2009

Marlo made three interesting arguments yesterday contending that cap-and-trade would generate protectionist outcomes. I want to add another, pervasive, yet oft-neglected reason.

Environmental regulation spurs the businesses who feel cheated to lobby for other forms of protectionism for their industries. This is a very different mechanism from Marlo’s identification of particular measures with protectionist policies. It doesn’t matter what the content of the regulation is; as long as businesses perceive it as hurting them, they will lobby for and get protectionist measures to help them in other ways. Just think what the auto industry would do if Congress tried to increase CAFE significantly or require drivers or manufacturers to buy carbon credits; they’d probably log-roll and get tarriffs against foreign manufacturers as part of the package deal. Something for you, something for me, less for the consumer.

There is good empirical support for this proposition. Western Washington University economist Steven Globerman made the argument back in 1999, hidden within a broader book arguing that trade is actually good for the environment.

Globerman noted that “lobby groups will use environmental issues to extract protection against imports.” And they will generally win. “Governments in high enforcement countries can and will invoke trade remedy laws, particularly countervailing duties, against exporters in weak enforcement 

countries.” The log-rolling takes place internationally as well. If we give into the EU’s demand to join a climate regime, we may be able to get acquiesence in our new protectionist measures.

We don’t want “significantly higher risks of trade wars tied to escalating retaliation for specific environmental practices.” As economist and MP Michael Spicer put it in his 1996 book The Challenge from the East and the Rebirth of the West, “if the stability of the world is to be assured it must be through the spread of free trade.”

Yes, for three reasons.

(1) Companies in carbon-constrained countries will demand carbon tariffs to “level the playing field” vis-a-vis firms in non-carbon constrained countries.

(2) Cheating will be rampant unless deterred and punished by credible trade sanctions.

(3) The EU-IPCC-Al Gore goal of achieving a 50% reduction in global emissions by mid-century is impossible absent deep emission cuts in developing countries, which in turn won’t happen unless developing countries are bullied into limiting their consumption of coal and oil.

For further discussion, see my post on Masterresource.Org.

In today’s Guardian, Juliana Glover reports that carbon permit prices in Europe’s Emission Trading System (ETS) have crashed from €31 last summer to €8 today. This price is too low to create any incentive for covered entities to invest in ‘green’ technology.

Glover identifies two causes for the collapse of carbon permit prices. First, the recession has reduced demand for energy and, thus, for carbon permits. Second, European governments handed out “luxurious quantities” of carbon permits, free of charge, to big emitters, claiming that economic growth “would soon see them bumping against the ceiling.”

Glover says the EU must do two things to rescue the ETS:

First, the EU must stop importing permits from countries such as Russia–a bonus for a paper transaction. No one really believes that 15m tonnes of imported permits will not be emitted by a steelworks somewhere east of Novosibirsk.

Second, it must publish plans to crack down on the surplus of permits when the recession is over. Warnings of famine ahead, when the scheme enters its third stage in 2012, would raise prices now, if believed.

She concludes caustically: “Like medieval pardoners handing out unlimited indulgences, governments have created a glut. Reformation must follow. Wanted–a modern Martin Luther to nail a shaming truth to industry’s door: Europe’s whiz-bang carbon market is turning sub-prime.”

Glover’s commentary vindicates free-market critics (see, e.g., here, here, and here) who have warned that Europe’s vaunted ETS is an unsavory combination of wealth transfer and creative accounting.

My concern is what lessons if any climate doomsters here in the United States draw from Europe’s failure.

Most U.S. greens prefer cap-and-trade to carbon taxes. Part of the reason is political. Most voters oppose new taxes, but most do not understand that cap-and-trade schemes are stealth energy taxes.

Greens also argue that only cap-and-trade (a) provides “emissions certainty” (determines in advance how much and how fast emissions will decline) and (b) creates strong incentives for firms to innovate and go “beyond compliance” in order to amass and sell surplus carbon permits (transferring wealth from buyers to sellers).

But the collapse of the carbon market calls in question both alleged policy advantages of cap-and-trade. Europe’s ETS is exerting no pressure to reduce emissions in today’s distressed economy, whereas a carbon tax mostly certainly would. Moreover, the ETS is fostering creative accounting, not innovation.

