The current conventional wisdom - broadly echoed by the news media and the blogosphere - is that comprehensive, economy-wide CO2 cap-and-trade legislation is dead in the current U.S. Congress, and perhaps for the next several years.
Watch out for conventional wisdoms! They inevitably appear to be the collective judgment of numerous well-informed observers and sources, but frequently they are little more than the massive repetition of a few sample points of opinion across the echo-chamber of the professional news media and the blogosphere.
Keep in mind that the conventional wisdom as recently as June of 2009 had it that - with the Waxman-Markey bill having been passed triumphantly by the House of Representatives - Senate action would follow; the only question raised by many commentators was whether the final legislation could be sent to the President for his signature by the time of the Copenhagen climate talks in December. My, how the conventional wisdom has changed!
But over the past nine months, the politics have not fundamentally changed. In June of 2009, passage of meaningful climate legislation in the Senate was already unlikely, because of the terrible economic recession in which the country found itself, and - of even greater political salience - lingering high rates of unemployment. And with the lack of Republican support for the stimulus bill, the relatively small (partisan) margin by which the House passed Waxman-Markey, the then-upcoming challenges of health care and financial regulatory reform dominating the legislative calendar, and concerns voiced about climate legislation by moderate Senate Democrats, success in the Senate was always a long-shot.
What is the Likely Legislative Outcome?
In addition to ongoing consideration of an economy-wide cap-and-trade system, another possibility now receiving attention is a utility-only cap-and-trade system, which some members of the Congress inexplicably find more attractive than an economy-wide approach. The result of such a system would be much less accomplished (forget about the President's "conditional commitment" under the Copenhagen Accord), and at much greater cost. This would be equivalent to taking the Northeast's Regional Greenhouse Gas Initiative (RGGI) as a model for national action. Not a good idea.
Even more likely is that the Congress would develop a so-called energy-only bill, which would - to a large degree - consist of killing the one part of Waxman-Markey worth saving (the comprehensive CO2 cap-and-trade system), and moving forward with the worst parts of that legislation - the smorgasbord of regulatory initiatives. As I've written previously, those additional elements of the legislation are highly problematic. When implemented under the cap-and-trade umbrella, many of those conventional standards and subsidies would have no net greenhouse-gas-reducing benefits, would limit flexibility, and would thereby have the unintended consequence of driving up compliance costs. That's the soft under‑belly of the House legislation.
Without the cap-and-trade umbrella, that same set of standards and subsidies will accomplish very little, and do so at exceedingly high cost. Take just one example that seems to be popular among politicians - "renewable portfolio standards" (RPS), requirements that all states or all electricity utilities derive some fixed share of their power, say 20%, from renewable sources. Note, for example, that such an approach does not distinguish between coal and natural gas, despite the dramatically different impacts these fuels have on CO2 emissions (and a host of other environmental outcomes). Furthermore, although an RPS may displace some new coal-fired generation with other types of generation, there is little, if any, effect on the operation of existing coal-fired power plants.
If those other, regulatory parts of the climate legislation are so ineffective and so costly, why are they so popular with politicians? The reason is simple. The costs are hidden. The government simply mandates that electric utilities or manufacturers take particular actions, employing the best technology available. Where's the cost? Unlike a cap-and-trade system, there's no analysis and debate about the cost of allowances (and the marginal abatement costs they represent); and unlike a carbon tax, there's no analysis and no focus on the dollar amount of the tax and the aggregate cost. That is the unfortunate but fundamental political economy behind much of U.S. environmental policy since the first Earth Day in 1970.
What about Court-Ordered Regulation?
Whether "best-available-control technology standards" are crafted by the Congress or put in place by the Environmental Protection Agency (EPA) under the court-ordered mandate stemming from the Supreme Court decision in Massachusetts v. EPA and the Obama administration's subsequent "endangerment finding," such an approach will be relatively ineffective and terribly costly for what is accomplished. The EPA route would essentially apply the mechanisms of the Clean Air Act, intended for localized, "criteria air pollutants," to CO2, resulting in ineffective and costly regulations.
