An Earth Day Fable by David Montgomery

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The April 22 anniversary of Earth Day inspired, predictably enough, an article in the New Yorker bewailing the dissipation of the environmental sentiments of the 1970s, epitomized by the ignominious defeat of the Waxman-Markey bill to combat global warming in 2010. I learned from the New Yorker that several new books and studies attempt to diagnose the reasons for this dreadful moral failure and devise new strategies to accomplish the goal. Fortunately, the New Yorker goes in for long articles, and I was educated about the content of the books without having to read them.

The lesson taken from these books by the New Yorker is that the youthful energy of Earth Day led to passage of landmark legislation – the Clean Air Act, the Clean Water Act, and the Endangered Species Act. Then in the 21st Century, the movement sold out by making an alliance with big business to combat global warming.

According to one of the books, “the original Earth Day remains a model of effective political organizing .… educational, school-based, widely distributed, locally controlled, and mass-participatory.” But then the environmental movement became “an established presence in Washington,” willing to make deals with business and Republicans (the author does admit that all the grand successes came when Republicans were President).

In the New Yorker narrative, aging heads of established environmental organizations became enamored of “cap-and-trade, a system of tradable permits for carbon emissions … because that seemed to be the best way to bring business on board.” They had funding that no one dreamed of on Earth Day and spent it lavishly to promote climate legislation.

Yet they failed – and nothing resembling an explanation is offered, beyond the post hoc, propter hoc fallacy of observing that becoming insiders and deal-makers happened first, then the grand game was lost. Nevertheless, the author wishes for a return to the grass-roots organization and events to recharge the enthusiasm of Earth Day and produce — something.

The failure of the Waxman-Markey bill, the cap and trade legislation on which the New Yorker focused, is easily explained without reverting to grand theories of grassroots organizing versus insider deal-making. It was a bad piece of legislation, and it turned into a Christmas tree of favors to get votes from basically indifferent legislators. Unfortunately, there were not enough favors to go around once the sharks smelled the bait of free allowances and Waxman and Markey tried to incorporate all the contrary agendas of the environmental left.

The sentimental haze of time has allowed many who should know better to refer to Waxman-Markey as a cap-and-trade bill. It did contain a cap-and-trade system, but most of its 1400 pages were taken up with additional regulations, subsidies, and exemptions that eliminated most of the potential benefits of cap and trade. I was one of the pioneers advancing the concept of cap and trade as environmental policy, and I can tell the difference.

A brief explanation of cap and trade and list of provisions of the Waxman-Markey bill is necessary for understanding of what happened. Cap and trade starts with a cap – for example, the bill required that in 2020 carbon dioxide emission must be no larger than 83% of 1990 levels. EPA would then print out emission permits, possibly in one-ton denominations, equal to the limit. Every source of emissions would have to turn in a permit for each ton of carbon dioxide it released in 2020. Emissions would be kept under the hard cap by the fact that only that many permits would be printed. Permits were called “allowances” in the bill, and I will use that name from here on.

The price of allowances would be established by supply and demand. Sources that could control their emissions at a cost less than the market price would do so, and those that could not would purchase allowances. The market price would adjust so that actual emissions equaled the limit.

Cap and trade does just one thing: it puts a limit, chosen by legislators, on greenhouse gas emissions, and it provides just the right incentives for the private sector to choose the least cost ways of achieving that reduction.

That is all theory, and it works as the Title IV program of the Clean Air Act that cleaned up Acid Rain proved. The Acid Rain program was able to get the votes to be included in the Clean Air Act Amendments of 1990 because it replaced a very badly designed program, foisted on the public by Senator Robert Byrd (D-WV) to protect his coal industry. Unfortunately, three new factors made it impossible to repeat that success with climate policy.

First, the electric utilities responsible for most sulfur emissions, the precursors of acid rain, were already regulated, and cap and trade was an unambiguous improvement. Instead of expensive and for many unnecessary controls, the utilities got flexibility to choose the cheapest way of complying – which was mostly stopping the use of Senator Byrd’s high-sulfur coal. In particular, there was no real fight about how to decide what limit to apply to each utility, since they already were required to reduce their emissions.

Limits on carbon dioxide were new. There was no historical regulatory limit to refer to in allocating allowances. That turned the fight for allowances into a free-for-all. Not only were the actual sources of carbon dioxide fighting among themselves for allowances, but every other interest group with any hint of a claim to be doing something about global warming claimed a right to some as well.

Barbara Boxer let the cat out of the bag when she observed that the bill contained “hundreds of billions of dollars worth of allowances that Congress could allocate to deserving purposes” – such as re-election.

