Herd Mentality on Cap and Trade

Thank goodness Ben Stein is an independent thinker who can elucidate why exuberant enthusiasm over a cap-and-trade system is misguided and dangerous. I am afraid we are condemned to this inefficient dreamed artifice, whereas straight taxation of emissions would be far more effective.


February 22, 2009

Everybody’s Business

The Dangers of ‘Cap and Trade’


WHENEVER I pull up to my neighborhood service station in Rancho Mirage, Calif., or anywhere else lately, I have a strange feeling. Because gasoline is so incredibly cheaper than it was just eight months ago, I almost feel as if I am getting something free.

I keep wondering when someone in government will award some kind of stimulus prize to the oil companies for that. After all, by cutting the price of gasoline and other fuels by roughly half, the oil companies are giving consumers hundreds of billions of dollars in new purchasing power for other goods and services. Isn’t that worthy of praise?

What’s that, you say? It isn’t the oil companies? It’s just the free market correcting itself after a huge oil price bubble last year? Well, I agree. But I have a lot of angry e-mail burned into my brain from readers insisting that those high prices were an oil-company conspiracy.

So, are the lower prices now a conspiracy to help the consumer? If that’s silly — and it is — then let’s go back to the free-market explanation. It might actually work. The free market can make us crazy, but it can also explain a lot.

Still, when I go to my local gas station, I am amazed that there is any gasoline there at all. Yes, I can see how the big oil companies happily made gasoline when oil was $140 a barrel. But how can they do it when oil is in the $30s? That takes some fancy planning.

How do the oil companies manage to keep going when the price of their basic source product changes so much? Again, that takes fancy planning.

Such planning has allowed this country to get by without major supply disruptions since the shah of Iran was overthrown. But the situation is about to become much trickier, as we confront the need to reduce carbon emissions on the way to a cleaner environment. Indeed, President Obama’s Environmental Protection Agency now seems likely to act within months to begin restraints on carbon dioxide. This move had been resisted by the previous administration.

Obviously, oil and gasoline are a big part of the emissions problem, and something needs to be done. I seem to have trouble breathing on too many days. Part of the solution involves more efficient cars and furnaces, and better technology at all levels. But what about a direct financial restraint on burning hydrocarbons? Might that not reduce hydrocarbon emissions, too? It is hard to believe that it wouldn’t.

Two main ways to address the issue are under discussion. One would involve a nationwide system of credits for carbon burning, with a total cap. The credits would be traded in national and maybe world markets. Entities that emit more carbon gases would have to pay more to buy these credits, and those who saved carbon would pay less and be able to sell credits to heavier users.

The other idea is a direct tax on carbon emissions of a stable amount. The proceeds might be refunded in whole or in part to energy producers to help with other goals, such as producing cleaner fuels.

Both ideas have merit, but there is a tricky little history to “cap and trade,” which seems to be President Obama’s favored approach. Because the credits would be traded on an exchange, or somewhere else, their prices would fluctuate. They could even fluctuate wildly, as prices of traded items often do. (See the stock, bond and commodity markets if you’re looking for examples.)

The European system of cap and trade has seen large fluctuations. Right now, because of the recession in European manufacturing, the cost of these carbon credits has fallen fantastically, rendering the cost of carbon emissions low. That doesn’t do much for reducing emissions.

Why add another element of uncertainty to energy production, especially if the goal of suppressing carbon-based fuel burning can be accomplished by another means? Energy companies have enough problems as it is — including reduced supplies, political risks and wildly changing prices for raw materials.

Of course, the new system would be a great benefit to the people who traded the credits. But how about the rest of us? Haven’t we just had a big lesson in what happens when we put traders ahead of producers and consumers? Have we forgotten that lesson already?

Why not do what governments usually do to reduce consumption — namely, impose a tax that punishes the production of carbon emissions? That would also be much less sensitive to manipulation by speculators — and the types of extremes that have led to our country’s recent undoing.

It seems a more direct and simpler way to go, and would help ensure that gasoline will always be there when we need it.

Ben Stein is a lawyer, writer, actor and economist. E-mail: ebiz@nytimes.com.

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