Cap and Trade:
Applying it to gasoline
14 Jun 2008 in Regulatory Economics, Legislation
Energy economist Jonathan Lesser publishes a commentary in the Wall Street Journal "recommending" a cap-and-trade program for gasoline. The piece is lightly satirical but nevertheless highlights an important point: All emission permit systems, including the proposed cap-and-trade regime for greenhouse gases, is a form of rationing.
Lesser writes (link temporarily available to non-subscribers):
Although the Senate's recent attempt to introduce a cap-and-trade system for carbon crashed and burned when it collided with $4 per gallon gasoline, fear not. Some in Congress are fearlessly tilting at another windmill: the "windfall" profits earned by oil companies.
Unfortunately, by reducing supplies, a windfall profits tax will only lead to even higher prices. Still, if Congress really wants to "do something" about high gasoline prices and global warming, it can always try rationing.
To lower gasoline prices permanently, you can reduce demand, increase supply, or do both. Congress long ago capped supplies by proclaiming from on high: Drillest thou not offshore, nor in ANWR. The next obvious step for our solons is to cap demand by rationing gasoline, and then gradually reduce the quantity of ration coupons.
"Trading" in coupons would be encouraged to ensure gasoline is allocated to uses of only the highest value. So Congress could reserve quantities of ration coupons for key lobbyists and their clients. Environmentalists could buy up coupons and "retire" them, lowering gasoline sales even more. Refineries could continue to produce gasoline, but as consumer demand would be sharply limited (and declining), oil companies would be forced to reduce the prices they charge. No more windfall profits! And lower carbon emissions!
For legislators and environmentalists – if not average citizens – this plan has other virtues: As ration coupons are reduced, consumers would increasingly clamor for more electric cars, cars that ran on French-fry oil, and "flex-fuel" cars that burn everything from gasoline to garbage. Eventually, gasoline could just be banned, reducing prices to zero and eliminating all ill-gotten profits.
And if Congress then had to tackle French-fry oil speculators and impose a windfall profits tax on Big Spud, well why not?
Unfortunately, by reducing supplies, a windfall profits tax will only lead to even higher prices. Still, if Congress really wants to "do something" about high gasoline prices and global warming, it can always try rationing.
To lower gasoline prices permanently, you can reduce demand, increase supply, or do both. Congress long ago capped supplies by proclaiming from on high: Drillest thou not offshore, nor in ANWR. The next obvious step for our solons is to cap demand by rationing gasoline, and then gradually reduce the quantity of ration coupons.
"Trading" in coupons would be encouraged to ensure gasoline is allocated to uses of only the highest value. So Congress could reserve quantities of ration coupons for key lobbyists and their clients. Environmentalists could buy up coupons and "retire" them, lowering gasoline sales even more. Refineries could continue to produce gasoline, but as consumer demand would be sharply limited (and declining), oil companies would be forced to reduce the prices they charge. No more windfall profits! And lower carbon emissions!
For legislators and environmentalists – if not average citizens – this plan has other virtues: As ration coupons are reduced, consumers would increasingly clamor for more electric cars, cars that ran on French-fry oil, and "flex-fuel" cars that burn everything from gasoline to garbage. Eventually, gasoline could just be banned, reducing prices to zero and eliminating all ill-gotten profits.
And if Congress then had to tackle French-fry oil speculators and impose a windfall profits tax on Big Spud, well why not?
There are two essential features of any effective cap-and-trade regime. First, the legal right to emit is contained within emission allowances, which the government either distributes based on some formula or auctions to the highest bidders. Second, only those with permits may emit, and those who emit without owning a permit must be surely, swiftly, and severely penalized. (There are two additional features that are essential for efficiency: Permit owners must be able to buy, sell, and exercise them without restriction or interference; and neither the government nor any private party may have the explicit or implicit power to confiscate them. Sulfur dioxide permits established pursuant to the Clean Air Act Amendments of 1990 do not meet these conditions.)
This is a form of rationing, no different in principle from the various coupons the government issued during World War II by the Office of Price Administration. The Ames (Iowa) Historical Society lists goods that were rationed and the periods during which rationing was imposed.
War ration books and tokens were issued to each American family, dictating how much gasoline, tires, sugar, meat, silk, shoes, nylon and other items any one person could buy. View a listing of all rationed items. Across the country 8000 rationing boards were created to administer these restrictions. The 1943 Sears, Roebuck and Co. catalog contains a list of all rationed farm equipment and tells the reasons and benefits of rationing as well as who is eligible. Even chicken wire fencing was rationed.
Types of rationing included: Uniform coupon rationing (sugar is an example) provided equal shares of a single commodity to all consumers; Point rationing provided equivalent shares of commodities by coupons issued for points which could be spent for any combination of items in the group (processed foods, meats, fats, cheese); Differential coupon rationing provided shares of a single product according to varying needs (gasoline, fuel oil); and Certificate rationing allowed individuals products only after an application demonstrated need (tires, cars, stoves, typewriters).
