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Obama's Missing Ideas

By Sebastian Mallaby
Monday, February 25, 2008

"Understand that what's lacking right now is not good ideas," Barack Obama declared in Thursday's debate. "The problem we have is that Washington has become a place where good ideas go to die." The audience applauded heartily, and Obama's lines boomed out of my radio at breakfast the next morning. But the truth is that, on some of the big issues facing the next president, good ideas are actually quite scarce. Just take a look at climate change.

A couple of years back, ethanol was touted as a good answer to global warming. Venture capitalists poured cash into the concept of powering vehicles with crops from the Midwest rather than oil from the Middle East, and farmers were delighted. But a new article in the journal Science demonstrates that the ethanol craze is premised on an accounting error. If you grow crops to turn into biofuel, you are using land; somewhere in the world, forest or grassland will probably be plowed to make up for the acreage taken out of food production. If you account for the greenhouse gases released by that plowing, fueling cars with corn-based ethanol almost doubles greenhouse gas emissions for every mile driven, according to Timothy Searchinger, the lead author of the Science article. Ethanol made from switch grass would boost emissions 50 percent, assuming the grass was planted on good cropland.

Then there is carbon trading with developing countries. The system developed under the Kyoto Protocol allows companies in the rich world to pay companies in the poor world to reduce emissions. This sounds like another smart idea: Emissions can be cut cheaply in developing countries, so we get to reach our climate goal without too steep a financial penalty. But emissions trading with developing countries has been a bust. China has deliberately designed factories to release prodigious quantities of greenhouse gases, then pocketed billions for redesigning them.

So two apparently excellent climate-change ideas have been rudely pierced. Biofuels not only fail to reduce global warming but they also consume billions in taxpayer subsidies. To the extent that they take land from farming rather than forestry or pasture, they push up the cost of food, hurting the poor. Meanwhile, emissions trading with poor countries has poured billions into the coffers of the Chinese state, which is already sitting on $1.5 trillion in foreign exchange reserves and hardly needs the money.

If these policies don't work, perhaps there are plenty of other good ideas with which to replace them? Like John McCain and Hillary Clinton, Obama favors a cap-and-trade regime. This is indeed a good idea, and the candidates are right to back it. But a cap-and-trade system is not the silver bullet that advocates sometimes imply. The same is unfortunately true for that other popular cure-all, a carbon tax.

Consider these policies' effects on the construction industry. Let's say a green design, which minimizes the use of climate-warming materials such as steel and cement, boosts the cost of building a home from $300,000 to $320,000. A $21,000 tax on the extra carbon released in making the standard home might induce people to build the green one. The same goes for a cap-and-trade regime in which the permit to release the extra carbon costs $21,000. But this price mechanism doesn't work if you can import the cement and steel from countries in which carbon isn't taxed or capped.

For the near future, this import loophole will be large, because there's no way that most countries will sign on to a unified tax or cap-and-trade regime. In the absence of international harmonization, cap-and-trade will work well in non-tradable sectors such as transportation. But it won't work so well with tradable goods, and it will push what remains of carbon-intensive U.S. manufacturing to other countries. Given Obama's threats to withhold tax breaks from firms that shift American jobs abroad, he must admit this is a quandary.

So it just isn't true that we have all the good ideas we need -- at least not on climate change. And it's peculiar that Obama, the brainiac Harvard grad, should dismiss the importance of fresh thinking this way: He is an intellectual, he is beloved by intellectuals, and yet he poses as an anti-intellectual. If he locks up the Democratic nomination and faces off against a brave old airman with little interest in domestic policy, he will want to encourage a debate about ideas. He has the skills to win it.

As it happens, a publication called Democracy: A Journal of Ideas has a neat climate proposal in its next issue. Instead of charging drivers for car insurance at a fixed rate, why not link the insurance cost to the number of miles driven? That would create a new incentive to drive less, cutting carbon dioxide emissions by around 130 million tons per year, according to author Jason Bordoff. Obama should be celebrating this sort of creative thought, not pretending that we have enough of it already.

smallaby@cfr.org

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