A Maverick Climate Policy

Republican nominee for president John McCain recently returned from
a whirlwind tour of Europe meant to promote his global statesmanship.
In Europe, he met with leaders such as French President Nicolas Sarkozy
and former British Prime Minister Tony Blair, and even published
opinion pieces in major French and English newspapers that outlined his
global vision.

Central to that vision is global warming. In
his contribution to the French paper Le Monde, McCain gave the fight
against climate change equal billing with the war on terror. He warned
that Americans and Europeans “will hand over a much-diminished world to
our grandchildren” if they do not “get serious” about climate change.

who once admitted that he “doesn’t really understand economics,”
claimed the solution to the “looming threat” of climate change is to
“unleash the power and innovation of the marketplace.”

McCain’s plan fails to free anything. In fact, his big government
climate policy would mitigate not global warming but economic growth.

background: Four years ago, Senator McCain co-sponsored—with the
then-Democratic Senator Joseph Lieberman of Connecticut—the Climate
Stewardship Act, a so-called “cap and trade” program to reduce
greenhouse gas emissions. The Act was updated in 2007, and is now one
of several cap and trade proposals being debated in Congress.

all cap and trade policies, this would require central planning of the
economy. Starting in 2012, the government would assign emissions quotas
(caps) to thousands of industrial users and suppliers of energy.
Because emissions are synonymous with energy use, McCain’s climate plan
would be America’s first energy rationing program since the oil crises
of the early 1970s.

Businesses would receive part of their
emissions rations free of charge, but they would have to purchase the
rest from a government-run auction. Over time, emissions quotas would
get smaller, until 2050, when aggregate emissions are capped at about a
third of what they are now.

As the cap shrinks, companies
would have to find new ways to cut their carbon footprint. In any given
year, if a company’s emissions exceed its quota, it could avoid a
penalty by purchasing surplus emission rights from a business that beat
its target.

“leadership” on the global warming issue, so he must believe that his
Climate Stewardship Act makes for good politics. That’s likely to
change once voters learn more about the plan.

For one thing,
evidence suggests that controlling billions of tons of greenhouse gas
emissions from thousands of sources is too complex for government
bureaucracies to handle. For example, in Phase I of the European
Union’s Emissions Trading Scheme, which started three years ago, a huge
misallocation of emissions quotas led to a collapse in the price of
carbon from $40 to 40 cents. At that price, there was no incentive to
reduce emissions, which is why Phase I was an abject failure.

a functioning cap could have only a limited effect on emissions.
Energy-intensive industries would have every incentive to move their
operations to countries without carbon controls, like China. As a
result, McCain’s plan would cause a net reduction not of greenhouse gas
emissions, but of American jobs.

Again, the European example
is illustrative. Last month, the European Commission announced it will
probably exempt Europe’s steel, chemical, and power sectors from Phase
II of the Emissions Trading Scheme because “it is not in the interest
of the European Union that in the future production moves to countries
with less strict emissions limits.” But without those high-emission
sectors, what possible good can come of a cap and trade scheme?

maybe we should ask whose good? The Arizona senator’s plan might not
shrink emissions, but it will surely grow government. Under the Climate
Stewardship Act, companies must buy an increasing portion of their
annual emissions allotment from a government-run auction that would
raise billions of dollars.

McCain does not offset this
increase in government revenue with tax cuts elsewhere in the budget,
so government would get bigger. He has said that he wants to promote
“green jobs,” and indeed he would be doing so, by adding green

Ultimately, the burden of the bill would fall
upon American consumers. Industry cannot simply absorb the losses
imposed upon it by McCain’s energy rationing plan. Instead, as noted in
a 2007 Congressional Budget Office study, “much of the cost of a cap
and trade would be passed on to consumers in the form of higher prices
for energy intensive goods.”

In addition to mandatory
emissions caps, McCain’s bill would establish one of the largest ever
government research programs, to develop clean energy technology. But
government-funded research is unlikely to achieve a clean energy
technological breakthrough because politicians are poor judges of which
technologies show the most promise. If they were any good at picking
winners, they would probably be venture capitalists.

government has a long history of failed energy initiatives. Synfuels
have remained unaffordable for half a century, despite generous
government support. The 1970s energy crisis prompted Congress to
establish the Solar Energy Research Institute; a generation later,
solar power is still far from competitive.

And just last month the White House shelved plans for FutureGen, a multi-billion-dollar clean-coal power plant prototype.

Stewardship Act is a market-based solution to global warming. It is
anything but. He would have the government cap emissions; create the
emissions market and rake off the profits; and control clean energy

If he really wants to put forward free market
alternatives, they do exist. He could advocate the elimination of
government market interventions that obstruct emission reductions and
discourage the adoption of lower emission technologies.

wit, the way the electricity market works now—centralized electricity
production transmitted over great distances to consumers—is grossly
inefficient. This wasteful model will persist only as long as
government forbids competition in electricity transmission and
distribution. Deregulation of the electricity grid would allow
entrepreneurs to profit by making the system more energy efficient, and
thus more environmentally friendly.

Then there’s nuclear
power. It leaves virtually no carbon footprint, but plant construction
has slowed to a virtual halt because of the regulatory burden imposed
on nuclear energy by local and federal governments. Lightening this
burden would allow nuclear to compete properly with coal and natural
gas, again to the benefit of the climate.

effective free market solution is expensing—the removal of tax
penalties on capital investment. By allowing companies to write off
more of their investments sooner, expensing would encourage rapid
turnover of plants and equipment. In general, newer facilities are more
productive than older units, delivering more output per unit of input.
Expensing would accelerate carbon intensity decline—without dreaded
energy rationing.

Natural gas has half the carbon footprint
of coal. There is enough of it off the Gulf Coast to power American
industry for 30 years, but it remains locked away because the federal
government refuses to open it up to exploration. A certain someone
could pressure his colleagues to do just that.

Congress is
considering several climate bills, all of which include cap and trade
schemes along the lines of McCain’s American jobs killing proposal. If
the Arizona senator wants to be a true maverick, he should buck the
trend that he helped start—by supporting free market solutions to
global warming that might actually make a difference.