The Polluter Pays Principle (PPP) is an environmental policy principle which requires that the costs of pollution be borne by those who cause it. In its original emergence the Polluter Pays Principle aims at determining how the costs of pollution prevention and control must be allocated: the polluter must pay.
Its immediate goal is that of internalizing the environmental externalities of economic activities, so that the prices of goods and services fully reflect the costs of production. Bugge (1996) has identified four versions of the PPP: economically, it promotes efficiency; legally, it promotes justice; it promotes harmonization of international environmental policies; it defines how to allocate costs within a State.
In March of this year over 600 economists signed a statement (PDF) arguing that "the free allocation of carbon credits to emitting industries under a cap-and-trade program would undermine the program's long-term success." Europe's experience offers a similar lesson.
Unfortunately, after using the logic behind the principle to his political advantage during the campaign, President Obama is now wavering on his promise to fight for it to be incorporated into law.
On October 8th, 2007, as the Democratic primary was taking shape, then-candidate Barack Obama staked out a position to the left of his opponents on energy policy by calling for a 100% auction of all pollution emissions permits (emphasis mine):
In addition to this cap, all polluters will have to pay based on the amount of pollution they release into the sky. The market will set the price, but unlike the other cap-and-trade proposals that have been offered in this race, no business will be allowed to emit any greenhouses gases for free. Businesses don't own the sky, the public does, and if we want them to stop polluting it, we have to put a price on all pollution. It's time to make the cleaner way of doing business the more profitable way of doing business.
An early draft of his energy plan (PDF) was released simultaneously:
100% Allowance Auction: Without a profit motive or incentive to innovate, corporations do not spend time or money to develop new clean ways of doing business. Obama's cap-and-trade system will require all pollution credits to be auctioned. A 100% auction ensures that all polluters pay for every ton of emissions they release, rather than giving these emission rights away for free to coal and oil companies.
As Grist's David Roberts noted at the time, the 100% auction of emissions permits was the aspect of Obama's plan that was superior to what candidates Clinton and Edwards were offering.
The fact sheet currently (June 2009) on barackobama.com (PDF) includes an identical statement, with the emission of one strongly worded sentence:
Without a profit motive or incentive to innovate, corporations do not spend time or money to develop new clean ways of doing business.
As the general election campaign began in earnest in June of 2008, team Obama once again used his commitment to the polluter pays principle to differentiate himself from the opposition:
Obama's camp attacks McCain's program as a huge government giveaway. Says Jason Grumet, Obama's principal advisor on energy and the environment: "McCain, in contrast to his self-description as a fiscal conservative, would give hundreds of billions of dollars of emissions permits away to the energy industry in the hope that they would pass the savings on to consumers."
In August of 2008 the Obama-Biden campaign released a new energy plan (PDF), which included this language:
The Obama‐Biden cap‐and‐trade policy will require all pollution credits to be auctioned. A 100 percent auction ensures that all industries pay for every ton of emissions they release, rather than giving these valuable emission rights away to companies on the basis of their past pollution.
On March 3rd, OMB Director Peter Orszag told the House Energy and Commerce Committee the inconvenient truth about giving pollution permits to corporations absolutely free of charge:
If you didn't auction the permits it would represent the largest corporate welfare program that has ever been enacted in the history of the United States. All of the evidence suggests that what would occur is that corporate profits would increase by approximately the value of the permits.
At a Business Roundtable event on March 12th, the President's language took a turn for the worst. Daniel Fulton, President of the paper and cardboard product company Weyerhaeuser, asked this question:
I just wanted to comment that a number of us in the business community are concerned that a hundred percent auction will effectively be a tax that would impose significant costs on energy-intensive industries such as some that we operate, and may impact existing industries' ability to fund needed investments in new low-carbon technologies.
I just wondered if you could explain how the hundred percent auction approach would work in our highly challenged economy -- because we're all feeling a lot of pressure today on costs -- and yet still preserve jobs for existing industries, and strengthen our existing manufacturing sector.
