One Controversial, Uncertain, Imperfect Chance: Is It Worth It?

“I don’t mind what Congress does, as long as they don’t do it in the streets and frighten the horses.”—Victor Hugo

The Danger of Scarce Resources

Let’s start at the beginning—the very first lesson of Econ 101, in fact. In the deep recesses of your memory, surely you recall that economics is “the study of the allocation of scarce resources.”

Today, nearly 80 percent of the world’s oil reserves are concentrated in less than 10 countries. Global production has plateaued, while demand continues to increase.

Just as economics predicts, prices are rising. If only that were the end of the story.

Most people think our oil troubles began with gas lines in the 1970s. There is a price to pay for how much history we forget these days.

The real story dates back to 1945 when President Franklin D. Roosevelt made a deal with the devil, so to speak. He guaranteed American protection of the Saudi Arabian royal family in return for access to their oil wells. Fifty-six years later, Osama bin Laden listed American military presence in Saudi Arabia as one of the top reasons for hijacking four airplanes on September 11.

The story picks up again in 1971 when President Richard Nixon instated wage and price controls, which did nothing but stall the economy for three years. The price controls finally ended in 1981 when President Jimmy Carter bargained with Congress to institute a windfall profit tax in their place. If that sounds familiar, it’s because Barack Obama proposed just such a tax during the campaign, but he never mentioned that Carter tried it—because it only made us more dependent on foreign oil. Surprise, surprise.

Carter didn’t stop there with his mindless energy policies. In 1980, he told the world that Persian Gulf oil was a “vital interest” to the United States, and we would protect that interest “by any means necessary, including military force.” Today, we spend over $138 billion each year for this protection. Good thing we don’t have a trillion-dollar budget deficit or anything else that needs money, like infrastructure or health care.

Since the beginning of human civilization, the Earth’s resources have fuelled empires and shaped cultures. It should come as no surprise that they continue to drive geopolitics to this day.

The villagers of Darfur may never see the inside of a classroom, but they are well acquainted with this idea. Most Americans chalk their civil-war-turned-genocide up to ethnic tensions—if they bother to understand it at all—but the Sudanese know better. Yes, they feel the tribal element, but they also see a desperate struggle for water and oil. At the height of the conflict, one reporter noted, “Oil revenues to [the genocidal regime] have been about $1 million a day, exactly the amount which the government funnels into arms—helicopters and bombers from Russia, tanks from Poland and China, missiles from Iran.”

Sadly, no politician has thought to solve this underlying problem.

Darfur is not alone. Across the globe, oil-producing states are uniting in what Middle East expert Flynt Leverett calls the “Axis of Oil.” The dangerous trade is stunning.

Last year, China signed a deal to receive $100 billion of oil from Iran in exchange for weapons. They trained Venezuela’s military with the promise of triple the oil supply. To the north, Russia signed a deal to send $6 billion in arms to Indonesia for gas, all the while training militaries in Central Asia to keep their options open.

Not to be outdone, the United States has been holding joint military exercises with Australia, Singapore, Japan, and India. It has cultivated military-energy partnerships with Azerbaijan, Georgia, Turkmenistan, and Saudi Arabia.

Where these countries have been blessed with oil, a trail of blood is usually not far behind.

Fifteen years ago, oil-producing countries hosted one-fifth of the world’s civil wars; today, that number has jumped to one-third. “[Oil] wealth,” explains one expert, “often wreaks havoc on a country’s economy and politics, makes it easier for insurgents to fund their rebellions, and aggravates ethnic grievances.”

But as anyone who has heard the name “Al Gore” knows, dependence on foreign oil is only part of the problem.

Even If You’re Skeptical of Global Warming, Stay with Me…

The global warming debate goes back to 1824 when Joseph Fourier discovered the greenhouse effect. Of that there is no debate. Certain gases trap the sun’s heat in our atmosphere. Without them, Earth would be uninhabitably cold. The question is whether our coal-burning factories and gas-guzzling cars have added so much carbon dioxide to the air that Earth is becoming uninhabitably warm.

