Cap and Trade and Horse Trading
Has a thought about how to get votes for a cap and trade bill in the Senate without giving a windfall to incumbent polluters. The problem is that it seems to be necessary to buy the votes of coal state legislators. The House’s solution is to give C02 permits to current polluters. This is a pure transfer. It will be very relevant to shareholders of those firms, but not so important to anyone else.
The idea, such as it is, is to give to agents in states which would otherwise bear more than their share of the burden of reducing greenhouse gas emissions, that is, states with coal or states where lots of coal is currently burned.
My idea is to auction all of the permits and set up a fund to compensate overburdened states by giving money to the state government. The formula would be uhm complicated and negotiated endlessly but basically close to cap and trade revenues from the state.
The advantages of this approach is that a transfer from Federal to state governments is desperately needed right now. That means it would be important to transfer funds now based on expected future revenue.
The problem is that once the market for votes in the Senate is made explicit it will be even less restrained by shame or hypocrisy than it is now.
Robert – “That means it would be important to transfer funds now based on expected future revenue.”
I would hope that the recession would be a distant memory by the time cap and trade kicks in. If not, we’ve got bigger problems than CO2 emissions. The problem with your proposal is that it assumes congress critters are aligned with the interests of their state governments. I don’t think Senators are terribly interested in handing over money to state legislators…even state legislators from their own state.
I’m thinking that the EPA’s announcement yesterday could be a game changer in that it makes cap and trade a virtual necessity even if you think global warming is a myth. If EPA is seen as serious about regulating CO2 as a health issue, then businesses are going to be begging Congress to establish CO2 trading markets with known and certain property rights.
More pertinent for us now is that the public option has been dumped by the Democrats. Of course it was stupid of Americans to think they could throw off the incubus of the private insurance industry and get health insurance for all. The US is a society characterized by its unfairness, its extremes of wealth and poverty, and the fact that everything everywhere depends on money. The American Dream is a laughable nightmare by now. But fortunately for the plutocracy, the public doesn’t really see through all this. On top of the rest, it is a declining power wandering about in confusion, stuck in unwinnable wars, with a failing and weak President who can’t get much support because he is black (actually half black, that is the same thing for most racist Americans.) Oh, I forgot: Merry Christmas.
no we don’t have bigger problems than CO2 emissions.
but what’s wrong with cap and trade is that it’s another goddam game dreamed up by economists who are too clever by half. it’s a way to avoid facing reality and make money for wall stret and extra profits for the big guys.
a straightforward carbon tax would do all of the good and none of the harm of a cap and trade scheme.
(and yes, the poor would have to drive cheaper cars or take the bus. that’s the point.)
A carbon tax and cap-and-trade are equivalent. For example, see Krugman’s post on this.
MG, I found this statement to be more hilarious: “The problem is that once the market for votes in the Senate is made explicit it will be even less restrained by shame or hypocrisy than it is now.”
That is such a liberal view. No respect, Robert?
As far as the EPA ruling. It will take many years before any thing is implemented. It will take that long to fight through the lawsuits. Everybody should lawyer up now, cause it’s gonna get interesting.
Seems to me the consumers and businesses in the coal states would get to pay the bill while the government would get the relief. And what would the state governments do with the money? Hard to say.
I’d say a recession which lasts years is less of a problem than C02 emissions, but we agree that it is unlikely. That’s why I propose a plan which is balanced budget over 10 years but transfers money to states now.
The basis of my proposal is that Senators have to win re-election and people are suffering because state budgets are tight. A Senator is very vulnerable to state officials who explain that they have to fire these people and cut that program because the Senator filibustered a bill. There are many state government officials who would like to be Senators.
Since I propose giving the money now, it is easy to say what they would do. They would change policy less (status quo bias). In particular they wouldn’t lay off teachers and cut social welfare programs.
At the moment state governments are shifting policy to balance budgets. This means policy changes which reduce aggregate demand and cut assistance during a recession.
Only if you think state government spending is normally much much too high could you think that current state level policy reforms are good — that is if state spending should be slashed now it should be slashed much more in normal times.
My idea may be a too clever by half attempt to kill two birds with one stone. However there really are two birds.
MG I don’t see what’s hilarious. Just below 2slug explains the reasoning for that statement. We are not in a normal economic situtation. We are in a liquidity trap. There is strong evidence that deficit spending via the ARRA moved the US economy towards efficiency. Yes I am advocating increasing the deficit. I think most economists agree with me that it would be a good idea right now. In any case, there is a serious argument based on evidence for increasing the deficit.
The basis of my proposal is that Senators have to win re-election and people are suffering because state budgets are tight.
Yep. I agree with that. I was taking a snarkier approach. I think that Senators would like to have more direct control over how money is spent in their states. A Democratic senator would rather divvy out the money to his constituents rather than allow some GOP governor to get all the glory…especially if that GOP governor is likely to challenge the Democratic senator. Yes, states need money badly and the Treasury ought to be flooding states with cash. The current situation in which states are cutting back on services and furloughing employees might make some voters feel good because the pain is shared, but it’s also a case of cutting off your nose to spite your face. Cutting back on state services in a deep recession only makes the recession worse and deeper.
no they are not equivalent. could you explain why you think they are and save me the aggravation of link-ing?
i think you meant to say “more of a problem.” but i don’t agree. a recession is just the country making less toys it doesn’t need. if it goes on long enough the culture about work will change so that more people work fewer hours. CO2, if the science is true, and i think it is, is the death of the planet. somewhat more serious than learning to live like we used to in 1950… with some modern technology to ease the pain, and an enlightened policy to bettre share the wealth.
do not despair. i think a 100% public option was the best answer. but given the rube goldberg solution on offer, the public option contemplated was not a signficant improvement. meanwhile i am hoping that the snarled mess they are offering will fail of it’s own weight and we will be able to improve on it as time goes by, having established the gov’t responsibility for health care with this bill.
oh, heck, Robert, don’t take it personally. you are not the too clever by half economists i was thinking of.
i agree about the two birds. generally though it’s easier to kill two birds with two stones.
