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Greenhouse Gas Regulation Is Not a Mere 'Social Issue'

Lee Lane

President Obama fought to prevent curbs on new global warming regulations from being included in the recent budget deal. In doing so, he claimed that social issues like emission controls have no place in bargaining about government spending. In fact, EPAs planned emission controls raise issues very similar to those raised by other aspects of the on-going budget war.

The concern over future deficits springs from Americas main economic challenge: the country consumes more than it produces. In the long run, output per worker must rise if consumption is not to fall. One tried and true way to boost output is to increase the stock of capital that supports each worker. But deficits impede that remedy. They push the Fed to raise interest rates, which makes the funds that firms need to increase capital per worker more costly. Also, deficits may prompt the government to raise taxes, and higher taxes siphon off the savings from which investments can be drawn.

The effects of EPAs scheme to curb emissions of global warming gases are much like those of deficits. Both divert capital from efforts to serve the market to purposes decreed by government. The EPA plan to replace low-cost coal-fired power plants with more expensive energy sources would, in effect, compel firms to divert capital that might otherwise have boosted output per worker into investments designed to lower emissions.

This policy would make sense if the value of the damage from climate change that it avoided exceeded the loss in output from diverting the capital. But it will not. This judgment rests on three facts about the economics of climate policy. First, Cass Sunstein, now of the Obama White House, has rightly noted that the U.S. can adapt to climate change more cheaply than can most other countries. Second, total global emissions, not U.S. emissions, will affect the scale and pace of climate change, and U.S. emissions are too small a share of the total for the EPA rules to seriously lower the risks to which the U.S. is exposed. Third, even the most ardent proponents of emission controls concede that the Clean Air Act is a needlessly costly policy tool for this purpose.

It follows that EPAs global warming regulations would waste resources just as much as do bridges to nowhere and high-speed rail links for which no rider would willingly pay full cost. Indeed, those who pursue ideological goals or merely scheme to aggrandize some favored interest group may reach their goals through either a fiscal route or a regulatory one. Actually, regulation may in the long run pose as big a threat as wasteful spending. Its costs are easier to hide, and gains in fiscal discipline will increase regulations allure as a path for ideologues and rent-seekers.

President Obama seems to want to dismiss the matter by mislabeling resistance to wasteful regulation as a mere social issue. Of course, he has a strong motive for trying to deprive Congress of the leverage that the power of the purse grants it. If, though, members of Congress truly care about not wasting scarce national resources, rather than mere budget accounting for its own sake, they will use this leverage to the hilt in their efforts to block the presidents EPA power grab.

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