is likely to be extremely volatile – exactly the opposite of what is needed for wise investment decisions. Creating a layer of carbon futures and options derivatives is a poor solution.
In Europe, the most obvious approach would be to collect an upstream Carbon Tax (on fuel imports and abstraction) as a replacement for VAT. The cost of operating a small business would fall significantly, while layers of fraud-prone bureaucratic practices would be lifted.
The reason the EU chooses to have both the ETS and VAT is that both involve major transfer of power to the political classes to dish out (sell) as needs dictate. Witness recent changes in VAT rules in France, UK for examples.
Waxman-Markey should be rejected. It is guaranteed to fail to deliver a high, predictable carbon price, but will distribute $billions to vested interests.