The White House (and most member of Congress) recognize that this is an inappropriate way to address climate change, but they seem determined to go forward, claiming that this threat will force the hand of Congress to do something more sensible instead. Unfortunately, this is akin to my telling you that if you don't do what I want, I will shoot myself in the foot - not a very credible or intelligent threat. What I am referring to is that costly Clean Air Act regulation of CO2 will play into the hands of right-wing opponents of climate action, creating a poster-child of excessive regulatory intervention that will bring about a backlash against sensible climate policies. EPA claims that there will be no such excessive regulatory actions, because it will exempt small sources through a so-called "tailoring rule." But legal scholars have noted that the tailoring rule stands on questionable legal grounds and could be invalidated by the courts. In this regard, note that the first lawsuits to stop EPA from exempting small sources are coming from groups on the right, not the left.
Perhaps Senator Murkowski's proposed joint resolution (H.J. Res. 66), introduced on January 21, 2010, disapproving (stopping) EPA's regulatory action under the endangerment finding could save the Administration. The conventional wisdom is that Senator Murkowski's resolution has no political future, but with a bi-partisan list of 40 co-sponsors, that's a total of 41 votes (more than the current total of 40 "Yes" and "Probably Yes" votes in the Senate for serious climate legislation, according to Environment and Energy Daily). And remember that the disapproval resolution requires only 51, not 60 votes in the Senate, under the rules of the enabling statute, the Congressional Review Act of 1996 (signed by President Clinton, and part of the Republican "Contract with America"). Of course, House action, not to mention signature by President Obama, would also be required for the resolution to take effect. But a positive vote in the Senate will send a strong political message.
So Is There No Hope for Good Climate Policy?
Here is where it gets interesting, because as much as the current political environment in Washington may seem increasingly unreceptive to an economy-wide cap-and-trade system or some other meaningful and sensible climate policy, there is one promising approach that could actually benefit from the national political climate.
In these pages, I have expressed support for cap-and-trade mechanisms to address climate change, including the system embodied in the Waxman-Markey legislation that emerged from the House in June of last year. Although that approach is scientifically sound, economically sensible, and may still turn out to be politically acceptable, there's a modified version of cap-and-trade that could be much more attractive in this era of rampant expressions of populism, coming both from the right ("no new taxes") and the left ("bash the corporations"). Neither of those views, of course, is consistent with sound economic thinking on the environment, but it's nevertheless possible to recognize their national appeal and build upon them.
This could be done with a simple upstream cap-and-trade system in which all of the needed allowances are sold (auctioned) - not given freely - to fossil-fuel producers and importers, and a very large share - say 75% - of the revenue is rebated directly to American households through monthly checks in a progressive scheme through which all individuals receive identical payments.
Such an approach could appeal to the populist sentiments that are increasingly dominating political discourse and judgments in this mid-term election year. Such a system - which would have direct and visible positive financial consequences (i.e., rebate checks larger than energy price increases) for 80% of American households - might not only not be difficult for politicians to support, but it might actually be difficult for politicians to oppose!
Importantly, even though this is a specific type of cap-and-trade design (which has been known, studied, and proposed for decades), for better political optics, it should be called something else. How about "cap-and-dividend?"
A CLEAR Answer?
What I've described bears a close resemblance to the "Carbon Limits and Energy for America's Renewal (CLEAR) Act," sponsored by Senators Maria Cantwell (D-Washington) and Susan Collins (R-Maine). So, the politics of their proposal looks appealing, and the substance of it looks promising - a simple upstream cap-and-trade system (called something else), with 100% of the allowances auctioned (with a "price collar" on allowance prices to reduce cost uncertainty), 75% of the revenue refunded to all legal U.S. residents, each month, on an equal per capita basis as non-taxable income, the other 25% of the revenue dedicated to specified purposes, including "transition assistance," and some built-in measures of protection for particularly energy-intensive, trade-sensitive sectors (not unlike Waxman-Markey).
