For national security conservatives, last week's State of the Union address was something of a wasteland. On the most pressing challenges facing the nation -- Iranian and North Korean nukes, Syria's meltdown, the war in Afghanistan, Al Qaeda's metastasization, the looming disaster of defense sequestration -- we were treated to a heaping portion of presidential mush, platitudes, and happy talk largely detached from the urgency of the historical moment. The overall effect will surely reinforce a dangerous perception that has increasingly taken root among friend and foe alike: America is waning. The world may be unraveling, but as far as President Obama is concerned, it's really not our problem. U.S. leadership is closed for the season. We're busy nation building at home.
Dismal as it was, there was a section of the president's address that may hold unexpected promise. Though wrapped in a bright green bow of climate change, Obama's discussion of energy could have important national security consequences. Of particular note was his embrace of an energy security trust fund. The proposal is the brainchild of an organization called Securing America's Future Energy (SAFE) and its Energy Security Leadership Council (ESLC) -- the "nonpartisan coalition of CEOs and retired generals and admirals" that the president highlighted in his speech.
In a report issued last December, SAFE and the ESLC called for the establishment of an energy security trust that would be funded by royalties derived from expanded drilling for oil and gas on federal lands. The trust would have one purpose only: supporting R&D on technologies designed to break oil's stranglehold over America's transportation sector, which accounts for about 70 percent of overall U.S. consumption.
Importantly, the underlying motive behind the SAFE/ESLC proposal had nothing to do with climate change and everything to do with national security and the country's economic health. Its authors properly see America's dependence on oil as a major strategic vulnerability. Even taking into account today's revolution in North American energy production, the United States for the foreseeable future will remain mired in a global petroleum market characterized by high and volatile prices, domination by an oftentimes hostile cartel, and the constant threat of disruption by geopolitical events in the world's most unstable regions. While convinced that America's current oil and gas boom must be fully exploited for the huge economic benefits it promises, SAFE and the ESLC also believe it must be leveraged for the long-term objective of breaking our dependence on oil once and for all -- thereby achieving true energy security and a measure of strategic flexibility that U.S. foreign policy has not known for decades.
National security conservatives should be sympathetic to the effort. As I've recounted elsewhere, while the idea of targeting Iranian oil sales as a means of pressuring its nuclear program has been around since at least 2007, the trigger on such sanctions wasn't pulled until 2012. For almost five years, both the Bush and Obama administrations were deterred from taking aggressive action due to fears that removing large quantities of Iranian crude from the market might produce a devastating price shock that would inflict major harm on the global economy.
That's five crucial years that were largely frittered away while Iran was allowed to earn hundreds of billions of dollars in revenue, dramatically enhance its enrichment capacity, and accumulate a stockpile of enriched uranium that with further processing could be used to build a handful of nuclear bombs. Five crucial years during which the pursuit of America's most pressing national security priority -- stopping Iran from acquiring nuclear weapons -- was dangerously constrained by our vulnerability to global oil markets. If that's not an intolerable situation for the world's leading nation to be in, I'm not sure what is. If there's a realistic strategy for doing something to mitigate it, we damn well should get started.
Equally worth noting, however, is the fact that when oil sanctions were finally imposed on Iran last year -- cutting Iranian exports by up to a million barrels per day -- a major disruption to global markets was successfully avoided in no small measure because of corresponding increases in oil production from the United States. As the race to stop Iran's nuclear program intensifies in coming months and further steps to curtail Iranian exports are contemplated -- perhaps removing as much as another 1.5 million barrels per day from the world market -- continued growth in U.S. production will only become more vital.
