How Would Cap and Trade Affect Transportation?
Cap and trade, as envisioned by the Obama Administration and Congressmen Waxman and Markey, will do grave damage to all transportation sectors. While the Administration proposed a 14% reduction in greenhouse gas levels by 2020 from 2005, the Waxman/Markey draft bill mandates a 20% reduction, going to a 42% reduction by 2030.
Cap and trade really is cap and tax, and, yes, it's a floating carbon tax. Since the emissions caps are hard, the pseudo market created by government edict has to yield prices that force various sectors of our economy to reduce emissions by the required amount. Transportation is accused of being responsible for 30% of greenhouse gas emissions, so it will have to alter its activities to generate at least 30% of the required reductions. Presumably, if that isn't occurring, then the government agency controlling the "market" in emission allowances will manipulate the rules to force further reductions.
Thus, the prices of transportation that are in any way carbon fueled will be forced sharply upwards over relatively short periods of time. That is precisely the point of such a system. Cap and trade cannot repeal the laws of supply and demand in the real world, so demand for transportation services will be suppressed, unless and until carbon is no longer a significant transportation fuel.
The Waxman/Markey bill contains another dagger pointed at the heart of the maritime, railroad and trucking industries: carbon tariffs. To combat what is being styled "carbon leakage" (i.e., production moves to countries that don't similarly reduce emissions), the bill would give the President standby authority to impose tariffs based on the carbon content of imported goods. Thus, if China and India stick to their current positions that they won't impede their economic growth by agreeing to such reductions in emissions, imports from those countries will be penalized accordingly. I haven't yet seen an explanation of how this is permissible under GATT.
Finally, if such a massive carbon tax ($650 billion to $1.9 trillion over ten years) is imposed, I can't imagine a political scenario that also results in increases in direct fuel taxes dedicated to the Highway Trust Fund. While proponents of cap and trade have suggested a variety of ways to spend this massive influx of revenue, virtually none of them have endorsed depositing to the Highway Trust Fund the revenues generated by transportation activities. While there is an overwhelming consensus that we need to invest heavily in the renewal and expansion of our transportation infrastructure, we seem to be headed toward a scenario in which carbon taxes ultimately paid by transportation users are diverted to non-transportation uses.
Jim Burnley is a partner in the Washington office of Venable LLP, and is widely recognized as one of the nation's foremost authorities on transportation law and policy
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Whether a cap-and-trade carbon program would do grave damage to transportation depends on how you define grave damage. If one defines grave damage as reductions in the tons-miles per capita then yes, it clearly would do grave damage. If one defines grave damage as higher cost for transportation then again, it would do grave damage.
However, one could also define grave damage as retaining a market structure that encourages increasing use of transportation in the face of rising costs associated with its use. The entire point of cap and trade is to use economics to provide incentive to force people and firms to make choices that result in fewer CO2 emissions and yes, fewer VMTs. Several researchers have long argued that freight transportation is too cheap both because it often generates but does not pay external costs associated with pollution and because user charges for infrastructure are inadequate to maintain the current system. Add to that the instability in the price of oil and we clearly have an unstable and unsustainable transportation system. The real crime here is under-pricing a costly good. Eventually we will have to pay the full price for freight transportation, but the longer we put off paying that bill, the higher it will be, with possibly catastrophic results for society.
So the real discussion should be not about how awful it will be having expensive transportation, but how awful it will be if we make our grandchildren pay the bill.
Pete Swan
Editor's Note: Pete Swan is assistant professor of logistics and operations management, Smeal College of Business, Penn State University.