The Wise Seek Rent?

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The sage saying has it that only the fool learns from experience – the wise man learns from the experience of others. While Congress tries to make us learn about cap-and-trade in the hard, personal way, a new and frightening report from Britain tells us what we are in for.

The report, “The Expensive Failure of the European Union Emissions Trading Scheme,” is by eminent economist Matthew Sinclair, Research Director at the Taxpayer’s Alliance (TPA), a British think tank. It is available on the TPA website. In it, Sinclair details the myriad ways in which the ED’s cap-and- trade scheme, called the Emissions Trading Scheme (ETS), enacted in January 2005, has failed to live up to the promises that were made for it.

The ETS is the largest such scheme in the world, cover- ing 11,500 company sites in the European Union countries. Like the cap-and-trade proposal passed by our own House of Representatives (and at this writing, awaiting passage in the Senate), the ETS is based on a deceptively simple theory: if government puts a limit on the total amount of carbon dioxide that businesses collectively emit, but lets individual companies trade emissions permits, then the result will be the most efficient reductions possible.

The huge cap-and-trade scheme has now been in place four years, and allows Sinclair (and us) to make some observations.

The first should have surprised nobody: the ETS increased the cost of energy to all consumers – households as well as businesses and other organizations. So European households have been hit with a double whammy: their energy bills went up, but prices on everything else went up as well, because businesses had to pay higher energy costs. Sinclair calculates that the ETS costs the average British family around $200 yearly. Over the first four years of the ETS, he estimates that it cost the average European – individually! – over $277.

This tax is highly regressive; it hits the poor and those on fixed income (such as the elderly and the disabled) hardest.

And Sinclair notes that these costs far exceed the estimates that pro-cap-and-tax economists made of the social costs of carbon dioxide emissions – the costs that emissions of carbon dioxide impose on society over time. For example, William Nordhaus, the so-called “father of climate change economics,” estimates the social cost of carbon dioxide at $7.40 per ton. Economist Richard Tol did a meta-analysis of 211 estimates and came up with an average of $6.82 per ton. But so far, the costs of the ETS are the equivalent of $21 per ton, obviously far higher than the supposed social costs.

Several other bad effects were not anticipated. For instance, there has been a large increase in “windfall profits” for the energy companies, which is no doubt why energy companies here are pushing for our own cap-and-trade bill. The ETS has perversely transferred wealth from poor consumers to wealthy energy companies. Legislation like this is a rent- seekers’ dream.

Another unanticipated consequence is that there has been a lot of volatility in the emissions price, so that now an unholy alliance of environmentalists and energy companies is demanding that some floor price be set by the EU bureaucracy. This raises the spectre of even higher prices set by a government-sanctioned monopoly. And this price unpredictability has made it hard for businesses to plan their operations rationally.

In sum, the experience of others with cap-and-trade makes it clear that similar legislation here will be a disaster. Let’s see whether we’re wise enough to profit from this knowledge.

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