On Friday, June 26, 2009 the US House of Representatives narrowly passed a “cap and trade” bill (219-212 votes). Cap and trade is a relatively simple concept that is both theoretically and practically sound, provided that (1) there is a need to reduce carbon emissions, (2) all major polluting nations (including China and India) will realistically act to reduce carbon emissions, and (3) the program is structured properly. I’m not sure any of those exist for this legislation, but my purpose today is to try to explain in relatively simple terms, how cap and trade works. I’ll do this by using what we economists call a “model,” in which we use simplifying assumptions to better understand how something works.

The Model

Assume that there are only two companies in the country, company A and company B. Company A generates coal powered electricity and company B is a gray iron foundry. That’s good because we need electricity and we also need metal parts, but we will also assume that we need to reduce carbon emissions.

Assume that each company produces 100 tons of carbon emissions per day, for total “societal” carbon emissions of 200 tons per day. Let’s assume that the government wants the total amount of emissions to be reduced from 200 tons to 150 tons per day. Let also assume that both companies have different costs of reducing carbon emissions. Utility company A can reduce emissions at a cost of $1,000 per ton, while it costs grey iron foundry B $2,000 per ton to reduce emissions.

Mandated Emissions Reductions. If the government simply mandated that each company reduce their emissions by 25 tons per day (to achieve the 50 ton desired reduction in emissions) it would cost company A $25,000 to reduce emissions by 25 tons and company B $50,000 per day to reduce emissions by 25 tons. The total “societal costs” of mandating that each company reduce emissions by 25 tons per day would be $75,000.

Under a Cap and Trade program, the government would allow market forces to work, while at the same time achieving its “CAP” goal of reducing emissions to 150 tons per day. Because utility A can reduce emissions at a cost of $1,000 per ton, while it costs foundry B $2,000 per ton to reduce emissions, it makes sense for company A to reduce its emissions by 50 tons, while company B would not reduce emissions at all. The total cost of reducing emissions by 50 tons (if company A does all of the emissions reductions) would be 50 X $1,000 or $50,000. That is a “societal” savings of $25,000 over the mandated plan presented above, while still meeting the desired CAP of 150 tons of pollution per day.

But why would the electric company agree to spend another $25,000 to reduce emissions on behalf of the foundry, which doesn’t reduce emissions at all? Because the foundry will pay the electric company more than $25,000 to increase its abatement from 25 to 50 tons. In essence, the foundry buys from the electric company its tradable rights to pollute. If the foundry is willing to pay the electric company, say $1,500 per ton to reduce 25 tons of emissions on its behalf, the electric company will end up receiving $37,500 for reducing pollution that costs it only $25,000 to abate. This is a profit of $12,500 for the electric company.

On the other hand, the foundry, which would have paid $2,000 per ton ($50,000 total) to reduce 25 tons of pollution in a mandated plan, would spend only $37,500 to pay the electricity company to reduce pollution by the same 25 tons.

To summarize; if there was a mandated plan which demanded each polluter to reduce pollution by 25 tons, total pollution emissions would be reduced from 200 tons to 150 tons. The total societal cost of that pollution reduction would be $ 75,000. Under a cap and trade program the same goal of 150 tons of pollution would be achieved, but the total societal cost of the pollution reduction would be $50,000. There would be a private transfer cost of $12,500 from the foundry to the electric company, but this would not be a pollution abatement cost, but a trade profit for the electric company. Likewise, the foundry saves $12,500 that it would have spent under a mandated program, while at the same time satisfying the overall goal of reducing pollution from 200 tons to 150 tons.

Over time the government could reduce the CAP amount. This would raise the price of tradeable credits, but would still be more economical than a program that mandates pollution reduction from businesses in which it is extremely costly to abate emissions. The devil is in the details. We have yet to discuss the ramifications of the cap and trade program passed this week in the house. Of course, pollution abatement increases costs, and reduces output and employment in the economy. We’ll also address that in a later blog.