Now that President Obama has sought to co-opt the ESLC's CEOs, generals, and admirals for his purposes, it's vital to keep in mind the details of what exactly their energy security trust entails. Perhaps most importantly, the ESLC proposed that money for the Trust should come from new drilling in currently inaccessible federal lands and waters -- specifically to include the Pacific, Atlantic and eastern Gulf of Mexico areas of the Outer Continental Shelf (OCS), as well as the Arctic National Wildlife Refuge (ANWR). Moreover, the funds should be drawn from royalties that oil companies already pay as a matter of standard operating procedure when granted drilling rights in areas owned by the federal government. More pointedly, the trust as envisioned by SAFE and ESLC, explicitly ruled out the leveling of any new fees or taxes -- carbon or otherwise -- on oil and gas production. Finally, it's important to note that the money that would be diverted to the trust represents but a small fraction -- much less than 10 percent -- of the total new royalties that would fill federal coffers by opening the designated areas to drilling.
Perhaps not surprisingly, this isn't quite the Obama administration's vision for the Trust -- at least not yet. Most importantly, the administration is proposing that the money should be raised from royalties on existing production rather than from new production in the OCS and ANWR.
While Republicans should see the trust as an idea worth exploring and engage with Obama accordingly, they should hold fast to the ESLC's actual recommendation that explicitly links the trust to the opening of federal areas that were previously off limits. If the president wants to cloak himself in a proposal that "a nonpartisan coalition of CEOs and retired generals and admirals can get behind," Republicans should insist that he at least remain faithful to that proposal's core content.
The weight of the argument certainly favors Republicans. Economically, expanding oil production will serve as a huge boon to a still faltering U.S. economy. Strategically, it can play a vital role in stabilizing nervous global markets, especially in light of the looming showdown over Iran's nuclear weapons program. And politically, the reality is that no deal on an energy security trust is likely to get done unless Republicans get something significant on expanded drilling. Addressing that central pillar in the GOP's energy platform is probably an essential trade-off if Republicans are expected to overcome their deep-seated skepticism and go along with yet more funding for the Democrats' favorite hobby horse of green energy research.
Of course, it was the prospect of a win-win compromise that represented the genius of the SAFE/ESLC proposal in the first place. Republicans get expanded drilling. Democrats get more money for green energy. And in a single package, the sometimes competing goals of economic growth, reducing oil dependence, and lowering carbon emissions could all be addressed in a reasonable way. Something for everyone. That's the basis for broad consensus on a bipartisan energy deal that might actually do the country considerable good. If President Obama turns out to be truly serious about it, Republicans should be prepared to meet him half way.
One final note: For any Washington think tank, having the president of the United States specifically reference your organization in a State of the Union address and endorse one of its policy recommendations is the equivalent of hitting the jackpot. Major kudos to SAFE, an organization that I work with in an advisory capacity. Its success is a great reminder of the extraordinarily important contribution that privately funded non-profit research institutions can make to U.S. policy and the advancement of American interests.
Tom Pennington/Getty Images
I am in Panama for the second time in seven years, and it certainly is a very different place today. Skyscrapers are sprouting up all over the city and there has been explosive growth here. Constant sunshine, no earthquakes, fabulous location, peaceful Costa Rica to the north and a natural buffer of the Darien region to the south make Panama a stable and peaceful democracy. Americans are not perceived as an alien presence but a welcome partner. To be an American in Panama, especially an American who speaks Spanish, is to feel very, very welcome.
The Embassy estimates as many as 45,000 American citizens down here while the Panamanian government estimates as many as 250,000. One of the reasons for the discrepancy in estimates is that many Panamanians, for legacy reasons, possess U.S. passports and dual citizenship. In short, the U.S. legacy in Panama is obvious. At one point the U.S. had 35 military bases here to protect the canal from Japanese attacks in World War II, but today there are no U.S. bases in Panama. Many of the former U.S. bases have become urban renewal projects similar to the Presidio in San Francisco, and the new U.S. Embassy is built in one of these old sites.
Though this past year Panama's growth rate was 8.5 percent, services account for over three-quarters of the economy and English is a big need here. There is a shortage of skilled workers, and English is not as strong as it might be, or as strong as many locals think (although many call centers have been built here). The weakness of English in Panama is the legacy of dictator Omar Torrijos, who deemphasized English, going so far as to ban the teaching of English in public schools and stopping an entire generation from learning the language. Anecdotes tell of English teachers at public schools who have a hard time conducting visa interviews with the U.S. embassy in English.
