A TIP OF THE CAP

5/22/09

Yesterday, the House Energy and Commerce Committee voted in favor of a cap and trade system, i.e., a system that allows companies to buy and sell rights to pollute within the framework of overall limits on emissions of the harmful detritus of industrial and energy producing processes. Most Democrats voted for the bill while most Republicans opposed it. Republican opposition to this bill is very curious.

The idea of a cap and trade system emerged from libertarian/conservative think tanks over twenty years ago as a free market method of cleaning up our environment. The idea was and is brilliant; companies would be incentivized to pollute less because doing so would enable them to sell their resultant excess pollution rights. Those companies that refused, or decided not, to reduce pollution would be forced to buy rights from cleaner companies. Thus, clean and green companies would get rewarded by dirty companies, thus inducing companies to become clean and green. Further, the pollution rights would be tradable commodities and would, and probably will, under the proposed system, be actively traded on commodities exchanges, providing real time updates of the cost of being a polluter and the potential rewards of cleaning up one’s (industrial) act.
Perhaps more importantly, though more arcanely, companies could make rational economic decisions concerning the balancing of the costs of their externalities and the costs of reducing them. Such a system is right out of the free market playbook of the branch of the Republican Party that used to be personified by the late, great Jack Kemp before Mr. Kemp became enamored of “big government conservatism” and other such nonsense.
Cap and trade did, and does, have its flaws, the largest of which is what the aggregate limit on emissions would be and who would render such a decision, along with the potential for corruption that the latter would provide (which, one would think, would make the system especially attractive to the gang of louts that populates the ranks of our public servants in Washington), but, by and large, it is a perfect example of the application of free market approaches to societal problems that the Republican Party laughably argues it favors.

So it should come as a supreme irony that the first administration to propose a cap and trade system was the administration vilified by self-styled conservatives (with a great deal of justification, seeing as how Henry Wallace never captured the big prize back in the ‘40s) as the most liberal in our nation’s history. When Mr. Obama proposed such a system, opposition from Republicans, and from the quarters of the media that fancy themselves “conservative,” was vociferous. A cynic might say that such opposition was wholly partisan, but opponents to cap and trade, as proposed by Mr. Obama, had some valid objections. The largest and most legitimate of these objections was that, under the Obama plan, such rights would be sold by the government, which made cap and trade one of the largest tax increases in recent history, a tax increase that would hit our struggling industrial sector especially hard but that would also hit anyone who uses energy. Note that it is not necessary for the government to sell the rights for the system to work and that thus the only justification for the government’s selling the rights is the supposition that the government somehow has rights to pollute while productive economic actors don’t, a very questionable assumption indeed.

However, the Republican’s valid objection to cap and trade, the government’s using the system as a revenue generating cudgel, was largely eliminated not by Republicans but by Democrats from industrial states. Under the bill passed out of the Energy and Commerce Committee, 85% of the rights will be distributed free of charge. Thus, the major valid objection of the Republicans has been mitigated, indeed, largely eliminated, so further GOP opposition can be construed as simple intolerance of the notion that one of the best ideas of true free market conservatism has been adopted by an administration the Republicans consider anathema after their boy George Bush did nothing on, or actively opposed, this ultimately conservative idea. So opposition by Republicans to cap and trade is a desperate attempt to prevent their exposure for the hypocrites, or handmaidens of industry, the free market be damned, that they are. Or it could be just a negotiating ploy to get that last 15% of the rights to be distributed for free, but I’m betting on the former.

The existing cap and trade proposal still has flaws that transcend selling some of the permits. The most glaring is the government’s ability to issue new pollution permits once their price exceeds $28 per ton of emissions (up from the minimum initial bid price of those that will be auctioned by the government of $10 per ton). This amounts to the government’s putting price controls on pollution rights, and we all know how well price controls work. In this case, such controls would go a long way toward wrecking the entire system and thus causing it to fail in its goal of substantial reduction of emissions. A cynic might say that this “additional permits” provision was inserted by those Democrats who want such a free market system to fail. A cynic, in this case (as in many, if not most, cases) might be right. However, anyone who really believes in the free market, as opposed to members of a certain political party that like to mouth paeans to the free market when it serves other, more nefarious, goals, should support the cap and trade system despite its flaws.

True free marketeers ought to rejoice, rather than be sullen and down in the mouth, when Democrats seize our best ideas. What, after all, have the Republicans done for us lately?