A careful reading of the latest column by Paul Krugman shows that he doesn’t see what the problem is with the climate change bill now on its way to the House floor. He defends the concept of a cap relative to a tax, which is fine with me. (Jim Hansen, who is a hero in climate science but not a specialist on the economics front, has only muddied the waters by raising this complaint.) He laments the giveaways in Waxman-Markey, but agrees with me that they can be remedied by moving toward full auction in the future. What never makes an appearance, however, is the problem that Waxman-Markey caps individual uses of carbon fuels one sector at a time, and this is not fixable without overhauling the whole approach. What’s wrong with the W-M model? Let me count the ways:
1. The ability to achieve carbon targets depends on the coverage of the program. W-M starts with limited coverage (few sectors capped) and then sets up a protracted battle for extending cap-and-trade to more sectors in the years to come. In spite of timetables written into the bill, you can be sure that each extension will be fought over; there will always be a reason (amplified by lobbying largesse) to postpone bringing in new parts of the economy.
2. Once you have agreed to a sectoral approach, and once you start handing out carbon permits to everyone on the receiving line, you get to haggle over each sector’s carbon budget. There is always a reason to make your sector’s emission reduction target a little lower than the next guy’s.
3. Contrary to what Krugman claims, verifying the actual carbon emissions of each sector is herculean and quite likely to fail.
4. The experience of the European Trading System, which W-M emulates, confirms all these predictions; it has been a disaster. Fixing it, and fixing a future system along the same lines in the US, will mean scrapping it and starting over.
The irony is that there is a much simpler, much more effective alternative: put a limit on the amount of carbon fuels available to the economy by requiring a permit to extract or import them. Coverage is complete, there is a single, economy-wide target, and verification is a snap. There is little opportunity under such a system for businesses to offer or politicians to demand favors for loopholes and special-interest tweaks. Maybe that’s why it’s not on the table.