That's the good news. The bad news, however, is that the proposal needs to be changed before it can promise to be not only politically attractive, but economically sensible. In particular, as it is currently structured, only producers and importers of fossil fuels can buy the carbon allowances. In an up-stream system - an approach I have endorsed for years - it is producers and importers that are subject to compliance, that is, must eventually hold the allowances. That's fine. But there is no sound reason to exclude other entities from participating in the auction markets; and doing so will greatly reduce market liquidity.
Furthermore, the Senators' proposal says that holders of carbon allowances are actually prohibited from creating, selling, purchasing, or trading carbon derivatives, thereby tremendously reducing the efficiency of the market and needlessly driving up costs. While no doubt borne out of a well-intentioned desire to protect consumers (remembering the recent impacts of mortgage-backed securities on financial markets), the Senators' approach is akin to responding to a tragic airplane crash by concluding that the best way to protect consumers from air disasters in the future is simply to ban flying.
These and other important problems with the CLEAR proposal can - in principle - be addressed while maintaining its basic structure and political attraction.
An Economic Perspective
It is interesting to note that many - perhaps most - economists have long favored the variant of cap-and-trade whereby allowances are auctioned and the auction revenue is used to cut distortionary taxes (on capital and/or labor), thereby reducing the net social cost of the policy. Cap-and-Dividend moves in another direction. This system (which was introduced several years ago in the "Sky Trust" proposal) has some merits compared with the economist's favorite approach of tax cuts, namely that the Cap-and-Dividend scheme addresses some of the distributional issues that would be raised by using the auction revenue to fund tax cuts (which could favor higher income households). On the other hand, it eliminates the efficiency (cost-effectiveness) gains associated with the tax-cut approach. In fact, Stanford's Larry Goulder has estimated that the tax-and-dividend approach would cost 40% more than an approach of combining an auction of allowances with ideal income tax rate cuts. (By "ideal," I mean focusing on tax cuts that would lead to the lowest net cost.)
In general, there are sound reasons to seek to compensate consumers for the energy price increases that will be brought about by a cap-and-trade system, or any meaningful climate change policy. But it is important not to insulate consumers from those price increases, as diluting the price signal reduces the effectiveness and drives up the cost of the overall policy. Thus, "compensation" as in Cap-and-Dividend is fine, but "insulation" is not.
The most politically salient question with the Waxman-Markey approach of freely allocating a significant portion of the allowances to the private sector is how to distribute (that is, who gets) those allowances which are freely allocated. In this regard, contrary to much of the hand-wringing in the press, the deal-making that took place in the House and may still take place in the Senate for shares of free allowances is an example of the useful and important mechanism through which a cap-and-trade system provides the means for a political constituency of support and action to be assembled without reducing the policy's effectiveness or driving up its cost.
The ultimate political question seems to be whether there is greater (geographic and sectoral) political support for the Waxman-Markey (H.R. 2454) approach of substantial free allocations and targeted use of auction revenue, or if there is greater (populist) political support for the full auction combined with lump-sum rebate which characterizes the "cap-and-dividend" approach. Alas, the textbook economics preference -- full auction combined with cuts of distortionary taxes -- appears to be a political, if not academic, orphan.
NFW.
Just tax emission at about 1$ per ton Carbon equivalent for mercury, curies, Co2, So2, etc...
Remove all subsides, break, grants and insurance from Fossils and nukes, they have had 50 and 100 years!
Put no new money into fossils and nukes.
Put all the money for new energy into
rooftop pv solar, Wind, efficiency and waste Biofuels.
These four techs can supply 3 times the total electricity and fuels the world needs for a first world energy budget,
Quickly, safely, clean, cheaper and forever.
See my profile for proof and links.