For years, the Panamanians have been stalling building the last piece of the Pan-American Highway through the Darién region, and the U.S. has supported them for a number of reasons -- preventing the northward spread of foot and mouth disease, environmental worries, and perhaps other security concerns relating to narcotrafficking.
When I was last here, there were discussions about building an extension of the Panama Canal. The expansion is well underway, and ideally the expanded canal will be up and running in 2014 though more likely this will happen in 2015. You may have heard of the "Panamax" class of boats, but the expansion was needed for the "New Panamax" class of ships. At its narrowest portion, the canal can only run one way at a time right now for the largest ships, but after 2015 it will be able to run both ways at all points. The U.S. administered the canal as a public utility until 1999 and therefore hardly made any money. Today, the Panamanians run the canal like a business and it generates around $1 billion annually in profits for the Panamanian Treasury. This figure will increase considerably after the expansion.
In October, Congress finally approved the Panama Trade Promotion Agreement. It took way too many years under the current administration to sign this agreement. Though it is more a signaling effect, the upshot of this is the elimination of tariffs that were making it difficult for American goods to compete in Panama.
As far as security for U.S. interests in the region, there is little concern here over Hugo Chavez's influence except perhaps rumors of mischief with labor unions, and there are likewise no murmured concerns about Chinese influence. Nor do there seem to be any agricultural, mineral, or fuel resources that attract the attentions of China. In fact, Panama has kept official relations with Taiwan over China. I also asked about the ownership of Pacific and Atlantic ports through Hong Kong's Hutchison Port Holdings. It was met with a series of shrugs from U.S. officials and old Panama hands.
The FARC has used Panama's Darién region as a base of "rest and relaxation" but the current center-right government has taken a notably harder line than in the past. The FARC is almost exclusively interested in drug trafficking here, unlike in Colombia, where the group poses a threat to the state. According to U.S. officials, Panama yearly seizes about 40 tons of drugs in partnership with the U.S. There are also gang problems here but nowhere near the level of trouble that other Central American countries have been having over the last decade or so. Perhaps the biggest challenge to Panama's future is the weakness of its institutions and the persistent whispers of endemic corruption in the society. If Panama can confront this challenge, it will be on its ways to being as wealthy as the United States.
Two hours by plane to Mexico City, 40 minutes to San José (Costa Rica), less than an hour to Bogotá, and 4.5 hours to Washington. Panama, with a population of 3.4 million, is truly the hub of the region and a great American ally.
It's not easy to portray an international oil company in a sympathetic light, but Ecuadorean President Rafael Correa has managed to pull it off. At first blush, an Ecuadorean court's recent $8.6 billion dollar judgment against Chevron for environmental damages -- which made headlines around the world -- appears to be something out of an anthropology major's most garish fantasy: a multinational company despoils a pristine rain forest, sickening its indigenous residents, refuses to pay, and then receives its comeuppance in a court of law.
However, as one begins to strip away the layers, the case resembles more a shady attempt to shakedown a large multinational that says infinitely more about the shortcomings of Ecuadorean justice than it does about who did what to whom and who is responsible.
It would be impossible in this space to recount all the twists and turns in a case that has been in litigation for the past 18 years, but the basic facts are these: From 1964 to 1992, Texaco, which Chevron acquired in 2001, operated in northeastern Ecuador in a minority partnership with the state-owned oil company, Petroecuador. When the concession expired, Texaco left the country, but not before reaching a $40 million agreement with the government to clean up a portion of the area. It was then released from all future liability. Petroecuador has continued to operate in the area up until this day.
Chevron, which inherited the lawsuit when it acquired Texaco, has argued that Texaco met its obligations under the previous agreement and that any further remediation is the responsibility of Petroecuador. The plaintiffs have disavowed the agreement and assert Chevron owes billions more on behalf of Texaco, even though neither has drilled in Ecuador in almost twenty years. (Competing websites on the case can be found here and here.)