The President's answer still reads like a punch to the gut:
Well, let me start by saying this. I said during the campaign we were looking at a hundred percent auction. We are not going to be able to move this in an effective way without partnership with the business community. But we just -- we can't get it done. And for businesses like yours that are committed to the concept and the idea, we're going to work to make sure that it works for you.
That is a far cry from "ensures that all polluters pay for every ton of emissions they release."
He continued (emphasis mine):
Now, the experience of a cap and trade system thus far is that if you're giving away carbon permits for free, then basically you're not really pricing the thing and it doesn't work, or people can game the system in so many ways that it's not creating the incentive structures that we're looking for. The flip side is, you're right, if it's so onerous that people can't meet it, then it defeats the purpose -- and politically we can't get it done anyway.
Seeing that the President's insistence on the polluter pays principle was beginning to falter, his advisers and spokespeople soon followed suit. On April April 8th 2009, John Holdren, Director of the White House Office of Science and Technology Policy, explained to the Washington Post:
"The idea, obviously, is to end up with a bill that reflects both the thinking of Congress and the administration, a bill that the president can sign," Holdren said, adding of a 100 percent auction, "whether you get to start with that or get there over a period of time is something that's being discussed."
In the same Post article, a white House spokesman gave Democrats in Congress the go-ahead they needed to gut the provision from legislation moving through a House Committee (emphasis mine):
"[The president's] preferred approach was 100% auction to create incentives for companies to reduce their greenhouse-gas emissions," said White House spokesman Ben LaBolt. "Members of Congress are looking at a variety of policy options to help us make that transition, and the administration will be flexible during the policy-making process as long as those larger goals" of a clean-energy economy, "green" job creation and cutting oil imports are met, he said in an email.
The President's final budget proposal, released in May, included a 100% auction provision which would generate $646 billion over ten years. By this point though, Democrats in Congress had other plans.
On May 15th, once it became clear that approximately 85% of emissions credits would be given away free of charge in the Energy and Commerce markup, White House spokesman Robert Gibbs offered this nuanced statement:
"Some of the details may not be perfect into what the president campaigned on, " he said.
"I think we believe that the legislation, as the president said a few days ago, represents a big step forward in dealing with dangerous greenhouse gases," he said.
Asked if the White House is disappointed that just 15% of the permits would be auctioned, Gibbs said, "I think they're looking through that. I know that this is the first step in this process."
Just a few days later, the House Energy and Commerce Committee approved the American Clean Energy and Security Act. The heavily compromised version of the legislation they ended up with gives away nearly 85% of emissions credits absolutely free of charge. President Obama's statement on the Committee vote was notably absent of any language encouraging the strengthening of the bill.
Here is the short version of how this has played out so far. President Obama clearly understands the importance of incorporating the polluter pays principle into clean energy legislation. He used it to differentiate himself from his opponents in both the primary campaign and in the general election. In the months that followed, polluting corporations invested hundreds of millions of dollars in advertising and bribery to safeguard their ability to pollute with impunity. Sensing the political difficulty of fulfilling his campaign promise of making polluters pay for poisoning the planet, President Obama has indicated willingness to compromise on this fundamental principle. The House Energy and Commerce, following the President's lead, has now essentially gutted the polluters pay principle from the American Clean Energy and Security Act.
This is President Obama's first major test on energy and environmental policy, and he appears to be giving up without a fight. This is not acceptable. President Obama, you know corporations should have to pay to pollute. You said yourself that the public owns the skies, not corporations. You led us to believe you would fight for this principle once you were elected President. You used this very issue to attack Senator McCain, calling opposition to 100% auction of emissions credits a massive corporate giveaway. Why are you wavering on your promise to the American people?
As the American Clean Energy and Security Act continues its treacherous path through the legislative process, there will be opportunities for it to be strengthened. But activists and environmentalists do not have the resources to purchase Members of Congress like industry does. Democratic leadership in the House can not even keep their own Members in line. We need a strong voice fighting to make the bill more just and more effective by adhering to the polluter pays principle. President Obama is the only person capable of making that argument right now. We will be watching, and waiting, for him to do the right thing.
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