How Would Cap-And-Trade Affect Transportation?

At National Journal’s Transportation blog, Lisa Caruso asks:

How would different modes of transportation fare under a cap-and-trade regime for reducing greenhouse gas emissions? Which modes would be winners and which would be losers, and what can the different modes do to lessen their impact on the environment? Are market incentives enough to bring about sufficient cuts in the estimated 30 percent of greenhouse gas emissions that come from the transportation sector?

The idea of using market mechanisms such as cap-and-trade or a carbon tax is a good one, in principle. Instead of government attempting to micromanage all sources of carbon emissions—and inevitably attempting to pick winners and losers—the market approach is to put a price on carbon and allow competitive market forces to sort out the least-cost way to reduce the output of carbon throughout our economy.

Alas, that simple and efficient approach seems increasingly unlikely to be implemented. Congress and the Obama administration are moving steadily toward a version of cap-and-trade that combines the worst of micromanagement and pork-barrel politics. If implemented, it would make this country poorer while reshaping transportation in undesirable ways.

For evidence, take a look at the cap-and-trade bill introduced recently by Reps. Ed Markey and Henry Waxman. Its 648 pages spell out in excruciating detail an enormous number of regulations, subsidies, and other interventions. Instead of letting the market sort things out via trading of emission allowances, the bill would also try to micro-manage everything, on the assumption that Congress “just knows” that certain outcomes are the right ones. That regulatory complexity is an open invitation to interest groups to lobby for changes, and gain access for their pleas via campaign contributions, etc. Adding to this pressure is the issue of how many emission allowances will be handed out for free, and to which carbon emitters. This kind of cap-and-trade approach offers more opportunities for congressional fund-raising than the U.S. tax code—and that’s really saying something.

As Steve van Beek points out, an upstream cap-and-trade system would be far simpler and could, in principle, be designed to substitute for the massive micromanagement approach proposed by Markey and Waxman. But that still leaves open the possibility of horse-trading among energy producers for free allowances at the starting point. Far cleaner would be a straightforward carbon tax, with the same rate applying to all emitters from day one—no exemptions. A recent report from the Congressional Research Service (Feb. 23, 2009) details the advantage of that approach.

Because either a carbon tax or a cap-and-trade system would likely impose huge costs on U.S. households (due to the increased cost of energy), the best use of the revenues would be to rebate them entirely to households. The relatively higher prices for some kinds of energy would still cause changes in behavior, as individuals and businesses shifted their energy uses to minimize their costs, but the blow to the economy from lost purchasing power would be offset by per-household rebates.

Finally, whatever approach is taken to reducing the carbon-intensity of the US economy, it’s vital that we pay attention to the cost-effectiveness of various control measures. Both the Intergovernmental Panel on Climate Change and the well-respected McKinsey study (December 2007) use $50/ton as a benchmark for cost-effective measures. McKinsey found that CO2 emissions could be drastically reduced by 2030 by using only “low-hanging fruit” measures costing no more than $50/ton.

In surface transportation, a forthcoming Reason Foundation study due out later this year will assess about a dozen proposed CO2-reduction proposals against this standard. You may be surprised at how few pass this test.