Yet for all the hoopla surrounding the case, it is unlikely that the plaintiffs will receive one cent from the judgment. It's not just that Chevron owns no assets in Ecuador, but that no responsible court anywhere in the world is likely to support seizing Chevron assets based on a verdict tainted by such flagrant political interference, judicial and plaintiff misconduct, and double standards of justice. (This week, a federal judge in New York extended a temporary order banning any collection of the judgment.)
Particularly damaging to any sense of due process in the case has been the actions of the Correa government. According to Investor's Business Daily, not only have "the plaintiffs been repeatedly caught in embarrassing acts of fraud and collusion with the Ecuadorean government and its courts," but, "It's been so bad -- an Ecuadorean judge was caught on candid camera telling plaintiffs the fix was in on his future ruling, and an ‘independent assessor' was caught on film outtakes colluding with plaintiffs -- that the entire court system is clearly compromised."
President Correa himself has been waving the bloody shirt, declaring Texaco guilty of "crimes against humanity," threatening judges with prosecution if they don't support the government's position, and offering the plaintiffs state resources to pursue their case.
Indeed, as if such flagrant trampling on the rights of the defendants were not enough, contrast the Correa government's untoward behavior in the Chevron case with that of another environmental crisis in a different part of Ecuador.
In the town of Tenguel, in the banana-growing province of Guayas, a local environmental activist, Esther Landetta, has been waging a lonely -- and dangerous -- battle against the ongoing contamination of four rivers as a result of irregular and unmonitored mining activities that have been discharging toxic waste into the waters, endangering the health of the local population and threatening their agricultural livelihoods.
Amnesty International has profiled Ms. Landetta's case as a result of the intimidation and death threats she has received for her campaign to get the government to stop the contamination of the region's rivers. Her pleas have fallen on deaf ears, however, primarily because she says the processing plant causing most of the pollution happens to be owned by a close advisor to President Correa, Galo Borja, a former Coordinating Minister for Strategic Industries and former Undersecretary of Foreign Trade.
Ms. Landetta told the Ecuadorean magazine Gestión, "I always said that, while this man (Borja) is high above in power, it will be difficult to have our rivers free of mining." She also said she secured a meeting with President Correa to discuss the matter, but that as she began to explain the problem, "He just got up and left, right in the middle of conversation. He would not hear anything."
Clearly, in Ecuador, such double standards indicate that the Correa government is less interested in seeking justice than it is in making sure the most expedient ox is gored. Attacking a huge oil multinational like Chevron makes for great politics at home and allows Correa to deflect scrutiny of his own state oil company's culpability in the matter. But turn the spotlight of justice around on the radical populist and all of a sudden they have another appointment that they forgot about. Of course, scapegoating has always been an essential part of the populist toolkit. But while targeting alleged, high-profile culprits may be entertaining to some, the resulting damage to rule of law and the interests of all Ecuadoreans is no laughing matter.
RODRIGO BUENDIA/AFP/Getty Images
By Phil Levy
Amidst the dire warnings and the pledges and the general cacophony coming out of the global climate talks in Denmark, how can we separate real progress from -- forgive me -- hot air?
It can help to set up our own scorecard. Let's set aside qualms about the way scientists have handled questions of global warming and stipulate that the goal is to reduce worldwide emissions of greenhouse gasses. Because these gasses float across national boundaries, this is a global problem.
We can ask the question dear to the hearts of secular economists: WOOPS -- What would an Omnipotent and Omniscient Planner Support? In this case, a wise and benevolent social planner would balance the costs and the benefits of global emissions reductions, set global targets, then allocate the reductions across countries so as to minimize the total costs. If the resulting burdens fell more heavily on China than on the United States, the U.S. Treasury would just cut Beijing a check to ensure an equitable outcome.
This does not seem terribly far removed from what the Copenhagen conference is trying to achieve, nor Kyoto before that. The problems lie not in the grand concept but in some familiar and gnarly political and international relations hurdles. Here are four.
