Matt says that Obama has McCain beat all hollow on energy policy:
And it's true. Barack Obama's energy policies -- focused on improving efficiency and developing renewable energy sources -- are pretty much party line answers because the Democratic party line is largely correct. McCain, by contrast, is a mess. He wants a cap and trade system to combat global warming (good) but wants to organize it so that the costs are borne entirely by consumers rather than polluters (bad). He says he's against subsidies for renewable energy because subsidies are a bad idea (understandable if a little pie in the sky) but wants massive subsidies for nuclear energy (because nuclear firms give him campaign contributions). McCain wants to get us off our addiction to oil (good) but he has no record of improving mass transit or fuel efficiency (bad) and his big idea is to wreck the economy of the coastal United States through offshore drilling which he falsely claims will lower short-term fuel prices. On top of all that, he proposes to lower gas prices through a "gas tax holiday" that's been denounced by experts across the ideological spectrum.
The question of auctioning carbon permits, vs. giving them away to companies, is often framed as a question of whether companies or consumers pay the cost. This is false. Consumers are going to pay the cost no matter what. Oil is in short supply, which means they'll pay to the point where the market clears no matter who gets the revenue. And utilities are generally heavily regulated companies with so-so profit margins--Con Ed, for example, which provided electricity to both me and Matt growing up, has a 7% net margin and an ROE of roughly 11%. Pepco, which currently serves us (I think--my rent includes utilities), does 4% and 9-10%. The costs of carbon, whatever they are, will pass through.
As they should. The only reason to have a carbon trading scheme, or a carbon tax, is to force carbon emissions down; otherwise it's just a stupidly inefficient tax that requires a gigantic new collection bureaucracy. And unfortunately, for the foreseeable future the main way we're gong to do that is to get people to use less energy. Taking money from Conoco doesn't further this goal unless the cost is passed through to consumers.
The core issues in the auction vs. giveaway question are two:
1) The distribution of costs between consumers and the government. A giveaway leaves the surplus in the hands of consumers; an auction gives the money to the government.
2) The distribution of benefits within the energy sector. A giveaway benefits industry incumbents, who can use their lobbying power to secure them. An auction benefits the holders of capital.
Austan Goolsbee talked a lot about that this weekend; he argues (correctly, I think) that a giveaway carries a high risk of corruption/regulatory capture. But he didn't frame the question as a showdown between consumers and power companies, because no matter how the permits are allocated, the consumer is going to pay the price.
Interesting breakdown of auction vs giveaway. Any thoughts on carbon tax vs cap-and-trade? It seems to me that a tax gives the government the money, and leaves the distribution of benefits to the market -- that is, there's no lobbying advantage (unless the tax is loopholed), and whichever providers can minimize costs to the consumer do best.
No matter who bears the cost, if the US and/or some subset of developed countries attempt to reduce CO2 emissions, the cost will be enormously greater than any measurable benefit.
"I'm shocked, shocked" that the US seriously considered taking a UNILATERAL approach to global climate change (Lieberman-Warner). Where is the coalition?
I don't understand the distinction Goolsbee is making regarding regulatory capture. The incentive to rent-seek comes from the fact that the power exists, not how the power is ultimately used. To offer an analogy, consider two scenarios. In the first, the government takes $100 from you and gives it to me (but it could feasibly not do so). In the second, the government isn't taking any money from you, but it could if it wanted. Is Goolsbee saying that there's a risk of rent-seeking and corruption in the first example, but not the second? They seem virtually identical to me (ignoring income effects).
I also don't understand why auction vs. giveaway is gov't surplus vs. consumer surplus. It sounds like gov't vs. producer surplus to me.
The difference on regulatory capture is that a straight auction gives you no incentive to lobby the government--you get what you pay for. If we give them away, there will be gigantic, complicated schemes for the allocation that are heavily influenced by lobbyists.
Of course, I expect lobbyists will still try to influence the structure of the auction, but this is a vastly lesser evil.
No. In general, allocation of carbon permits is really pure rent seeking by existing corporations; in theory, none of the money goes to consumers at all. The only exceptions are the regulated utilities, where utilities are forced by the government to maintain low profit margins, and thus inevitably will pass on some of the surplus.
The economics are pretty straightforward. As long as they're not conditional on current emissions (and to the extent that they are, they're pointless), permit allocations have absolutely no effect on the marginal costs of production, or anything else that defines the price level. They are lump-sum transfers to industry incumbents, pure and simple.
Again, with utilities, things are a little different, because utilities generally have implicit regulatory caps on their profit margins. But wherever the industry is not completely regulated -- for instance, wherever independent wholesalers are producing electricity -- you'll start to see the gains from permit allocations seep into profits for industry incumbents.
So your point (1) is just wrong:
"A giveaway leaves the surplus in the hands of consumers; an auction gives the money to the government."
A correct explanation would be:
"A giveaway hands most of the surplus to industry incumbents, except in a subset of highly regulated markets, such as public utilities, where consumers share the gain. An auction gives the money to the government."
Since the revenues for the government can fund lump-sum rebates to consumers, or relieve distortionary taxation, this is a really big difference.
This is false. Consumers are going to pay the cost no matter what.
That is absolutely correct. And I'd say that anybody who suggests there is some options where 'polluters pay' is, frankly, being intentionally dishonest. Someone who fully knows his position is B.S. but who realizes (as with the tobacco settlement) that pretending that 'big whatever' can be made to pay is an effective way to trick voters. Shame.
As for auction vs giveaway -- both worry me. Giving away credits allows politicians to dole out valuable credits (the equivalent of cash) to favored industries / supporters. But an auction brings in an enormous new pile of tax money. If those proceeds were to offset reductions in other taxes, that would be OK. But I fully expect they would be spent rather than returned to taxpayers. That being the case, if I have to choose, I'd rather take my chance with the giveaway than trusting the govt with a tax windfall.
This whole discussion is flawed in the sense that the amount of carbon is not adversely affecting our environment.....life on earth is BASED ON CARBON, for cryin' out loud.
If you want to have an "intellectual" discussion about who's paying the cost to stop climate change......at some point you're going to figure out that a whole lot of money has gone down a whole bunch of rat holes, and diddly squat was actually accomplished regarding the climate.....
permit allocations have absolutely no effect on the marginal costs of production, or anything else that defines the price level.
Matt, how can this be (assuming you're allowed to trade those allocations)? The opportunity cost of releasing a bit more carbon would rise to include the market price of selling that carbon permit.
Well, yes, life on Earth is based in carbon, jwh. That doesn't mean we can't adversely affect Earth's environment by changing the ratio of carbon-based compounds it contains.
That's like saying that one can safely drink gasoline - after all, it's carbon-based, right?
Global average temperature has been rising since ~1600. Atmospheric CO2 concentrations have been increasing since ~1750. If increasing atmospheric CO2 concentrations are driving global climate change, then CO2 emissions must be eliminated to stop the increase in global average temperature.
In that scenario, cap & trade is a passing phenomenon, since the cap must ultimately be zero globally to stop the warming, leaving nothing to trade.
In that scenario, cap & trade in a single economy is insanity, pure and simple. Reducing CO2 emissions in one economy can only reduce absolute global emissions if the reductions more than offset the increases in emissions in the remaining economies. That is hardly possible in the current scenario.
A little perspective is useful and necessary here.
I think the strangest point might be the idea that there is a bright line between "polluters" and "consumers." For example, it's clear that utility companies will be among the first to be regulated/taxed/capped. When I consume a kWh of electricity to power the appliances in my house, I'm clearly the consumer, but I'm also the polluter, not Pacific Gas and Electric.
Ryan says:
"Matt, how can this be (assuming you're allowed to trade those allocations)? The opportunity cost of releasing a bit more carbon would rise to include the market price of selling that carbon permit."
I wasn't as clear as I should have been. The existence of a market in permits, where you can buy or sell the right to emit a certain amount of carbon, does affect equilibrium prices.
But how those permits are initially allocated has no effect whatsoever. The marginal cost of emitting an additional ton of carbon is the market price of a permit, which is unaffected by how the permits are initially handed out -- it's solely determined by the demand for emissions and the aggregate number of permits handed out. The existence of a carbon market and the scarcity of carbon permits do change the picture, but how you initially distribute permits out doesn't.
Since it's clearly much better for the government to collect the money (and rebate it, or offset other taxes, or whatever) than for industry incumbents to arbitrarily receive large windfalls, this analysis has important policy implications.
As we should. But since consumers (voters) are too stupid to understand this, it's a lot more convenient to frame the issue the way Obama does, no?
How does Matt think offshore drilling 25 miles out will "wreck the economy of the coastal United States"? By providing lots of high-paying blue collar jobs to Americans in those areas? Does he think that oil rigs that no one will be able to see from even a high rise building on the beach will scare off beach goers?
This ignorance is frustrating. Matt has the resources and brand of The Atlantic behind him -- he's not blogging from his Harvard dorm anymore. If I were Matt, I'd pick up the phone and call some people who know something about the energy industry, and arrange to meet with them. Exxon Mobil and Chevron are frequent sponsors of The Atlantic; I bet the public relations departments at both firms would be willing to arrange interviews with senior execs, engineers, and scientists for Atlantic bloggers. Why not take advantage of that? If nothing else, it might put the claims of 'energy experts' such as Tom Friedman in a new light.
Lots of high-paying blue collar jobs to Americans? Sure, in a decade or so. The entire world's supply of offshore drill rigs are spoken for until 2012.
http://www.nytimes.com/2008/06/19/business/19drillship.html
Legalize it tomorrow if you want, you won't see a drop of the oil for 15 years.
We could focus our efforts on... you know, coming to terms with the end of the cheap-oil era. Or we could just continue to play the junkie looking for the next quick fix.
"Lots of high-paying blue collar jobs to Americans? Sure, in a decade or so. The entire world's supply of offshore drill rigs are spoken for until 2012."
Thanks for reminding me about those high-paying blue collar jobs that will be created by companies such as Fluor building more oil rigs to meet the rising demand for them.
"Legalize it tomorrow if you want, you won't see a drop of the oil for 15 years."
That's what opponents said 15 years ago.
"We could focus our efforts on... you know, coming to terms with the end of the cheap-oil era. Or we could just continue to play the junkie looking for the next quick fix."
Care to explicate? If your intent here is that we should focus on magical renewable fuels, why can't we do that and work to increase our domestic supply of oil and gas at the same time? This is the false dichotomy often presented by opponents of increasing domestic energy exploration and production.
Barges collide, pipes corrode, things leak, etc. Spills under 1,000 barrels do not have to be reported to the gov't and don't usually make the news. This can cause tar, empty barrels, etc. to wash up on the shores of local beaches. The lubricant used in drilling seeps into the water and mud surrounding the rigs. This mixture contains arsenic, mercury, bleach, etc. and is not good for local marine life (or the people who rely on or eat that marine life).
in 2007 alone, there were over 700 small spills off the coast of Texas resulting in over 2,000 barrels of oil spilling into the gulf. In 2006, in one incident, 21,000 gallons spilled off the coast of Galveston.
Katrina caused over 40 oil spills in the gulf (resulting in 7 million gallons of crude spilling into the gulf - Coast Guard Estimate). The news didn't pay much attention, but you can look at a picture here:
http://www.msnbc.msn.com/id/9365607/
Do you really think Miami (or Arnold's So.Cal beaches) want that happening so close to prime tourist areas (and their richest residents)?
It's not a false dichotomy, DaveinHackensack. The availability of oil has been the permanent excuse for not investing in sustainable energy. Guess what? Cheap oil is gone for good, short of finding another Ghawar or five. Drill offshore all we want, won't make a bit of difference.
We agree that offshore drilling's short-term impact will be nonexistent - except that it extends the illusion that oil is part of our energy future. It's not.
I'm 24, and I will live to see the decline and fall of the petroleum-based economy. The sooner we realize that it's over, the better. That's when we start seriously talking about what to do in the aftermath.
Since it's clearly much better for the government to collect the money (and rebate it, or offset other taxes, or whatever)
The 'rebate it' or 'offset other taxes' options sound good. But, unfortunately, 'or whatever' is what we're likely to get.
than for industry incumbents to arbitrarily receive large windfalls
Case 1: Con Ed is granted permits to cover 90 whatever percent last year's emissions. It can sell some of those permits, but only if it can generate electricity for its customers while emitting far less carbon. Otherwise, it has to use all the 'windfall' to cover its emissions. And, on top of that, reduce emissions by some percentage (or buy more permits on the open market). Result -- Con Ed's prices are marginally higher.
