Well you know what? They can laugh all they want, but they will figure it out when the light bill jumps up. Add to that the fact that we will have emissions traders out there making money off the newest boondoggle to hit DC. I just hope there is not another Enron style scandal.

Terrye on April 22, 2009 at 7:01 PM

Ironically enough tax and hide aka cap and trade was one of Enron’s schemes. They just got caught before they got to enact this one.

If these assumptions are correct. IF is the key word. There is no proof that carbon dioxide emissions “cost” anything to society beyond the market price of fuel–the scare about “global warming” is based on results from “climate models” which have been fed inaccurate “forcing functions” and feedback parameters.
…

Cap-and-trade does work for REAL pollutants, where there is a “cost to society” for emitting them. For example, cap-and-trade has worked for sulfur dioxide (SO2), which causes acid rain, and damages trees and wildlife, and degrades metallic buildings. Why did cap and trade work there? Because it’s possible to remove 98%+ of sulfur dioxide emissions from a stack using relatively inexpensive scrubbers, to generate sulfuric acid which can be sold for use in car batteries. If the scrubber costs less than the price of SO2 emissions, industries will buy the scrubber and sell their SO2 credits to somebody who can’t afford a scrubber, and the total emission of SO2 decreases. Between 1990 and 2000, total SO2 emissions in the USA decreased by 20.4%, despite an economic expansion during that decade.

The problem with CO2 is that you can’t burn anything (coal, oil, natural gas, wood, even ethanol) without generating it, and it’s extremely expensive to capture, and the “cost to society” of emitting it is negligible–it’s just not plain worth capturing!

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Steve Z on April 22, 2009 at 3:35 PM

I hope I didn’t give the impression I agreed with the assumptions; I was merely elucidating the thought process our esteemed Professor Reilly is using.

Most of society believes in global warming; therefore most of society believes that there is a social cost to CO2 emissions. You can argue with the climatologists on this point (in fact I encourage you to), but once they have spoken the economist’s job is to come up with the least costly way to meet the policy goal established on account thereof.

Your description of how cap-and-trade for SO2 works doesn’t capture the whole story. Allow me to paint a more complete picture:

From the point of view of society (i.e. government regulators), there is some optimum level of total SO2 emissions. They don’t care who emits what, so long as the total SO2 does not exceed that limit. Ways to reduce SO2 emissions to that level include: quotas on each industry, taxes on quantities emitted, and cap-and-trade.

Quotas will yield the desired amount of total emissions, but the costs of reducing emissions vary from industry to industry and from firm to firm. Thus, if every firm’s quota in year 1 is set to n% of their actual emissions in year 0, say, some firms will suffer much more than others–such an arrangement produces what economists call “deadweight loss.”

Taxes based on quantities emitted allow firms to decide whether it is less expensive to emit more than their share (their share, of course, being based on their share of emissions in year 0) and to pay extra taxes versus reducing their emissions. Thus, this arrangement does not come with DWL. However, it is impossible to know at what rate to set the taxes to yield the optimum total emissions, so the policy goal is not met.

Cap-and-trade combines the two strategies. It fixes total output to the desired level IAW policy, yet it allows flexibility as to which firms reduce emissions and which firms bear the tax burden instead of emissions reduction.

Because it meets the policy goal with no DWL, cap-and-trade is something of a holy grail to economists. But bear in mind, economists have abdicated the question of whether or not a particular policy goal is desirable to other fields.

Also, note that to apply this system to anything else–say, quantity of DVDs purchased in a household–would yield an outcome that even a Keynesian would say is inefficient. It only yields no DWL in economic models because of the assumption that the emissions have an external cost.

P.S. Don’t dare tell an economist that the social cost to ANYTHING is negative (i.e. there is a positive externality)–he’ll start pushing for the government to subsidize it. ;-)

Repent your wickedness Steve Z !!!

Rebuke the Thermometers of Blasphemy !!!

Disavow the satanic sorcery of empirical science !!!

Accept the teachings of the Profit(LPBUH) as was divined in the holiest of holies, Earth in the Balance.

Be not bothered that AGW models don’t conform to the known physical laws of the universe.

Be comforted that the Dear Leader Obama requires only a small sacrifice, a pittance actually, on your part to save humanity…

What does Obama get out of this? Is he really drinking this global warming kool-aid BS, or what does he get out of it. He has shown that he is not willing to give up his “tropically warm” office, or his gas-guzzling cars, or flying chefs around the country just to cook him a damn pizza! I don’t get it!

