Free Markets, Free People

Martin Feldstein

Feldstein: Cap-and-Trade A “Bad Idea”

Martin Feldstein, a professor of economics at Harvard University, president emeritus of the nonprofit National Bureau of Economic Research, and former chairman of the Council of Economic Advisers from 1982 to 1984 has concluded that the Waxman/Markey cap-and-trade legislation is a bad idea. He comes to that conclusion for a number of reasons.

First, his understanding of the legislation and its economic impact:

The leading legislative proposal, the Waxman-Markey bill that was recently passed out of the House Energy and Commerce Committee, would reduce allowable CO2 emissions to 83 percent of the 2005 level by 2020, then gradually decrease the amount further. Under the cap-and-trade system, the federal government would limit the total volume of CO2 that U.S. companies can emit each year and would issue permits that companies would be required to have for each ton of CO2 emitted. Once issued, these permits would be tradable and could be bought and sold, establishing a market price reflecting the targeted CO2 reduction, with a tougher CO2 standard and fewer available permits leading to higher prices.

Companies would buy permits from each other as long as it is cheaper to do that than to make the technological changes needed to eliminate an equivalent amount of CO2 emissions. Companies would also pass along the cost of the permits in their prices, pushing up the relative price of CO2-intensive goods and services such as gasoline, electricity and a range of industrial products. Consumers would respond by cutting back on consumption of CO2-intensive products in favor of other goods and services. This pass-through of the permit cost in higher consumer prices is the primary way the cap-and-trade system would reduce the production of CO2 in the United States.

Note that he doesn’t play any games when talking about where the cost of such permits will end up – passed through to consumers. He prefers the CBO’s lower estimate of the impact per family of about $1,600 per “typical” family to some of the higher estimates in the $3,000 t0 $4,000. But they’re all estimates and they all say, even at the low end, that the impact is going to be significant.

Feldstein then looks at the possible payoff and challenges Americans to ask a very pertinent question. He also calls the plan exactly what it is – a tax:

Americans should ask themselves whether this annual tax of $1,600-plus per family is justified by the very small resulting decline in global CO2. Since the U.S. share of global CO2 production is now less than 25 percent (and is projected to decline as China and other developing nations grow), a 15 percent fall in U.S. CO2 output would lower global CO2 output by less than 4 percent. Its impact on global warming would be virtually unnoticeable.

But its impact on the American economy? Well, you don’t have to be a Harvard economist to figure that out. And a quick glance at Europe and how quickly most of the countries there figured out a way to ignore Kyoto should tell you the rest of the story.

Feldstein may or may not believe the theory that says CO2 is a pollutant and the cause of “global climate change”. But what is clear is he certainly doesn’t believe our seeming desire to strap ourselves economically without the big emitters (China and India) doing the same is a) worth it economically and b) make a bit of difference in real terms.  Doing it without those two and all others included is about as smart as committing to unilateral nuclear disarmarment.

Feldstein goes on to attack the pending cap-and-trade legislation for other reasons as well – mostly on a revenue and impact basis (and how revenue can soften the impact – yeah, subsidy – at the “payee” end – i.e. consumers.  Of course, only a certain class of consumers would most likely be eligable and it will be up to the more well-to-do to pay their “fair share”).  But the two big points of his criticism are the most important in my thinking.

1. It will, regardless of how it is structured, have a negative economic impact on every American household and thus our economy.

2. It won’t make a bit of real difference unless everyone is involved in such reductions.  Exclusion of the big emitters makes our “economic sacrifice” literally worthless in terms of the supposed overall goal of cutting CO2 worldwide.

Because of those two points alone, we should demand that such legislation be voted down.  I think the focus on CO2 is a load of unscientific nonsense, but politically that has no legs at this time.  But what does have legs is the argument summed up in those two points and opponents of cap-and-trade should use them (and Feldstein’s name) to make the argument against the pending legislation.