TCS Daily


Carbon Caps Amidst the Crisis

By Craig Marxsen - March 4, 2009 12:00 AM

President Obama, promising to go forward with cap and trade carbon controls, may be dooming any eagerly awaited recovery. Watching recent behavior of the major stock indexes and the absence of improvement in transportation and housing suggests slim chances for renewed prosperity under our now totally democrat-controlled government. Our government seemingly remains devoted to Al Gore's compulsion to get America off carbon fuels. Gore's "planet emergency" takes precedence over our economic emergency, and melting polar ice trumps the economic meltdown as a policy issue.

Gasoline prices previously topped $4 per gallon partly because government contrived a shortage by regulating and threatening to regulate even more. According to James Pethokoukis, a recent George C. Marshall Institute study of the Lieberman-Warner cap and trade approach might add more than $2.50 per gallon to the price of gasoline. A rational person must hesitate to purchase a new automobile knowing that gasoline may soon cost more than $6.50 per gallon. Besides, who wants a car made by a company teetering on the edge of bankruptcy? James D. Hamilton thought rising gasoline prices largely triggered the present financial crisis and the automobile industry (together with housing) led the economy into its recent decline. Costly electric cars, with their expensive maintenance requirements, look unpromising as an easy substitute for the cars Americans currently have. The would-be American automobile buyer, with income declining, must speculate on how long government can continue life support for American automobile manufacturers. Will it turn out to be a rare orphan of a machine?

Waiting for revival of the housing sector likewise ignores the real shock that energy constraints imposed on commuters to the suburbs. The large house and long commute that underlay the past evolution of America's residential capital stock presumed the continued availability of cheap energy. Joseph Cortright provides a persuasive paper attributing the collapse of housing prices to the rise of gasoline prices. All indications suggest that prices fell in proportion to the distances of houses from the central business districts of the cities in which their occupants worked. Carbon caps will now stifle further investment in energy infrastructure, promote expectations of high fuel prices to come, and depress incomes. The roomy house in the suburbs seems unlikely to recover its lost value, or even hold its present residual value, in a carbon-capped nation.

Indeed, big houses anywhere are a big mistake if we can expect electricity and heating fuels to rise dramatically in price. Democrats obstruct nuclear power and coal is particularly high in carbon content. While declining conventional petroleum supplies might otherwise give way to unconventional sources -- such as Canadian tar sands and oil shale abundant in the U.S. -- these, too, are high-carbon energy sources that carbon caps will likely condemn. In other words, we can expect a pervasive energy crisis to escalate with every percentage point of recovery that might somehow occur.

Can we expect relief from solar and wind power, and biofuels? Biofuels already demonstrated an ability to divert global grain supplies from the mouths of the poor in developing countries. The Guardian featured a story about a secret World Bank report attributing three quarters of the rise in world food prices from 2002 to 2008 to biofuel production. Solar and wind are mantras from the 1970s and have found only limited application in our fossil fuel dominated energy system.

To achieve the government-driven carbon fuel replacement with solar and wind energy, we clearly need other adaptations to make it work. America needs to forsake the present automobile and the house in the suburbs, among other things. Unfortunately, much of America's real wealth consists of capital goods organized to produce and service these two fundamental assets of the American household. The financial sector fundamentally creates a pyramid of claims to this capital. The rapid, politically-driven abandonment of carbon fuels likewise abandons the financial assets that represented claims to such capital goods. The American retirement portfolio, in a carbon-controlled world, will be slow in recovering its value while houses and cars are losing theirs. Even if global warming really needs slowing, an optimal policy of more measured and moderate intervention could surely have avoided such catastrophe as is presently being wrought.

In spite of carbon controls, there remains hope that asset values might increase after all. Governments are creating huge amounts of liquidity in an effort to stay the decline in wealth and income that the financial crisis has brought. In theory, governments might make the values of almost everything rise by such a tactic. Unfortunately, the above comments will likely remain true for relative values (or inflation-adjusted prices). Thus, maybe even with carbon caps in place, government can still make nearly everyone a millionaire!

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