With the passage of the Waxman-Markey bill (HR 2454) in the House, the U.S. is one step closer towards the implementation of a major effort to reduce greenhouse gas emissions (GSGs).  Despite its inclusion of a cap-and-trade system, famed Harvard economist, Greg Mankiw, recently called the bill a "missed opportunity" because it gives away a significant number of very valuable pollution permits instead of using an auction system.

After the creation of the Kyoto Protocol, an international treaty that the Bush Administration notoriously refused to sign, most developed countries around the world introduced a cap-and-trade system.  These systems were touted as a way to take advantage of market mechanisms to reduce emissions - a "cap" would be placed on total emissions.  Participants could buy and sell their permits in order to comply with the limits.

Giving away these permits doesn't mean that they're without cost.  Instead, the government decided, and perhaps rightly so, that in order for the bill to pass, it needed to make some concessions to the business community.  The value of these giveaways are in the eye of the beholder (after all, is investment in alternative energy research simply a disguised subsidy?).  See CBO numbers here. In general, the permit giveaways creates problems - by giving away the permits, businesses gain a big bonus and the government loses a big chunk of revenue.  The Average Joe loses because: 

• If businesses need to change their practices or purchase more permits to comply with the set emissions limits, they will pass along at least some of that cost on to the average customer;  
• The government loses revenue that they could use for other environmental efforts or even other programs that could benefit communities historically adversely affected by pollution; and
• It becomes harder for citizens to really understand how much the right to pollute is really worth in the open market. 

The obvious upside is that if the bill passes the Senate vote, the U.S. will finally regain some international creditability on environmental issues.  If the bill is successful in reducing emission costs, the U.S. will benefit from better health outcomes and other outcomes that have yet to be quantified.  As currently written, the bill could spur some creative innovation in alternative energy sources and also includes some provisions for low-income households that could be adversely affected  by the cost of the program.

Make no mistake, reducing our energy consumption will take some genuine effort.  The U.S. is the largest per capita polluter in the world.  Households and businesses alike are stakeholders in this challenge.  However, by giving away the permits, it leads everyone to believe that change will be easy and inexpensive when in fact, the lost revenue is simply another type of green that the government could use more of right about now.
 

Click here for more OMB Watch analysis on its potential regulatory implications.

Image by Flickr user pfala. Used under a Creative Commons license.