Bootleggers & Baptists: How Economic Forces and Moral Persuasion Interact to Shape Regulatory Politics (19 page)

As Bootlegger/Baptist feeding frenzies go, the scramble for regulatory pork inspired by Kyoto takes the cake. By 2010, however, the banquet seemed to be coming to an end—at least temporarily. That was when the Senate abandoned efforts to pass climate change legislation that, among other things, would have introduced a cap-and-trade program for reducing carbon emissions from major dischargers (Siddique 2010). Nevertheless, that Great Recession breather is more likely to represent a semicolon than a period in the long story of the political effort “to do something” about carbon emissions.

This interruption indicates how quickly even coordinated Bootlegger/Baptist coalitions may come unglued in the face of a major recession. Economists know that demand for environmental quality and a willingness to pay for environmental improvements are sensitive to income levels and growth—a fact equally well understood by policymakers (e.g., Grossman and Krueger 1991, 1995; Yandle, Vijayaraghavan, and Bhatarai 2002). What may not have been fully appreciated was how income differences between countries could erode coordinated international efforts to bring down carbon emissions (Lipford and Yandle 2010a, 2010b). Those income effects explain many of the bumps in the highway toward climate change regulation.

This chapter gives a Bootlegger/Baptist interpretation of what happened between the adoption of Kyoto in 1997 and the near-demise of climate change legislation in 2010. The next section provides some detail on the Kyoto Protocol and the differential support it received. We present a series of stories to illustrate how specific Bootlegging firms and industries sought “polluter profits” through a series of carbon-reduction cartels. We then focus on the formation and splintering of Kyoto coalitions and describe how Bootleggers covertly became Baptists—and then sometimes reverted to their former Bootlegger status. With coalitions coming unglued, the following section lays out the story of a failed final effort in Copenhagen to structure an international Kyoto cartel and then explains how the late 2000s Great Recession dealt a blow to the prospects for U.S. cap-and-trade legislation. We close with some final thoughts.

Kyoto, the Carbon Commons, and Its Repair

Whether or not climate change is caused systematically by human action—or proposed rules are likely to remedy it—is not central to our story. What matters for the economic analysis of climate regulation is that many people are convinced of the need to reduce carbon emissions globally. Yet they are wary of the cost—in the form of reduced economic growth—of doing so locally. This dichotomy creates political challenges because our atmosphere is a commons; one country’s efforts to reduce emissions can be offset by the behavior of others who share the atmospheric commons (Anderson and Leal 2001; Hardin 1968). The problem is akin to two people in a leaking boat; one is diligently sealing cracks in the bottom and proclaiming progress while the other is drilling new holes.

Having embarked on a global effort to reduce the emission of greenhouse gases by way of the Kyoto Protocol in 1997, wealthy nations struggled to implement the terms of the action that set binding commitments to reduce greenhouse gas emissions to 1990 levels (UN 1997). The United States signed the 1997 agreement, but the agreement was not ratified by the U.S. Senate. In all some 37 industrialized countries and the European Union became parties to the agreement. The chief challenge was posed by developing countries, which according to the protocol were not required to reduce emissions but instead were to be subsidized by rich nations for making improvements in emission levels. In the post-1997 period, emission levels from the developing world rose markedly while industrialized nations showed some improvements. As it turned out, the developing nations were drilling holes in the boat about as fast as developed countries asserted they would seal up the leaks. Arguably, the greatest challenge to the Kyoto Protocol was that the United States was not then and is not now an official party.

Prior to the 1997 Kyoto discussions, the Senate voted overwhelmingly to instruct U.S. delegates not to sign the agreement unless it constrained all countries, including those in the developing world (Freedman 1997). The final word on this came in 2001 when the George W. Bush administration decided formally to reject Kyoto (Yandle and Buck 2002, 177). The Bush decision was widely supported by the U.S. Senate and by some important special interest groups, such as the AFL-CIO and the Teamsters Union, which were worried about jobs. Even so, the Bush administration became the target of vitriolic criticisms from our European cousins.
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Although not one European country had ratified the agreement at the time, the United States was described by various European spokesmen as being “completely irresponsible” and “guilty of sabotage” (Andrews 2001, 1).

