Inslee’s Cap and Trade: All Economic Pain, No Environmental Gain

Governor Jay Inslee has proposed a cap-and-trade program for Washington State that would function much like a carbon tax—except with less accountability. Even on its own terms, suppressing emissions at the state level makes no cost/benefit sense. As the Governor’s own analysis indicates, this is a move to plug a budget deficit. Finally, Washington State residents shouldn’t fall for his rhetoric when downplaying the significant impact they will see in energy prices.

Inslee’s Plan

As the official website explains:

Inslee’s proposed Carbon Pollution Accountability Act requires, for the first time, major polluters to pay for their carbon pollution. It creates a program to cut emissions to make Washington healthier and incentivize Washington’s innovative businesses to meet the needs of the growing clean energy economy.

Through this act, Washington will set an annual limit on the total amount of carbon pollution that emitters may release into the air. Major emitters will need to purchase “allowances” for the pollution they emit. Each year, the number of available allowances will decline to ensure emissions are gradually reduced. This provides emitters the time to adjust and make choices about how to manage their business. They can either invest in cleaner technology and improve their operation efficiency or pay for allowances that will diminish in supply and increase in cost over time.

The program will generate about $1 billion annually which will be used for transportation, education and disadvantaged communities.

As I explained in a previous post, environmental groups are licking their lips over the revenue that would flow into Washington State from a carbon tax (or, in Inslee’s case, a cap-and-trade program).

I suppose it should be refreshing that Washington residents are not being sold a bait-and-switch, where political officials assure them the carbon revenues will be used to offset existing taxes. No, by design this is going to be (largely) used to plug Washington State’s budget hole. Note that Washington is currently in the throes of a legal challenge because its legislature has failed to live up to constitutionally required funding of education.

State-Level Carbon Programs Make No Cost/Benefit Sense

It is well known in policy wonk circles that if, say, the United States and Europe enacted a carbon tax or cap-and-trade program without participation by China and India, then the effort would be largely symbolic—even using the suite of climate models featured in IPCC reports or the Obama Administration’s task force on the “social cost of carbon.” On its own terms, global climate change is a global problem. Even if we concede for the sake of argument that government limits of carbon dioxide emissions are a sensible way to tackle the issue—which I don’t—then it would be vitally important to get all major governments around the world to agree to binding and verifiable targets. Otherwise the jurisdictions with the carbon penalty would hurt their own economies while the unregulated jurisdictions emitted even more as business relocated.

Now if imposing unilateral carbon programs on a national level doesn’t make sense, it is particularly ludicrous to do it at the level of an American state. The hike in fuel prices—which Inslee’s own advisors estimate would be “7 to 15 percent in 2035,” a figure that industry groups think is optimistic—would discourage new businesses from locating in Washington State over the coming years, and would also push some marginal businesses already there over the edge into bankruptcy. Moreover, the drop in global emissions coming from a reduction in emissions from Washington State over the coming decades would be a rounding error. How big of a rounding error? If Washington State completely ceased emitting carbon dioxide today, the temperature “savings” by 2100 would be 0.0023 °C. Yes that’s right—2 thousandths of a degree by 2100. And because Inslee’s plan doesn’t lead to a total cessation of co2 emissions, its temperature savings will be even smaller.

Furthermore, Inslee’s proposal compounds the economic waste involved by earmarking a portion of the revenues to funding “green” projects. Even on its own terms, the textbook case for a carbon tax or cap-and-trade program is to correct a “negative externality” in market prices. But once that alleged “market failure” is addressed through a properly calibrated penalty on emissions, the textbook treatment says the government should allow the market to function. There shouldn’t be picking of winners and losers on top of the penalty. There is no reason to suppose that the political officials running Washington State can make better forecasts about future energy technologies than investors in the private sector.

Inslee Having It Both Ways on Economic Pain

Perhaps the most duplicitous aspect of Inslee’s proposal is his attempt to have it both ways. On the one hand, he says the measure—or something like it—will gain bipartisan support because the legislature knows that they could really use an extra billion dollars a year to shore up their finances.

Yet when pressed about how his constituents will deal with the rising energy prices that his proposal would obviously entail, this is how Inslee responded, according to a ClimateWire story (subscription required):

While acknowledging that some of the plan’s costs might be passed on to consumers, Inslee said that one aim of the program was to shift the state and its residents to a less carbon-intensive economy.

“It’s impossible for [companies] to pass along the cost of carbon when consumers aren’t using any,” he said.

This is an unbelievably flip response from someone who openly admits his proposal will raise almost a billion dollars in its first year alone. By the same token, if Inslee pushed through a 200% tax on beef sellers, it would be impossible for that to be passed on to consumers if they stopped eating meat. That would hardly be consolation for the hapless Washington residents.

Conclusion

Governor Jay Inslee’s proposed cap-and-trade scheme showcases everything wrong with the program of government carbon mitigation. Far from being calibrated to an optimal cost/benefit correction to a “negative externality,” it is openly a revenue sop. Even on the terms of the climate change debate laid out by proponents of such measures, a state-level initiative makes no sense. Inslee’s own team admits the proposal will drive up fuel costs, and his glib reply is that people in Washington can always stop using carbon.