The U.S. appears poised to act soon on global warming. Hopefully, Congress will craft policies that motivate a truly international solution rather than make the problem worse, hurt the economy, and create windfall profits for some regulated industries.
Most Americans are convinced that the buildup of green house gases (GHG) in the atmosphere is responsible for warming Arctic seas, shrinking mountain ice caps, and 90 degree October heat in New York.
CO2 emissions account for more than four fifths of GHG and a larger share of what government policies may curtail. Various proposals in Congress would establish a national cap on CO2 emissions, and roll those back over several decades.
Proposed regimes would allocate emission permits among business that process fossil fuels, like petroleum refineries, and use fuels intensely, like electric utilities and aluminum. Businesses may meet their goals by directly cutting emissions or purchasing permits from other firms that exceed their goals or shut down. Dubbed Cap and Trade, this approach is used in Europe, where a private market in trading permits has emerged.
Such an approach would bring the U.S., de facto, into the Kyoto Protocol. Implemented without U.S. participation, Kyoto commits virtually all other industrialized countries to reducing GHG emissions to 6% to 8% below 1990 levels. Developing countries are absolved, though industrialized countries may meet part of their abatement goals by financing cleanup projects in them.
Unfortunately, this regime encourages carbon-intensive manufacturing, like steel and aluminum, and consuming industries, like automobiles and appliances, to leave industrialized countries for places like China and India where fossil fuel use is unregulated and cheaper. This increases global emissions and reduces global GDP, because developing countries use fossil fuels, capital and labor less efficiently to make the same goods.
This madness is illustrated by the fact that China, with a GDP less than a third that of either the EU or U.S., emits more CO2 than either economy.
Every two years, Chinese emissions growth adds another country the size of Japan. It is hard to imagine that two years of China's growth, which comes to $650 billion, could replace Japan's $5 trillion economy. Yet, that is the kind of economic accounting cap and trade requires.
Government allocations of limited carbon use permits among businesses would create a new sandbox for Washington dealmakers, exacerbating the economic damage.
Utilities already face economic pressures to curb fossil fuel use, and through savvy lobbying could garner more emission permits than they will ultimately need. Once new CO2-limiting requirements take effect, utilities could build more efficient facilities, pass the capital costs into their rate structures, and reap windfall profits by selling excess permits.
Recently, American Electric Power, one the nation's largest operators of coal-fired electrical plants and staunchest advocates of Cap and Trade for CO2 abatement, signed a consent decree with nine states, 13 environmental groups and the Environmental Protection Agency to dramatically reduce emissions of acid rain causing SO2 under the Clean Air Act.
The decree prohibits AEP from purchasing emission credits through the existing Cap and Trade regime, using credits it has already earned, or generating new credits for sale through compliance with the decree.
It is illuminating that given the chance, environmentalists constrained AEP from using Cap and Trade for SO2 emissions, a concept AEP champions for CO2.
The international community has determined that global warming can be arrested by rolling back CO2 emissions, and the United States should do its share.
However, without participation by China and other developing counties, Kyoto will not solve global warming. By encouraging energy using industries to move to the developing world, it will only exacerbate the problem and make the world poorer in the bargain.
The United States should implement a regime that encourages participation and sacrifice by all nations, and does minimum damage to the global and U.S. economies.
It could adopt emissions standards for energy-intensive activities like electrical generation, aluminum, and steel and for carbon use in automobiles. In addition, the U.S. could require that products imported and sold in the U.S. meet the same production standards.
Extending the regime to imports would encourage governments in developing countries to meet similar standards to ensure access for their products in the rich U.S. market, and would meet the requirements of the World Trade Organization if those were applied equally to domestic and foreign producers.
That would reduce U.S. CO2 emissions without encouraging U.S. energy-intensive industries to migrate to China and other developing countries where they make the problem worse not better.
Peter Morici, an occasional contributor, is a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission.