Thoughts on Cap And Trade

Over on the FH Public Affairs blog, Silvio has a post with four reasons why cap-and-trade legislation won’t pass this year. Frankly, I was surprised to hear Obama ask for legislation in 2009 — though who knows if that was just an abdication of responsibility — because I think the politics are especially tricky for Rust Belt Democrats. Which is to say, if cap and trade legislation fails, it will not be because of the following things:

Cap and trade hasn’t worked to date Two functioning systems exist in the European Union and in the Northeast U.S. and Canada. Another, in the Northwest U.S. and Canada, is in the works. The EU’s system is the most mature, includes 21 countries, and commenced auctions in 2005. However, the system has not worked as promised, primarily because of an over-allocation of credits to induce participation. The Northeast system, or RGGI, includes 10 states and began functioning in 2008. It has held two successful auctions and raised roughly $140 million dollars. This is no small sum, but only equals a price of $3 per credit – far below the $50 estimate economists consider necessary. On the West Coast, the nascent WCI left many details to individual states, is hampered by vocal business opposition groups, and has not yet held an auction.

First, while there’s no question the EU stumbled out of the gates, things are improving, and credits are currently selling for $17 per ton and had been up to $38 per ton as of the Summer 2008. In addition, the EU scheme is auctioning well below 100 percent of the permits (they are now planning to ratchet up to 60 percent) which not only reduces revenue while less effectually curbing emissions, but also results in de facto price hikes for consumers regardless of how the permit was obtained. In other words, the problems with the EU scheme stem from correctable problems with the policy as implemented. Suggesting that cap and trade won’t work in the US because it hasn’t worked in Europe is like saying the shotgun spread isn’t a viable NFL offense because it didn’t work for the local JV squad. Finally, I’m not sure how being “hampered…by local business groups” is reflective of a policy’s worthiness.

America is suffering economically The central tenet of cap-and-trade is that pollution becomes expensive, and polluters are forced to clean up. Again, great in theory, but businesses pass cost onto consumers and the cost of generating electricity will spike – estimates place annual cost increases between seven and thirty-four percent. Homeowners are already struggling with energy costs, and stories abound of businesses closing their doors because they can’t pay utility bills. With the national economy already in serious recession, I can’t imagine a national groundswell of support for a proposal that would raise costs. Obama’s new budget assumes major revenue from the market, but exact estimates are fuzzy. Past Congressional estimates projected revenue of at least $50 billion per year by 2020. This could help offset consumer costs, but what happens until then? And are those estimates realistic, given the EU and RGGI markets?

This is one of the obvious benefits of easing in to the plan. It’s highly unlikely that any legislation would be enacted before 2011 or 2012, which would give time for the economy to recover and businesses to prepare for the cap. What’s more, this point reflects a general tendency to think of carbon emissions emanating primarily from power producers. This simply isn’t the case. For example, experts cite beef production as a source of roughly 11 percent of all US carbon emissions. Moreover, there are countless ways of reducing carbon footprint without inflating your total cost: take public transportation, carpool, use less air-conditioning, try a space heater, etc.

Other major economies must participate Most economists predict cap-and-trade implementation will hamper business and GDP to some degree. In this reality, unless other major economies implement similar systems, America faces a competitive economic disadvantage. Canada recently signaled they will follow suit, but China’s support has been tepid at best. China has made great strides in renewable power generation, but recently surpassed the U.S. in carbon emissions and opens roughly one coal-fired plant per day. The Kyoto Treaty showed what happens when all major players don’t agree to the same terms – the system does not work. To that end, it’s no surprise Secretary of State Clinton’s first overseas trip included climate talks with China. Put simply, as the other dominant world economy, China needs to play ball.

Leaving aside for the moment that we’re already lagging behind the EU, the US produces 22 percent of the world’s carbon emissions, and that the our per capita carbon emissions are roughly 8 times those of China’s, I’m not really sure why this is relevant. First, from a perspective of optics, the US prides itself on being a world leader. Typically, this is invoked as a reason to invade other countries, but there’s really no reason why it can’t apply to preventing calamitous environmental break down. This brings me to my second and final point: reversing climate change isn’t about holding hands, pleasing constituiences, or fairness. It’s about maximizing the survavability of our planet.  Climate change is real and if we don’t quickly, the economic (not to mention human) consequences stemming from environmental catastrophe will be far worse than anything resulting from cap and trade. Anyone who has bothered to look at the evidence knows this, which is why Silvio’s point here is really the only thing that matters.

The bill may not make it through Congress Senate Majority Leader Harry Reid and House Speaker Nancy Pelosi have stated they will pass a cap-and-trade bill this year, but they still need the votes. The recent economic stimulus bill showed just how close the Senate is – 60 votes were required for passage and Obama needed three Republican votes. This week, the “Gang of 16,” a group of Midwestern and industrial state Democrats, signaled they may not support the system unless concessions are made for their state’s coal- and manufacturing-dependant economies. If Democratic votes peel away because of constituenties at home, potential Republican votes will become even harder to secure. On an issue the GOP has typically opposed, this may be an impossible task.

This is a political problem, not a policy problem.

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One Response to “Thoughts on Cap And Trade”

  1. Matt Dernoga Says:

    Nice post. One problem I’m facing in my state of Maryland is our Governor is poorly using the meager funds our RGGI policy is generating

    http://madrad2002.wordpress.com/2009/03/15/omalley-raiding-70-million-from-efficiency-fund/


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