CHAMPAIGN, Ill. – A University of Illinois environmental policy expert will outline the economic impact of pollution regulations at a meeting of European Union finance ministers that will be a springboard for upcoming negotiations on a new international treaty to combat global warming.
Don Fullerton, a finance professor and former deputy assistant secretary of the U.S. Treasury Department, is the lone academic expert invited to speak about climate policy at the 27-nation alliance’s Oct. 2 conference in Gothenburg, Sweden.
Two of Europe’s top government tax and finance officials also are scheduled to discuss cost-effective options to reduce carbon emissions as the EU gears up for December talks in Copenhagen on a new United Nations-brokered climate treaty to replace the 1997 Kyoto protocol, which expires in 2012.
“They’re looking for economic expertise on all of their various options as they stake out a position for Copenhagen,” said Fullerton, who heads the environmental and energy economics program for the National Bureau of Economic Research, a nonprofit, nonpartisan think tank that provides economic analysis for government, business and the academic community.
He supports cap-and-trade systems to reduce carbon emissions, rather than imposing a tax on pollution or issuing mandates that force companies to enact specific climate-friendly measures such as coal scrubbers or switching from coal to low-carbon natural gas or no-carbon wind or solar power.
But government should sell – not give away – cap-and-trade permits, a system that sets reduced overall limits on the carbon gases that companies spew into the atmosphere, said Fullerton, a researcher with the U. of I. Institute of Government and Public Affairs.
“Giving away permits is like handing companies free profits,” he said. “Under cap-and-trade, firms that cut emissions beyond their limit can sell excess permits to other companies. And setting a price for carbon is likely to raise the cost of output, so even using the free permits creates profits because those companies can sell at a higher price and not bear the cost of reducing their own emissions.”
Selling permits would provide money that could be used for government programs such as health-care reform or to trim corporate taxes to encourage investment and job creation, Fullerton said.
“Handing corporations permits is free money and it has no impact on their behavior except their profits go up,” Fullerton said. “A permit price increases costs for businesses, who then pass those costs along to consumers. So businesses will adjust their behavior by reducing emissions and consumers will adjust their behavior by turning off lights, insulating their homes better or buying more efficient appliances.”
The EU implemented a cap-and-trade system with free permits after joining the Kyoto protocol, but plans to auction them off in its next round of emissions cuts.
In the U.S., which helped negotiate the Kyoto climate treaty but never signed on because the Senate failed to ratify it, Congress is considering a bill that would initially give away about 80 percent of permits, giving industries time to transition to the carbon restraints. The Office of Management and Budget estimates government would raise $627 billion between 2012 and 2019 if all permits were auctioned.
“I think it’s pretty dumb to hand out free money to corporations, especially with government strapped for cash already,” Fullerton said. “Why should we be handing profits to firms that are already profitable? We should be collecting money to cut the deficit or cut taxes or provide health care.”
He warns that cap-and-trade systems increase prices for electricity and gasoline, with economic effects similar to a regressive tax because those costs then comprise a much higher percentage of household spending for low-income families than for high wage earners.
Fullerton says cap-and-trade systems that charge for permits would have revenue for programs to ease the impact on the poor, such as tax credits or payroll tax reductions. But he cautions that government should avoid tying relief directly to the cost of electricity and gasoline.
“You don’t want to reduce the price of electricity or gasoline because that would undercut the pollution-reducing effects,” he said. “Higher prices are part of the incentive to cut back on use, and we want low-income people to cut back just like everyone else.”