Who Pays for Cap and Trade? -- II from the Wall Street Journal

March 13, 2009

We don't mind an intellectual fight, and in a nearby letter, two economists at Resources for the Future take aim at our Monday editorial on how the costs of cap and trade will be distributed across regions and income groups. Dallas Burtraw and Richard Sweeney call it "a bait-and-switch argument." Mr. Sweeney added on his blog that "The Wall Street Journal is an idiot."
That's how the global-warming clerisy debates these days, but we'll try to take their argument seriously. They claim that by citing state-level CO2 production data, rather than CO2 consumption data, we exaggerated regional differences. This is distortion disguised as verisimilitude.

It's true that discrepancies in per capita emissions -- 73 tons in West Virginia versus 12 tons in Rhode Island, for instance -- reflect the fact that carbon-heavy power plants and industries are based in some states and not others. It's also true that electricity crosses state lines, and that -- as cap and trade raises prices -- a consumer in California who buys a car built in Michigan, say, will bear some of its carbon costs.

However, one reason we didn't mention per capita consumption figures is that, strictly speaking, they don't exist. The economic literature on the incidence of cap and trade extrapolates carbon consumption by region from the government's Consumer Expenditure Survey. But nearly every human activity has some carbon cost associated with it. Consider the emissions of "consuming" french fries at a fast food restaurant:

There's CO2 in fertilizing and harvesting the potatoes; processing, freezing, then transporting them; and still more when they're cooked. Now multiply that by the entire economy. One danger of
a carbon tax -- especially if it is poorly designed -- is it that its costs will ripple throughout complex energy chains in ways that economic modeling can't quantify.

Still, in the spirit of comity, we'll mention the work of Messrs. Burtraw and Sweeney, who wrote a 2008 paper finding that cap and trade disproportionately hits the poorest households and that those effects are exacerbated in some regions over others. That was our argument too.

Of course, ultimately the incidence of a carbon tax depends on how the revenues it takes from the public are redistributed back to the public. Yet Congress, being Congress, is incapable of designing even a marginally efficient system -- and given environmental politics and state carbon realities, the losers will be concentrated in noncoastal regions that rely most on coal and manufacturing.

And therein lies the value of emissions production data. Not only does cap and trade tax at the point of production (even if some of those costs are ultimately borne by consumers elsewhere), but it also shifts economic activity away from those industries.

The states that produce the most emissions are going to see the strongest ancillary declines in income and increases in unemployment. The top carbon states -- in absolute, not per capita, emissions -- include Ohio (No. 3), Pennsylvania (No. 4), Indiana (No. 7) and Michigan (No. 9).

What really drives cap-and-trade idolaters like Messrs. Burtraw and Sweeney to schoolboy taunts is their fear that the American people might figure this out. Then their dreams of having government command a huge new chunk of the economy might collapse.