1. Two-level games. Robert Putnam introduced the idea that any agreement must win over both international negotiators and their domestic constituencies. Senator Jim Webb (D-VA) just helpfully reminded President Obama of this in the climate context, warning in a letter that emissions reductions were not to be set through presidential promise, that "only specific legislation agreed upon in the Congress, or a treaty ratified by the Senate, could actually create such a commitment on behalf of our country." Bon voyage, Mr. President. As it happens, the Senate has expressed little enthusiasm for pending cap-and-trade legislation. If it is any comfort, our Australian friends are having similar issues.
2. Observability and Verifiability. If the United States and Europe restrict their emissions, but China and India do not, then global emissions might not fall, and could even increase. In any scenario, every nation would have a strong incentive to free-ride on an agreement, forgoing the costs of abatement while enjoying a cooler global clime. Yet verification is a particularly difficult issue. First, these emissions can be widely dispersed and difficult to measure. Much of the discussion has focused on the more manageable task of verifying specific emission reduction projects, but these will do little good if the emissions reemerge elsewhere in the country. Second, there is strong reluctance among developing nations to accept even a limited verification program. According to a New York Times report today from Copenhagen:
[A] document was said to be framed by Brazil, South Africa, India and China. It made no mention of specific commitments on their part and rejected outside auditing of projects to reduce emissions financed by those countries on their own.
In other words, no checking up on overall emissions, no checking up on home-financed schemes, just oversight on foreign-funded projects.
3. Intertemporal Commitment. Much of the climate discussion involves long-range targets, such as the promise that U.S. emissions in 2050 will be 83 percent below 2005 levels. In 2050, Barack Obama will turn 89 years old and even Robert Byrd may no longer be in the U.S. Senate. It is notoriously difficult to make such commitments across time. The United States Congress annually undoes its past promises to cut Medicare spending and to apply the alternative minimum tax more broadly. One way to make painful emissions reduction promises credible would be to front-load the pain, but that seems highly unlikely in the midst of the current recession.
4. International Payments. In the study of international trade, it is taken as given that countries will not just hand over money to each other. They may tweak tariffs, quibble about quotas, or rejigger regulations, but they will not just hand over cash. We assume this because such payments are relatively rare. There is aid, U.N. dues, and the occasional instance of reparations, but overall very few instances where large credits and debits are settled between governments. More specifically on the minds of developing negotiators is the observation that "past commitments under earlier climate pacts have largely gone unpaid."
Our benevolent social planner would likely find cutting developing country emissions more globally efficient than cutting in the developed world. But that then brings demand for high-stakes compensation, which can be politically challenging. From the Wall Street Journal:
U.S. climate envoy Todd Stern has called a developing-country suggestion that industrialized countries contribute as much as 1% of their gross domestic products "untethered from reality."
The U.S. and the European Union have said they are willing to provide their "fair share" of a total global figure of $10 billion a year from 2010 to 2012.
That amount "would not buy developing countries' citizens enough coffins," said Lumumba Stanislaus Di-Aping, Sudan's U.N. ambassador, who represents the Group of 77, a body that includes China, India and Brazil.
The challenge for Copenhagen is to overcome not one but all of these major political obstacles. My favorite expression of skepticism was in the Financial Times:
When questioned, most Danes expressed enthusiasm for the conference even if some are cynical about the likely outcome. "They will do just enough to make it look like they're doing something," said Christian Jensen, a student.
AXEL SCHMIDT/AFP/Getty Images
Overall, Obama's Asia policy has been largely driven by events and domestic priorities rather than by an overarching strategic vision. The Obama team had to closely coordinate with China on financial matters in response to the financial crisis. Passing a cap and trade bill at home means that we need China to sign up to a global climate change pact; Americans will chafe at a costly bill if the world's largest carbon emitters do not agree to carbon reductions.
The Obama team attempted a new policy on Burma. The idea is to find a way to engage the military junta which would strengthen relations with the Association of Southeast Asian Nations, of which Burma is a member. But the policy change has been overtaken by events.
Aung San Suu Kyi was unfairly punished when an American swam across a lake to her residence. And the junta began a new round of repression, as its leaders jail and harass political opponents in the run up to their 2010 "elections." Obama could not radically shift Burma policy. Rather, adjustments to our relations with ASEAN and Burma have been only marginal. There has been some more contact with the junta. And as part of the broader attempt to build stronger relations with Southeast Asia, the administration signed the Treaty of Amity and Cooperation (TAC). These and visits to Southeast Asia by Secretary Clinton and her deputy, Jim Steinberg, demonstrate a desire to deepen American engagement with that region. It is unlikely that engaging Burma or signing the TAC will increase America's regional influence.
There are several Obama Asia policies that have been surprising. On a positive note, the Obama team has given much greater attention to the Japan alliance than I had expected. Secretary Clinton's first stop in Asia was in Tokyo, which eased Japanese concerns that they were in for another round of "Japan passing." Since the Democratic Party of Japan took over last September, Obama officials have visited Japan frequently to get a sense of how to deal with a party that has never before governed. The Obama team should be commended for trying to find its way with this inexperienced and eclectic ruling coalition.
Other policies should give us pause. For example, Obama is sticking to his campaign promises on trade, which means we have no trade policy. The Korea-U.S. Free Trade Agreement has been collecting dust in the Congress. The rest of the region, however, is not standing still. China seems to sign a trade agreement a minute and South Korea is moving forward on an FTA with the EU. If this continues, not only will our economy be disadvantaged, but our regional leadership will also suffer. While the Obama administration has done a fine job showing up to Asian multilateral meetings, without new trade proposals it has shown up empty handed.
A second troubling policy is the absence of any agenda on Taiwan. The Obama team was effusive in its praise of President Ma when he was elected in March 2008 and they applaud his attempts to ease tensions with the Mainland. The Taiwan president is doing what he thinks Washington wants - easing cross Strait tensions. But there was an implicit bargain with Taiwan that we are not upholding. We were supposed to strengthen Ma's hand by strengthening our ties to Taiwan. The Obama team is not helping Ma. We have not sold any arms to Taiwan even as China has continued its arms buildup across the Strait. And Obama has no plans of yet to deepen economic ties as Taiwan goes forward with a China FTA.
Third, the bluntness with which the team has downplayed China's miserable human rights record is an unfortunate break with past administrations' practices. Secretary Clinton announced that she would deemphasize human rights concerns on her first trip to China. This was followed by the president's refusal to meet with the Dalai Lama when the Tibetan spiritual leader was in Washington last month. The administration has also been silent on Uighur repression and will not meet with Uighur leader Rebiya Kadeer. It does not help either country for us to pretend that we are indifferent about Chinese respect for human rights, when in reality we have a huge stake in China's political liberalization.
Overall, despite a regular barrage of criticism by Candidate Obama directed at President Bush for his supposed neglect of Asia (never a fair criticism), the Obama team has not wowed the region with new ideas or lavished it with attention. During Bush's first year, his administration had offered the largest arms package ever to Taiwan, was well on its way to substantially upgrading ties with Japan, and was negotiating a diplomatic breakthrough with India of historical significance. Then-U.S. Trade Representative Bob Zoellick was negotiating free trade agreements with Singapore, Australia, and Korea.
The criticism of the Bush administration was that it was "distracted" by the war on terror. The Obama team is learning that fighting a war saps a nation's energy and attention. Now in office, the Obama team can see that the threat from Islamic extremism is very real. The Obama team may have really believed that they could "fix" Afghanistan, disengage from Iraq, and then move on to "re-engaging" the rest of the world.
As Obama is learning, it is not so easy to "move on" when you are at war. No president can disconnect a major foreign policy issue such as war from other foreign policy issues. Asians have a stake in America's Afghanistan policy. A loss in Afghanistan would have stark consequences, as friend and foe alike would question our resolve, and Islamic extremism would rear its head again in Southeast Asia.