Types of rationing included: Uniform coupon rationing (sugar is an example) provided equal shares of a single commodity to all consumers; Point rationing provided equivalent shares of commodities by coupons issued for points which could be spent for any combination of items in the group (processed foods, meats, fats, cheese); Differential coupon rationing provided shares of a single product according to varying needs (gasoline, fuel oil); and Certificate rationing allowed individuals products only after an application demonstrated need (tires, cars, stoves, typewriters).
In the contest between efficiency and equity, different tradeoffs were struck. For some items, everyone received an equal share and trades had to occur after sale. For other items, consumers could make their own tradeoffs within baskets of similar goods, and in other cases a specific need had to be demonstrated to the satisfaction of government bureaucrats, who were the arbiters of whether any citizen's claim for special treatment was strong enough.
As a system of allocation, rationing was defended as necessary in the interest of fairness. The alternative way to allocate is by price, which was widely viewed as yielding unfair outcomes. To obtain gasoline rations, consumers had to have their tires inspected by the government:
By the end of 1942, half of U.S automobiles were issued an 'A' sticker which allowed 4 gallons of fuel per week. That sticker was issued to owners whose use of their cars was nonessential. Hand the pump jockey your Mileage Ration Book coupons and cash, and she (yes, female service station attendants because the guys were over there) could sell you three or four gallons a week, no more. For nearly a year, A-stickered cars were not to be driven for pleasure at all.
The green 'B' sticker was for driving deemed essential to the war effort; industrial war workers, for example, could purchase eight gallons a week. Red 'C' stickers indicated physicians, ministers, mail carriers and railroad workers. 'T' was for truckers, and the rare 'X' sticker went to members of Congress and other VIPs. Truckers supplying the population with supplies had a T sticker for unlimited amounts of fuel...
The green 'B' sticker was for driving deemed essential to the war effort; industrial war workers, for example, could purchase eight gallons a week. Red 'C' stickers indicated physicians, ministers, mail carriers and railroad workers. 'T' was for truckers, and the rare 'X' sticker went to members of Congress and other VIPs. Truckers supplying the population with supplies had a T sticker for unlimited amounts of fuel...
The national maximum Victory Speed was 35 miles an hour, and Driving clubs or carpools were encouraged. The main idea was to conserve rubber, not gasoline. The interior side of the sticker issued for the car's windshield instructed the driver on this point. Every citizen, military or civilian, was to do their part. Even in the popular Warner Brothers cartoons, Daffy Duck exhorts the audience to Keep it under 40! Bugs Bunny's plunging airplane halts just before impact, out of gas as a consequence of the `A' sticker on its windshield."
The passage of time might make these examples seem quaint or amusing, but it is certain that Americans did not think so during the War. Winning the War was the focal point of American life, an existential challenge to the nation's survival.
Today, global climate change is often described in similar terms. United Nations Secretary General Ban-ki Moon has called climate change a "grave and growing problem" comparable to the threat of nuclear annihilation during the Cold War. In his 2007 Nobel lecture, former Vice President Al Gore said "the catastrophe now threatening us is unprecedented," and elsewhere made an illusion to World War II, analogizing the world's failure to restrict greenhouse gas emissions to its earlier failure to correctly recognize the threat posed by Nazism.
Thus, the American experience during World War II is instructive rather than fanciful. It is the last time the United States engaged in widespread allocation by rationing. Americans were sufficiently motivated during World War II to support (or at least acquiesce) in rationing that was both massive in scope, very explicit, and transparent for all to see. Proposed greenhouse gas cap-and-trade legislation, S. 3061, would also be massive in scope, but unlike its WWII antecedent, the rationing it prescribes would be implicit and opaque. Gasoline would be rationed, but indirectly and opaquely.
Given the expressed similarities in the magnitude of the threat, would the public agree to ration gasoline (and other forms of carbon-based energy) the way it was during World War II?
| World War II Rationing in the U.S. |
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| Rationed Items | Rationing Duration |
| Tires Cars Bicycles Gasoline Fuel Oil & Kerosene Solid Fuels Stoves Rubber Footwear Shoes Sugar Coffee Processed Foods Meats, canned fish Cheese, canned milk, fats Typewriters |
January 1942 to December 1945 February 1942 to October 1945 July 1942 to September 1945 May 1942 to August 1945 October 1942 to August 1945 September 1943 to August 1945 December 1942 to August 1945 October 1942 to September 1945 February 1943 to October 1945 May 1942 to 1947 November 1942 to July 1943 March 1943 to August 1945 March 1943 to November 1945 March 1943 to November 1945 March 1942 to April 1944 |
