Stavins and Schmalensee: “Demonizing cap-and-trade in the short term will turn out to be a mistake with serious long-term consequences for the economy, for business, and for consumers.”
"Stavins and Schmalensee: “Demonizing cap-and-trade in the short term will turn out to be a mistake with serious long-term consequences for the economy, for business, and for consumers.”"
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Harvard economist Robert Stavins has a good piece, “Beware of Scorched-Earth Strategies in Climate Debates.” In it, he reposts an op-ed co-authored with Dick Schmalensee, who served on President George H.W. Bush’s Council of Economic Advisers, on the self-destructive nature of conservative demagogueing against the very market-based solutions conservatives developed years ago when they actually cared about clean air and clean water and the health and well-being of our children.
Robert Stavins is Director of the Harvard Environmental Economics Program.
With the apparent collapse last week of U.S. Senate consideration of a meaningful climate policy, it is important to reflect on what could be a very serious long-term casualty of these acrimonious climate policy debates, namely the demonizing of cap-and-trade and the related tarnishing of market-based approaches to environmental protection.
In an op-ed which appeared on July 27th in The Boston Globe (click here for link to the original op-ed), Richard Schmalensee and I commented on this unfortunate outcome of U.S. political debates and described the irony that the attack on cap-and-trade – and carbon-pricing, more broadly – has been led by conservatives, who should take pride as the creators of these cost-effective policy innovations in three Republican administrations.
Rather than summarize (or expand on) our op-ed, I simply re-produce it below as it was published by The Boston Globe, with some hyperlinks added for interested readers.
By the way, for anyone who is not familiar with Dick Schmalensee, let me note that he is the Howard W. Johnson Professor of Economics and Management at MIT, where he served as the Dean of the Sloan School of Management from 1998 to 2007. Also, he served as a Member of the Council of Economic Advisers in the George H. W. Bush administration from 1989 to 1991.
“”””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””””-
The Power of Cap-and-Trade
by Richard Schmalensee and Robert Stavins
The Boston Globe, July 27, 2010
LAST WEEK, the Senate abandoned its latest attempt to pass climate legislation that would limit carbon dioxide emissions, putting off any action until the fall at the soonest. In the process, conservative Republicans dubbed the cap-and-trade system “cap-and-tax.” Regardless of what they think about climate change, however, they should resist demonizing market-based approaches to environmental protection and reverting to pre-1980s thinking that saddled business and consumers with needless costs.
In fact, market-based policies should be embraced, not condemned by Republicans (as well as Democrats). After all, these policies were innovations developed by conservatives in the Reagan, George H. W. Bush, and George W. Bush administrations (and once strongly condemned by liberals).
In the 1980s, President Ronald Reagan’s Environmental Protection Agency successfully put in place a cap-and-trade system to phase out leaded gasoline. The result was a more rapid elimination of leaded gasoline from the marketplace than anyone had anticipated, and at a savings of some $250 million per year, compared with a conventional no-trade, command-and-control approach.
In June 1989, President George H. W. Bush proposed the use of a cap-and-trade system to cut by half sulfur dioxide emissions from coal-fired power plants and consequent acid rain. An initially resistant Democratic Congress overwhelmingly endorsed the proposal. The landmark Clean Air Act amendments of 1990 passed the Senate 89 to 10 and the House 401 to 25. That cap-and-trade system has cut sulfur dioxide emissions by 50 percent, and has saved electricity companies “” and hence shareholders and ratepayers “” some $1 billion per year compared with a conventional, non-market approach.
In 2005, George W. Bush’s EPA issued the Clean Air Interstate Rule, aimed at achieving the largest reduction in air pollution in more than a decade, including reducing sulfur dioxide emissions by a further 70 percent from their 2003 levels. Cap-and-trade was again the policy instrument of choice in order to keep costs down and achieve the rapid reductions at minimum economic pain. (The rule was later invalidated by the courts, and is now being reformulated.)