Of course, that’s not the only question, so I’ll do my best to sort out the facts amidst the fray:

Don’t give me half-baked theories. What do we know for certain?

We know that global temperatures have increased by 1.35°F since the 19th century. As a direct result, sea levels rose 4 to 10 inches higher.

And if it continues?

The Earth would get up to 11.5°F hotter in the next century, which is the weather equivalent of making your Ford Taurus travel at the speed of sound. It’s not supposed to change that much or that fast. We’re talking longer droughts, more floods, and worse heat waves. This isn’t abstract stuff—it can be measured in human lives.

Yea, but how likely is that?

If you believe the Intergovernmental Panel on Climate Change with its 800 climate researchers and 2,500 scientists, very likely. The IPCC’s findings have been endorsed by 30 scientific societies, including the national academies of science for every major industrialized country, so they have my attention.

It sounds like a bandwagon of alarmists to me. Isn’t this just another one of Earth’s thousand-year cycles? And what about other natural factors like the Sun?

Actually, the data shows that the Earth should be naturally cooling right now, hence the concern. As for the Sun, there has been no net increase of solar brightness over the last thousand years. If you think something else caused global warming, you should check Gristmill’s handy counterarguments before you make up your mind.

But there is still some uncertainty, right?

As one scientist is quoted as saying, “If you are driving on a mountain road, approaching a cliff, in a car whose brakes may fail, and a fog bank rolls in, should you drive more or less cautiously?”

So what can we do?

The possibilities are endless. Physicist Amory Lovins estimates that we can eliminate all oil and create a million new jobs by 2050 with a one-time investment of $180 billion. Bobby Kennedy, Jr. says that national investments in hydrogen fuels could make America the “Saudi Arabia of wind.” With a level playing field, John Woolard brags his solar energy company could “power the entire United States on less than one percent of our total land.” The only way to allow these technologies to compete with oil, coal, and natural gas, though, is to make fossil fuels more expensive relative to clean energy.

The first choice of most economists would be a straightforward carbon tax, which could be offset with corporate, income, or payroll tax reductions. The second option is a cap-and-trade program. In this scenario, the government sets a maximum limit on the amount of carbon dioxide that firms and households can emit into the atmosphere each year; then it issues permits to companies that allow them to emit a certain amount, the cumulative total of which equals that countrywide maximum limit. If the permits are auctioned and the revenues go to the Treasury, it essentially functions like a carbon tax, except with a bit more government bureaucracy.

Wait, you mean government subsidies? No way I want my taxes spent on windmills. Why not let the free market take care of it?

I hate to break it to you, but the energy market is only “free” if you believe in fairy tales. Your taxes already pay for $17 billion in subsidies to oil companies each year. Add in environmental damage, illness, and the cost of protecting oil fields in the Middle East, and the average taxpayer shells out approximately $2,700 for Big Oil. If it weren’t so sad, it would be comical that we really pay about $13 for each gallon of gas.

I don’t want to distort the market anymore than the next guy. Incentives are definitely a dangerous business. We needn’t look any further than the current energy market to see that. I’m saying it’s time to fix the market—level the playing field again, so to speak.

What if we don’t? If these technologies are so good, won’t the market invest in them by itself?

You can wait for the market to fix itself, if you like. When the Arab oil embargo hit in 1973, it became obvious that we need to wean ourselves off foreign oil. With the Persian Gulf War and the current conflict in Iraq, it has become imperative. Yet, in 1973 imports were 35% of our oil use; today, they are 60%. How’s that Invisible Hand working so far?

Don’t get me wrong. The market unequivocally allocates money better than the government—when it incentivizes the right behavior. Let’s take the current policy, for instance. Over the last eight years, the White House dedicated a few hundred million dollars per year to alternative fuels. Meanwhile, energy companies spend several billion a year improving their technology for coal and oil. The only way to fix this gross imbalance is through the proper incentives.

Government incentives that work are nothing new. Congress commissioned the first telegraph line, helped build canals and railroads across the country, and financed the creation of the Internet. You’re right, what a waste of taxpayer dollars.

