COLUMN-Carbon geography of the United States: John Kemp

-- John Kemp is a Reuters columnist. The views expressed are his own --

By John Kemp

LONDON, May 13 (Reuters) - Unless advocates of a cap-and-trade emissions scheme can design a credible and well-funded compensation mechanism to compensate the losers (including coal miners, heavy industrial workers, and their communities) carbon control policy risks becoming mired in the same controversy as trade liberalisation.

In a report published this month, Michael Cragg of the Brattle Group consultancy and Professor Matthew Kahn of UCLA Institute of the Environment illustrate how the "carbon geography" of the United States affects congressional votes on carbon control legislation (http://mek1966.googlepages.com/cragg_kahn_5_7_09.pdf).

While the basic conclusion is not surprising (representatives in states and counties with high carbon intensity are least likely to vote for tough control measures), the paper provides a wealth of supporting detail and comprehensive statistical analysis.

In particular, Cragg and Kahn find:

(1) The variation in intensity of carbon emissions is extreme. Across 1,559 counties with at least 25,000 residents in 2002, the average carbon emissions per capita was 7.66 tons but with a median of 3.28 tons and a standard deviation of 16.9 tons. Whether through a carbon tax or a cap-and-trade programme, the impact of emissions control and pricing will not be anything like uniform across the United States. It will result in large distributive consequences and income shifts, hitting some groups far harder than others.

(2) Counties with high emissions per capita are likely to be poorer and represented by a more conservative legislator. According to the report, "Conservative, poor, rural areas will face a higher carbon bill under a cap and trade system than liberal, rich, urban areas. This compounds the regressiveness of any energy tax or cost increase, making it a political necessity that some offset by designed".

(3) Representatives in high-carbon districts are more likely to vote against regulation (after controlling for other effects). Liberal representatives with constituents on high per capita incomes and with low per capita emissions are more likely to vote in favour of carbon control legislation.

At the end of the paper, the authors provide an elegant set of charts showing total carbon emissions per capita for each state, as well as a breakdown of emissions from different sources (commercial, industrial, transportation, residential and power utilities).

The division between high-carbon and low-carbon states closely mirrors the divisions within the Democratic Party displayed when 26 senators from mostly Midwestern industrial and Appalachian coal states broke ranks with 31 of their colleagues last month to prevent use of the expedited budget reconciliation process to pass a cap and trade programme as part of the regular budget [ID:nL8582519].

As the authors note, "In mid-2009, the direction of carbon regulation is unclear and as this paper shows will certainly be constrained by the political reality that the incidence of regulatory costs arising from carbon regulation is highly skewed".

So far, most attention has focused on how to soften the impact of a cap and trade programme on industrial and coal-producing states to secure a 60-vote super-majority in the Senate to pass the legislation, through a combination of free emissions permit allocations, grandfathering and long phase-in periods.

But while these measures can soften or delay the blow, they do not alter the fact that a binding carbon tax or cap-and-trade programme will eventually impose highly skewed burdens across the United States. Cap-and-trade advocates will come under pressure to develop compensatory mechanisms designed to level the playing field.

The problem is similar to the debate over free trade. Free trade has reasonably clear theoretical advantages over protectionism via tariffs and other measures.

In aggregate, the static benefits to consumers from cheaper imports and dynamic benefits from increased competition should outweigh the costs borne by some domestic producers and workers. In principle the "winners" can compensate the "losers" and still have benefits left over (free trade is "Pareto optimal").

In practice, though, such income transfers rarely happen on any significant scale. The problem with free trade is that winners do not in fact compensate losers so the policy imposes a highly uneven pattern of burdens and benefits, even if it is beneficial for the country as a whole. The federal government's Trade Adjustment Assistance (TAA) programme is tiny. In fiscal 2007, funding was just $900 million.

It is the failure to implement an effective compensation programme for the losers that has gradually undercut political support for trade liberalisation in recent decades.

In a development that should worry advocates, many of the losers under cap-and-trade systems overlap with groups that have been hit hard by free trade and the hollowing out of the U.S. manufacturing base.

The Obama administration has proposed using most of the revenues from the sale of emissions permits to provide tax breaks to low-income groups. But the design of these tax breaks is uncertain. It is not clear whether they would be targeted as hard hit communities or simply be general anti-poverty programmes. Nor is it clear whether there would be enough money to fully compensate for the huge costs of re-orienting the industrial and employment base of affected states. (Edited by David Evans)