MONDAY, JULY 6, 2009
THOMAS G. DONLAN – EDITORIAL COMMENTARY   BARRON’S MAGAZINE

The Cap That Doesn’t Fit – A cap-and-trade system for reducing emissions looks great on paper. Did politicians feed their copies to the dogs?

FEW CONCEPTS IN ENVIRONMENTAL ECONOMICS COULD be more logical and efficient than a “cap-and-trade” system to reduce emissions of a noxious substance. All it requires is competent authorities to decide, on the basis of the best scientific evidence, how much of the substance should be allowed to escape into the world. Then the authorities print up certificates allowing that much emission, which they auction for cash. The emitters then can buy and sell the certificates in a free market.

Emitters with no easy alternative will bid vigorously for certificates as a matter of survival, but an emitter with an easy alternative also will bid, because he can sell certificates after reducing his own emissions.

The market for certificates also will attract speculators and hedgers; the rapid exchange of cash will stimulate invention; every emitter who can reduce emissions will profit; there will be less of the noxious substance; and the world will be a better place.

Those industries that are low emitters and those that can easily curb their emissions will be winners. Emitters with no choices will have to buy certificates and they will pass their new costs along to their customers, or go out of business. Their customers also will be worse off if they have to pay higher prices or curb their use of products that can’t be made without the noxious emissions.

Thanks to the market for cap-and-trade certificates, the authorities and the citizenry will know they have done the best they can in the face of a serious challenge: Emissions will be lowered at the least possible cost, and everyone who benefits from emissions will pay for the reduction.

Theory and Practice

That’s the story in some economics textbooks. In the real world, it is hard to find competent regulators, harder to understand the best scientific evidence and hardest of all to determine what emissions actually are noxious. The difference between theory and practice is that, in theory, there is no difference. But in practice, there is.

The House of Representatives passed a cap-and-trade bill last month to control carbon dioxide and other greenhouse gases. It’s considerably different from the textbook version of cap-and-trade. It is a remarkable case study in political science, focused on special-interest pleading and rent-seeking.

The bill, drafted under the supervision of Rep. Henry Waxman (D-Calif.) and Rep. Edward Markey (D-Mass.), is crammed with energy-wasting, money-wasting pet ideas. After promising to hand out 85% of the permits at no charge, the bill also provides loopholes and exemptions and escape clauses from the cap-and-trade system.

From coast to coast, the Waxman-Markey bill subsidizes, mandates and spends the taxpayers’ money on the ideas and industries dear to them and to a couple of hundred other congressmen. Markey and Waxman imagine cap-and-trade as a tax on business that won’t tax customers.

“Food Fight at the Carbon Trough”

Joining the congressmen in such absurdity are some major U.S. corporations. The U.S. Climate Action Partnership includes more than the usual environmental activists. Big energy producers and users are also members, including the former Big Three auto companies, ConocoPhillips, Alcoa, DuPont, and several big electric utilities.

Maybe they hope to have a voice in the shaping of the final legislation — a form of political-risk management. Some, such as General Electric and Siemens, may hope to reap subsidies for their green investments.

European businesses went along with a pan-European cap-and-trade system that started in 2005. That system has provided little reduction in carbon dioxide, but it has taught a few lessons.

The European regulators created too many emission certificates and they exempted 55% of greenhouse-gas emissions. The market set the price of certificates at nearly zero, and emissions increased under the system designed to reduce them.

After 2007, the system was tightened. Now the European authorities claim credit for reduced emissions, although the worldwide recession and the high energy prices of 2008 may also have something to do with it. Imagine how Congress will follow the European example. Not all emitters will have to have certificates — some will be more equal than others: small businesses, of course, especially small farmers, and individual car owners and homeowners and any other groups that vote in great numbers.

After that, industries and traders will be lining up and lobbying for the “free” certificates — always with the argument that one industry is unfairly hurt, or that another industry is extremely important to the economy and deserves a break. Kenneth Green, a fellow at the American Enterprise Institute in Washington, predicts “a food fight at the carbon trough.”

It will be just like the food fight at the defense trough, the food fight at the stimulus trough, the food fight at the tax-break trough, the food fight at the housing trough, the food fight at the health-care trough, the food fight at the poverty trough, the food fight at the oil-and-gas trough and at all the other troughs Congress has created.

No-So-Hidden Tax

In the current political debate, cap-and-trade has been denounced as an energy tax in disguise. It is, but raising energy prices is a sensible thing — probably the only sensible thing — if you want to reduce carbon-dioxide emissions or increase energy efficiency.