It’s easier to say we can invest in green technology without taxes, but it’s also dishonest. Unlike agricultural and oil subsidies (a.k.a. corporate welfare), successful incentives would penalize those who pollute the air and endanger our country by making us dependent on the Middle East—as any good economist would say, eliminating market failure by correcting for negative externalities. Just as the patent system serves as an incentive for pharmaceutical companies to dedicate billions of dollars each year to create life-saving drugs, the proper incentives would encourage energy companies to dedicate their money to create planet-saving fuels.

How high are the stakes?

A 2006 report by former World Bank Chief Economist Sir Nicholas Stern predicts that failure to act now could create a decline in global GDP by up to twenty percent. In 2007, a national security report linked climate change to political instability through shortage of water, food, and land. Continued warming could trigger “civil strife, genocide, and the growth of terrorism.”

It’s understandable not to fully endorse something as complex and uncertain as global warming. You may not know it from listening to some pundits, but you can be skeptical. Still, the past year’s dance with the mortgage devil should teach us to be wary when the risks are so high. Questioning the status quo is the American way, but jeopardizing our children’s future is not.

A Second-Best Solution

At the moment, our potential savior is a controversial one. It’s official name is “H.R. 2454: American Clean Energy and Security Act of 2009,” but it is better known as the “Waxman-Markey bill,” named after Congressmen Henry A. Waxman (Chairman of the Energy and Commerce Committee) and Edward J. Markey (Chairman of the Energy and Environment Subcommittee and Select Committee on Global Warming). It recently passed the House and now moves to the Senate for another round of debate and modifications.

First, let me say what this act is not. It is not perfect. It is not a simple, efficient carbon tax. It creates a national cap-and-trade program, but it only auctions about 15% of the permits. The rest are free giveaways. And, as you would expect from any tax, it imposes costs on the economy at a time when it has more than enough costs to bear already. It leaves most observers underwhelmed, to say the least.

Economists have studied this phenomenon for many years as part of a field called public choice theory. If you’re like most Americans, you’ve never heard of this branch of economics, and that’s a shame. Public choice is all too frequently ignored by pundits and politicians, when it ought to be studied by all voting citizens.

Until the mid-twentieth century, explains Nobel laureate James Buchanan, macroeconomists outlined the proper role of government by delineating “theories of market failure. But failure in comparison with what? The implicit presumption was always that politicized corrections for market failures would work perfectly. In other words, market failures were set against an idealized politics.”

Buchanan, along with Gordon Tullock, built upon the early insights of Swedish economist Knut Wicksell to show how political agents, like economic agents, pursue their own self-interest, often to the detriment of their constituents. The result is a collection of models that explain “why pork-barrel politics [dominates] the attention of legislators; why there seems to be a direct relationship between the overall size of government and the investment in efforts to secure special concessions from government (rent seeking); why the tax system is described by the increasing number of special credits, exemptions, and loopholes; why balanced budgets are so hard to secure; and why strategically placed industries secure tariff protection.”

If you had asked a public choice theorist to predict the energy bill, he probably would have been right on the money, warts and all. We could end the story there and dismiss the bill as a waste of time, but if we thought about politics that way, we should have given up on the system a long time ago. Rather, the question a public choice theorist must ask is, do the good measures in the bill outweigh the bad ones?

Waxman-Markey is a good start. Often, politics is the art of finding the second-best solution. In today’s political climate, legislators see an across-the-board carbon tax as kryptonite, and corporate lobbyists have too much sway on Capitol Hill for 100% auction of carbon permits.

Instead, the Waxman-Markey bill is a step in the right direction. It is a signal that America is serious about creating a green economy. It is the only way that other countries will even consider limiting their own emissions. It paves the way for future Congresses to take bolder steps. And it is an opportunity the Senate should seize immediately.