To reject this legacy and embrace the failed 1970s policies of one-size-fits-all regulatory mandates would signify unilateral surrender of principled support for markets. If some conservatives oppose energy or climate policies because of disagreement about the threat of climate change or the costs of those policies, so be it. But in the process of debating risks and costs, there should be no tarnishing of market-based policy instruments. Such a scorched-earth approach will come back to haunt when future environmental policies will not be able to use the power of the marketplace to reduce business costs.
Virtually all economists agree on a market-based approach to reduce carbon dioxide emissions. Some favor carbon taxes combined with revenue-neutral cuts in distortionary taxes, whereas others support cap-and-trade mechanisms “” or “cap-and-dividend,” with revenues from auctioned allowances refunded directly to citizens.
Conventional approaches advanced as “painless alternatives” “” a plethora of standards, special-interest technology subsidies, and tax breaks “” won’t do the job, and will be unnecessarily expensive. While we are struggling to revitalize the economy, we simply cannot afford to turn our backs on markets and impose unnecessary costs on businesses and consumers.
A price on carbon is the least costly way to provide meaningful incentives for technology innovation and diffusion, reduce emissions from fossil fuels, and drive energy efficiency. In the long run, it can reduce our use of oil and drive our transportation system toward alternative energy sources.
Market-based approaches to environmental protection – including cap-and-trade – should be lauded, not condemned, by political leaders, no matter what their party affiliation. Demonizing cap-and-trade in the short term will turn out to be a mistake with serious long-term consequences for the economy, for business, and for consumers.
— Schmalensee and Stavins
FRONT
I think we need to change the term from “cap and trade” to “market-based solution.” It would be much harder for Republicans to attack a market-based solution.
Koch Industries uses the expression Market Based Management. They are connected with MIT.
As you always say, Joe, conservatives hate the solution, and so deny the problem. Even a cap and trade implies the presence of a government entity, and certainly, global warming demands binding international agreements. Both are anathema to Republicans.
So they can’t support even their own market-based policies because to do so would be to admit there’s a problem. With global warming, you’re either in for a pound or out — no ounces and no increments work.
Worse for them, admitting that global warming is real, undermines their entire free market uber alles philosophy. After all, if there’s an externality that exceeds the size of the entire economy, then the magic market ain’t so magic, and big gubmint is vital.
That’s why they can’t support even market-based solutions — their very essence is threatened by the existence of global warming, as are their true constituencies, big oil and dirty coal.
The time for rational thinking is long past, sad to say. The cat of pure greed and moral indifference is well out of the bag. The only way forward is to mess with the Neanderthal politicians where it hurts- on their home turf, on political terms.
Given that the particular means of distribution of the annually declining permits
has a critical influence on the end achieved,
perhaps the proper descriptive title for this market-enhancing solution is :
CAP, ALLOCATE & TRADE.
regards,
Lewis
Charles Siegel… I’ve been saying exactly the same thing for the past two years. Everyone please stop saying “cap and trade.” The right wing has already reframed that as “cap and tax.” Use the term “market based solutions” please.
The only problem is that we’ve exhausted resources and polluted the planet to the point of causing our own extinction, but we’re still using an economic model that requires growth and which got us here in the first place!
Wrong Track Thinking
Yes. Thanks for the great post.
For some reason, a great number of Republicans—by no means all conservatives, but nevertheless a large majority of Republican politicians that conservatives elect—are presently choosing positions and approaches that are doomed to fail, harmful to their own ideologies, contrary to basic fact, and credibility killing as well.
By doing so, they are shooting themselves in the feet, pulling the rug of reason out from under themselves, undermining the effectiveness of both democracy and the marketplace, building a terrible legacy for themselves, and pulling the rest of us down with them.
Indeed, they are doing the exact opposite of what they should be doing, even in their own self-interest and in the interest of the views they claim to hold.
