Cap-and-trade: Peas-and-broccoli
Posted October 15, 2009 at 7:18 am 
Filed in: Today’s WAPO headline (http://www.washingtonpost.com/wp-dyn/content/article/2009/10/14/AR2009101404054.html?hpid=topnews) delivers the grim news: “Cap-and-trade Would Slow Economy, CBO Chief Says.”
The article paraphrases CBO Director Douglas Elmendorf as saying in testimony before the Senate Energy Committee that the Waxman-Markey bill ”would slow the nation’s economic growth slightly over the next few decades and would create “significant” job losses from fossil fuel industries as the country shifts to renewable energy.”
During the hearing, Elmendorf “emphasized that his estimates contained significant uncertainties and “do not include any benefits from averting climate change,” but his message nevertheless contrasted sharply with those of President Obama and congressional Democratic leaders, who have suggested that a cap on carbon emissions would help revive the U.S. economy.”
Given CBO’s and Elmendorf’s stellar reputation, it’s not surprising that he told the truth about limiting greenhouse gas emissions through an economy-wide cap. And it stands to reason that policies designed to limit the use of cheap fossil fuels in favor of more expensive alternative fuels will have a negative macroeconomic impact. As noted above, of course, the equation doesn’t include avoiding the damage that climate change is likely to cause. And Elmendorf went on to discuss the fact that some industries “would benefit under a carbon cap, such as solar and wind power.” It’s also not clear whether the energy efficiency gains that could be achieved were adequately factored in.
Nonetheless, we should be under no illusion that investing in a future low-carbon economy will be cost-free. As Elmendorf put it: “The shifts will be significant. . . . We want to leave no misunderstanding that aggregate performance — the fact that jobs turn up somewhere else for some people — does not mean that there are not substantial costs borne by people, communities, firms in affected industries and affected areas. You saw that in manufacturing, and we would see that in response to changes that this legislation would produce.”
All true, as any native of the Midwest can tell you. That’s why thoughtful policy-makers like Senators Lindsey Graham (R-SC) and John Kerry (D-MA) — there are others, but those two got published in the NYT on Sunday, so they get the shout-out — know that with cap-and-trade must also come economy-enhancing energy security provisions. Things like robust electrification assistance for the transportation sector, clearing unnecessary hurdles for nuclear power development, and revenue-generating off-shore natural gas and oil production.
Unfortunately, some of Graham and Kerry’s colleagues are already raising objections to natural gas and oil production being part of a comprehensive bill, arguing that conventional energy production is “inconsistent” with reducing greenhouse gas emissions. They miss the point. Once you have a cap on emissions, your emissions trajectory is set and conventional energy use must occur under the cap. Producing more vital energy, as long as the cap stays in place, will be entirely consistent with your emissions goals. Even better, revenues raised from that production can help fund public-private innovation in clean energy — making the achievement of emissions goals less costly and improving our economic health at the same time.
Without measures like those, merely capping greenhouse gas emissions will likely merely cap economic activity. It’s like losing weight. Sure, you could go on a strict diet of just peas and broccoli. Guaranteed you’ll lose weight, but you’ll also run out of energy to do anything at all. Losing weight will be the least of your troubles. To lose weight and stay healthy, you need a balanced diet combined with exercise. Similarly, to reduce greenhouse gas emissions and stay economically healthy, the U.S. needs to limit emissions and enhance energy security at the same time. Kudos to the Senators for proclaiming that fact.
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