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Morning Bell: Economics 101

Posted By Conn Carroll On May 13, 2008 @ 9:17 am In Ongoing Priorities | Comments Disabled

“The issue of economics is not something I’ve understood as well as I should,” John McCain famously admitted [1] to the Boston Globe late last year. And yesterday in Portland, Ore., McCain proved it by outlining a cap-and-trade plan [2] designed to reduce U.S. carbon emissions by 60% by 2050. The plan McCain outlined is only slightly better than the current cap-and-trade bill in the Senate, which reduces emissions by 70% by 2050.

In his prepared remarks [3] yesterday, McCain said, “For the market to do more, government must do more by opening new paths of invention and ingenuity. And we must do this in a way that gives American businesses new incentives and new rewards to seek, instead of just giving them new taxes to pay and new orders to follow.” The distinction McCain tries to draw here between a cap-and-trade system and a new tax on energy is completely erroneous.

If a cap-and-trade system works perfectly (and that is a huge assumption considering the high transaction and compliance costs, not to mention the rent-seeking from special-interest groups that is guaranteed to affect the policy’s implementation), then it functions in exactly the same way as an energy tax does. A 2008 Congressional Budget Office analysis [4] of the Lieberman-Warner bill stated that the legislation would increase overall federal revenues by $1.21 trillion between 2009 and 2018. In other words: McCain wants to raise your taxes by $1.21 trillion over the next decade.

But the damage does not end there. When you tax something, you get less of it. And in this case, that “it” is energy, a necessary component of every business in the United States. The Heritage Foundation released a study [5] yesterday estimating the impact of Lieberman-Warner on the U.S. economy and found that even under the most generous assumptions, the bill would inflict a cumulative loss in gross domestic product of at least $1.7 trillion. And this assumes that, as the Lieberman-Warner bill does, carbon capture and sequestration (CCS) technology will magically be ready for full-scale commercial use in just 10 years.

Advocates of a cap-and-trade system like to point to the success of the 1990 sulfur dioxide cap-and-trade system as proof the system works. But when those amendments to the Clean Air Act were passed, the technology for reducing sulfur dioxide emissions already was commercialized and widely implemented.

One telling difference [6] between McCain’s speech as delivered yesterday in Portland and the prepared remarks e-mailed to reporters Sunday was a call for punitive tariffs against countries that do not limit carbon emissions like India and China. These tariffs are a key part of the Lieberman-Warner bill:  All goods entering the U.S. would have to include a written declaration identifying carbon-reduction allowances acquired.

For example, if production of a product generates two tons of CO2, importers of the product would need to buy two tons of allowances from the world market. Negotiating and verifying these tariffs and allowances would kill free trade as we know it.

Trillions in new taxes, trillions lost in GDP and a huge global trade war. These are the costs of a Lieberman-Warner cap-and-trade style approach to global warming. And for what? Even if the U.S. meets Kyoto’s ambitious goals, the Earth’s surface temperature would be reduced by an imperceptible 0.14°F per 50 years [7]. You don’t need an economist to tell you this is a bad deal for the United States.

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URL to article: http://blog.heritage.org/2008/05/13/morning-bell-economics-101/

URLs in this post:

[1] admitted: http://www.weeklystandard.com/Content/Public/Articles/000/000/014/751tryie.asp

[2] cap-and-trade plan: http://www.nytimes.com/2008/05/13/us/politics/12cnd-mccain.html

[3] prepared remarks: http://www.johnmccain.com/Informing/News/Speeches/Read.aspx?guid=0b381abd-e573-459d-8716-fbd83ab62d8d

[4] analysis: http://www.cbo.gov/ftpdocs/91xx/doc9121/s2191_EPW_Amendment.pdf

[5] study: http://www.heritage.org/Research/EnergyandEnvironment/cda08-02.cfm

[6] difference: http://www.nytimes.com/2008/05/13/us/politics/13mccain.html?ref=todayspaper

[7] would be reduced by an imperceptible 0.14°F per 50 years: http://www.foundry.org/2008/02/07/morning-bell-avoiding-our-own-cap-and-trade-calamity/

[8] Federal spending reached an all-time high: http://au.biz.yahoo.com/080512/2/1qlzn.html

[9] government spending: http://www.heritage.org/research/reports/2012/10/federal-spending-by-the-numbers-2012

[10] new research shows: http://www.latimes.com/news/science/environment/la-sci-birds10-2008may10,0,2454876.story

[11] the third national vote in less than three years: http://www.latimes.com/news/nationworld/world/la-fg-bolivia13-2008may13,0,5840898.story

[12] reports: http://www.politico.com/news/stories/0508/10298.html

[13] Oxfam America: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/05/09/MN1110JA53.DTL&hw=farm+bill&sn=005&sc=410

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