Steve Z on April 22, 2009 at 3:35 PM

Excellent analysis and scientifically correct. Unfortunately it is politically incorrect.

We are all going to pay dearly for the politics of the left.

The cap-and-trade idea is firmly grounded in modern economic theory. That’s not to say it isn’t wrong, but it’s well-supported academically.

If one assumes that energy production and use carries with it a negative “externality”—a cost to society that is not reflected in the market price—then the economically-efficient thing to do is to apply some manner of tax to reduce energy consumption to the hypothetically-optimum level. If these assumptions are correct, a cap-and-trade system reduces energy consumption to the optimum level with the lowest deadweight loss among the various possible tax or regulatory schemes.

hicsuget on April 22, 2009 at 2:39 PM

If these assumptions are correct. IF is the key word. There is no proof that carbon dioxide emissions “cost” anything to society beyond the market price of fuel–the scare about “global warming” is based on results from “climate models” which have been fed inaccurate “forcing functions” and feedback parameters.

I work with many professional meteorologists (who should know weather better than laymen), and all but one of them DON’T believe in global warming, and the youngest is on the fence. The best weather-forecasting models are reasonably accurate to about five days into the future, then the model predictions diverge from the eventual weather experienced within ten days. If a computer model can’t predict the weather 10 DAYS into the future, how can a model hope to predict anything 100 YEARS into the future?

Global average temperatures have been DECREASING since 1998, and rather sharply since 2006, but CO2 concentrations continue to increase. If CO2 causes global warming, why is it getting cooler now? What do you believe, the gee-whiz wonderful climate models, or all the thermometers on the planet?

Cap-and-trade does work for REAL pollutants, where there is a “cost to society” for emitting them. For example, cap-and-trade has worked for sulfur dioxide (SO2), which causes acid rain, and damages trees and wildlife, and degrades metallic buildings. Why did cap and trade work there? Because it’s possible to remove 98%+ of sulfur dioxide emissions from a stack using relatively inexpensive scrubbers, to generate sulfuric acid which can be sold for use in car batteries. If the scrubber costs less than the price of SO2 emissions, industries will buy the scrubber and sell their SO2 credits to somebody who can’t afford a scrubber, and the total emission of SO2 decreases. Between 1990 and 2000, total SO2 emissions in the USA decreased by 20.4%, despite an economic expansion during that decade.

The problem with CO2 is that you can’t burn anything (coal, oil, natural gas, wood, even ethanol) without generating it, and it’s extremely expensive to capture, and the “cost to society” of emitting it is negligible–it’s just not plain worth capturing!

Carbon dioxide is NECESSARY for life on Earth–it’s plant food, and NOT toxic. In fact, many experiments show that high CO2 levels in the air speed up plant growth and increase crop yields, meaning that higher future CO2 levels could lead to a greener, more fertile Earth. If the “cost to society” of CO2 emissions is NEGATIVE, why bother trying to limit them?

It just so happens that in the particular case of calculating the economic impact of cap and trade on the median household, to think like an accountant makes more sense than to think like an economist.

hicsuget on April 22, 2009 at 3:08 PM

Accounting is economic record keeping. Economics is a social science. Was Reilly doing record keeping or science? There is, obviously, a very large difference in impact of the two when it comes to selling a program that impacts the common taxpayer.

If he was doing science then he failed miserably. If he was simply doing accounting then he should have said so. Since he is a Professor of Economics, at MIT, people would assume he was doing the job of a social scientist, not the job of an accountant.

But but but….we were promised no new taxes!!!! Does this mean, Obama lied??????????
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capejasmine on April 22, 2009 at 3:19 PM

That depends on what the meaning of “is” is.

It’s been stated that to make alternative energy viable, gasoline and oil must be more expensive – gas on the order of $5 a gallon.

To me, this sets a baseline. Energy prices will not be any cheaper than an equivalent energy price of $5 a gallon.

How is this not an increased financial drain on the people? Cap and trade only amplifies those costs.

SouthernRoots on April 22, 2009 at 12:41 PM

But but but….we were promised no new taxes!!!! Does this mean, Obama lied??????????

I try not to waste energy on hate, but I really feel loathing for this man, and liberals, that think this kind of crap is just dandy!!!

So, the static model approach is faulty in that unit rates must go up in a vicious cycle to offset reductions in usage. Unless Obama wants to nationalize the power/water/gas companies, too. I guess then we can have “free” heat, light and water service…