Cap and Trade 101
Paul Krugman is trying to lecture us about the economics of cap and trade this morning. He has a nice little graphic explaining the relationship between caps and costs. He insists that the blue “rents” in the chart should not be factored as costs because:
The creation of cap and trade means that emission permits command a market price, and the value of these permits — the blue rectangle — goes to someone. Under Waxman-Markey, some of it (a growing fraction over time) would be captured by the government through auctions, and used to cut or avoid increases in other taxes — in effect, recycled to consumers. The rest would be passed on to industry — but because the biggest recipients would be regulated utilities, much of this would also be passed on to consumers.
My very limited understanding of cap and trade, most of which was gained during my tenure at The Heartland Institute, is that the real issue is the stability of the permit price. Krugman’s basic explanation is plausible enough if the permit price is something stable and predictable. But in reality, the value of the permits will be determined solely by the emissions cap set by the EPA.
In other words, the alleged “market value” of tradable permits is subject to the whim of the government. This will make it impossible for energy producers to plan production beyond the next election cycle. Not a problem for politicians, but a BIG problem for business. Thus the “value” of permits will likely not factor into the production equation and therefore never be passed on to consumers, resulting in a cost increase for the end consumers.
Comment by Jacob Steelman on 28 September 2009:
Cap and trade is just another government scheme to tax consumers since the tax will fall mainly on public utilities who will pass this on to consumers (utilities can do this because they are government granted monopolies and the utility industry is a government created and sponsored cartel). It is obviously aimed at the coal industry. The natural gas industry has for years been trying to take market share away from the coal industry in the United States and around the world wherever natural gas is available (with LNG natural gas is available almost everywhere). But coal is cheap and the costs of converting from coal to natural gas is high and utilities would be at the mercy of another utility – the natural gas transportation and distribution industry which is another government created and sponsored utility. The electric utilities have already seen what happened in the 1970s and early 1980s with the take-or-pay contracts which created much financial stress within the natural gas industry and the customers of natural gas who were forced to bear some of the burden (through increased prices of natural gas) of the take-or-pay contracts taken on by the gas utilities during the energy shortages of the 1970s. A modern day version of this is playing out in Europe which is being held hostage by Russian gas suppliers.
Comment by CCD on 28 September 2009:
Thank you for pointing out the flaws in Krugman’s argument. It is absurd to deny that the consumer will not be forced to pay the outrageously high costs for this cap and trade scheme. This bill will cost Americans dearly. Voice your opposition to cap and trade at http://tiny.cc/pxIgi.
Comment by sas3598 on 28 September 2009:
Cap and trade is not a government scheme to drive American’s into the poorhouse. In fact, industry devised cap and trade back in the 90s when acid rain was a hot issue and it was the environmentalists who balked at the idea. These same arguments that are being made now are recycled from the arguments against cap and trade then. But, it worked. Not only did we reduce acid rain, we did it cheaper and quicker than anyone expected. Americans weren’t run into the poorhouse and industry continued to thrive.
Comment by Jacob Steelman on 28 September 2009:
Any government mandated payment is in fact a tax. Any tax takes money away from individuals and businesses by force and leaves them with less money and thus less wealth thereby making them poorer. Government “management of the environment” is merely a battleground for the ruling elites to use government for the purpose of control through government land use planning. In the non-ferrous industries in the United States debt to equity ratios among the industry generally were in the 25-30% range prior to imposition of government imposed environmental “standards” and thereafter zoomed to 66-75%. Eventually most of the non-ferrous industry was driven offshore from the United States to foreign locations due to the government intervention rather than the voluntary decision of consumers voting in a free market. The best way to achieve environmental efficiency is to do away with “the commons” which is an inefficient legacy concept and replace it with private property rights which allows “environmental issues” to be handled voluntarily rather than by government force. Government intervention creates class warfare which ultimately erupts into armed conflict since government can only govern at the point of a gun.
Comment by Sheldon Richman on 29 September 2009:
Mike, you give Krugman too much credit. Who really believes the revenues from the auctions will be used to cut taxes or avoid tax increases? That’s not how politicians act. They will spend every dime they can get their hands on. Money to the treasury is not money to the taxpayers. We are not the State.