While it would be premature to say that the cap-and-trade lobby is losing its clout on the Hill, it is interesting that Energy Secretary Steven Chu recently floated the idea of a carbon tax. It is also noteworthy that NASA’s James Hansen, the doyen of global warming alarmism, cautioned President-elect Obama last December that, “A carbon cap that makes one more stinking millionaire on the backs of the public is going to infuriate the public.” Hansen argued that, “A carbon tax (across all fossil fuels at their source) is essential.”

Given the Administration’s apparent determination to regulate carbon dioxide (CO2) under the Clean Air Act (CAA), we could possibly see growing support within green circles for a combination of carbon taxes and CAA regulation of CO2 from autos and large stationary sources.

Of course, this would take all the fun and profit out of global warming for the corporations pursuing European-style wealth transfers and windfall profits under cap-and-trade.

So, liberty lovers be warned: We could end up with cap-and-trade, carbon taxes, and CAA controls on CO2. As Al Gore said at his March 2007 Senate Environment and Public Works hearing, “We need it all.”

The ultra powerful enviro-lobby has a big problem: So far, it hasn’t been able to convince the Congress to enact energy-rationing policies to fight “global warming” (I am using quotation marks because it hasn’t warmed in 7 years, despite a steady increase in global greenhouse gas emissions).

Last year, a bi-partisan group of Senators spurned a cap-and-trade scheme written by California Senator Barbara Boxer’s staff because they couldn’t countenance imposing higher energy costs on their constituents at a time when gas cost $4/gallon. Given current economic woes, a cap-and-trade energy rationing scheme is even more unlikely to make it through the Congress.

Faced with this political and economic reality, the eviros have adopted a new strategy. They want to pull an end run around Congress by having the executive branch regulate green house gases without a legislative mandate.

It’s a complicated process, but here’s the gist: They are trying to get the Environmental Protection Agency to find that greenhouse gas emissions are “pollutants” that “endanger” public welfare, a ruling that automatically results in regulation under the Clean Air Act. This is not a good thing. As noted by my colleague Marlo Lewis, if the EPA were to regulate greenhouse gases under the Clean Air Act, it would result in a regulatory nightmare.

The EPA simply could declare that greenhouse gases endanger public welfare, but there are also a number of circuitous pathways by which the green lobby could force the EPA’s hand.  In today’s DC Examiner, former CEI Warren Brooks Fellow Jeremy Lott and I have an opinion piece that explains one such round-about route to a regulatory nightmare-the California tailpipe emissions waiver.

A sample:

If the EPA allows California to regulate greenhouse gases from automobiles, it will tacitly acknowledge that greenhouse gases are “pollutants” — and under the Clean Air Act anything considered a pollutant is automatically subject to regulation. Environmental groups will be sure to have their lawyers sue the EPA to make this explicit.

Once greenhouse gases are classified as a “pollutant,” big construction projects (power plants, high schools, apartment buildings, hospitals) will be delayed and perhaps halted while federal regulators try to decide whether they comply with the Clean Air Act. New construction jobs? Forget about it.

Before the EPA takes this drastic step, shouldn’t our nation’s representatives in Congress debate and vote on whether to substitute this California regulation for federal law? Environmentalists don’t think so.

Rather than have Congress deliberate, the environmental groups want the courts to decide. The Environmental Defense Fund (EDF) and other well-funded, litigation-happy green groups think the California waiver is a dream come true.

Click here to read the rest.

Good news and bad news for drivers from federal Transportation Secretary Ray LaHood. The good news is:

LaHood said he firmly opposes raising the federal gasoline tax in the current recession.

The bad news is that, because people are using less gas as they switch to more fuel-efficient vehicles and just plain drive less, LaHood is thinking of taxing us according to how many miles we drive – a VMT (Vehicle Miles Traveled) Tax. Now in some ways, this is a more equitable taxation scheme to fund road maintenance than the gas tax – it’s more reflective of the amount you use the road – and is therefore less objectionable, especially if it replaces rather than supplements the gas tax. However, it comes with a host of ramifications.

Most seriously, it will entail government surveillance of our driving habits. So there are obvious civil liberty concerns. Older Britons – and not so old – will remember the government asking them, “Is your journey really necessary?” This will give the government the chance to ask that question more directly.