Two Competing Kyoto Viewpoints

The 1997 Kyoto Protocol can be viewed in two decidedly different ways. The popular view embraces the public interest theory of regulation and sees the protocol as an enlightened effort (by 84 countries initially and 193 eventually) to reduce greenhouse gas emissions to 1990 levels by 2012 (Sparber and O’Rourke 1998; UN 1997). For the protocol to become binding, at least 55 countries, collectively responsible for at least 55 percent of 1990 carbon emissions, had to ratify the agreement (UN Framework Convention on Climate Change 2011). This requirement was met on February 16, 2005, when Russia ratified the protocol (Pershing 2005).

The protocol allowed countries that reduced emissions below 1990 levels to bank those reductions and sell them in a future carbon offset market. Russia’s willing endorsement was prompted partly by the prospect of earning $10 billion from the sale of carbon emission reductions that had accrued to the country by virtue of its recent economic collapse (Ferriter 2005). With Russia in the fold, the United States and Australia were the only industrialized countries that remained outside the Kyoto family.

When viewed through the public interest lens, the Kyoto plan looks a lot like an enlightened effort to save the planet from human harm.
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But the fact that Kyoto set limits for higher-income industrialized nations while leaving the developing world unconstrained begs for a less benign interpretation. After all, the 1997 emissions from the developing world were almost equal to those of the richer world—and rising fast. Indeed, by 2011 developing economies accounted for 58 percent of total emissions, with China alone responsible for 23 percent of world emissions (Wilted Greenery 2011, 73). In December 2012, former World Bank chief economist and noted climate change analyst Nicholas Stern indicated that based on current calculations, by 2030 the developing world would be emitting 37 billion to 38 billion tons of carbon annually while the developed world’s emissions would be about 11 billion to 14 billion tons (Harvey 2012). He went on to note that even if the developed world cut emissions to zero, world emission levels would still exceed 1990 levels.

The facts leave the public interest theory for parlor discussions and call for a special interest interpretation, a Bootlegger/Baptist explanation, to shed light on what really happened. Viewed through the Bootlegger/Baptist lens, Kyoto is about redistributing income from higher- to lower-income countries and creating a process that enables interest groups to build profitable cartels. Kyoto delivered a bright green invitation to a major-league pork cookout.

The Carbon Commons

As with most environmental issues, the problem Kyoto sought to address begins with a commons: an unfenced resource that tends to be overexploited. One way to avoid that undesirable outcome, often dubbed the “tragedy of the commons” (Hardin 1968), is to string regulatory barbed wire around the commons. We know that regulatory fences and other forms of rationing can convert tragedy into triumph by preserving vital resources. But we should also anticipate that pork-seeking efforts to influence regulatory strategies will help determine just how those fences are built (Buchanan and Tullock 1975).

Coordinated output restrictions are necessary to gain the support of Bootleggers in a Bootlegger/Baptist coalition: even the most public-spirited companies would be foolish to limit their own emissions unless they are assured their competitors will do the same. Better still, however, would be a restriction that generates extra profits—money that the Bootlegger can take to the bank. Regulators can reduce carbon dioxide emissions in at least five ways. Consider the following choices.

Choice 1: Performance standards

The simplest and perhaps most cost-effective way is to announce a reduction goal that applies to all emission sources along with penalties for failure to meet the goal. Then monitor what comes out of the smokestack and enforce the rule. This approach is called setting a performance standard. Emitters can accomplish the goal any way they wish. Competition will drive firms to discover low-cost ways to bring down emissions. Some firms may decide to switch fuels. Others may install new technologies. Still others may just shut down their dirtier plants. One way or another—assuming credible enforcement of the law—the goal will be met. But note that the regulated firms gain no pork. The best Bootleggers can hope for is avoiding penalties—not putting money in the bank. Baptists may like this approach, but no decent Bootlegger would lobby for it.

