Caps and Trade-offs: Presidential Candidates and Climate Change

     The 2008 campaign season features sharp disagreements among the leading presidential aspirants from both parties. Climate change, however, seems to be the exception that proves the rule, as all three frontrunners have embraced broadly similar policy prescriptions that would supposedly combat global warming.

     Sens. Hillary Clinton (D-N.Y.), John McCain (R-Ariz.), and Barack Obama (D-Ill.) have declared their support for mandatory emissions reductions and heavy investment in renewable fuel technology. All three are also co-sponsors of the 2007 Climate Stewardship and Innovation Act (S. 280), a bill that would establish a cap-and-trade system to restrict carbon dioxide emissions over the next several decades. Meanwhile, Sens. Joe Lieberman (D-Conn.) and John Warner (R-Va.) recently introduced America’s Climate Security Act of 2007 (S. 2191), which proposes a similar cap-and-trade policy.

     A cap-and-trade system would set an absolute limit on permissible carbon emissions. Companies would be required to hold permits equivalent to the value of any carbon emissions that exceed the proposed cap. By allowing companies that produce less carbon dioxide to sell their excess emissions permits to companies that pollute over the limit, supporters hope a cap-and-trade program will provide an immediate economic incentive for CO2 reduction. Although this scheme provides some flexibility through its exchange mechanism, it also promises significant costs for both consumers and corporations.

     Reducing emissions is an expensive proposition, and individual consumers would bear the brunt of any additional regulations. While debating America’s Climate Security Act, Sen. James Inhofe (R-Okla.) warned his colleagues that a similar bill would have cost a family of four an estimated $3,500 per year.

     A study conducted by the Department of Energy indicated that “S. 280 increases the cost of using energy, which reduces real economic output, reduces purchasing power, and lowers aggregate demand for goods and services. The result is that projected real [GDP] falls relative to the reference case.” According to the Department of Energy, GDP growth would be $471 billion to $572 billion less over the next several decades under the Climate Stewardship and Innovation Act.

     Another important consideration is the method of permit distribution. Because emissions permits give companies license to pollute at a certain level, they have substantial monetary value. A study conducted by Friends of the Earth indicates that the America’s Climate Security Act would hand out $1.5 trillion worth of emissions permits over the next 40 years.

     Money raised from auctioning permits could be funneled into research and development subsidies, but this strategy has its own set of pitfalls. Because the trajectory of future technological development is so uncertain, it is extremely difficult to subsidize private-sector research and development effectively.

     Subsidization policies are also vulnerable to the worst features of our political process: Politicians have a vested interest in procuring spending for their constituents, and savvy lobbyists are paid to ensure that Washington connections take precedence over viable research strategies. Private corporations are better positioned to allocate funds for research as they tend to be more careful with their own (and their shareholders’) money.

     With these challenges in mind, policymakers should learn from other efforts to reduce emissions. The non-partisan Congressional Budget Office has concluded that the European Union’s cap-and-trade program suffers from “insufficient historic emissions data” and an overly complicated regulatory superstructure.

     British Columbia, on the other hand, recently implemented a carbon tax that features a commensurate reduction in income and corporate taxation. So far most U.S. carbon tax proposals – like the one Rep. John Dingell (D-Mich.) offered partially in jest last year – have been designed to extract hundreds of billions of extra dollars from Americans’ wallets.

     Crafting growth-friendly strategies to combat pollution has never been an easy task. Private-sector research and development may provide new ways to reduce emissions without the burden of increased regulation or higher taxes that would reduce America’s competitiveness abroad. And while no policy can provide cost-free emissions reduction, limiting the potential for excessive government intervention in the economy should remain a priority.

Brianna Cardiff is a policy analyst with the National Taxpayers Union Foundation. Will Collins is an associate policy analyst with the National Taxpayers Union Foundation.

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