I am just as distressed by its shortcomings as economists like Andrew Samwick, who wisely advocated a green tax swap instead, but to veto Waxman-Markey because it is imperfect is to torpedo climate change legislation altogether. A green tax swap is politically impossible, and as Matt Yglesias pointed out, there is good reason to believe it’s Waxman-Markey or nothing:

I think on the overall question of whether or not the package is worth supporting, probably the best thing you can do is read Charlie Homans’ Waxman profile from earlier this year in The Washington Monthly. There’s simply nobody else in Congress whose record of progressive legislative accomplishments can hold a candle to Waxman’s. When you draw intersecting curves of “what needs to be done” and “what can realistically be done,” Waxman has time and again put himself at the intersection, and I think it involves a fair amount of hubris to think that you know better than him what the best feasible legislative outcome is.

This is probably our one shot to do something. For the rest of this discussion, let us make a very reasonable assumption: This is a binary decision. We cannot hold out for something better. We are faced with Waxman-Markey or the dithering inaction that is the status quo.

The Dreaded Cost-Benefit Analysis

Barack Obama has been touting Waxman-Markey as a big source of new jobs. This shtick, of course, is mostly politics. The President is trying to sell Americans on the bill, and economics sells better than environmentalism or geopolitics, at least in this context. Whether his claim has any merit cuts to the heart of the latest round of debates.

Every economist wants to boil down legislation to cost-benefit analysis. If we can measure everything in numbers, then it’s just a matter of whether the end result has a plus or negative sign in front of it. Indeed, that would make life easier, but getting there is no simple task.

Keith Hennessey, an economist who served in the second Bush administration, called the President out for violating truth-in-advertising. I thought the language he used was a bit too strong, and I said so last week on this blog:

Hennessey is a good economist, but he should be more careful when he takes President Obama to task for saying that efforts to reverse climate change “will lead to the development of new technologies that lead to new industries that could create millions of new jobs in America.” In fairness to Hennessey, his revulsion to this sort of language is not unwarranted. Politicians make [this sort of claim] all the time with little understanding of the economic implications of their policies. Hennessey is right to point out that the President does not guarantee a NET increase of jobs. But his counterargument, that taxing carbon necessarily implies a net decrease of jobs, is incorrect. If the government taxes the private sector and invests that money in projects that yield a higher return on investment than that money would otherwise have generated in the private sector, then it can easily lead to a net increase in jobs and GDP. The most likely time for this to happen is a recession, i.e. now.

One reader, Mark H., replied with some excellent opposing points:

Hennessey’s implied [counterargument] that “taxing carbon necessarily implies a net decrease of jobs, is incorrect.” is [accurate] if one changes the word “necessarily” to “more than likely”. Taxing carbon necessarily incurs deadweight losses. Moreover, cap and trade is a highly inefficient form of carbon taxation (see Nordhaus [DICE] papers) and this particular initiative almost certainly flunks a cost-benefit test.

It is always possible that government would find something to invest in that the private market might have missed something that would not crowd out private [investment] and yield an increased rate of return AND that they would actually invest in it – however I don’t see what in public choice theory or empirical experience that would indicate this is likely. Far more likely is an “investment” in response to interest group projects or local pork for votes.

I know that many “command and control” believers imagine a world in which “if they were in charge”…but such is not reality. The reality is that the market is far more likely to invest for greater ROI than governments.

And Hennessy himself added:

I think I could have eliminated Trading Eights’ counterargument had I been a bit more precise. Still, I agree with Mark H. on both counts. The deadweight loss point is almost always ignored in policy debates, and I am hard-pressed to think of examples of Congress spending taxpayer funds in a manner that yields a higher return than if those dollars had been left in private hands.

Deadweight loss, for non-economists, is a loss of economic efficiency, which basically means that the economy is not producing as much value as possible. It’s boring jargon to most folks, but to economists it represents real people losing jobs and money. Are Mark H. and Keith Hennessey correct that we should expect such an outcome from Waxman-Markey?

Usually, I would agree with them, which is why I agreed with Hennessey’s general “revulsion to this sort of language.” For Waxman-Markey, however, the economic analysis is more complicated than usual. The net effect on GDP and jobs, I would argue, is slightly positive—for three reasons.