If it weren’t so darn harmful, it would be merely astonishing!
In addition to the points being made in the post, above . . .
Most Republicans are taking an incredibly anti-science stance. A party that presumably champions science, wants science education in the U.S. to improve, and absolutely loves the technologies that science provides is, in essence, choosing to disagree with — or at least cloud and misrepresent — the carefully considered assessments of 97 percent of the relevant scientific community. They are killing their own credibility. Their stance towards science is apparently to accept the science they like and to disregard the science that they don’t like. They’d like to be able to swim in water — AND to walk on it.
Similarly, they are pitting themselves against the powers of Nature Herself. Good luck in that battle!
Then we have the point that the post (above) makes so well. Republicans and other conservatives SHOULD be energetically arguing for every approach that would help the markets, and industry, genuinely and effectively address the climate change problem and transition to sustainable energy sources. They should be arguing FOR a mechanism — and the best possible one, at that — that will result in a price on GHG emissions, i.e. on carbon. Instead, they are arguing for things that are doomed to failure, and that are credibility-killing as well. They are apparently setting the stage to prove that markets and money-infused democracy CAN’T address the pivotal issues of the day. You’d think that lovers of markets would want to prove that markets CAN recognize and effectively address problems, that they CAN face the challenges of the day, that they CAN lead to sustainability. But no, not our present lovers of markets. They seem to be trying to do everything possible to ensure that problems won’t be addressed. Do they think that they can keep the problems — increasing climate change, perpetual dependence on foreign oil, lackluster job growth, lost opportunities to achieve leadership in clean technologies, and etc. — a secret?
Similarly, they have some ideological unbalanced view of “freedom”, even. Most sane people understand the matters and degrees of freedom, I should hope, and the notion of “freedom with responsibility”. A person’s freedom to swing his fist must necessarily end where another person’s nose is. So, what sort of “freedom” do we aspire to have, here in America? Do we aspire to have the sort of freedom to pour immense amounts of GHGs, perpetually, into the global atmospheric commons, even though the vast majority of our scientists tell us that doing so will cause immense problems, including to billions of people who aren’t putting nearly as much CO2 into the atmosphere as we are. Can Republicans walk and chew gum at the same time? Then please have them reconcile their apparent brand of “freedom” with the realities of “the problem of the commons”? Is theirs a “freedom” that is, by definition, destined to destroy global commons? Do they think that any approach that can possibly respect the global commons and put humankind on a sustainable course must necessarily be a sinful violation of their brand of “freedom”? Indeed, is their brand of “freedom” incompatible with global survival and sustainability?
I must say, they have me confused these days.
People who believe that markets can solve things, and who want to maximize their chances to demonstrate that, and people who want to respect science and retain credibility, and who want to be champions of science, would (and should) be doing the exact opposite of what most present-day Republicans seem intent on doing. They are shooting themselves in the feet. If the stakes weren’t so darn large, it would merely be amusing to watch.
I’ll add a few more related thoughts in a forthcoming comment.
(And thanks for the great post.)
Be Well,
Jeff
The problem with carbon – emission trading is, that it doesn’t help to reduce emissions in the first place.
Plankton, base of ocean food web, in big decline
Worldwide phytoplankton levels are down 40 percent since the 1950s, according to a study published Wednesday in the journal Nature. The likely cause is global warming, which makes it hard for the plant plankton to get vital nutrients, researchers say.
http://www.newsvine.com/_news/2010/07/28/4770306-plankton-base-of-ocean-food-web-in-big-decline
The problem with trying to do a name change now, is that they can employ the strategy of saying “this is just cap and tax in disguise – they’re trying to sneak this through against the will of the American People!”
It doesn’t matter what you want to do, or what you call it – they’ll still find a way to make it look like a bad thing.
Prokaryotes –
are you perhaps conflating the function of carbon offset trading, (which I’d readily agree is fraught with leakage issues over verification, definition etc)
and carbon emission permits’ trading, whose annually declining provision ensures a rising incentive to cut ones need of them.
