A Rush to Judgment?

Earlier this year, Sens. John McCain and Joe Lieberman announced their intention to introduce legislation in the 108th Congress aimed at curbing greenhouse gas emissions in the United States. More recently, Sen. Lincoln Chaffee (R-R.I.) has made clear his support for such policies, meaning that the issue could come to a vote on the Senate floor should he break rank with fellow Republican members of the Energy and Public Works Committee. Avoiding the many questions of any global warming plan—scientific uncertainties, compliance by other nations, economic burdens, administration, and enforcement—proponents of efforts to reduce carbon dioxide emissions claim the plan is superior because it relies on a market-based “cap and trade” system. But ultimately, any system that restricts emissions is restricting the nation’s access to energy. Market-based or not, choking the nation’s energy supply will have significant costs for the economy as consumers face higher prices and workers find themselves out of work in important sectors of the economy.

The McCain-Lieberman proposal would have a sweeping impact on the American economy, requiring energy users to reduce their emissions to their 2000 levels by the year 2010, and to achieve emissions no greater than 1990 levels by the year 2016. The cap and trade system is supposed to make this a less painful proposition. The “cap” is the limit on emissions, while the “trade” refers to the ability of producers who come in below their cap to bank or sell their unused emission allowances. This “market” created by regulation allows producers to buy emission allowances when necessary while providing an incentive for all producers to reduce emissions whenever feasible. These unused emissions can be saved for a rainy day, or sold in the market to others who have hit their emission limits.

While the ability to buy and sell emission credits does establish a market, it is a contrived market, established and enforced by the government. The supply of credits is controlled by the Environmental Protection Agency, which would maintain an inventory of greenhouse gas emissions. Companies would be required to submit allowances to the EPA to cover emissions during a given period. The EPA will determine the amount of emissions associated with the use of a unit of petroleum and credit allowances accordingly. In addition, the Department of Commerce must determine the initial endowments of emissions, or a starting point that distributes credit allowances throughout the market, and establish an auction market for the sale of additional allowances.

This is not a market in the usual sense of the word; it is a regulatory regime that attempts to mimic a market. Important elements are controlled and defined by government, opening the door to political manipulation while expanding federal control over important sectors of the economy. When ill-conceived or politically influenced, such contrived markets can perform poorly and can have significant adverse effects on the economy, as was made all too clear by the state of California’s attempt to create a government controlled market for electricity.

In the end, any regulation to reduce greenhouse gas emissions must be evaluated not on the implementing mechanism, but on the merits of the reduction itself. With respect to global warming, important issues must be resolved before adopting draconian measures on the American economy. The greenhouse effect itself is not in dispute and we do know that there has been some warming over the past century; however, this does not necessarily point to a human induced global warming crisis or worldwide calamity.

Man-made emissions of greenhouse gases have been increasing, primarily due to the use of fossil fuels, which releases carbon dioxide. But this is only one of several greenhouse gases, and the most prevalent—water vapor—is by far the most prevalent greenhouse gas, responsible for 95 percent of the greenhouse effect. Even with respect to carbon dioxide, man-made emissions are responsible for less than 3 percent of total emissions (Energy Information Administration, p. 5 ). The complexities of the Earth’s climate cannot be ignored, and there remains a great deal to learn about human impact on global warming.

Far more is known about the adverse impacts of rationing energy. Implementing the Kyoto Protocol, an international treaty to reduce greenhouse gas emissions, has been estimated to cost the U.S. economy between $130 billion to $400 billion annually. Yet with many developing countries exempted even though they will be major producers of greenhouse gases in the coming years, it is doubtful that there will be benefits commensurate to the costs.

Likewise, proposals such as the McCain-Lieberman plan, which unilaterally restrict U.S. energy consumption, will impose real costs on the economy for questionable benefits at best. Even more disconcerting, the poor and those on fixed incomes will be disproportionately harmed because of the regressive nature of the proposal. To say it is a good plan because it is market-based is putting the cart before the horse. The much larger policy question of climate change must be resolved before adopting costly new regulations that will ration energy, harm consumers, and increase unemployment.