The Guest Blog

Morici: Obama's Climate Plan Has Put the US Economy in a Straight Jacket

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Once again, President Obama has declared the United States must respond to the threat of climate change; however, putting the U.S. economy in a straight jacket—as many of his supporters in the environmental community advocate—would likely hasten the pace of global warming. Instead, the United States should accentuate several environmental policies President Obama has already put in place and exploit its new bounty of natural gas to strengthen the U.S. economy and global environment.

Many Americans are persuaded that the buildup of green house gases (GHG) in the atmosphere is responsible for shrinking mountain ice caps, rising sea levels and the ferocious destruction of Hurricane Sandy and similar storms.

CO2 emissions account for more than four fifths of GHG and a larger share of what government policies may curtail. During President Bush's second term, Congress considered several bills that would cap U.S. CO2 emissions—those failed to become law, as did a similar proposal offered by President Obama in his 2010 Budget.

Such regimes would allocate emission permits among businesses that process fossil fuels, like petroleum refineries, and use fuels intensely, like electric utilities and aluminum. Businesses may meet their goals by directly cutting emissions or purchasing permits from other firms that exceed their goals or shut down. Dubbed Cap and Trade, this approach is used in Europe, where a private market in trading permits has emerged.

Such an approach would bring the United States, de facto, into the Kyoto Protocol. Implemented without U.S. ratification, this agreement commits most industrialized countries to reducing GHG emissions to 6 to 8 percent below 1990 levels. Importantly, developing countries are absolved, though industrialized countries may meet part of their abatement goals by financing cleanup projects in them.

Unfortunately, this regime encourages carbon-intensive manufacturing, like steel and aluminum, and consuming industries, like automobiles and appliances, to leave industrialized countries for places like China and India where fossil fuel use is unregulated and often subsidized. This increases global emissions and reduces global GDP, because developing countries often use fossil fuels, capital and labor less efficiently to make the same goods.

This madness is illustrated by the fact that China, with a GDP less than a half that of either the European Union or United States, emits more CO2 than either economy.

Every year, Chinese emissions growth adds another country the size of Japan. It is hard to imagine that one year of China's growth, which comes to about $600 billion, could replace the emissions of Japan's $5 trillion economy. Yet, that is the kind of economic accounting cap and trade requires.

Moreover, government allocations of limited carbon use permits among businesses would create a new sandbox for Washington dealmakers, exacerbating the economic damage, and the opportunity for New York to establish a national trading platform—yet another occasion for Wall Street to create synthetic securities and expand gambling that distorts economic decision making and hampers growth.

Having failed to persuade Congress to implement European-style regime, President Obama has embraced policies that are reducing U.S. CO2 emissions about 2 percent each year. These include higher mileage standards for cars and moving electric utilities from coal and oil to natural gas.

If the President and Congress choose to go further, they should embrace policies that encourage participation and sacrifice by all nations, and strengthen, not weaken the U.S. economy.

For example, the United States should require that foreign products sold in the United States meet the same emission standards as those made here. This would require that developing countries like China not exploit the cost advantages from dirty production methods, and these requirements could be crafted to meet World Trade Organization requirements by treating domestic and foreign producers equally. That would reduce U.S. CO2 emissions without encouraging U.S. energy-intensive industries to migrate to China and other developing countries where they make the problem worse not better.

Further, many heavy industries like petrochemicals and primary metals are energy intensive, and the recent bounty of U.S. natural gas offers domestic producers new cost advantages to win export markets. This has the potential to reduce global emissions, because heavy industry in the United States uses fossil fuels more efficiently than do competitors in China and other developing countries.

Currently, the Department of Energy is considering proposals to boost exports of liquefied natural gas—a costly and environmentally dangerous process—that generates fewer jobs and less growth than keeping the natural gas in the United States for use by energy-intensive industries. Given the cleaner production methods applied in the United States than in developing countries, reserving natural gas for domestic industrial use would both maximize employment gains from developing abundant domestic natural gas and positively affect the global environment.

Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and a widely published columnist. You can follow him on Twitter @PMorici1