Congresswoman Michele Bachmann is entirely correct when she asserts that cap-and-trade programs proposed to limit greenhouse gas emissions will have the effect of a tax.
Requiring entities that emit CO2 and other such gasses to buy emissions permits will raise the costs, and hence the market prices, of the goods produced. Consumers will pay more for electricity or whatever other good is affected.
Bachmann also is correct that it will be very difficult to limit, much less reduce, gas emissions if China, India and other rapidly industrializing nations don’t also reduce emissions.
But while she is correct on these points, she really remains stuck in the climate change quandary that bedevils the Republican Party. All of the alternatives they consider are bad ones, either in terms of the party’s key philosophies or in terms of winning elections. And so the party is divided, with one wing beating up on policies advanced by another wing.
A brief review of their choices is useful. The simplest approach is to assert that atmospheric warming induced by human activity simply is not occurring. That was the tack of the George W. Bush administration for several years. It appeals to an important group in the Republican base. It obviates the need to do anything.
The political problem is that this is a losing proposition with the electorate as a whole. Even if the argument that global warming is a hoax is correct, it convinces fewer and fewer educated, middle-income-and-up voters in the political center. This is precisely the group that Republicans need most to win elections. Moreover, it is not popular with youthful Republicans or with Rick Warren-type evangelicals who take stewardship seriously as a Christian value.
A second option is to assert that climate change will cause only aesthetic damage that has little value in contrast to the national output or income that might be reduced by emissions limitation initiatives. That was the position of George H.W. Bush at the time of the 1991 Rio Conference that set the first targets for global emissions reductions. Bush said he favored environmental improvement but ruled out any response “that would harm the U.S. economy.” As his son gradually acknowledged that climate change might, in fact, be occurring, he adopted the same position, that no economic tradeoff was possible.
A third option is accepting Bachmann’s correct assertion that emissions limitation efforts are doomed if newly industrializing nations don’t participate. In that case, the congresswoman implies, the best course for our country likewise is to do nothing and ride out whatever actually happens over the next century.
That may well be what plays out, but pragmatic Republicans rightly worry that advocating it is not a position that will pull in swing voters.
If you reject these three options and decide that our country needs to do something to limit greenhouse gas emissions, then you have three choices: technology mandates, emissions taxes or a cap-and-trade permit system.
Democrats love the first, which is the least efficient and imposes the greatest economic cost per unit of emissions reduced. Telling car manufacturers they have to increase average mileage or requiring utilities to produce arbitrary quotas of wind power lets us delude ourselves into thinking that pollution is a problem of evil companies and can be solved without affecting households in any way. That has been our approach to environmental improvement for 40 years.
Oddly, it also is beloved by a subset of Republicans such as Minnesota Gov. Tim Pawlenty who scorn the advice of their own party’s brightest economists, including Greg Mankiw, the longest-serving of George W. Bush’s chief economic advisors.
Mankiw is an articulate advocate of straightforward emissions taxes as the cheapest, most effective way to deal with a range of environmental problems, including greenhouse gas emissions. He’s not out on a limb, because probably more than 95 percent of economists, right and left, Republicans and Democrats, Keynesian or New Classical, agree with him.
It is hard to find any economic issue on which there is greater consensus than that taxes are the first and best alternative for controlling harmful emissions. But the very word “tax” makes it a nonstarter in the modern Republican Party, even among educated elected officials who themselves realize the economic and social cost of rejecting this option. Fear of Republican demagoguery causes Democrats to shy away also.
That leaves cap-and-trade. As Bachmann argues, it has the effects of a tax. But it does not actually include the word “tax,” so moderate Republicans such as John McCain, Rudy Giuliani and Mitt Romney can endorse cap-and-trade as the best option. They may realize that a simple tax would be better, but cap-and-trade is much better than technology mandates and is politically viable.
With cap-and-trade, there are additional issues, including whether you give out the permits or auction them off, and what you do with the money raised if you do sell them. But that is the subject of a different column.
© 2009 Edward Lotterman
Chanarambie Consulting, Inc.