Thursday, March 5, 2009

Cap-and-Trade Policy

The Detroit News slams the Obama administration's cap-and-trade proposal as a "giant economic dagger aimed at the nation's heartland."

President Barack Obama's proposed cap-and-trade system on greenhouse gas emissions is a giant economic dagger aimed at the nation's heartland -- particularly Michigan. It is a multibillion-dollar tax hike on everything that Michigan does, including making things, driving cars and burning coal.

The president is asking for a system of government limits on carbon emissions. The right to emit carbon would be auctioned off to generate revenue for more government spending programs.

The president's budget projects receipts totaling $646 billion through 2019 from the sale of these greenhouse gas permits.

The goal, according to the president's budget outline, is to reduce greenhouse gas emissions such as carbon dioxide to 14 percent below 2005 levels by 2020.

Doing so will drive up the cost of nearly everything and will amount to a major tax increase for American consumers.

Such a tax will hit the Midwest particularly hard, which is why House Minority Leader John A. Boehner, R-Ohio, told the New York Times, "let's just be honest and call it a carbon tax that will increase taxes on all Americans who drive a car, who have a job, who turn on a light switch, pure and simple."

The carbon tax will be paid by energy companies, manufacturers and public utilities, who will pass the cost on to their consumers. Michigan will be especially targeted. It gets 60 percent of its electric power from coal plants, and the state's economy is still reliant on heavy manufacturing such as car and truck assembly and auto parts production.

Michigan will lose as carbon tax money is shifted to states with a greater presence of high-tech and service businesses.

The proposed tax would take effect in 2012 and has the very real potential to throw the nation back into recession, if indeed the expected recovery has arrived by then. It's impossible to raise costs for such basics as manufacturing and energy production by more than half a trillion dollars over a decade and not have the effects felt across the economy.

Not only would many variants of a cap-and-trade program increase government's power to choose economic winners and redistribute wealth---they could also disadvantage US manufacturing. Why would a manufacturing company, facing newly onerous carbon taxes, decide to green its factory when it could merely close up shop and open a new factory in a country such as the People's Republic of China, say, or India where there is no such tax? A poorly designed cap-and-trade system would put another finger on the scale in opposition to US industry.

There seem a few ways of coping with this problem. Here are a few:
  1. Do not have a cap-and-trade policy.
  2. Create various global agreements, which would put binding fees on all nations.
  3. Offer manufacturing rebates to local industries.
  4. Place "carbon tariffs" on imports from countries without a carbon tax system.
  5. Put in place various subsidies/investments so that areas hit hardest by these taxes could transition to new industries.
  6. Have cap-and-trade and do nothing to cope with the industrial fallout.
All of these routes have their own complications. All of these---with the exception of 1---increase government intervention in the economy. 2 seems at the moment to be a very difficult aim for cap-and-trade. 3 opens up a huge can of worms for who would get rebates. 4 would probably run afoul of WTO rules, could risk inspiring a trade war, and may smack too much of "protectionism" for supposed "free-traders." 5 may offer some comfort to more manufacturing-based regions but may not stop certain forms of deindustrialization. 6 would also not help industrialization and would provide no other economic relief, either.

Cap-and-trade and other carbon tax proposals will necessarily involve questions of US trade policy. There is a political opportunity here as well as political peril. At its worst, cap-and-trade could prove to be a massive patronage system for those in power, a destroyer of US industry, a reducer of living standards across the board, an excuse for the invasive government management of our daily lives, a non-entity in terms of environmental protection, and an exercise in ideology that fails to meet the demands of practice.

A party which can prove itself an advocate for a responsible industrial policy could go a long way toward establishing a political base in the Midwest and in other areas. Republicans especially could burnish their middle-class credentials by asking piercing questions about how to balance industrial growth and environmental legislation. The GOP would do well to emphasize the economic dangers of ill-thought carbon proposals. Cap-and-trade could be an area where questions of government intervention in the economy overlap with middle class economic anxieties in a way favorable to Republicans.

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