Fossil Fuels Get Down and Dirty

The New York Times reports today that the united front of gas, oil, coal and electricity generating companies has splintered as climate legislation slowly advances in Congress. Where they once merged their voices, and dollars, in denial of climate change and against any curtailment of carbon emissions, they are now scrambling to secure advantages for their own industry in the fine print of Waxman-Markey-Boxer-Kerry. Gas wants special privileges for its product, since it has a lower carbon content than its fossil siblings. Oil is focused on removing subsidies for biofuels. Electrical utilities are split between those with a higher hydropower component (good for renewable portfolio standards) and those without, but both benefit from free allocation of permits. Only coal sits on the sidelines, denouncing the “hoax” perpetrated by several thousand communist-inspired climate scientists. (Although they will no doubt throw their weight behind carbon capture and storage provisions as the end draws near.)

Is this a good thing or a bad thing?

Mainstream environmentalists are tickled. When the well-heeled hydrocarbon lobbies were solid against climate change legislation, it was difficult to make progress. Now that they are pursuing competing agendas, they can be played off against each other, and some sort of a bill can go through. In fact, you could argue that the particular flavor of cap-and-trade that anchors WMBK is designed to achieve exactly that.

The downside, of course, is that the climate policy regime we end up with will be a product of this dogfight. Each fuel sector will have its own budget of free vs auctioned permits. Moneys collected by the government from whatever permits are auctioned will subsidize the industries with the greatest lobbying heft. Some energy products will see minimal price increases, others a lot. Ostensible carbon caps will have giant loopholes for offsets to benefit still other industries, largely determined by their own lobbying efforts.

The alternative strategy would have been to keep the system simple and without favoritism. Require a permit for extracting or importing hydrocarbon fuels, with a fixed formula for the amount of fuel per permit based on carbon content. Cap the permits to achieve carbon emission targets. Auction all the permits without exception, and return the bulk of the money to households to buffer them against the inevitable price jolt. Make no provision for offset loopholes.

The problem with this approach is that the fossil fuel interests, and the fuel-intensive industries most closely aligned with them, would resist monolithically to the end. The advantage is that such a bill, if passed, would be far more efficient economically, more equitable in its effects on income distribution, and, above all, would actually have a reasonable chance to meet its targets. Instead, we have a much greater chance of passing legislation that is filled with pork, regressive, and is almost guaranteed to fall well short of its headline emission reduction promises.