Tuesday, August 25, 2009

Capping Trade

Good piece in yesterday's WSJ by David Schoenbrod and Richard B. Stewart on what they call the Cap-and-Trade Bait and Switch. While these gentlemen are both proponents of a true market driven cap-and-trade system to reduce carbon emissions, they say that the current bill is nothing but top-down regulation and giveaways to favored industries.

Waxman-Markey is largely top-down regulation dressed in cap-and-trade clothing. It purports to set a cap on greenhouse gases, but the cap is so loose in the early years that through the use of cheap offsets the U.S. need not significantly reduce its fossil-fuel emissions until about 2025. Then the bill would require a nosedive in fossil-fuel emissions. This balloon mortgage pledge of big cuts later is unlikely to be kept.

The top-down directives come in three forms. First, electric utilities, auto makers and states get free allowances on the condition that they comply with regulations requiring coal sequestration, alternative energy sources, energy conservation, advanced auto technology and more. Second, many other provisions of the 1,428 page bill mandate outright regulation on subjects ranging from how electricity is generated to off-road vehicles and household lighting. Third, still other provisions provide subsidies for government-chosen technology "winners" such as alternate energy sources, plug-in vehicles and weatherization of old buildings.

Progress on most or all such fronts will be needed, but when, where and how should be decided principally by a cap-driven market, not the "red tape" that candidate Obama deplored.

This government dictation of technology would undermine President Obama's March 19 pledge that, by addressing climate change, we would become "the world's leading exporter of renewable energy." That requires coming up with better, lower-cost technologies than the rest of the world. This won't happen if the government picks the technologies. Recall that, in the 1980s, government established the Synfuels Corporation that spent billions to produce energy alternatives and came up with nothing. More recently, government required refiners to put corn-based ethanol into gasoline on the theory that it's good for the environment. Yet we've learned that wide-scale ethanol production can do more harm than good in regard to air quality and climate change, turn wildlife habitat into corn fields, and raise food prices.

A true market-based cap-and-trade approach would have the government set the cap on carbon emissions and then allow firms to come up with the most effective approaches to meet those caps. That would lead to the innovation and global leadership in new energy sources that the supporters of the bill purportedly want to achieve. Instead, it's filled with political payoffs to particular industries and companies who have been able to bend the ear of their representatives in Congress.

Last month, I was catching up with one of my cousins who lives in California. He's working at a start-up company that's trying to develop better and more energy efficient street lights. They've received a lot of interest from venture capitalists and have a prototype that they're trying to get municipalities and commercial firms to accept for trials.

I asked him if there was anything in the either the stimulus or energy bills that might prove helpful to his company. He explained that they've largely been blocked from realizing any benefits because most of the legislation specifies exactly what technology must be used in government funded programs. It just so happens that said specified technology may not be the best choice, but it is the one that certain companies with good political connections just happen to manufacture. If the government was truly interested in having street lights that provided more light at less cost, they would specify what the end goal was not the technological path to get there.

This is just another example of how most corporations have no interest in promoting truly free market approaches. They're more than happy to work with the government and politicians to erect barriers to competition and ensure that they profit from further regulation. It's good to keep this in mind when you see companies supporting cap-and-trade in the interests of "protecting the environment" or government health care in the interests of "improving the system." The bottom line for why they favor these proposals is their bottom line.

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