Trading in emissions permits allows businesses to make more efficient use of their resources, thus maximizing the viable rate of decline of emissions permits and thereby achieving the earliest end to fossil fuel dependence.
Regards,
Lewis
Lewis, i’m for strict regulation of carbon emitting sources. Therefor i like to see a carbon tax and strict pollution guidelines.
I can imagine to offset own footprints, as seen in this example
http://earth2tech.com/2010/07/27/the-real-reason-google-is-buying-wind-power/
Republican Confusions, and An Example
Adding to my earlier comment, it seems to me that many Republicans (or at least the political leaders that they perpetually elect) are confusing three things:
* The very-short-term economic interests of a minority of them (some politicians, corporate execs, some of the financiers, etc.)
* What they — Republicans — say they believe (in terms of all the positive aspects of industry, marketplaces, and so forth) and what they presumably want to demonstrate effectively (i.e., that markets can result in good outcomes for society, can recognize problems, can respond to problems, can solve problems such as climate change, and so forth)
* The differences between the interests of particular companies in the marketplace, given the present situation, and the interests of other companies in the marketplace, the healthfulness and effectiveness of the marketplace itself, and the credibility of the marketplace (and of those who champion it)
For example, let’s say ExxonMobil wants to stubbornly stick to pushing oil upon the whole world. They want to continue to do what they do better than anyone else, as Rex Tillerson famously said in a New York Times article not long ago. Apparently, they define themselves as an oil company rather than as an energy company. Apparently, they don’t know about the mistake made by the “horse and buggy” companies (who insisted on sticking with horses and buggies rather than seeing themselves as transportation companies and getting into the auto business) and by many other companies in similar situations.
Be that as it may, the question is this: Are the interests of people who champion markets, and of Republicans, and of Harvard Business School (to use an example), and of McKinsey (to use another example), and of other segments of American industry, aligned well with those of ExxonMobil, ConocoPhillips, and Chevron? Is “sticking to oil” in the long-term best interests of all these folks and organizations, or even in their short-term interests?
What if it is the case — as it IS the case — that all of the folks who actually want marketplaces and industry to demonstrate effectiveness, and to “prove successful” at facing and addressing major problems and the changing nature of our real circumstances, should want markets and industry to get us OFF of our addiction to hydrocarbons AS SOON AS POSSIBLE and AS EFFECTIVELY AS POSSIBLE, and get us onto more sustainable clean-energy pathways ASAP and AEAP?
Then, in that case, all those folks have an interest that is NOT aligned with the present, unwise, self-serving, and stubborn interest that ExxonMobil has adopted.
ExxonMobil is like the passenger in the lifeboat who keeps wanting to grab the rudder and steer the lifeboat South when all of the other passengers — or at least any of them who have looked at the compass, and the map, and who have stayed sober — understand that the lifeboat should head North ASAP, if they are to make it alive.
A story may be helpful . . .
In the 1970s, as we know, much of society decided that it would be a great idea to greatly enhance the fuel efficiency of our automobiles (and auto industry), to strive to develop alternative fuels and approaches, and to get ourselves off of our addiction to oil.
But then (for a variety of reasons) interest in all those good ideas died.
Together, the auto companies and oil companies were fine with the status quo, and the auto companies developed a habit of fighting against any initiatives that would prompt and encourage them to develop substantially more fuel-efficient vehicles or to transition to new energy technologies. Apparently, the auto and oil industries seemed to see their interests as being aligned.
As history shows, so far, the oil companies have gotten the “better half” of this supposed and confused alignment. In recent years, our oil companies have been earning IMMENSE profits, paying huge dividends, and so forth. ExxonMobil is the most profitable company in the U.S. Meanwhile, our entire auto industry nearly went bankrupt. It would be hard to pick more polar opposites in terms of profitability. If you stick with oil, the oil companies do great, of course. But what about everyone else?
