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Brooks Wilson's Economics Blog: Carbon Regulation

Thursday, December 30, 2010

Carbon Regulation

Kimberly Schwandt, a FoxNews writer, reports on Obama administration efforts to control carbon emissions through EPA mandates rather than through legislation in “White House Plans to Push Global Warming Policy, GOP Vows Fight”.  The path was cleared for the EPA to regulate carbon emissions by the EPA’s “endangerment findings” as required by the Clean Air Act.  (I provide some thoughts on the “endangerment findings” here.).  The EPA mandates are controversial because the advocates of carbon regulation, including the administration, were unable to pass legislation to establish regulatory authority and because the Clean Air Act was not designed to regulate climate change.  Schwandt reports
After failing to get climate-change legislation through Congress, the Obama administration plans on pushing through its environmental policies through other means, and Republicans are ready to put up a fight.

On Jan. 2, new carbon emissions limits will be put forward as the Environmental Protection Agency prepares regulations that would force companies to get permits to release greenhouse gases under the Clean Air Act.

Critics say the new rules are a backdoor effort to enact the president's agenda on global warming without the support of Congress, and would hurt the economy and put jobs in jeopardy by forcing companies to pay for expensive new equipment.
She later quotes Ken Green of the American Enterprise Institute who claims that carbon regulation will kill jobs, and Dan Howells of Greenpeace who argues the opposite.  Green is aiming at the right target but misses the bull’s eye when he said,
They are job killers. Regulations, period -- any kind of regulation is a weight on economy. It requires people to comply with the law, which takes work hours and time, which reduces the profitability of firms. Therefore, they grow more slowly and you create less jobs.
The first issue is one of semantics and is probably not important.  The creation of property rights can be considered regulation, and I would bet dollars to donuts that Green would agree that good property rights are important.

The second issue is of more weight.  Green is correct in observing that carbon regulation makes firms less profitable by increasing the cost of producing goods and services.  That is exactly what the regulations are designed to do.  Howells is also correct in stating that the regulations will add jobs.  Companies and industries that find adjustment costly will shrink and those that find it less costly will grow. In the long run, we will experience full employment.

The real question is whether carbon regulation makes us better off.  If carbon pollution is a real threat to future wealth creation and the regulation effectively reduces our carbon emissions and other countries do not free ride off our efforts by increasing their carbon emissions, then carbon regulation will make us better off.  I have problems with all three clauses, particularly the last two.

The timing of the new carbon regulations is also bad.  Unemployment is still high, many businesses were financial weakened from the Great Recession, and those same business are attempting to internalize health care reform.  Others are trying to digest regulatory reform of the financial sector, regulatory reform of the food sector, and possibly new regulation of the Internet.  While carbon regulation may not kill jobs, it will certainly delay our return to something akin to full employment.

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