Reason #1: Follow the Money

Mark H.’s primary disagreement with my argument stemmed from my implication that the tax revenues from Waxman-Markey may be used to invest in projects with a higher return-on-investment (ROI) than that money would have earned in the private sector. Markets are better at finding good investments, he argues, so it is unlikely the government will generate higher returns—especially when their guiding principle is not high ROIs but rather pleasing special interests. (I should note that this problem would be reduced by the lobbying reform I recommended in my first post.)

In general, he is correct, but there are several areas where governments are more likely to invest in high ROI projects, such as comparative effectiveness research in health care, infrastructure, basic scientific research, and clean technologies. (In fact, the Center for American Progress projects the ROI on clean technologies will be so high that the economy will see a net increase of 1.7 million jobs.) If these projects sound familiar, it is probably because they were part of the stimulus package that the President signed a few months ago—and that, I would argue, is where the Waxman-Markey tax revenues are going.

Recall that one of the stated goals of climate change legislation was “deficit reduction.” Indeed, our budget deficits were bought on borrowed money and must be paid back somehow. You could wait for the economy to grow enough for higher incomes to do the trick, but by then inflation probably would have wiped out any added value. Instead, we need to cut spending or raise taxes. Waxman-Markey contributes its quasi-tax revenues to this cause.

You could say that’s disingenuous. They’re two different bills, and I’m giving Waxman-Markey credit for investments made months ago. I would say it’s all coming out of the same pot, so Waxman-Markey is paying for those investments, even if their passage into law was independent and separated by time. And if we want an answer to the disagreement between Mark H. and me over whether the tax revenues are generating sufficiently high ROIs, the only way to find out is to follow the money.

Hennessey says he can’t think of a good example of a government investment with higher ROI than would probably have been possible in the free market, but I can think of quite a few. Many investments have upfront costs that are too high or risky or unfocused for individual firms to chance it, but the inventions that follow often have great societal value—so the burden falls on the government. Who invented the Internet, computers, fiber optics, satellites, microwave ovens, smoke detectors, and GPS—in other words, who funded all the basic research that fuelled the last fifty years of economic growth? Uncle Sam. That’s right, every one of those technologies were created in the Department of Defense during the Cold War, and the private sector, to its credit, did what markets are supposed to do—made them cheap and accessible.

Reason #2: Recession Economics

In my original commentary on Hennessey’s post, I actually understated the utility of government investment. Macroeconomists have known for many decades that government should invest in projects that are slightly below the ROI on private projects if private investors are not employing enough of the nation’s savings in active investments.

If you ask any readers of my op-ed columns from the last three years, you will hear that I was a deficit hawk before the recession, but when the economy slows and investment declines, government spending takes on renewed importance, which can roughly be divided into the good, the bad, and the ugly.

The good effect is called the “multiplier.” Government spending by itself increases economic activity, but if it employs people who are currently unemployed, those people will spend their new income, which creates even more economic activity. If, for instance, each dollar of government spending creates fifty cents of additional private spending, then the multiplier is 1.5.

The bad effect takes the opposite tack: What if the government employs people who are currently employed in the private sector? Then they are not creating new economic activity. They may, in fact, be reducing economic activity if the government jobs are less productive than the private jobs. This is called “crowding out.”

Which is more likely to happen? Probably the multiplier. Unemployment is currently 9.4% and rising. There are plenty of unemployed people to snatch up new government jobs, so the multiplier effect will almost certainly overwhelm the crowding out factor. (It is for this reason that economic theory considers crowding out to be a “full employment” phenomenon, so it hardly applies here.)

The lack of economic activity in the private sphere is exactly why the government should step in. Mark H. is right to be concerned about crowding out during normal times, but currently private borrowing is so low that public borrowing must make up the difference. A great chart from Brad Setser illustrates this shift:

Private vs. Public Borrowing in the U.S.

The ugly factor is the reason economists have been supporting aggressive fiscal policy lately: Monetary policy is impotent. For the first time since the Great Depression, we are in a “liquidity trap.” Interest rates are near zero, so there isn’t much left in Ben Bernanke’s arsenal. The “Taylor rule” that central bankers use to guide their decisions says that rates should now go to negative 6%, which is, alas, impossible.

