More on Waxman-Markey

Over at the National Review, Stephen Spruiell and Kevin Williamson list their top 50 reasons for voting against the Waxman-Markey climate change bill (tip: Volokh Conspiracy). (I'm on a roll with global warming posts - earlier posts here and here.) I agree with much of what they write, but there's a number of points with which I disagree. Also, their first reason displays a stunning ignorance of economics:

1. The big doozy: Eighty-five percent of the carbon permits will not be sold at auction — they will be given away to utility companies, petroleum interests, refineries, and a coterie of politically connected businesses. If you’re wondering why Big Business supports cap-and-trade, that’s why. Free money for business, but higher energy prices for you.

There are two reasons this is bad economics. First, as the Coase Theorem points out, if there is an externality problem (say, excess pollution) and transaction costs are low, private parties will bargain to an efficient level of the externality. Furthermore, the end result is independent of the initial property right delineation - ignoring income effects. If polluters receive the right to pollute, pollution recipients will pay polluters to reduce their emissions, and if polluters do not have the right to pollute, they will pollution recipients to allow pollution. Either way, according to the Coase Theorem, the same level of pollution will result.

The Coase Theorem cannot solve the climate change problem, however, since transaction costs are too high (transaction costs are the costs of reaching an acceptable agreement). Thus cap-and-trade schemes are a way of lowering transaction costs. The government presumably sets the cap at pollution levels that recipients would bargain to, and, in theory, the scheme enables polluters to reduce emissions at the lowest possible cost.

Anyway, whether the government auctions off the permits or gives them away, the same amount of pollution will be eliminated. The only difference is that auctioning the permits grants the government a windfall revenue increase, and giving them away grants businesses a windfall. Given that we are in a recession, I don't think that granting businesses a windfall is such a bad thing.

The second display of poor economic reasoning is the claim that although Waxman-Markey will be "free money for business," it will lead to "higher energy prices for you." This sentence is not even internally consistent. If businesses actually made money by receiving permits, why would they charger higher energy prices? Businesses typically lower their prices when they are profitable.

Many commentators have said that Waxman-Markey will lead to higher energy prices. This will happen only as the government lowers the cap and forces businesses to buy permits or to implement pollution-reducing technology. And this probably won't happen for a few years. If the government made polluters buy permits, price increases would be more immediate.

Why I Don't Like Politics...

I recently blogged about why I think the Waxman-Markley climate-change bill is a bad idea. (The House, by the way, approved the bill last Friday.) As I mentioned in the previous post, I don't think that climate-change regulation is undesirable per se. I instead think that (a) the costs of this ill-conceived cap-and-trade scheme will outweigh the benefits and that (b) a carbon tax is far preferable.

Anyway, the breakdown of how members of the House voted on this bill reminded me of the vote on the stimulus package. No Republicans voted for the stimulus bill, while only eight Republicans voted for Waxman-Markey. These outcomes are stark examples of why I hate politics.

I find it very hard to believe that virtually all Republicans thought that both the stimulus and the climate-change bills were terrible. It is thus seems clear that, on these important issues, Republicans voted strictly along party lines. If party membership determined their congressional votes, members of Congress did not necessarily vote according to what they felt would be best for our country. And that, in my view, is a major problem. (To be fair, I'm equally certain many Democrats simply voted along party lines.)

The two-party system does more harm than good. The parties largely determine how members of Congress will vote on each issue. If party members stray, their reelection funding source may be cut off. With Waxman-Markey, conservative bloggers are absolutely livid about the eight Republicans who voted for it, saying that they have betrayed the principles of the Republican party (you know, the principles that President Bush and Congress upheld so firmly over the last eight years - principles like low government spending and limited government interference).

Maybe it seems silly that I'm upset about the backlash against Republicans who voted for Waxman-Markey, since I'm not in favor of the bill. But I would much prefer politicians who vote on the basis of what they think is best. Sure I may disagree with their votes, but at least I'm disagreeing with their ideas - not with what the party thinks best.