Here, then, is a great example of how interests that may SEEM aligned are really not aligned at all.
Politicians, theorists, think-tankers, business school profs, Republican leaders, and the leaders of companies in industries other than oil and coal, ought to “think carefully” about where their own long-term interests are. Are their interests and claimed views best served by, and best demonstrated by, sticking stubbornly with the oil and coal companies, even though such stubbornness will ultimately result in demonstrating that industry and markets (as we presently implement them, if this scenario comes to pass) are NOT well suited to face and address problems and to lead to good societal outcomes?
To put it bluntly, and to use a concrete example, the interests of Harvard Business School (and Stanford BS and so forth and so on), and of McKinsey, and of General Electric, and of PG&E, and of people who espouse the wonders of markets, including most Republicans, and so forth, are NOT well served by siding with the ExxonMobils of the world. Period. It may pay — in the short term — to do so, if you happen to be on the ExxonMobil payroll or in their cash stream. But at what cost? The undermining of your own ideology, the destruction of your own credibility, and the compromising of your own long-term interests!
It seems to me that Harvard Business School’s credibility is at stake. (I don’t mind saying this, as I respect HBS and graduated as a Baker Scholar from HBS.) It seems to me, also, that McKinsey’s credibility is at stake. (I don’t mind saying this, as I respect McKinsey in many ways and I was a McKinsey consultant myself for a number of years.) If these organizations want to show that markets and industries can work, and can recognize problems, and can solve them, and can effectively and efficiently lead to good outcomes for the public and for the U.S., then does it really make sense to fight AGAINST a “price for carbon”, to side with ExxonMobil and the status quo, to stand on the sidelines, and to be complacent as disinformation flows through the media, disabling the wisdom of democracy itself?
These folks should all ask, Should I really be on the side that claims that markets will pull rabbits out of hats even without any mechanism to generate a “price for carbon”? Should I really be fighting against such a mechanism, and for what reason? For who? Should I really be helping ExxonMobil and the coal companies keep us — the U.S. and U.S. industry — in the PAST? Should I be staking out a position that puts me at odds with the vast majority of the scientific community? Should I put my own credibility at stake by speaking incorrectly or by NOT speaking out at all to correct the incorrectness?
Don’t you just love the situation Mitt Romney has gotten himself into? I once thought of him as a brilliant and credible guy. He was from Bain (or was it BCG?) if I remember correctly. Now, he seems to have stances that put him at odds with the vast majority of the scientific community and that seem to suggest that he has forgotten some key aspects of basic economics. (I don’t claim to be up-to-speed with his latest views, but this is the impression that I have of him now.)
Many folks, and organizations, are digging themselves into very big holes. (And I think that many of them know it but just aren’t sure what to do. They better think fast, and well.)
OK, enough for now. Thanks for the great post. It’s an important topic.
Cheers,
Jeff
As much as I like the idea of “market-based solutions,” there were a lot of concessions made to coal power plants and a lot of things put off the table (like agriculture) and probably other loopholes we never found out about.
I don’t deny the general point being made in the article, but cap-and-trade doesn’t seem intuitively appealing the way that across the board taxes or cap and dividend does. At least people understand what a tax is. (Mencken’s maxim that for every problem there is a solution that is neat, plausible and wrong may apply here, but he didn’t have to worry about getting things passed in the Senate).
I for one wish the rallying cry could be remove subsidies for the oil industry. I was shocked to hear on a podcast last week that the Senate opposition to a measure to remove oil subsidies was in the 2 to 1 range. The fact that oil subsidies seem here to stay just amazes me.