Case 2: Con Ed has to buy permits for every ton of carbon it emits. It must charge higher rates to cover the cost of all of these permits. In theory, the government cuts other taxes, enabling people to pay the higher rates. But in practice, the government spends most of the windfall on national health-care, subsidizing alternative energy programs (more corn ethanol anyone?) in powerful senators' states, etc.
I'd prefer case 1 over hoping that, in case 2, hoping against hope that the govt will really rebate all of its tax windfall.
It's really not consumers vs government for the same reason it's not consumers vs corporations; the government is just us. It's more like high-pollution consumers vs low-pollution consumers.
I have to agree with Matt Rognlie.
I don't know how permits would affect Con Ed's prices (re Slocum's last post) because I don't understand to what extent electricity is a free market in the US. But for something like oil "giveaway" permits would amount to a huge transfer from consumers to oil companies. We have seen that prices need to rise dramatically to reduce consumption even modestly. Oil company's expenses would not rise and might even fall slightly as they produced less oil. I have to think their profits would soar.
Looked at a different way, the major oil companies could conspire to set higher prices (thus *slightly* reducing the quantity consumed). I think we all agree that would mean jail time if they were caught, but make a lot of money if not. Permits would do the same thing unless that wealth was transfered back to the government and thereby us in an auction.
Spills under 1,000 barrels do not have to be reported to the gov't and don't usually make the news.
That's not quite correct. A facility is allowed to have a maximum of one oil spill not exceeding 1000 gallons, or any two spills not exceeding 42 gallons each, within a 3-year period. Breach either of those thresholds and the EPA will be happy to voice a finance-reducing opinion on the matter, and then demand that you scrub every pebble with a toothbrush. Certain exceptions are made for acts of war, terrorism, and natural disasters, although the facility owner is expected to take reasonable security precautions to limit access by the general public and in particular, any would-be vandals hiding withing it.
Also, any facility having more than 1,320 gallons onsite in containers of 55 gallons or more is required to have an on-site plan for addressing, containing, and reporting oil spills which, in most cases, must be developed in compliance with some fairly specific site-planning formulas and then vetted by the regional EPA administrator. It's all spelled out in mind-gumming detail in Title 40 of the Code of Federal Regulations, Part 112.
Obviously, offshore drilling presents special difficulties, but shove it far enough out and these need not be crippling. Unless, like California legislators, you regularly deal in the kind of cognitive dissonance that allows you to envision a world where everyone carpools in electrics and pretends that many of the car's constituent components aren't being produced by environmentally destructive process and energy sources in foreign countries, and that their charging sources in the US won't be majority coal-fired.
Slocum (and McArdle) are right, Rognlie is wrong, and Aleah appears to have misunderstood the concept of emissions permits. Emissions permits are for people who emit. Someone operating an oil-fired power plant would need a great deal; someone operating an oil rig would not. Pumping oil out of the ground certainly is not a carbon neutral activity, but it's hardly comparable to what burning it does.
Contrary to Aleah's assumptions, permits would NOT limit the amount of oil which could be pumped out of the ground. In fact, a properly functioning permit system would actually drive the demand for oil down. Permits would limit the amount of oil which could be burned, and who wants to buy oil you can't use? In fact, not only would the quantity consumed decrease, but so would the price. Oil companies would probably be more inclined to classify this as a "disaster" than a "windfall".
All that being said, while Slocum is correct that there won't be any windfalls if everyone is simply handed permits for, let's say, 80% of the previous year's carbon output, there is scope for massive problems if permits are misallocated. Let's imagine that the right total number of permits get handed out, but via some concerted bribery the newly formed CarbonLobby Inc. gets assigned half the total permits, with existing firms only receiving permits worth 40% of last years output. It should be obvious that CarbonCo's owners could simply sell the permits back to the people who "should" have received them and make out like thieves - with the money being recovered primarily from customers.
