So Right, and yet So Wrong...

Ricardo Bayon on July 3, 2009 Comment

In an opinion piece on the recent passage of climate change legislation is the US House of representatives, everyone's favorite opinion master, Thomas Friedman, gets it both remarkably right and dead wrong.

He is right in arguing for passage of a similar climate bill in the Senate, right also in calling on Republicans, moderate Democrats, and "We the People" to get out there and push for passage of a similar bill in the Senate. But his understanding of what is needed in terms climate change legislation, and his argument that a tax is simpler and "would have made much more sense than this Rube Goldberg contraption" (by which he means cap-and-trade), are just plain wrong.

In theory, a carbon tax is simpler than a cap-and-trade scheme in that the government handles everything (from setting the price for carbon, to collecting the money). And, since the government sets the price, we all know where the price is coming from. But anyone who thinks taxes are straightforward in practice has either conveniently forgotten the trauma of sorting through tax documents each April 15th, or else has an army of lawyers and accountants handling things for them.

Which brings me to my first point. There is a common argument that one of the many problems with cap-and-trade is that the system can be gamed and that it will only benefit "evil speculators on Wall Street". Truth is taxes, too, can be gamed. In fact, large taxpayers spend hundreds of millions of dollars every year hiring people who are specialized at "gaming" the tax system. They call it finding loopholes, but it amounts to the same thing. And, while cap-and-trade may benefit some speculators, taxes will benefit an army of "evil tax-dodging lawyers." Who is to say which is worse?

Yes, in theory taxes are straightforward, but as Yogi Berra once said: In theory there is no difference between theory and practice, but in practice there is..."

Secondly, I worry about a system where government sets the price for anything. As we saw in the battle to get the Waxman-Markey bill passed by the House of Representatives, our governments are good at parsing the needs and desires of special interests. They aren't so good at making hard decisions. Do we really want the price of carbon set every year (or, worse still, every few months) by government agencies responding to political pressures? Do we really think that will ensure that we get the "right" price of carbon? More likely the price will be either too high (damaging economic growth), or too low (not achieving the greatest amount of reductions possible). There is a reason why most countries don't rely on governments to tell them how much anything is worth. They are constitutionally incapable of doing it. And they can't adjust prices quickly enough to respond to changing situations. Much has been made about how the price of carbon declined recently as a result of the economic slowdown. But to me, that is precisely what they should have done. The slowdown leads to less emissions in and of itself, and this change in the underlying fundamentals needs to be reflected in the price of carbon. It was a good thing that the price of carbon was adjusted. Imagine trying to accomplish a similar outcome with a tax!

Besides, this is in many ways a false dichotomy. The truth is that we will need both well-designed market-based approaches to this problem, as well as taxes if we are ever to hope to truly address climate change. But to say that anything cap-and-trade can do, taxes can do better is to not really understand the strengths and weaknesses of each.

Friedman has forever advocated against cap-and-trade in favor of taxes. And he has consistently been wrong on this. Unfortunately in this case, (because I think he often gets a lot of things right), lots of powerful people listen to him and take his every word as fact.

Finally, Friedman lays into the Obama Administration, saying:

"Something feels very calculating in how he has approached this bill, as if he doesn't quite want to get his hands dirty, as if he is ready to twist arms in private, but not so much that if the bill goes down he will get tarnished. That is no way to fight this war."

Here again, he is missing the point. Word on the Hill is that the administration lobbied extensively (but quietly) to get this bill passed. It is, some say, thanks to this arm-twisting that it squeaked by with no votes to spare (it passed by the minimum margin possible). The fact that he hasn't been overly public about it (yet) is, I think, a good thing. He needs to keep his powder dry for the bigger battle (the one coming up in the Senate). The fact that he has saved some political chits until now actually gives me comfort. That is PRECISELY the way this war needs to be fought: shrewdly and keeping an eye on the prize which is to win not just the big battles, but also the war.

So, while I agree --as I often do-- with Friedman's conclusion (that we all need to do all we can to get climate change legislation passed), I don't agree with his reasoning here. I'm not saying the Waxman-Markey bill as it passed the House is perfect (far from it, see my previous post), but it's problem is not that it tries to establish a cap-and-trade system. That is the part it actually got right!

I just wish people as influential as Mr. Friedman could see that...