Rooftop PV lasts 20 years then has to be sent to a toxic waste dump, cost 35 cents a kwh average , and would provide only 3% of US energy needs if mounted on the rooftop of every houshold in the US.
Wind has to be balanced with so much natural gas plant that we might as well just build the gas plant and forget the wind. No GHG savings there.
Efficiency is a pipedream. The worlds poor want our energy lifestyle not led bulbs.
Waste biomass is required for organic soil conservation. None left for wasteful fuel production.
A worldwide investment in 10000 new mass produced nuclear reactors would be paid for by and would end fossil fuel use, eliminate most air pollution saving millions of lives, end the global warming/peak oil problem with a 100% elimination of GHG's within a ten year time frame, is a great job producing economy boosting investment, requires only a small part of our industrial capacity, and pays for itself in less than three years.
Upfront cost would be 10% of the world's annual GDP.
CDS investment insurance reached 10 times the world GDP.
but 10% is too much???????
http://www.huffingtonpost.com/2010/01/22/frank-luntz-advice-to-env_n_432703.html
One last thing: do refer to the environmental costs which corporations have heretofore passed onto customers as "externalities." We like learning new words for concepts we may have only vaguely considered previously. It also tends to give the impression that fancy-dressed "college boys" understand the same reality in which everybody else labors.
Palin followers are not really populists. Just trust me on that.
http://www.blm.gov/ca/st/en/info/newsroom/2009/may/DOI_Reweable_permitting_offices.html
Americans have an estimated 206 gigawatts of wind energy potential on public lands in the West. An estimated 2,900 gigawatts of solar energy potential in the southwest. And an estimated 1,000 gigawatts of wind energy potential in waters off the Atlantic coast alone.
A clean energy economy also means new jobs and economic development for rural America, Salazar noted. "Rural communities are on the leading edge of the renewable energy frontier. In Colorado, where I'm from, we're adding thousands of jobs at new wind turbine manufacturing plants in places like Pueblo, Brighton, and Windsor. Ranchers across the eastern plains are earning extra money as wind farms spring to life. And in my native San Luis Valley - one of the poorest areas of the country - a new solar farm has brought hope for a brighter economic future."
I would hate to see unsafe nukes,
Oh yeah, Chernobyl.
It seems to me that the left is saying “regulate our corporations” not “bash” them, no?
If we have learned anything from this terrible economic recession, it is that a lack of regulation leads to chaos. The proposed regulations would impose fair equal burden on all stakeholders, reflecting a shared sense of responsibility, whereas in the act of Emissions Trading, like your beloved CO2 cap-and-trade proposals, responsibility is displaced for their manufacture.
Today’s discourse on Emissions, is reminiscent of the antiquated “diffusion is the solution” approach that was once advocated for pollution in oceans.
There are no safe levels of pollution. The addition of explicit regulations on Emissions will be essential for ensuring long-term Public Health.
It is unfair to compare costs of the mainstream to Renewable Energy sources, since mainstream energy has great impacts which are not, at present, adequately accounted for fiscally.
I am confident that these new regulations will clean up the manufacturing & transportation sectors, ushering in an overdue era of zero-emissions inner&edge city transit for the majority of people in the US, and foster new R&D for clean technology.
It seems to me that the left is saying “regulate our corporations” not “bash” them, no?
If we have learned anything from this terrible economic recession, it is that a lack of regulation leads to chaos. The proposed regulations would impose fair equal burden on all stakeholders, reflecting a shared sense of responsibility, whereas in the act of Emissions Trading, like your beloved CO2 cap-and-trade proposals, responsibility is displaced for their manufacture.
Today’s discourse on Emissions, is reminiscent of the antiquated “diffusion is the solution” approach that was once advocated for pollution in oceans.
There are no safe levels of pollution. The addition of explicit regulations on Emissions will be essential for ensuring long-term Public Health.
It is unfair to compare costs of the mainstream to Renewable Energy sources, since mainstream energy has great impacts which are not, at present, adequately accounted for fiscally.