The media is currently having a feeding frenzy reporting about the post-election demonstrations in Iran. There is talk about the fall of the Iranian regime in favor of a western-style secular political system. This is the same media that gives us two hours of live helicopter videos whenever some idiot in Los Angeles evades police with his automobile. It is also the same media that spends night after night speculating about missing baby Cayley.

Since the fall of the shah thirty years ago, the American media has given life to the myth that the majority of people in Iran want liberalization of the country and a western-style democracy. It is true that there are many people in Tehran who speak English, have higher incomes, and have a genuine desire for such liberalization, but the vast majority of the people who reelected Ahmadinejad last week share no such sentiments. While there may have been isolated incidents of election fraud, there is little doubt among experts that Ahmadinejad’s re-election was the will of the majority of the Iranian people.

Unlike students and the professional classes in Tehran, the majority of the electorate in Iran live in rural regions, don’t “tweet”, don’t have computers, firmly believe in the virtues of Islam, and want Iran to be an Islamic state. In a country where the telephone system is archaic and most rural residents don’t own a phone, is it any wonder that telephone polls showed Mousavi ahead of Ahmedinejad? Even if Mousavi had been elected, the “reforms” possible under his administration would have been modest.

Ahmedinejad is well liked in Iran. His national security posturing, complete with his insistence that Iran become a nuclear power and that Israel be wiped off the map, has accelerated his popularity among rank and file Iranians. By the beginning of July any minor demonstrations still existing in Iran will no longer draw the attention of even the “car chase” media.

Turn off Fox news and MSNBC. Watch golf or soap operas instead. Nothing will change in this Iranian stalemate. Obama wants to negotiate with the Iranians with the goal to get them to abandon their nuclear ambitions. That will never happen. The Iranians have learned one important lesson from Kim Jung Il; the key to international legitimacy is an A-bomb complete with a missile to deliver it. All of the talk and negotiations in the world won’t change this situation. Either the Iranians will join the nuclear club or the Israelis (with or without Obama’s permission) will forcibly prevent that from happening. No matter how many sugar plum fairies dance in the White House or in the hallways of the United Nations, it is my unfortunate conclusion that this conflict will not end well.

There is no question that the Republican Party is in big trouble.  Trounced in the 2008 elections, the Republican Party has neither the platform nor the leaders that appeal to a majority of the electorate.  As the GOP has tried to please Christian conservatives, while at the same time engaging in wreckless spending and growing big government, shrinking numbers of voters are now coming on board.  It is increasingly difficult for many Americans, who once voted year after year for the GOP, to refer to themselves as Republicans.  Not that the electorate is happy with Democrats.  After only a few months in office, great numbers of people from all political persuasions are regretting they voted for the Obama/Democratic power grab and rapid descent into something resembling French Socialism.

How can the GOP re-design itself to be relevant again?  Is the GOP ever going to be able to re-emerge as a legitimate political contender?  I’ve got advice for the Republican Party.  As always, they won’t take it, but I’ll offer it anyway.

The largest reason that Republicans are irrelevant is that they have consistently passed laws to enforce their brand of moral behavior on the rest of us.  While the Democrats want to destroy our economic freedoms by taking our money and re-negotiating our contracts, Republicans want to destroy our personal liberties in the name of religion or “conservatism”.  If Republicans had their way, there would be no abortion, no gay marriage, no embryonic stem cell research, and no birth control pills, just to name a few things.  These are moral issues, which in the opinion of most people, should be decided by personal conscience, not by legislators.  As long as the Republican Party goes down the path of denying individual freedom via federal legislation, they will be irrelevant.

What should the Republican Party do?  In my opinion, Republicans holding federal office (House of Representatives or U.S. Senate) should strictly concentrate on economic and foreign policy issues.  Republicans should diligently support restrictions in federal government spending, de-regulation of industries to increase efficiency, free trade, and the rule of law with absolute respect for contract rights.
Republicans should deal with “moral issues” only at the state level.  States that wish to pass laws restricting abortion may do so.  States that wish to allow stem cell research, use of medical marijuana, or gay marriage may do so.   This way, if you want an abortion and live in a state that does not permit it, you may travel to another state which allows the procedure.  The same would be true for gay couples wishing to marry, or medical professionals wishing to do stem cell research.