The biggest concern of most economists when considering such a bill during a recession, however, is the “dynamic timing” issue, which is economist-speak for “Don’t raise taxes during a recession!” Fortunately, Waxman-Markey is backloaded; because most of the permits are given away in the early years, the “tax” impact is less severe. If it were not the case that Waxman-Markey seemed to be our only chance, politically, to pass such legislation, though, there would be little reason to consider any such tax at this time.

Reason #3: Unmeasurable (or Ignored) Benefits

Because Waxman-Markey impacts everything on the planet, it is next to impossible to conduct a proper cost-benefit analysis, but some economists have tried. The first half of the equation, costs, is the easier of the two. The most respected, nonpartisan estimate comes from the Congressional Budget Office, which places the “net annual economywide cost…in 2020 [at] $22 billion—or about $175 per household.” Waxman-Markey supporters have taken to bragging that it only costs a postage stamp a day to save the world.

More biased groups have, of course, placed a higher price tag on the bill. The Wall Street Journal ran an editorial a few days ago waving around the numbers of the conservative Heritage Foundation, when in fact climate experts had already debunked that study:

Heritage concedes a key flaw in their reasoning: they do not include in their accounting of the bill’s impacts three of its four major provisions: a renewable energy standard, energy efficiency standards, and transition assistance for consumers. […] Heritage justifies such omissions simply by asserting that they are inefficient and won’t achieve any consumer savings. But they do this without providing any answer to the ample studies demonstrating that such energy efficiency standards could save consumers $3900 per household by 2030.

That’s just intellectually dishonest. The WSJ does Heritage one better:

Note also that the CBO analysis is an average for the country as a whole. It doesn’t take into account the fact that certain regions and populations will be more severely hit than others — manufacturing states more than service states; coal producing states more than states that rely on hydro or natural gas. Low-income Americans, who devote more of their disposable income to energy, have more to lose than high-income families.

This is a blatant lie. The CBO analysis clearly states that low-income households would gain roughly $40 per year.

Of course, doing nothing is pretty costly, too. Climate change will wreck havoc that can be counted in the trillions of dollars, so avoiding those costs is the major benefit of Waxman-Markey. But which is more, the costs or the benefits?

The benefits are so hard to measure that the CBO threw its hands in the air, saying its analysis of Waxman-Markey “does not include the economic benefits and other benefits of the reduction in greenhouse gas emissions and the associated slowing of climate change.” And they were only talking about the next few decades. Imagine how difficult it must be to measure the benefits in the 22nd century, when the worst effects of climate change would be felt.

It would be even worse to assume that the benefits do not exist. Most pundits hear the costs and assume that GDP would have grown just fine without Waxman-Markey, but once it becomes law our standard of living will be south of what it otherwise would have been. But they’re using the wrong baseline. Over the next century, worldwide GDP is supposed to decrease 3% from its normal trajectory thanks to climate change. That is our baseline. The environmental benefits of stopping climate change will lessen that blow, but the question is, will the economic costs outweigh the amount of GDP that is spared the wrath of climate change?

No one can pinpoint a precise answer to that question, and anyone who says they can is just trying to win an argument. I’m not going to pretend that I know the answer, but I will tell you what most economists think is the answer from their rough estimates:

[There] is a broad consensus that the cost of climate inaction would greatly exceed the cost of climate action—it’s cheaper to act than not to act. Reducing greenhouse gas emissions by moving to alternative energy sources and capturing carbon from coal-fired power plants will cost less in the long run than dealing with the effect of rising sea levels, drought, famine, wildfire, pestilence, and millions of climate refugees. (There are some outliers who disagree with this—Danish statistician Bjorn Lomborg comes to mind—and some respected economists, like William Nordhaus, who argue that future, richer generations will be able to more easily shoulder the cost burden than we can.) But influential mainstream economists from Paul Volcker to Robert Stavins to Lord Nicholas Stern to Larry Summers all agree that action is cheaper than inaction…

I say Bravo! to the few pundits, like Jim Manzi and Robert Murphy, who have tried to use respected economic models to perform a cost-benefit analysis of Waxman-Markey, but I wouldn’t put much stock in them other than as ballpark figures. Manzi and Murphy, like Mark H., trust Nordhaus, who, as indicated above, is an excellent economist but only forms one end of the spectrum. It is entirely plausible that he is correct, but given that most of his colleagues disagree with him, it is more likely that the truth is closer to Stavins or Stern. Personally, I prefer to play the odds than run the risk that Nordhaus is wrong and my generation inherits a fraction of a planet.