I am confident that these new regulations will clean up the manufacturing & transportation sectors, ushering in an overdue era of zero-emissions inner&edge city transit for the majority of people in the US, and foster new R&D for clean technology.
If the science is correct, no matter what we do here, I'll be growing Oranges in Northern Masschusetts.
A thus far hard to believe and little known energy source, fractional Hydrogen, lets a barrel of ordinary water become the energy equivalent of 200 barrels of oil.
If automotive applications of this revolutionary breakthrough are developed rapidly enough, the projected increase in the price of oil might be dramatically halted and conceivably reversed.
Thus far, since the science is not yet generally accepted, the White House and the U.S. Department of Energy understandably ignore this urgent work.
Our competitor, BlackLight Power, is the subject of a recent article: Newly Discovered Hydrinos can Provide Cheap Power for the World. Read it at: http://www.american-reporter.com They call fractional Hydrogen hydrinos. We call it ECHO - Energy from Collapsing Hydrogen Orbits. ECHO makes possible SPICE - a Self Powered Internal Combustion Engine.
A car with a hybrid SPICE fueled by ECHO is expected to travel 1,000 miles on a gallon of distilled water.
Even better, the engine can run when the vehicle is parked, spinning a generator and selling electricity to the local utility. No wires required. Such cars and trucks can be expected to pay for themselves!
Two laboratories have validated the BlackLight work. More should do so.
Put on a 24/7 footing without delay, the economic impact might be monumental.
See: http://www.chavaenergy.com
It is possible to create hydrogen by splitting H2O in to 2H and O2 with a Braun's machine, which runs on solar power (electricity). Hydrogen burns better than any fossil fuel and the process creates no emissions other than water.
Today they try to make us believe hydrogen is not feasible, because it is supposedly to dangerous, not fully developed yet, etc. In WW I there were German submarines driving on hydrogen. That was 93 years ago; a long time to develop an engine. Hydrogen is also not more dangerous than propane.
The real problem with hydrogen is this: if you car drives on water, who is going to buy gas for three bucks a gallon?
water + green electricity --> H2 --> to H2 fuel tank --> Fool Cell --> Battery --> electric motor uses 4 times more energy than the much simpler & VASTLY CHEAPER:
green electricity --> battery --> electric motor.
See:
http://www.hydrogenhighway.ca.gov/sb76/workshop/brooks_nov2.pdf
The Hydrogen Economy – Energy and Economic Black Hole - by Alice Friedemann:
http://www.energybulletin.net/2401.html
A couple quotes:
‘‘…No matter how it’s been made, hydrogen has no energy in it. It is the lowest energy dense fuel on earth (5). At room temperature and pressure, hydrogen takes up three thousand more times space than gasoline containing an equivalent amount of energy (3). To put energy into hydrogen, it must be compressed or liquefied. To compress hydrogen to 10,000 psi is a multi-stage process that will lose an additional 15% of the energy contained in the hydrogen.…’’
"...Canister trucks ($250,000 each) can carry enough fuel for 60 cars (3, 13). These trucks weight 40,000 kg but deliver only 400 kg of hydrogen. For a delivery distance of 150 miles, the delivery energy used is nearly 20% of the usable energy in the hydrogen delivered. At 300 miles 40%. The same size truck carrying gasoline delivers 10,000 gallons of fuel, enough to fill about 800 cars (3)...”
What will happen to a Meaningful U.S. energy reform? When it comes to energy-reform we face Exxon (#ONE on the Forbes list). We face Chevron (#2), Conoco Phillips (#3) and we face many more, who make windfall profits right now, with things as they are. Exxon alone had profits of over 40 times of what biggest health group (Cardinal) had in 2009.
If health care fails, there is no question if energy reform will pass. It can't pass, not if it cuts into profits of big oil. If health reform fails, there will be only the question left if we still live in a Republic, or if we are we already in a true Plutocracy?