Higher energy prices are an effective incentive to conserve. Tradable permits, moreover, can work better than a straightforward energy tax, because the system can allow for winners and losers. A tax forces every energy user to cut back; the cap-and-trade system can push for the least efficient energy users to cut back the most and allow the most profitable uses of energy to expand.

Cap-and-trade will slow down economic growth and put some Americans out of work. But a properly designed system should be less painful than an energy tax, and far less painful than a regulatory mandate for equal reductions by all emitters.

If carbon-dioxide emissions are a real environmental problem, cap-and-trade should be the right economic solution. But, first, Congress has to read the textbook.

Editorial Page Editor THOMAS G. DONLAN receives e-mail at  tg.donlan at barrons.com.

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Barron’s concludes: It is hard to find competent regulators, harder to understand the best scientific evidence and hardest to determine what emissions must be controlled. The difference between theory and practice is that in theory, there is no difference, but in practice there is.

 

We liked the above Barron’s article and we also see a move at The Wall Street Journal that starts to see the truth in the danger from Climate Change – so the money folks start seeing the reality and even better – they start like in this Barron’s editorial – to makes positive criticism in the name of true free enterprise concepts – so the culprits are no more the scientists but the politicians and spcial interests with their manhandler Washington lobbyists legionaires.

 

Among the other self appointed speakers for free enterprise, we still find that The Cato Institute was left nearly alone as speakers for plain insanity as they still doubt that there is a man made global warming effect and distribute long lists of names with professorial titles (lots of them emeritus) addressing now President Obama with “all due repect – Mr. President, that is not true” notes on all what the vast majority of world’s scientists have already accepted as immediate needs for action.

But then, in utter disbelief, we founfd that Alan Reynolds of CATO is ready to accept a fuel tax if this is what will save that miserable US General Motors company that no way can measure up to today’s world without being propped up by the corrupt culture that allowed for its boom time.

We rather feel that it will be a time to danse when finally the curtain is drawn on GM.

See Mr. Reynolds, big Wall Street Journal OPINION piece for which he got paid – we hope.

Fuel Standards Are Killing GM: A higher gas tax is a better way to get green cars on the road.

By ALAN REYNOLDS

General Motors can survive bankruptcy far more easily than it can survive President Barack Obama’s ambitious fuel economy standards, which mandate that all new vehicles average 35.5 miles per gallon by 2016.

The actual Corporate Average Fuel Economy (CAFE) results will depend on the mixture of fuel-thrifty and fuel-thirsty vehicles consumers choose to buy from each manufacturer — not on what producers hope to sell. That means only those companies most successful in selling the smallest cars with the smallest engines will, in the future, be allowed to sell the more profitable larger pickups and SUVs and more powerful luxury and sports cars.

Sales of Toyota’s Prius, Yaris, Corolla and Scion, for example, allow and encourage Toyota to market more Lexus 460s, Sequoia SUVs and Tundra pickups in the U.S. without incurring fines. Hyundai’s success selling Accent and Elantra compacts allows it to sell 368-horsepower Genesis sedans.

Similarly, Ford has the Toyota-licensed hybrid Fusion and will soon produce the European Ford Fiesta in Mexico. Chrysler will soon have Fiats. But what does GM have?

No independent reviewer suggests that the Chevy Aveo and Cobalt are credible contenders in the small car field. Even the president’s auto task force finds the electric Chevy Volt “unviable,” since it will lose money unless priced above a Cadillac CTS. The Opel-engineered 2011 Chevy Cruze will face tough competition from Asian cars whose reliability is better established. Launching such new models will be even tougher in the future, now that GM has lost control of Opel.

GM accounted for about 19% of vehicle sales so far this year, but the company had a much smaller share of the market for small cars and SUVs (which accounted for 20% of total sales through May). To continue offering a Toyota-like array of larger cars and trucks under ever-tighter CAFE rules, GM would have to capture a much larger share of the market for small and/or diesel-powered vehicles. Unfortunately, European and Asian car makers have decades more experience building reliable subcompact cars and diesel engines for their local markets — where consumers face steep taxes on gasoline and large engines.

General Motors does produce competitive cars and trucks, but not one of them is small. Consumer Reports recommends three GM cars and three GM trucks. The recommended cars are the Chevy Malibu (the unrecommended hybrid has been dropped), the large Buick Lucerne and the Cadillac DTS. Consumer Reports recommends the Chevy Avalanche and Silverado and the GMC Sierra trucks. Car enthusiast magazines insist on adding Camaro, Corvette and the 556-horsepower Cadillac CTS-V to that list.

