Obama’s China Syndrome

It is looking less and less likely that President Obama will be able
to institute his vaunted cap-and-trade scheme for greenhouse gas
reduction through the back door of the budget reconciliation process.
This places him in a very awkward situation internationally in the
run-up to the Copenhagen conference on emissions reduction in December.
Moreover, it forces him to confront face-to-face the biggest problem in
any attempt to reduce greenhouse gases worldwide: China.

seems that the President’s initial plan was quite simple: use the
economic crisis as a pretext to push a cap-and-trade scheme through
Congress, then use that to push for action in Copenhagen. It hasn’t
worked out that way. The problem with any cap-and-trade scheme is that
it hurts middle America, because it works by making energy more
expensive. The greatest users of energy are the manufacturing states.
Furthermore, the poor use greater proportions of their incomes on
energy than those above them on the social ladder. Cap-and-trade
schemes therefore come with a huge cost attached. This has not escaped
Senators and Congressmen from states that would be badly affected,
which is why it looks like the scheme will be pulled from the budget
reconciliation process.

This makes things much more
difficult for the President’s plans. The virtue of the reconciliation
process from his point of view is that it passes on a simple majority,
and is not subject to filibuster. Now he will have to seek the 60 votes
necessary to back a stand-alone cap and trade bill, which will be far
more difficult. In order to secure passage, he may have to water the
proposal down considerably (he has already talked about regional
schemes to lessen the effect), which will in turn reduce the measure’s
effectiveness at reducing emissions. Moreover, a stand-alone bill will
be subject to the lobbying of rent-seekers like the US steel industry.

is where China starts to enter the picture. Energy Secretary Steven Chu
has told Congress that if the international effectiveness of American
industry is hampered by having to pay for carbon reduction, then the
Administration would have to look at leveling the playing field with
foreign countries that are not so hampered by introducing tariffs, and
that is something Big Steel is looking for. Interestingly, in itself
this is a repudiation of the famous agreement reached at Kyoto that is
more intense than anything advanced by the Bush administration.
President Bush simply said he wasn’t going to aim for the Kyoto
targets, which were agreed to affect only developed nations. Now, if
Secretary Chu is to be believed, not only will the US not meet its
targets (the cap and trade scheme will achieve nowhere near the
reductions Kyoto demands of the US), but it will punish countries that
the US agreed in 1997 should not have to reduce their emissions for
fear of harming their development efforts. China is unlikely to be
impressed by this threat of a carbon trade war.

And this is
the rub for Obama. Without an agreed domestic emissions reduction
program, he cannot go to Copenhagen and call for other high-emitting
countries exempt from emissions reduction under Kyoto – countries like
China, India and Brazil – to pull their weight. Yet there are only two
ways he can get a domestic emissions reduction program in place. Either
those other countries must agree to reduce their emissions (which
places the President in Catch-22) or there must be sanctions on those
other countries, which will ruin any chance of them agreeing to
emissions reduction at all.

Something has to give if
emissions reductions are to be achieved. Either the President and
Congress must between them be willing to sacrifice American industry to
preserve China’s competitive advantage in an emissions-restricted
world, or they must be willing to turn their backs on the benefits of
free trade and retreat into a protectionist wind-powered cocoon, and
thereby destroy the already weakened American economy in another way.
Neither sounds attractive.

Thought of in this way, the
prospects for any truly historic agreement on emissions at Copenhagen
are small. Of course, every such conference since Kyoto has been hailed
as the historic breakthrough, even as emissions have risen and
temperatures stayed the same. Given his options, it may be best for the
President to find a pressing reason to stay away from Copenhagen, and
try his luck with the reconciliation process next year. The Chinese,
meanwhile, can continue to blame America for failing to show
leadership. At least they’ll be happy.

Iain Murray is Senior Fellow in Energy, Science and Technology at the Competitive Enterprise Institute and blogs at www.openmarket.org.