More generally, the tax may be self-defeating. It will serve as a disincentive to drive, thereby reducing the amount it raises. For those who have to drive long distances, because they have a long commute or because their job requires it in other ways, it will also serve as a burden on economic activity (although perhaps no more than the current gas tax). Environmentalists may worry that it will reduce the incentive to switch to more fuel-efficient vehicles. While this would probably be a good thing in terms of road safety, environmentalists are not ones to let 2000 deaths a year get in the way of their war on oil, so my betting is that the VMT tax will, in fact, supplement a gas tax, putting your journey in double jeopardy.

Finally, if the Secretary is so opposed to a gas tax, what does he think of cap-and-trade of greenhouse gas emissions, which will be functionally equivalent to a gas tax? That’s administration policy. So it looks like the Secretary is actually in favor of a gas tax, as long as we don’t call it that.

UPDATE: I meant to include a few words about an even better idea. The redoubtable Jerry Taylor has instead done it for me at The Corner: T

hat said, there is an even better reform — get rid of federal gasoline taxes altogether and send all road construction and maintenance programs back to the states. All the bridges to nowhere, all the Robert Byrd memorial thises and thats, all the corruption associated with log-rolling transportation earmarks in Congress . . . all goes away. Alas, not even the late, great President George W. Bush dared entertain such an idea, and with all roads to recovery thought to come out of some shovel-ready highway somewhere, LaHood most certainly won’t go there.

Earlier this week, in a letter to Sierra Club climate council David Bookbinder, EPA Administrator Lisa Jackson said the Agency would reconsider, via a notice-and-comment rulemaking, a Bush-EPA memorandum interpreting regulations that determine whether carbon dioxide (CO₂) is currently subject to emission controls under the Clean Air Act’s Prevention of Significant Deterioration (PSD) pre-construction permitting program.

The memorandum, issued on December 18, 2008 by Jackson’s predecessor, Stephen Johnson, responds to EPA’s Environmental Appeals Board (EAB) decision in a dispute between EPA Region 8 and the Sierra Club. Region 8 granted Deseret Electric Power Cooperative a PSD permit to build a new coal electric generating unit near Bonanza, Utah. Like all other PSD permits issued in the program’s history, this one did not require the regulated entity to install best available control technology (BACT) to limit CO₂ emissions. Sierra Club argued that EPA regulations adopted in 1993, which require power producers to monitor and report CO₂ emissions, make CO₂ a regulated pollutant for PSD purposes. Region 8 countered that it has no power to apply PSD or BACT to CO₂, because EPA has consistently interpreted “subject to regulation” to mean subject to emission controls. The 1993 rules require data collection and reporting, not emissions control.

The EAB disagreed with Sierra Club in part, and with Region 8 in part. Contrary to Sierra Club, “subject to regulation” does not have an unambiguous meaning that compels EPA to impose a CO2 BACT standard in a PSD permit. But, contrary to Region 8, EPA is not bound by the Agency’s historic interpretation to apply PSD only to pollutants for which EPA currently administers emission controls. The EAB asked EPA to clarify the meaning of “subject to regulation” in the context of an action of “nationwide scope.” That’s what Johnson did in his December 18, 2008 memorandum.

The reason this is important, even if you don’t live in Bonanza, Utah, is that applying PSD to CO₂ could have a chilling effect on new construction and economic development throughout the nation. As explained here, here, and here, the cutoff for regulating business entities as “major stationary sources” under the PSD program is a potential to emit 250 tons per year (TPY) of a CAA-regulated air pollutant. An estimated 1.2 million previously unregulated buildings and facilities actually emit 250 TPY of CO₂. All would be vulnerable to new controls, paperwork, and penalties if courts deem CO₂ “subject to regulation” under the CAA.

Before any firm could build or modify, for example, a large commercial office building, enclosed mall, or big box store, it would have to obtain a PSD permit, which means it would have to undertake a complex investigation of how to comply with BACT (see pp. B6-9 of EPA’s New Source Review Workshop Manual). Even apart from any technology investments required for BACT compliance, the PSD permitting process is costly and time-consuming. In 2007, each PSD permit on average cost $125,120 and 866 burden hours to obtain.