Obama's Asia team must be finding that during wartime, presidential attention is the scarcest of commodities. Obama has no choice but to focus on "the wars we are in," often at the expense of the Obama team's hopes for a grand "re-engagement" with Asia.
Win McNamee/Getty Images
By Christian Brose
Admittedly, I'm no climate science expert, but I found this piece from Jim Manzi pretty darn persuasive as to why Waxman-Markey -- the American Clean Energy and Security Act -- is a bad bill. It's well worth your time in light of Congress' vote on the bill tomorrow.
By Phil Levy
There's an internet fight going on about how to limit emissions of greenhouse gases. In Corner #1, we have the Cap-and-Trade Kids, advocating limits on the amount of gases emitted. In Corner #2, we have the Pigou Clubbers, arguing for a carbon tax. Backing cap-and-trade are President Obama, Senator McCain (during the campaign), the European Union, and much of the rest of the world. Backing the carbon tax are ... Andrew Sullivan and a bunch of economists, nominally led by Harvard's Greg Mankiw. This seems a little lopsided.
What's interesting is that there are those arguing that the fight should be called off before a punch is even thrown. The winner will have to take on The Status Quo, and cap-and-traders want to go into that fight unblemished. Since they're the only ones with a chance, the argument goes, the Pigou Clubbers should toss in the towel now.
This raises some interesting questions. Is there any difference between cap-and-trade and a carbon tax? Is cap-and-trade the only politically viable approach? And would either have a chance against The Status Quo, who is drawing new fans in the midst of the economic downturn?
First, there is a difference. Cap-and-trade can do a very good impersonation of a carbon tax when we know the demand for emissions with certainty, when we do a great job of regulating, and when we auction off all the emissions permits. If we're uncertain about the demand for producing emissions, if it is hard to keep tabs on what various emitters are doing, or if politics intrudes into the process of handing out emissions permits, then the two approaches veer apart.
For ease of use and immunity from political meddling, the carbon tax is the clear winner. Taxes can be applied early in the fuel distribution process, which makes the logistical task much easier. That sort of upstream application would make attempts at political interference much more transparent, as well. So what about uncertainty? The big critique of a carbon tax is that it cannot guarantee a country will come in under a pre-set emissions cap. If the desire to pollute is really, really high one year, we could find that a given tax won't serve as a sufficient deterrent, and we'll blow past our limits.
Europe, though, has had the opposite problem with their cap-and-trade system. In the first phase of the program, they printed more permits to pollute than anyone wanted. That drove the price of permits near zero, deeply annoying anyone who had paid up for the right to pollute. It also meant that the system was ineffective in restraining pollution. That would be hard to do with a carbon tax.
The Cap-and-Trade Kids argue that, whatever the economic merits, their approach is the only one with a political chance. But why? Carbon taxes have certainly been seen as a political third rail, at least since President Bill Clinton dropped a proposed BTU tax in 1993. People don't want to have to pay more for energy. But how does cap-and-trade overcome this critique? If it's going to rein in eagerness to pollute, it will have to raise the cost of pollution. It may be possible to win support by pretending this won't happen, but it's worth thinking hard about whether such deception is a sound basis for creating a major long-term policy.
And what of the big ruckus with The Status Quo? Australian cap-and-traders just postponed their fight. Prime Minister Kevin Rudd gave a number of reasons, including the need for business certainty (a plus for a carbon tax, by the way) and the impact of the global financial crisis. Does it make any sense to raise taxes, implicitly or explicitly, in the midst of a recession?
Actually, it might. It would depend what we did with the revenue. Imagine we used it to finance a cut in payroll taxes. That would make it more expensive to pollute, but cheaper to hire people. That could be a nice combo. I wouldn't bet much on the political chances of the carbon tax, but it's got enough promise to at least go down swinging.
Shadow Government is a blog about U.S. foreign policy under the Obama administration, written by experienced policy makers from the loyal opposition and curated by Peter D. Feaver and William Inboden.