I prefer fee & 100% dividend. See:
http://www.climatelobby.com/
Jeff – Interesting comments regarding oil companies’ inability to see themselves as energy companies. The situation is so bad that when they were racking up record profits during the last price spike, companies like ExxonMobil used a huge fraction of their cash to buy back their own stock! All the nonsense you hear about oil company profits nd subsidies being used to spur more exploration and production is ridiculous – ExxonMobil’s plan is to sit on the reserves they already have, do all they can to discourage the development of energy alternatives, and thereby milk as much money out of consumers as they can in future oil crises.
Thank you, Professors Stavins and Schmalensee.
And a belated — but hearty — thank you to every economist, regulator, legislator, engineer, and technician who helped get the poison lead out of gasoline (at least in the US).
Really glad to finally see a post linking cap and trade to conservatism. It is a market-based mechanism. It is what economic conservatives are supposed to propose as solutions to problems of this kind instead of command and control regulation. And, yes, they’re supposed to admit these problems as the hard-nosed, reality-facing types.
Indeed, fighting against cap and trade or a carbon tax or other pricing mechanisms is to me one of the cardinal signs that the brand of so-called conservatism in the US isn’t really conservative, or at least not economically conservative.
Business executives operate under legal and market forces by which they are relentlessly judged on their ability to produce short-term profits. This is obviously not universally true, but environmental protection and sustainability concepts are of concern to many corporations only in terms of minimizing the costs of legal compliance; the most favored result from the corporation’s standpoint is to externalize all pollution/environmental protection costs.
The Republican Party, especially since Bush II, has found it politically expedient to take blatantly anti-science positions to build its base and to expand its power.
These dynamics are dangerous, unsustainable, and the result of alliances within the Republican Party that appear to be quite strong. Even the market crash and the Great Recession of the last two years or so hasn’t led to needed legal reforms and the most popular Republican politician seems to be Sarah Palin–doesn’t get more anti-science than that. Thus, and sadly, I don’t see either of these dynamics changing significantly or ending other than by a major societal train wreck.
What legislation are Republicans holding back now?
1. Climate. Clear market expectations of a price on carbon would fuel investment and help the economy.
2. Immigration. Legalizing long-term residents would let them put down more roots, fueling investment and helping the economy.
3. Further infrastructure investment/stimulus. Directly helps the economy in short and long term.
4. Public insurance option. Reduces the long-term deficit outlook, which increases security and is mildly helpful to the economy.
All of these ideas have 50 votes but not 60 votes, and all of them would help end the recession. Republicans are no longer the party of business, they’re just the party of Scrooge McDuck, swimming in his unproductive vault of gold coins. Aside from being great news for the planet, filibuster reform and/or an unlooked-for Democratic gain in the Senate (it’s possible) would be great news for the economy.
Given the opposition in the GOP to the principles of economic conservatism,
alongside an abhorrence of ecological conservatism,
it seems worth noting that only in terms of its form of socialism can the GOP really fulfil its supposed dedication to conservative interests.
The social conservative, with preferences over skin colour, paternal supremacy, mixed gender marriage, foetus rights, weapons rights, beef & gas rights, etc, is quite readily identifiable, and the list affirms the fact that the current conservative actually puts these social values way above the critical functional issues of economy and ecology.
With the title Neo-Con having lost much currency during the recession, it is surely time for a new label to be applied to the social conservative constituency.
I’d suggest Soc-Con, since it give their particular form of socialism the exclusive emphasis that they award to it.
Regards,
Lewis
Homunq wrote: “What legislation are Republicans holding back now?”
The latest is a bill to prolong medical aid to first responders who were made sick by breathing the dust of the WTC on 9/11.
http://www.politico.com/blogs/glennthrush/0710/House_GOP_leaders_911_first_responders_aid_bill_a_massive_new_entitlement_program.html
House GOP leaders: 9/11 first responders aid bill ‘a massive new entitlement program’
July 28, 2010
Total cost is estimated at $7.4 billion. I don’t know all the procedural ins and outs; the bill got 255 yeas vs. 159 nays, but the House Dems set it up so a two-thirds majority was needed for passage.