For example, if you’re a successful Republican governor who has not supported abortion in the past and you are elected to the US Senate, your credo would be:  “I have no comment on abortion, nor do I intend on dealing with abortion on the federal level.  Abortion rights are the prerogative of the state legislatures.  My goal in the Senate will be to embrace free trade, term limits, etc.”

I doubt the Republicans will take my advice.  They will continue to try to fight the abortion and stem cell fights, in spite of the fact that there will never be a consensus on these issues.  I predict that the Republicans will continue to go down the same path, thinking that the likes of Sarah Palin and Newt Gringrich can save them, only to be trounced once again in the next election.

The day may yet come when the Republicans rule Washington again.  Without de-coupling civil liberties (morality) issues from economic issues at the federal level, the return to prominence of the Republican Party could materialize when the vast majority of citizens who have taken the “hope and change” bait realize that they are much worse off than before.  Perhaps they will be forced to turn to the hapless Republicans for their salvation.  That day may be sooner than later.

Government Motors: A few months ago, Herb Peter, a friend of mine, wrote a letter to the editor of our local newspaper referring to General Motors as “Government Motors.” I thought it was clever. Last Monday it became official, as GM entered into Chapter 11 bankruptcy and is now 60% owned by the taxpayers. General Motors, once a car company, is now a government jobs program. If you think that George Bush couldn’t find an exit strategy for Iraq, wait until you see how many years will pass before Barak Obama gets out of General Motors.

Of course, Obama doesn’t want to own General Motors. He is a “reluctant investor.” Brian Deese, Obama’s person who is in charge of dismantling General Motors, is a 31 year-old who dropped out of Yale Law School and who has never had a job in the private sector and has absolutely no business experience or knowledge of the automobile industry. He did, however, have a position in the Clinton campaign before going to work for Obama’s campaign.

If you think that General Motors has any prospect of surviving this government intrusion, you had better think again. Fortunately, there is still an original American car company out there waiting for you to buy their great vehicles; God bless you, Henry Ford!

Pravda:

On April 27, 2009 a foreign newspaper published an editorial titled; “American capitalism gone with a whimper.” That newspaper is Pravda, which means “truth” in the Russian language. The next paragraphs come directly from the article. I’ll leave the link for the entire article at the end of this blog. This is a sad commentary; I guess it takes a socialist to know a socialist.

American capitalism gone with a whimper.

“It must be said, that like the breaking of a great dam, the American decent into Marxism is happening with breath taking speed, against the back drop of a passive, hapless sheeple, excuse me dear reader, I meant people.

First, the population was dumbed down through a politicized and substandard education system based on pop culture, rather than the classics. Americans know more about their favorite TV dramas then the drama in DC that directly affects their lives. They care more for their “right” to choke down a McDonalds burger or a Burger King burger than for their constitutional rights. Then they turn around and lecture us about our rights and about our “democracy”. Pride blinds the foolish.

Then their faith in God was destroyed, until their churches, all tens of thousands of different “branches and denominations” were for the most part little more than Sunday circuses and their televangelists and top protestant mega preachers were more than happy to sell out their souls and flocks to be on the “winning” side of one pseudo Marxist politician or another. Their flocks may complain, but when explained that they would be on the “winning” side, their flocks were ever so quick to reject Christ in hopes for earthly power. Even our Holy Orthodox churches are scandalously liberalized in America.

The final collapse has come with the election of Barack Obama. His speed in the past three months has been truly impressive. His spending and money printing has been a record setting, not just in America’s short history but in the world. If this keeps up for more than another year, and there is no sign that it will not, America at best will resemble the Wiemar Republic and at worst Zimbabwe.”

Click HERE to read Pravda Article from Pravda Website.