The second reason for failure is that cap and trade imposes a very visible cost on every form of energy. Translating from dollars per ton of carbon to dollars per gallon of gasoline or dollars per kilowatt hour of electricity is a matter of simple multiplication, and everyone involved made those calculations loudly and visibly. There were large disagreements about what the price of carbon would be, but there was no way to hide the fact that a cost there would be.

The entire history of environmental regulation, by means of regulatory agencies that impose specific emission limits on cars, trucks, powerplants, and industries, is one of concealing the cost of those regulations and convincing gullible voters that “business” is paying all the cost and consumers get a free ride. That is just about impossible with cap and trade, and even harder with a carbon tax.

The third reason is that the environmental movement did lose something in the years after Earth Day. Instead of concentrating on the environmental problems – clean air and water and endangered species – it became the voice for a whole range of inconsistent causes: ban nuclear power, mandate energy efficiency, promote renewable energy, use ethanol even if it is worse than gasoline, limit population, get rid of fossil fuels, punish the oil companies, and on and on. Just cutting greenhouse gas emissions in the most cost-effective way was no longer enough to satisfy the desires of the environmental left.

So, Representative Waxman’s first task in the House of Representatives was to see how much he could sweeten the deal for just enough Democrats to get the bill passed. He did this by distributing allowances to buy votes and adding regulatory measures and subsidies for favored industries and environmentalists varied causes.

So allowances were divvied up politically. Some were auctioned to provide revenues to be spent on politically-salient causes, of the rest electric utilities got the most, 15% were to be given to industries that could prove they were threatened by competitors in countries doing nothing about global warming, 10% went to states to spend on renewables and energy conservation, and other free allowances went to autos, efforts to capture and sequester carbon dioxide, and forestry programs.

Distributing allowances arbitrarily or politically does not alter the economic merits of cap and trade, as long as it is not done in a really dumb way, but it does have a great deal to do with political success or failure.

But this was not enough. Contrary to the New Yorker fantasy of a sell-out to the big business desire for cap and trade, the bill was bulked up to its 1400 or so pages by adding substantive provisions that environmentalists demanded in order to support cap and trade.

These included a requirement that utilities to meet a certain percentage of their load with electricity generated from renewable sources; like wind, biomass, solar, and geothermal, promotion of small-scale generation with extra allowances, taxing utilities in addition to cap and trade to create a carbon sequestration research fund, subsidizing specific CO2 reduction technologies singled out in the law, setting CO2 emission standards for coal-fired powerplants even though it would have no effect on total emissions, requiring utilities to support electric vehicles, mandating stricter building codes to reduce energy use, mandating tougher energy efficiency standards for lighting and consumer goods, requiring tighter fuel economy standards for cars, and setting industrial energy efficiency standards.

None of these provisions do anything to reduce emissions further than the cap and trade program would do on its own. To the extent that they do anything at all, they simply require that more costly ways of reducing emissions be substituted for the least cost ways that the price of allowances gives everyone an incentive to adopt.

The result was fine-tuned to pass the House of Representatives by a slim margin, but it then ran into the problem that there are two Houses of Congress, and Senators have very different constituencies and political debts than their House colleagues. There is no way to construct an explicit and effective piece of comprehensive legislation to limit greenhouse gas emissions that give enough electorally significant benefits to a majority of both the House and the Senate.

That’s partly because the cost is explicit and now and the benefits are uncertain and far off. So there are very few members of Congress who care about dealing with global warming explicitly and effectively. If the Senate leadership had modified the House bill to attract a majority of Senators, the result would have been defeated when it went back to the House. That is the fundamental reason we do not have cap and trade. Few in Congress cared about global warming per se, and there were not enough favors to go around to buy their votes.

All the tears shed about failure to pass the Waxman bill flow from an inability to tell the difference between good and bad legislation. Claim that a bill will fix global warming and its passage becomes a moral imperative, no matter that the bill has become a monstrous collection of favors, duplicative regulations and bad ideas. Not to mention being utterly ineffective on a global scale, except in the fantasy world that has China, India and others being so impressed by our naive willingness to make futile gestures that they have a come to Jesus moment and reverse their strongly held policy of growth at all costs.

A true return to Earth Day would be for environmentalists to drop their overriding interests in social engineering and moralizing about ineffective solutions, and turn back to caring about the problem itself. They have the opportunity to do that now, by backing a simple carbon tax to fund completion of the tax reform agenda. We will see if they pass the test.

David Montgomery is retired from a career of teaching, government service and consulting, during which he became internationally recognized as an expert on energy, environmental and climate policy.  He has a PhD in economics from Harvard University and also studied economics at Cambridge University and theology at the Catholic University of America,   David and his wife Esther live in St Michaels, and he now spends his time in front of the computer writing about economic, political and religious topics and the rest of the day outdoors engaged in politically incorrect activities.

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