Fools Rush In

The Council of Economic Advisors (CEA) just issued its annual “Economic Report of the President,” including a chapter on environmental policy. The report's language sent mixed signals on how the Bush administration plans to address questions of economic growth and environmental regulations. As the administration addresses questions of climate change and responds to intense pressure from environmental alarmists, three principal options appear possible. The first (and least likely) is that the administration will wait for more and better climate science research to be conducted before moving ahead with any regulation. This would be consistent with the president's rhetoric to date. But political pressures on the administration to do “something” on climate change may trump a prudent regard for, and major investment in, science. Another possibility would yield an “emission intensity” standard. Under such a program, any given unit of economic output – e.g., percentage of Gross Domestic Product, possibly broken down by industry or market sector — must be produced with a decreasing intensity of carbon-fuel requirements. Regrettably, such a step would prejudice against affordable coal and favor expensive solar and wind energy. The goal of such a standard is to prompt continued improvement in U.S. industrial energy efficiency. Such a standard would be less problematic than severe Kyoto-like restrictions on energy use, for the simple reason that, unlike a cap, an emission-intensity standard permits growth. Potential snags that would need to be addressed, however, include how to allow for weather patterns such as El Nino or changes in levels of automation, altering the amount of energy required to run the economy year-to-year. The third possibility is the least attractive: an emissions trading scheme. And some clues in the CEA's report suggest the White House might endorse such a system, albeit a “voluntary trading” scheme for carbon dioxide (CO2). However, an actual cap would likely replace this voluntary system. Trading programs are dangerous because they simply have no impact unless they are mandatory. Why? Tradable emission credits are worthless without scarcity, and there exists no scarcity without a cap (the Congressional Budget Office confirmed in a June 2001 report that cap-and-trade serves as an inefficient energy tax). Therefore, a “voluntary” scheme merely creates the framework – and wealthy lobby — for inevitable mandatory energy use reduction. Alarmism Over Sound Science The administration already has expanded costly programs designed to improve our understanding of climate science; and it is pumping millions more dollars into technological developments so that any regulations, if necessary, would place a minimal burden on economic activity. Despite this, administration officials believe that, without some regulatory program, they will be perceived as “doing nothing” to address fears of climate change. Unfortunately, actions taken to “do something” about climate change fears could end up being tragically similar to actions taken by the earlier Bush Administration in the form of its 1990 Clean Air Act (CAA) amendments. In that case, the administration rushed to regulate before the science on acid rain — designed to ensure an educated regulatory decision — had been completed. The 1990 amendments instituted an acid rain program and required expensive controls. At the time, the amendments' skeptics counseled that a government assessment of the promise of potential controls was due within months — at a cost to the taxpayer of nearly a half a billion dollars — so that maybe regulatory actions should wait until they could be predicated upon scientific knowledge (as opposed to speculation and conjecture). Logic lost: ten years later, that study's findings – that controls would not reduce lake or river acidity — were proved correct. Despite that, the measures were lauded in this year's CEA report as a paradigm for future environmental regulation. Given the pressure to produce a climate proposal before the president's upcoming trip to Asia, an emissions-intensity program (housed in the Department of Energy as opposed to the EPA) would be a minor victory for sobriety over environmental alarmism. Indeed, several Senate Republicans, in bill S. 1294, offer this approach. Better yet, the president should invert an old adage as he waits for the science to mature: “don't just do something, stand there.”