EPA’s Advanced Notice of Proposed Rulemaking (ANPR) estimates that even a ten-fold increase in PSD permitting from 200-300 permits per year to 2,000-3,000 permits “could overwhelm permitting authorities” and subject firms to “new costs, uncertainty, and delay in obtaining their permits to construct.” Yet if firms seek to modify just 1% of the 1.2 million entities that currently emit 250 TPY of CO₂, EPA and its state counterparts would have to process 12,000 PSD permits per year. The costs, delays, and uncertainties produced by this administrative quagmire would bring economic development to a halt.

Johnson’s memorandum makes a strong case for the lawfulness of EPA’s historic interpretation that PSD and BACT are triggered only by emission control requirements established under other provisions, not by monitoring and reporting regulations. I find particularly impressive Johnson’s argument that Sierra Club’s reading of the Act would make nonsense of CAA §114, which authorizes the Administrator to require entities to gather and report emissions data to inform policy development. If EPA took the position that monitoring and reporting regulations automatically trigger PSD and BACT, then “the mere act of gathering the information would essentially dictate the result of the decision that the information is being gathered to inform (whether or not to require control of a pollutant).” Johnson remarks: “I prefer an interpretation that allows the Agency to first assess whether there is a justification for controlling emissions of a particular pollutant under relevant criteria in the Act.”

Attorney Peter Glaser put the point more forcefully in an amicus brief on behalf CEI and 13 other free-market groups. In the Deseret case, Sierra Club wanted the EAB to mandate CO₂ regulation under PSD and BACT even though the EPA Administrator had not determined (and still has not determined) whether CO₂ emissions endanger public health or welfare. This regulate first, do the analysis later (if ever) approach would stand the logic of the CAA on its head.

Johnson’s memorandum accomplished two things. First, it averted a “PSD nightmare”—at least on his watch. Second, as an Aiken Gump analysis astutely observed, the only way Johnson’s successor could overturn his “interpretative rule” would be through a notice and comment rulemaking. Jackson’s decision to reconsider Johnson’s memorandum via a rulemaking seems to confirm that assessment.

Sierra Club, Environmental Defense Fund, and Natural Resources Defense Council sued EPA last month in the U.S. Circuit Court of Appeals for the District of Columbia, asking the court to overturn Johnson’s memo. But, as Greenwire reported on February 17, when the deadline came, the groups declined to file a motion to “stay” the memo, or put it on hold. Greenwire explains: “If the agency were to stay the memo immediately, Bookbinder said, it could trigger an obligation under the Clean Air Act for broad-ranging regulations targeting even very small sources of carbon dioxide emissions.”

Bookbinder commented: “The Clean Air Act has language in there that is kind of all or nothing if CO2 gets regulated, and it could be unbelievably complicated and administratively nightmarish for both EPA and the states if they were to yank the Johnson memo and not have something in place that makes it clear that we’re going after only the very large sources.”

This is quite remarkable. At a September 23, 2008 hearing before the Senate Environment & Public Works Committee (see segments 1:47:10-1:48:22 and 2:03:83-2:05:20 of the Committee’s Archive Webcast), Bookbinder derided as a “bugaboo,” “red herring,” and “pure scare tactic” warnings by industry and free-market groups that establishing greenhouse gas (GHG) emission standards for new motor vehicles under CAA §202 would expose tens of thousands of previously unregulated stationary sources to PSD and BACT regulation. Yet now he acknowledges that, if applied to CO₂, the PSD program could morph into an “unbelievably complicated and nightmarish” affair.

To be sure, Bookbinder thinks it’s possible for EPA, in a rulemaking, to make “clear we’re going after only very large sources.” But as a matter of law, EPA has no authority to pretend that a statutory cutoff set at 250 TPY really means 10,000 TPY, 25,000 TPY, or 100,000 TPY. Furthermore, although neither the Sierra Club nor any other major environmental group would sue EPA to insist on a strict letter-of-the-law application of PSD to CO₂, the major environmental groups do not have a monopoly on CAA litigation. Applying PSD to small CO₂ sources would empower legions of NIMBY (“Not in my backyard”) activists to block or delay construction of strip malls, big box stores, fast food restaurants, or other development they deem undesirable.

Lisa Jackson needs to understand that she cannot rescind Johnson’s interpretation and make CO₂ a pollutant “subject to regulation” under PSD without running the very serious risk of turning the Clean Air Act into a gigantic de-stimulus package.