Choice 2: Taxing emissions

Instead of announcing a performance standard and leaving it to dischargers to find solutions, the regulator can experiment with taxing emissions. This can be done with a combination of performance standards and emission taxes. A goal is set, and any firm that emits more than its allocated share must pay a tax on each unit discharged. An even simpler approach just imposes taxes on each unit of emission. These can be raised and lowered as necessary to bring about the desired goal. To avoid paying taxes, dischargers will search for cleaner ways to operate their plants. Plant operators may change fuels, alter technologies, and shut down dirty plants.

Taxes induce companies to find efficient ways to meet environmental goals. Furthermore, emission taxes offer a special advantage to deficit-stricken nations eager for additional revenues. If deficits are not a problem, then emission tax revenues may be used to replace other more burdensome taxes, such as personal income and employment taxes, yielding what some call a “double dividend” (Carraro, Galeotti, and Gallo 1996; Green, Hayward, and Hassett 2007). The regulator would accomplish two things: emissions would be reduced, and the economy would be made more productive by the removal of less-efficient taxes.

So what’s the problem? Well, for one, taxes rob Bootleggers of pork they might otherwise earn. Thus, special interest groups lobby aggressively against them. Even if these challengers can be defeated, the happy story sketched above makes a heroic assumption: that all-knowing regulators dedicated to finding the most efficient outcome are running the show. A more realistic alternative is that those regulators, or at least their bosses in Congress, end up captured by Bootleggers and assess a tax in the manner most favorable to influential industry players.

Choice 3: Adopting technologies

Taking a different approach, regulators might specify particular technologies that must be used in different plants and industries. Then, providing proof that specified technologies are installed and operating is sufficient to satisfy the regulator. This approach, which is called the use of technology-based standards, is the approach found in U.S. clean water and clean air statutes. Once again, however, Bootleggers don’t particularly like this approach unless (a) the Bootlegger happens to hold patents on the technology specified, (b) the Bootlegger already uses the technology but his competitors do not, and (c) stricter standards are required of new and expanding firms than for existing firms. It turns out that U.S. technology-based standards have set stricter standards for expanding firms, much to the Bootleggers’ delight.

Choice 4: Cap and trade

Finally, the regulator may take a cap-and-trade approach. The “cap” part of this approach sets an overall output goal to be met by all polluters taken together—in this case, so many tons of carbon emissions annually. The “trade” part allows individual polluters to reduce more than the initial constraint and to sell the extra reductions to others who reduce less. In essence, cap-and-trade creates an asset: a tradable allowance that may be sold.

Now when the binding constraint is announced, provided the associated rights are assigned to polluters at no charge, Bootleggers who know how to clean up at low cost can dance all the way to the bank. They have gained a new source of earnings: profits from selling the rights to the emissions they’ve managed to cut. If the Bootleggers are forced to pay for the initial and future distribution, however, then all bets are off. There would be no money to take to the bank. Once again, no Bootlegger worth his salt would support paying for such a scheme.

From the standpoint of a viable Bootlegger/Baptist solution, the cap-and-trade approach to managing the environmental commons is hard to beat. The environmental Baptists like the “cap” part of the plan, and the Bootleggers like the “trade” part—as long as those initial permits are distributed free of charge.

Choice 5: Common law protection

In desperation, a regulator might take the approach of the old common law and assign property rights to unsullied air quality to parties downstream from carbon dioxide dischargers. Then if the polluters fail to reduce emissions, public defenders can organize public nuisance suits against the dischargers and seek court injunctions to shut them down as well as pay compensatory damages. Common law solutions may work so well that Bootleggers never support a common law regime (Meiners and Yandle 1999). Again, there is just no money in it for the Bootlegger.

Although a common law approach to reducing carbon emissions may seem far-fetched, just such an effort was mounted by attorneys general for eight northeastern states. The attorneys general brought a common law nuisance case against electric power generators whose emissions were received by those states. Arguing that environmental costs had been imposed on the affected populations against their will, they eventually made it to the U.S. Supreme Court. In June 2011, the Court ruled unanimously against the plaintiffs in
American Power v. Connecticut
. Speaking for the majority, in an opinion that must have made the Bootleggers and Baptists happy, Justice Ruth Bader Ginsburg wrote: