Cap and Trade Opinion is Missing a Lot of Good Science, History and Economics

Published October 4, 2010

Editorials these days are ruing the loss of the cap and trade legislation intended to offset the supposed trend in global warming. An example is the 2010 Labor Day editorial in the Chicago Tribune. The villains in the piece are Republicans, who are out to score partisan political points in advance of the off-year elections. However, there may be better reasons for the electorate to turn cool on global warming.
First there is the brutal fact that we are in a deep recession. Reducing the supply of energy by 80 percent will raise fuel prices by a factor of 2.5 times, from what we know about long-term energy demand elasticities. This would be the equivalent to a huge tax that will extend and deepen the recession. 

Second, there is the matter of climate science. Is the slight warming of the earth due primarily to the burning of fossil fuels? That is the conclusion from the Climate Research Unit of the University of East Anglia. But it is based on manipulated temperature data that have now been destroyed. Thus, the scientific community cannot verify or falsify the conclusion. As climate scientist Patrick Michaels has observed, if there are no data, there is no science. Moreover, if there is no science, the political agenda is seriously flawed. 

Third, it may be that using coal to generate the base load of electricity will be drastically reduced by regulation and legislation. But coal will not be replaced by large new nuclear plants and peaking generators fueled by natural gas, as lay opinion holds. A more natural (not government-subsidized) trend will be an advance in clean-coal technology. Another potential trend is for a widespread installation and use of gas-fired microturbine generators located at or near the points of consumption. Thus the reliability of the electric power system and emission reduction will be achieved by a distributed system with greater redundancy, not less. 

Fourth, faith in government markets in general and cap and trade in particular are not justified by experience. The failures include (1) the RECLAIM NOx system in the South Coast Air Basin, (2) the California electricity spot markets, (3) the Clean Air Act trading of SO2 allowances for new source review plants, (4) The dominance of hedging with natural gas derivatives over emission allowances and credits, (5) denial in the House carbon cap-and-trade bill of credit for early reductions, (6) offsets in the House bill for forestry but not no-till agriculture.

Cap-and-trade sounds like a market institution where rights are exchanged. But the allowances and credits in all of the systems above are denied property-right status. The reason is that the government does not want to comply with the Fifth Amendment of the Constitution, to compensate victims for taking their property. Cap-and-trade is not a market, therefore it is not “efficient” in any meaningful economic way. Moreover, cap and trade will not contribute to the general welfare. 

Jim Johnston ([email protected]) is a senior economic advisor to The Heartland Institute.