TCS Daily

A Mountain of Money

By Brian F. Mannix - October 9, 2003 12:00 AM

From 1974 until 1984 the federal government kept 4.8 billion gasoline rationing coupons locked away in a hollow mountain near Pueblo, Colorado. Printed at President Nixon's order during the Arab oil embargo, these coupons were never usable; for one thing, the Treasury Department designed and printed them in a hurry, using a familiar off-the-shelf portrait of George Washington... yes, that portrait. As a result, if you put one of these coupons in a dollar-bill change machine you got four quarters back. Of course, had the government actually imposed gasoline rationing, the exchange rate for coupons might have risen to considerably more than a dollar per gallon. And the ensuing fight over who was entitled to receive all those pictures of our first president would have been contentious indeed.


Yet that mountain of money is but a molehill compared to the fortune that will be up for grabs if the government ever imposes carbon rationing. The Kyoto protocol and its progeny -- including the McCain-Lieberman bill (S.139) and various "micro-Kyoto" bills circulating in state legislatures -- would cap, or ration, not only gasoline, but most other carbon-based fuels as well, including diesel fuel, jet fuel, natural gas, and coal. While none of the proposed programs use paper coupons, the cost of the carbon allowances, or "C-rations," would be built into the price of fuels and into the price of electricity and all the other products and services that use them. With a cap for U.S. carbon emissions of about 1.5 billion tons (carbon-equivalent) per year, and a market price anywhere from $20 to $200 per ton (depending on how binding the cap is), the value of C-rations distributed by the government would be in the range of $30 to $300 billion dollars per year.


The cost of all those C-rations will be passed on to U.S. consumers -- a fact that advocates of carbon rationing typically neglect to mention. Most "Cost of Kyoto" estimates look only at the real-resource cost (reduced GNP) of carbon rationing, yet this represents only about 10 percent of the total cost to consumers. The other 90 percent is the price consumers pay to holders of the coveted C-rations. In that sense carbon rationing is like a tax -- it produces revenue -- but the revenues from carbon rationing will not go to reduce the budget deficit. Instead, the C-rations will be allocated to industries and organizations that find favor with the government.


We have a good idea of what that process will look like. From 1974 to 1981 the Federal Energy Administration and the Department of Energy allocated "oil entitlements" to determine who would get the benefit of access to price-controlled domestic crude oil; at its peak, the value of these oil entitlements reached about $15 billion per year. As would be the case with C-rations, the allocation of oil entitlements did not physically move fuel around the country; it really just re-allocated money. And the monthly "entitlements list" quickly became an off-budget slush fund for every special interest that could afford a lobbyist. Small refiners got money for being small; Caribbean refiners got money by electing to be "domestic" only when it paid off; New England got an extra allowance for using residual oil; Michigan got moved to New England because . . . well, because John Dingell is from Michigan. A Director of Hearings and Appeals got to hand out ad hoc entitlements as he saw fit, and got to dine at Washington's finest restaurants. Mark Rich, the fugitive who was famously pardoned on President Clinton's last day in office, made his fortune in the chaos of trading entitlement-controlled oil. And consumers, who paid for all this, got to wait in line at gas stations.


Will carbon rationing be any different? The McCain-Lieberman bill would put the allocation process in the hands of the Environmental Protection Agency and the Commerce Department, plus a special "Climate Change Credit Corporation." But before any such process even exists, the contest for C-rations is well underway. The government keeps an inventory of CO2 emissions, which will be the starting point for allocating C-rations. Companies who reduce emissions voluntarily (i.e., for whatever reason) strive for official recognition of the reduction, so that in the future they can claim extra C-rations. On September 30 the Chicago Climate Exchange conducted the first voluntary auction of carbon allowances; yet the only reason someone would pay money now for such allowances is that they might one day be converted into mandatory C-rations.


Once rationing is imposed and the price of energy goes up, there will be many more claimants getting in line. Can the government refuse to give C-rations to schools? To hospitals? To the armed forces? To local police departments? To mass transit? To manufacturers facing foreign competition? The average consumer will have no place in this contest, except as a victim.


The politics of carbon rationing cannot be understood by looking just at theories of climate change, or at the serious economic losses that rationing would cause. Rationing will extract tens to hundreds of billions of dollars of revenue per year from consumers, and the fate of that revenue is what will drive political decisions. Advocates of rationing argue that we should start a program with modest goals. But once a feeding frenzy for C-rations begins, modesty and restraint will be very scarce indeed.


Brian Mannix is a Senior Research Fellow, The Mercatus Center at George Mason University, Arlington, Virginia. ( )


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