Pay automakers to cut greenhouse-gas emissions?

You probably did not notice that the auto bailout bill has such a provision. It does; it is the very provision to which Eugene drew our attention yesterday:

(g) WITHDRAWAL FROM CERTAIN ACTIONS. — The terms of any financial assistance under this Act shall prohibit the eligible automobile manufacturer from participating in, pursuing, funding, or supporting in any way, any legal challenge (existing or contemplated) to State laws concerning greenhouse gas emission standards.

Section (g) sounds like a prohibition but recall that the bill does not obligate automakers to do anything. Automakers have the option to turn down financing offered by the "czar." Suppose, then, that automakers believe that the net present value of challenging some current or future state greenhouse gas regulation is 100. Automakers will give up this option only in return for an amount of money greater than or equal to 100. This would take the form of favorable financing terms—interest rates, or whatever. Thus, Congress—that is, the taxpayer—pays automakers not to challenge state greenhouse gas laws that presumably do or will cause automakers to reduce emissions.

You might think that automakers are in no position to demand an extra 100, but that would misconceive what is at stake here. The automakers have quite a bit of bargaining power: if the czar does not give terms that increase the value of equity, then the automakers can go out of business, causing immense suffering to the two important constituencies driving the bill—workers and creditors. Of course, the automakers will be better off with financing than without it, but the point is that they will be better off only if they are better off—meaning taxpayers must give them that extra 100 to cause them to drop positive net present value projects worth 100, on top of everything else.

Well, so what? It is surely better for the automakers to comply with state greenhouse gas laws than to challenge them, and if we have to pay them to comply with these laws, then maybe that is the best we can do. After all, the normal legal response to pollution is to tax or restrict behavior—a federal law that curbs greenhouse gas emissions (several are floating around), and not just of automakers but of everyone. The normal response would impose enormous costs on automakers at the same time that we are trying to reduce their costs! With one hand, we give by reducing the cost of credit; with the other hand, we take away by increasing the cost of production.

If you support the bailout bill as a kind of public works project, then you might have second thoughts. Wouldn't it be better to pay people to engage in useless activity (digging and filling holes, say) than destructive activity (working in factories that emit greenhouse gases and cars that no one wants). If you support the bailout bill because you believe the public relations reason—that it is temporary financing necessary to save a healthy industry during a credit crunch—then you should be uneasy about section (g). Here's why:

1. It almost never makes sense to pay polluters to stop polluting. That exacerbates tax distortions and encourages new entrants into the industry, who will have to paid off as well. Ask yourself how you would respond to this headline: "Congress announces that it will pay industry to stop polluting."

2. The state laws could well be idiotic, and, even if not, inconsistent with the states' constitutions. Why should Congress pay people not to challenge defects in state law? (At present, few, perhaps no, state laws impose meaningful restrictions on automakers but that could change in the future.)

3. Section (g) does not apply to any automaker who refuses a deal; it also cannot apply to foreign automakers. That means foreign automakers remain free to challenge the state laws (by the same token, it won't be necessary to pay domestic automakers much to refrain from doing so).

4. State laws that restrict automakers probably will have virtually no benefit for the climate. Any sensible climate regulation has to apply to all or nearly all sources of greenhouse gases (to avoid substitution to non-regulated activities) and has to apply to the entire nation, indeed to the entire world.

For more on the bill, see Randy Picker, David Zaring ("tough oversight"? where?), and Steven Davidoff.