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What Does Data Show About the Economics of Regional Cap-and-Trade?

Posted in Alternative Fuels, Climate Change, Entrepreneurs, Legislation, Natural Resources and Environment, Renewable Energy, Sustainable Business

Back before the recession, there was a major push in Washington State to adopt a state carbon cap-and-trade program as part of Washington’s membership in the Western Climate Initiative (WCI).  The argument was heated, and like most things these days tended to split on party lines with a gulf between the two.  Democrats generally argued that in the absence of federal action, the state had to act to prevent or reduce climate change, and doing so ahead of federal action would allow the state to lead in developing the new technologies that would later spread to the nation as a whole and potentially be exported beyond the United States.  Republicans argued that adopting a statewide or regional cap-and-trade program would put Washington at a disadvantage relative to parts of the country without cap-and-trade, that it would raise the price of basic necessities, such as heating oil, to the prejudice of the poor and middle class, and that it would stifle Washington’s economy.  After the 2008 election, there was an additional argument that we would soon have a national cap-and-trade program, so there was no need for Washington to get out ahead of that curve.

Then came the recession, and no politician wanted to be anywhere near an argument that they might have thought about doing something that might hurt, or might be thought to hurt, the state’s economy or jobs.  So cap-and-trade in Washington – either Washington – was dead.

I’ve thought that there are a lot of reasons to make sure that the price of carbon fully accounts for the costs carbon imposes on the larger society.  I have also criticized the supporters of cap-and-trade for what seemed to me to be arguments that shouldn’t be taken seriously. In short, I have been glad it was not my decision.

Now, though, I would really like to see some economics master’s degree student do a careful analysis of a recent report coming out of the Regional Greenhouse Gas Initiative (RGGI).

RGGI is an cooperative of nine Northeastern states – Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island and Vermont – which set out to reduce power sector CO2 emissions 10 percent by 2018 through a cap-and-trade program.  The program was implemented in 2008, and recently released a report claiming that they have experienced a 20% greater reduction in per-capita carbon emissions than non-RGGI states.  The report also claims that the RGGI states have had twice the growth of per-capita GDP than non-RGGI states.

For any economic study, you would have to read the details and carefully examine the assumptions in order to know whether it is biased or accurate.  I’m not qualified to render economic opinions.  But I did look at how unemployment in the RGGI states has compared to unemployment in the United States as a whole over the last four years.  You can do it yourself.  While the unemployment rate in Rhode Island has been above the national average – both before and after the RGGI was adopted – and New York has recently trended up, every other RGGI state appears to have had an unemployment rate below the national average throughout the period that the cap-and-trade program has been in place, and throughout the recession.

That raises some questions that merit further study.

  • Are these results anomalous or did the opponents of Washington’s cap-and-trade proposal overstate its potential effects on the economy?
  • Why didn’t the RCCI program have more adverse impacts on jobs in the RCCI states?
  • Were there other adverse effects that need to be taken into account?

There may well be answers that suggest that the rhetoric of the Washington State debate was on point.  It may be that the drop in the price of natural gas over the period from 2008 to the present made it a particularly opportune time for electrical utilities in the RCCI states to move away from coal power generation, and made meeting the initial carbon reduction goals easy.  It may be that the fact that the RCCI states were not, by and large, the focus of the housing bubble made their employment statistics look better than the national average.  It may be that their progress since 2008 is not sustainable over a longer period.  It may be that the WCCI program, which was not primarily directed at power generation sources of carbon, would have been much more onerous.

On the other hand, it may be that in the larger scheme of things, there will always be forces that essentially swamp the economic effects of increasing the price of carbon, so that in the end, it will often be the case that it is impossible to attach blame for economic ills to increasing the cost of carbon.  If so, it would be important to understand that.

In what I do, which is primarily litigation, decisions are based on evidence.  They also tend to be based on looking back at a contested series of events.  But at the end of the day, in litigation, judgments are made based on facts, not prognostications.  On the other hand, in the political arena, where people make new laws, legislators are required to try to figure out what the future consequences of their decisions will be.  The prognostications of Washington’s cap-and-trade debate are essentially unavoidable, because the question in any new legislation is necessarily one trying to predict the future.  That leads to the sort of rhetorical divide that we see in Washington’s debate on cap-and-trade, because both parties are operating without actual facts to rely on.

The RGGI experience gives us some evidence.  It is undoubtedly not conclusive, but it is still worth looking at carefully.  What we know is that humans continue putting the carbon that was sequestered in fossil fuels over millions of years back into the atmosphere at a vastly faster rate than it can be re-sequestered.  We know that climate change is upon us, in the form of stronger storms on a more regular basis.  So we know that there are consequences to not acting to increase the cost of carbon and thereby make alternative sources of energy more competitive.  If the adverse consequences of raising the price of carbon have been overstated or not fully understood, it is important to know that.