By William O’Keefe Setting a price on carbon emissions is, supposedly, the main objective of current efforts to pass national climate legislation. Yet, it’s hard to make an intellectually honest argument that the system outlined in the Kerry-Boxer bill would deliver that goal. In fact, it is a certainty that its 2020 goal cannot be achieved while maintaining a healthy economy. Given its heavy reliance on international offsets and the massive giveaways of free allowances, the proposed cap and trade scheme would actually send a mixed price signal -- hindering the legislation’s very purpose. This predicament is not unique. In fact, a national energy dilemma that transpired 75 years ago has implications for the current Congressional climate policy debate. In the 1930’s, the Roosevelt Administration faced a major problem with overproduction. This issue stemmed from a particular rule of resource ownership -- the law of capture -- which applied to mobile below-ground assets such as oil, gas and water. Under the rule, a person who extracted the resource could sell all he or she could pump, regardless of whether it may have migrated from beneath someone else’s land. The rule promoted oil discovery, but also waste. Landowners surrounding an oil strike would quickly drill their own wells and begin to pump it out, in the process reducing the underground pressure that enabled easy development of the resource. In the end, overproduction helped turn energy booms to busts and made a lot of America’s oil unrecoverable. The sudden rush meant “competitive suicide” for the oil industry, as independent and major producers pumped so much oil it was being sold below cost. Worried that the situation threatened the “utter collapse” of the U.S. oil industry, Roosevelt’s Interior Secretary, Harold Ickes turned to Interior Department lawyer, J. Howard Marshall II-- who would later become an oil titan. Marshall first considered putting in place price controls, though, soon discovered that a price floor set by government fiat would only put more “hot oil” on the market. So, instead, he implemented a plan to manipulate demand by requiring certificates of clearance for legally produced oil shipped in interstate commerce. A federal tender board would track the certificates at the refineries and pipelines -- the choke points for oil demand and production -- to make sure they squared with quotas set for oil leases. And to keep imports from blowing this scheme to smithereens? A special import tax of 21 cents per barrel. Marshall’s plan eliminated much of the waste by giving participants a more straightforward, reliable method of regulation. Therein lies the lessons for today’s climate debate. Any emissions plan must encompass all participants. Individual state attempts to control hot oil failed because producers in other states weren’t held to the same standards. Likewise, climate plans that cap one nation’s emissions but leave others unchecked create the opportunity for leakage. It’s best to apply “regulations to the few at the passes rather than the multitude at the sources (or the even larger multitudes at the markets),” according to Marshall. His regulation wasn’t at the wellhead or gas station but at the choke point of the refinery and pipeline. The choke point for control of human atmospheric carbon is clearly not its emission from millions of tailpipes or homes or small businesses tailpipes. Keep the accounting simple. The genius of the tender board and certificates was that a barrel of oil at a refinery or pipeline could be matched to a barrel of production at a wellhead. Most cap and trade plans aren’t so simple, involving numerous types of certificates, like offsets and allowances, requiring all sorts of accounting for emissions, some of which may be totally unverifiable. Yet, the cap and trade program at the center of both the Senate and House climate bills flout these principles. The 111th Congress needs, instead, to take a page from the “hot oil” hubbub and implement a climate policy that’s transparent, direct, and effective. William O’Keefe, chief executive officer of the George C. Marshall Institute, is president of Solutions Consulting Inc.
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