The Obama Permits Plan Won’t Work

If Barack Obama gets his way, America will have its own version of Europe’s Emissions Trading Scheme — a so-called cap-and-trade system. His budget anticipates a flow of $645 billion into the Treasury over the next 10 years from the sale of permits to emit carbon-dioxide, with electric utilities, heavy industries and oil companies bearing the largest direct burden, and consumers the ultimate cost.

The goal is to make it so expensive for polluters that they will switch to other, greener means of producing energy. But investment in greener technologies can occur only if investors can calculate the costs faced by their carbon-dioxide-emitting competitors. It is easy to figure out the cost of coal, but not so easy to guess the cost of permits. In the EU, permits, now selling for €10 per tonne, at their nadir were valueless — a glitch say cap-and-trade enthusiasts — and have sold for as much as € 30. Green technologies that were economic, and could attract capital when carbon cost €30, are uneconomic when the cost is far less.

In short, the volatility of the price of permits is a serious deterrent to investment in greener sources of energy, although a bonanza for traders. Which is one reason that complicated systems of subsidies for such sources are necessary.

The solution, of course, would be a tax on carbon, offset by lower payroll taxes. But unlike the hidden tax of cap-and-trade — the higher costs of doing business are passed on to consumers in the form of higher prices for electricity, petroleum products, and other goods — a carbon tax is out there for the voters to see. And given the choice between a stealth tax and a straight, visible tax, politicians will pick the former every time. Even if, as in this case, the stealth tax is less likely to accomplish its objectives — assured revenues for the exchequer and investment in green energy.

My own informal survey of coal-burning utilities and their representatives, and environmentalists suggests that a carbon tax of somewhere between $12 (almost €10) and $20 (€16) would be effective in reducing emissions, especially if the lower figure were to rise by inflation-plus-5% annually. Emissions-producers would have an incentive to clean up their act, and investors in alternative energy a firm target around which to plan. But direct taxation would require candour on the part of the president and Congress, and that is a resource in extraordinarily short supply.