Thursday, July 02, 2009

Cap & Trade Details

In reply to this recent post concerning the lack of apparent equity market reaction to Friday's stealth passage by the House of a 'cap and trade' bill, a reader wrote this note to me,

"Re your post on your Reasoned Skeptic blog on the cap and trade bill, I'd be interested in you doing a blog post on your thoughts on allowing a border tax adjustment for imports from countries with lax carbon standards. You may have noticed that the House bill includes a border adjustment provision; it was slipped in late last week, despite arguments against one from the Obama administration. If you're not familiar with border adjustment, attached are comments by Representative Inglis arguing for border adjustment, and slides by AEI on carbon border adjustment (14-18 re border adjustment and carbon; 1-13 re background on border adjustments)."

To be honest, no, I did not know this. I have yet to read the detailed article from last weekend's Wall Street Journal, and this sort of fine point isn't necessarily gleaned from televised coverage, little as there was, given the weekend news cycle and my own aversion to viewing such weekend coverage.

The reader sent me two attachments discussing how such a proposed 'carbon equalization' regime would work, which I appreciated. Suffice to say, as I expected, after quite a bit of dense, mind-numbing detail on these schemes, both documents admitted to the two things I had already guessed, prior to reading them.

First, the sheer implementational difficulties of such a regime are represent real obstacles to their successful operation. Think months'-long delays, if not years, as complicated carbon-usage forms are completed, submitted, and then overwhelm some federal department charged with administration of the whole mess.

That's the optimistic view. The reality, as with our recent experience with mortgage finance 'liar loans,' is likely to be wholesale fraud, deceit, and the employment of various 'consultants' to complete applications in such a manner as to gain favorable treatment, knowing the ability of government to investigate each application and enforce penalties for fraud will be de minimis.

Then there's the real problem- a GATT-based challenge at the WTO. This sort of issue was my first instinct in believing this importation-adjustment process to be practically unenforceable.

To get to the plainly-written crux of the matter, this will come down to a question of whether it's legal, in the context of world trade agreements, for one country to enforce its pollution penalties on producers in other countries importing into the first country.

Similar to the phenomenon of labor-intensive, low-value-added work moving to low-labor-cost countries around the world, despite various attempts of high-wage countries to stop it, it's logical to expect high-carbon-cost countries to lose employment, GDP and tax revenues from both to low-carbon-cost countries, irrespective of attempts to stop this flow.

I just don't believe a lot of complicated US law involving various carbon-usage adjustments is going to fly. Before it's sorted out, the economic uncertainty and resulting loss of jobs and economic activity from the US to poorer, 'dirtier' countries, will probably cause a serious rethink of the whole idea.

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