How to Screw Your Constituents

| Wed May 13, 2009 12:52 PM EDT

Matt Yglesias watches the sausage grinder at work on the Waxman-Markey climate bill and is especially outraged at so-called moderates who insist that a large fraction of carbon emission permits should be given away, rather than auctioned off:

The moderate bloc [...] has portrayed itself as concerned with the climate crisis but worried about the tradeoffs with short-term economic growth. But the concession they’ve forced here doesn’t do anything to boost short-term growth. Instead, whereas auctioning the permits would have made rich people bear most of the cost of reducing emissions, by giving the permits away you make poor people bear most of the cost.

The environmental impact of the two methods is similar, and the overall costs are similar. But the moderates acted swiftly and decisively to reallocate a portion of the costs onto the backs of the poor. And they’ve done so specifically under guise of looking out for the interests of the working class. They ought to be ashamed of themselves.

In a way, this is even worse than Matt makes it out to be.  As I understand the politics of the situation, the problem is basically regional: a lot of moderates come from the midwest and the south, where they rely on coal-fired plants for the bulk of their electricity.  These plants emit more carbon than even other fossil-fueled plants, and way more carbon than hydro or solar plants.  And to make it even worse, most of these states have done very little to become more energy efficient over the years.  Put all this together and the bottom line is that carbon pricing hits them much harder than it hits, say, California.

This means that any bill that raises the price of carbon is disproportionately painful for the midwest and the south.  So they want relief.  Now, you can argue that global warming is such serious stuff that they shouldn't be given any, but let's face it: this kind of regional politics is pretty standard stuff.  It's hard to get too bent out of shape about it.

Except for one thing: it won't work.  The theory here is that giving away permits to coal-fired plants means they don't have to raise prices.  After all, the permits are free.  And this means that voters in the midwest and the south won't start hauling out their pitchforks and throwing out incumbents because their electric bills have gone up.

But guess what?  The electric utilities are going to raise their prices anyway.  Kevin Drum explains:

The economic theory involved is a little hairy, but those permits have a value on the open market, and that means that in many cases marginal producers can make more money selling their permits than by producing power. They'll only be willing to produce power if they can raise prices enough to make the power-producing business more profitable than the permit-selling business, and eventually everyone will jack up prices to follow suit.

This may sound abstract—even a bit fantastical—but it's absolutely real. In fact, when permits in phase one of Europe's ETS system were handed out for free, electricity prices rose and power companies pocketed a windfall profit (which Britain's Department of Trade and Industry estimated at about $1.1 billion a year in the UK alone). Dale Bryk, an attorney with the Natural Resources Defense Council (NRDC), puts it bluntly: "If you ask them point-blank if they'll charge customers for free permits, they won't tell you. But they know they will."

If moderates were demanding free permits because they wanted to keep electric prices in their states low for a few years while they work on converting to new power sources, that would be one thing.  We could argue about whether it's a good idea, but at least it's normal, understandable stuff.  But that's not what they're doing.  Prices are going to go up regardless, and the free permits do nothing except provide windfall profits to operators of coal plants.  The moderates pushing this "compromise" either don't understand basic economics, in which they case they need to learn some, or else they understand it perfectly well and like the idea of screwing their constituents in order to provide a bonanza for coal plant operators.  In either case, yes, they ought to be ashamed of themselves.

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