All of these models account for the costs quite well, but few of them capture the breadth of benefits that are possible. Think, for instance, about that $138 billion we spend each year guarding oil in the Middle East. No one accounts for the opportunity to save all that money once we are free of foreign oil, but it is a game-changing amount.

To Auction, or Not to Auction: That Is Not the Question

Some critics dismiss Waxman-Markey because, unlike a pure tax, most of the revenues do not accrue to the government, and many of the permits are given freely to big corporations thanks to their trusty lobbyists. It’s not fair, but it’s not enough to override the bill’s impact. Stavins explains:

Generally speaking, the choice between auctioning and freely allocating allowances does not influence firms’ production and emission reduction decisions. Firms face the same emissions cost regardless of the allocation method. When using an allowance, whether it was received for free or purchased, a firm loses the opportunity to sell that allowance, and thereby recognizes this “opportunity cost” in deciding whether to use the allowance. Consequently, the allocation choice will not influence a cap’s overall costs.

Maybe even more important is a fact that escapes many pundits but is crucial to the bill’s fairness: “80% of the value of allowances go to consumers and public purposes, and 20% to private industry.” Not quite the way they described it in the media, eh?

Leaky Legislation

Implicit in global warming is global. The United States is only part of the problem, and it would be a poor practical joke if we made sacrifices and the rest of the world watched from the comfort of their unregulated economies. Economists call this the “free rider” problem; if we’re shouldering most of the burden, other countries have no incentive to do their part, yet they can reap the benefits. The problem is, we are responsible for more greenhouse gases than any other country, and whether they came with other benefits for the rest of the world or not, other countries refuse to cut emissions until we step forward. Who can blame them? The U.S. is not exactly known for its international cooperation. It’s not hard to understand why other countries look at us and whisper about the free rider problem going in the other direction.

The other international problem is carbon “leakage,” which refers to companies leaving the U.S. to relocate in countries that don’t impose costs on carbon emission. Stavins points out that, empirically, it’s not a big deal:

Despite the high levels of attention that international competitiveness therefore receives in debates about domestic climate policies, economic research has consistently found that the actual competitiveness impacts of proposed domestic climate policies would not — in quantitative terms — constitute a major economy-wide economic issue for the United States, partly because differences in other costs of production (including labor and energy costs, without accounting for carbon constraints) across countries swamp differences in costs due to environmental policies, including prospective climate policies.

At present, Waxman-Markey contains a questionable measure that could avoid this problem, but even if it doesn’t, it’s nothing a good multilateral plan can’t solve.

Our Moral Obligation

Matt Yglesias, who dabbles in philosophy, made a poignant remark recently:

I think the main issue here isn’t so much that it isn’t possible to develop such a metric, as that a dollars and cents approach to the costs of letting the world burn tends not to capture what’s going on. For example, even a very optimistic take on the consequences of climate change is going to say that things will look very bleak for [Bangladesh]. But Bangladesh is a poor country. Consequently, the economic costs of Bangladesh’s 161 million people all dying tomorrow would be relatively modest—their whole GDP is only about $225 billion. The cost to Americans of Bangladesh being wiped off the face of the earth would be tiny. But that doesn’t mean it’s okay for Americans to be blithely unconcerned about activity that threatens the lives of hundreds of millions of people in the developing world.

I think we’d all agree that we can give up $70 apiece to keep countries from falling off the map. Maybe not. Maybe the rest of the world is right about us. Maybe we’re all about dollars and cents. Maybe we are just the big bad empire that doesn’t care what happens to the least among us.

Personally, I don’t believe that. I think there’s more to us than meets the eye, but I guess we’ll find out soon enough, won’t we?