Among those nine best GM vehicles, only the four-cylinder Malibu achieved as much as 25 mpg in Consumer Reports testing. The others get 12-17 mpg, yet they are no less fuel-efficient than comparable foreign brands. The Environmental Protection Agency rates the mileage of the Toyota Sienna van and Nissan Titan pickup as worst in their class, and comparable Chevys as best. Unlike GM, however, Japanese car companies sell enough small cars to offset the large and thus hold down the average figures.

General Motors is likely to become profitable only if it is allowed to specialize in what it does best — namely, midsize and large sedans, sports cars, pickup trucks and SUVs. The company can’t possibly afford to scrap billions of dollars of equipment used to produce its best vehicles simply to please politicians who would rather see GM start from scratch, wasting more taxpayer money on “retooling” to produce unwanted and unprofitable subcompacts and electric cars. The average mileage of GM’s future cars won’t matter if nobody buys them.

Politicians are addicted to CAFE standards because they create an illusion of doing something sometime in the future without voters experiencing the slightest inconvenience in the present. Tighter future CAFE rules will have no effect at all on the type of vehicles we choose to buy. Their only effect will be to compel us to buy larger and more powerful vehicles from foreign manufacturers. Americans will still buy Jaguars, but from an Indian firm, Tata, rather than Ford. They’ll buy Hummers, but from a Chinese firm, Tengzhong, rather than GM. The whole game is a charade; symbolism without substance.

As a matter of practical politics, rescuing GM from strangulation by CAFE will require offering economically literate environmentalists a greener alternative, i.e., one that works. Luckily, the government has two policy tools that, with minor modifications, really could discourage people from buying the least fuel-efficient vehicles.

One is the federal excise tax on “gas guzzlers,” which could take some fun out of the horsepower race except that it applies only to cars, not to SUVS, vans and trucks. Why not apply this tax to all types of gas guzzling vehicles? Owners of trucks used for business could deduct the tax in proportion to miles used for business, as they do with other vehicular expenses. Phase it in after 2011 to encourage buyers to snap up the unsold inventory of gas guzzling trucks quickly — a timely “stimulus plan.”

Second, the federal fuel tax is highest on the most efficient fuel (diesel) and below zero on the least efficient fuel (ethanol). Cars get about 30% better mileage on diesel than on gasoline, and cars running mainly on gasoline get about 30% better mileage than they would using 85% ethanol.

To stop distorting consumer choices, simply apply the same 24-cent-a-gallon federal tax to gasoline and ethanol as we do to diesel. This would add funds to the depleted federal highway trust. More importantly, it would remove an irrational tax penalty on buying diesel-powered cars — arguably the most cost-effective way to improve mileage without reducing car size or performance.

These two proposals are a greener alternative to CAFE, because they’ll work. But they’ll only work if Congress totally and permanently abandons the charade of CAFE. It is arguably worthwhile to accept a modest tax increase in exchange for an end to harmful regulations, but that exchange is effective precisely because it is not painless.

Unifying fuel taxes and broadening the excise tax on gas guzzlers makes sense as an alternative to CAFE. Otherwise it’s just more pain with no gain.

If politicians insist on tightening fleet average mileage standards for bankrupt auto companies, how could those rules be enforced? The only penalty for violating CAFE rules is a big fine. If consumers keep refusing to buy enough small cars from GM and Chrysler to allow them to meet the CAFE rules, how are those companies expected to pay the fines?

The government is already planning to spend about $50 billion bailing out General Motors plus $7 billion for Chrysler. Will President Barack Obama provide Detroit auto makers with even more subsidies to pay CAFE fines?

Maybe so. That would be only slightly more bizarre than current plans to bribe folks with $4,500 to sell their “clunkers,” or to offer huge tax credits to those rich enough to buy a $73,000 hybrid Cadillac Escalade or an $88,000 Fisker Karma.

The bottom line is that CAFE standards are totally unenforceable and ineffective. Regardless of how much damage the rules do to GM and Chrysler, Americans can and will continue to buy big and fast vehicles from German, Japanese, Korean, Chinese and Indian car companies. CAFE standards might just be another foolhardy regulatory nuisance — were it not for the fact that they could easily prove fatally dangerous for any auto maker overly dependent on the uniquely overregulated U.S. market.

Mr. Reynolds is a senior fellow at the Cato Institute, and the author of “Income and Wealth” (Greenwood Press, 2006).

Printed in The Wall Street Journal, page   A13, Thursday July 2, 2009.

http://online.wsj.com/article/SB124649332091983175.html