“I would hope that the recession would be a distant memory by the time cap and trade kicks in. If not, we’ve got bigger problems than CO2 emissions. “
If cap and trades is passed next year as expected (I hope it fails like Kyoto but have no illusions) I can easily see it being implemented before we are out of teh recession. Which do you think has a better chance of happening by election day 2010>> 12% unemplyment or 8%?
Considering Obama’s and the Dems policies (you own it all) I go with 12%.
And I still stand by my prediction that under Obama that unemployment will be double Bush’s highest rae (Basicall 15%).
“, if the science is true, and i think it is, is the death of the planet”. No. It won’t be teh death of the planet nor the end of the human race. That’s what I get from the pro-global warming guys. The science is up for debate but the results the downside are not planetary death. Get a grip.
Now a carbon tax would be a cleaner method than cap and trade, but there would be far less oppurtunities for graft and corruption for the Dems. And it would get them voted out of office in a heartbeat.
Lastly, no matter how much you try to cripple the US economy, none of this matters with China cranking out a coal plant a week (and being the #1 polluter on the planet). They and INdia and Iran and all of Africa etc etc, are not going to cripple their growth to appease the western decadent evironmental movement. They never have and won’t. Look at the firestorm the ‘Danish memo” has cuased at the Copenhagen conference.
You guys need to get back into the reality based community again…
Islam will change
Even if cap and trade passed today virtually none of it that affected GDP growth would kick in for at least another five years. So it doesn’t make sense to talk about cap and trade being an impediment to the economic recovery.
Your estimate of where unemployment is headed is wildly off the mark. A few months ago I said here that I thought 10.5 percent was probably a high end estimate for where unemployment would top out. I think that’s still right.
Basically a carbon tax would raise the price and pull back the output level. Cap-and-trade effectively fixes the output level which causes the price to rise. One approach works on the vertical axis and the other approach works on the horizontal axis. You get the same answer either way.
Here’s why I think a prolonged recession is a bigger problem than CO2. Most analysts seem to agree that the cost of cap-and-trade will be no more than 2 percent of GDP. So this tells us that the shadow price of CO2 emissions ought to be something on the order of 2 percent of GDP as well. The key here is that cap-and-trade along with some other work on people’s willingness to accept welfare losses in exchange for a greener environment all tell us that the CO2 damages represent about 2 percent of GDP per year. If weak aggregate demand due to the recession means that the economy is operating more than 2 percent below potential GDP, then the cost of the recession is a bigger problem (at least for that year) than the cost of deferring cap-and-trade by one year. Anyway, that seems like a reasonable way to view the problem. Others may disagree.
“death of the planet” was a figure of speech. “death of life as we know it” is more accurate.
my understanding is that china is ahead of us so far in “green technology.” they know the danger. they are just playing chicken with us right now for political/economic advantage. but as we who grew up in the fifties know, sometimes nobody chickens out in time.
Just below 2slug explains the reasoning for that statement. We are not in a normal economic situtation. We are in a liquidity trap.
No we’re not. Rates are low because the FED is manipulating them. In the real world rates are higher and banks are making a killing since they borrow at the low manipulated FED rate and lend at the higher market rate.
Rates are low because the FED is manipulating them.
Wow, are you out of touch with reality. What makes this a liquidity trap is that the Fed cannot manipulate rates due to a zero bound. The NAIRU rate should be around minus 6 percent, but the Fed can’t go there. If the Fed were able to break the nominal zero barrier and actually get down to the implied NAIRU interest rate, then we wouldn’t be in a liquidity trap. Based on your comment I’m not sure that you really understand what a liquidity trap is.
true enough, but you left out all the games that can be played with cap and trade. and if i read your comment correctly, i think the point we want to achieve is to reduce the output level.
i sure do. in the first place the measure of man is not money. in the second place all of your projections about money fall out the window in the face of likely real world experience. whatever people “think” is the welfare loss in exchange for a greener environment.
you have plastic toys on one hand and, if nothing else, clean air on the other hand. if you don’t care about clean air yourself, think of babies with lung diseases.
meanwhile the cost of “adjusting” to a warmer climae is going to be more than the cost of preventing one.
and finally… with respect to “death of the planet” or “end of life as we know it”.. what buff and co rev and apparently you seem to think is that evolution is something that “just happens” like compount interest. every year some humans are ten percent more evolved and they eat the ones who are only 2 percent more evolved. actually evolution is something that happens in response to changes in the environment, of which climate is a prime driver.
if you are really trapped in a cubicle and know no more about reality that what you see on TV i can understand how you might think as you do. but the rest of us have a planet to save. it’s not a problem that can be solved by playing games with balance sheets. extinction was cheap and scrooge liked it.