I don’t know what to say about this article—which is largely a critique of a grandfathered “cap & trade” system for reducing greenhouse emissions.
On the one hand, I shouldn’t complain. Any serious discussion in the press of climate policy is welcome.
But on the other hand—jeez, is it so hard to get climate policy right?
My problem isn’t so much that the article gets things wrong, (though it does). Instead, it’s that it tells at most half the story of cap and trade—and maybe not even the important half.
Here are some things that, from my perspective, the article clearly gets right:
- “Grandfathering” penalizes good citizenship — Handing out free “emissions credits” based on a company’s historic pollution may actually reward firms that have done nothing to reduce their emissions. The more you’ve done to limit your emissions in the past, the less you stand to benefit from a grandfathering system. So strict grandfathering sends exactly the wrong signal: delay any efficiency upgrades for as long as possible.
- “Grandfathering” is a legal nightmare—Emissions credits are worth money—so if the government hands them out for free, there’s going to be a mad scramble by everyone to maximize their share. Expect lots of companies to lawyer up, and lots of lawsuits, especially in the early years.
Here’s something it gets wrong:
- ‘ “A carbon tax is more economically efficient,”…says [economist Marc Jaccard], since it flows into all types of buying decisions, including those by consumers.’ —NO, NO, NO! I mean, I agree that carbon taxes are more efficient than a grandfathered cap & trade system, since taxes are so much easier to administer. But as for the implication that cap & trade doesn’t send price signals throughout the economy, it’s just dead wrong: a carbon cap winds up sending virtually the same price signals as a carbon tax. The only exceptions are in tightly regulated markets, such as rate-of-return regulated electric utilities, where firms may not be able to pass on the opportunity cost of allowances to their customers. (I’d be curious to know if Jaccard thinks this, or if it was a boo-boo by the reporter.)
But here’s the big, whopping elephant in the living room—which the article misses entirely:
- Grandfathered cap and trade will lead to massive windfall profits for historic polluters. I think this point can’t be stressed enough: even if companies get their emissions permits for free, they’ll still charge their customers for them. The best analogy I’ve heard is that emissions permits are like World Series tickets—they’re something of value, in limited supply. And if the government just gives all the World Series tickets to Exxon, you don’t think Exxon will turn around and give them as freebies to their customers, do you? I certainly don’t.
As it turns out, there’s actual empirical evidence for this last point: when the European Union handed out its emissions permits for its greenhouse trading system, the firms that received free credits still raised prices. (That’s just the way markets work: if firms have something that customers are willing to pay for, they’ll sell it, regardless of how much they paid for it.)
So in my mind, the biggest difference between grandfathered cap & trade and a carbon tax is this: grandfathering amounts to a massive, ginormous subsidy to any firm that gets free carbon permits. Taxes, or an auctioned cap & trade system, have the virtue of at least capturing the revenue for public purposes—reducing other taxes, cushioning price effects on the poor, paying for renewable energy, or anything other than a massive windfall for shareholders. Any critique of grandfathered cap and trade that overlooks this fact is really missing the point.
Morgan Ahouse
It’s a different rhetorical strategy. The learning lesson (grandfathering benefits historic polluters) is buried within the human interest hook: why isn’t this company screaming? Rather than telling us, the article shows how grandfathering benefits some more than it does others. It just requires a little attentive thinking. Plus, they don’t allow bullet points in Canadian newspapers.Help me out here. If I understand it right, the gift to Alcan comes in two packages. The first would be the windfall you’re talking about—the whole imperfect market thing where price jumps up but cost doesn’t. I don’t like the WS ticket metaphor. With grandfathering, no one pays for opening day tickets, unlike WS opening day tickets where most pay. Still, I would expect prices to rise in advance of rising costs when those cost rises are certain. Another source of excess profits for Alcan comes anytime other companies’ costs rise more than theirs in the effort to meet the emissions cap. This is something Alcan is clearly excited about, and it might outweigh the windfall over time. (Does anyone know?) Indeed, one large injection of investment could allow them to sell a third of their credits (to whom?) and probably increase their profitability and stock value, to boot. I would be excited, too, because at the same time their competition will struggle to reduce emissions.Regarding efficiency—I think what Jaccard is referring to is how a tax would be applied equally to automobile fuels as to coal as to methane as to all thing carbon containing. With C, the price signal has to jump across all kinds of markets to gain influence beyond the electricity market. Some jumps will be more equal than others. As a sloppy example, if you wanted to reduce the nation’s consumption of caffeine, which way would you go? Limiting coffee roaster output is unlikely to affect the price of tea as much as it would the price of coffee. And, taxing Ethiopian coffee imports will lead to an almost identical rise in the US price of beans from Guatemala but a smaller rise in the price of tea, and a far smaller rise in the price of energy drinks and pop. On the other hand, taxing caffeine content would allocate the burden more efficiently, even if it might not be as effective at reducing consumption.
Clark Williams-Derry
Wow, there’s a lot to respond to in there.As for Alcan—you may be right. Since aluminum is fungible & can move across borders, Alcan may not be able to pass on the opportunity cost of credits to consumers; an aluminum producer that’s operating outside a cap system can always undercut them.Switch that case to a gasoline refinery, and the situation changes: the refinery can pass on ~95% of the opportunity costs of permits as higher gas & diesel prices. They get way more benefit from the windfall than from reducing their emissions & selling the difference. Of course, this won’t eliminate the economic rationale for reducing emissions—they’ll still do that if the cost of the reductions < the value of the permits they could sell. But the much larger windfall to a refinery, I believe, comes from the permits themselves.If you can think of any better analogy than World Series tickets, pleeeeaase let us know. This is turning out to be really hard to explain; the World Series is just the best we’ve run across.