An auction system, of course, offers less scope for corruption, but is otherwise no better. This is - obviously - a zero sum game. If large sums of money are changing hands in any direction it's ultimately mostly coming from consumers (with, perhaps, a bit coming from investors in firms that didn't bribe their senator heavily enough), and it's pretty bloodly unlikely it will ultimately go back to them. (See also: The 3G spectrum auction disasters.)
Contrary to Aleah's assumptions, permits would NOT limit the amount of oil which could be pumped out of the ground.
True.
In fact, a properly functioning permit system would actually drive the demand for oil down. Permits would limit the amount of oil which could be burned, and who wants to buy oil you can't use?
Except that keep in mind that oil (and more to the point, coal -- which we have a lot more of) don't need to be burned here to be used. They can be exported to developing countries who are likely to remain effectively exempt from carbon emissions restrictions. But you're right that requiring emissions permits to use oil and coal in the U.S. is certainly not a net benefit for oil and coal companies.
All that being said, while Slocum is correct that there won't be any windfalls if everyone is simply handed permits for, let's say, 80% of the previous year's carbon output, there is scope for massive problems if permits are misallocated.
Yes, misallocation is a potential problem. As was seen in the European carbon markets when some governments handed out permits covering more than 100% of emissions to their industries, enabling them to sell the excess as a windfall (at least until the carbon market crashed). There is also the problem of creating perverse incentives for energy users to maximize their emissions in the period before the program starts to create a high-as-possible baseline.
Slocum almost asked the critical question in his last post. If the developing countries remain effectively exempt from CO2 emissions controls and can not only burn their own fossil fuels, but also buy and burn ours, what is the point of emissions controls, cap & trade, taxes etc. in the developed countries?
China is currently increasing its CO2 emissions about 6x faster than the US would have reduced ours under Lieberman-Warner. If it is free to continue to do so, atmospheric CO2 concentrations continue to increase, which (according to the gospel of St. Algore) means global temperatures continue to increase.
We'd be massively subsidizing their consumption, which is a feature and not a bug if you're into hairshirts rather than doing anything useful.
AT,
What good is "sackcloth and ashes" without the ashes?
Isn't it OK if the Chinese overheat their globe, as long as they don't overheat ours?
If there is some effect where China can exploit carbon taxes, then we have to consider carbon consumption taxes rather than production taxes.
But aren't only certain industries really affected like cement and chemicals?
Aaron,
The fundamental question regarding carbon: "Why are we discussing cap & trade, carbon taxes, CAFE standards, etc.?"
Answer: Global climate change supposedly caused by anthropogenic carbon emissions.
FACT: China is the largest emitter of anthropogenic carbon.
FACT: China has the fastest growing annual anthropogenic carbon emissions.
Therefore, China need not "exploit carbon taxes" in any way. China need only continue to increase its own anthropogenic carbon emissions to negate any possible climatological impact of cap & trade or carbon taxes anywhere in the world.
Cody, you don't refute my point at all. Under a system where permits are handed out to industry incumbents, producers get almost all the surplus from the carbon policy, with a small amount leaking to consumers due to the regulated profit margins of utilities. Consumers pay much more, and benefactors are whatever companies were lucky enough to be the highest emitters when the permits were initially allocated. Under a system where the permits are auctioned, the surplus goes directly to the government, which can then rebate it in lump-sum payments.
This is because permit allocations are, to use an economic turn of phrase, sunk benefits. Producers sell at a market price, and that market price is determined by factors like demand and the marginal cost of production that have nothing to do with the original allocation of the permits. (Of course, the quantity of permits handed out does matter, but how they are distributed isn't.) Companies who were lucky enough to receive free permits sell at the same price as newer entrants who don't have permits. If that's not a windfall, I don't know what is.
Matt,
Newer market entrants without permits enter the market with non-emitting technologies, if they have any brains, since they will ultimately have to use them anyway, as will all of their competitors.
The important fact is not that there are permits early, although fewer than are needed by all current emitters under a business-as-usual scenario; the important fact is that, over a period of time, the number of permits continues to decrease until there are no more permits available for anyone.
The approach used can affect the amount of pain experienced during the process, but not the end point of the process.