With the apparent collapse last week of U.S. Senate consideration of a meaningful climate policy, it is important to reflect on what could be a very serious long-term casualty of these acrimonious climate policy debates, namely the demonizing of cap-and-trade and the related tarnishing of market-based approaches to environmental protection.
In an op-ed which appeared on July 27th in The Boston Globe (click here for link to the original op-ed), Richard Schmalensee and I commented on this unfortunate outcome of U.S. political debates and described the irony that the attack on cap-and-trade -- and carbon-pricing, more broadly -- has been led by conservatives, who should take pride as the creators of these cost-effective policy innovations in three Republican administrations.
Rather than summarize (or expand on) our op-ed, I simply re-produce it below as it was published by The Boston Globe, with some hyperlinks added for interested readers.
By the way, for anyone who is not familiar with Dick Schmalensee, let me note that he is the Howard W. Johnson Professor of Economics and Management at MIT, where he served as the Dean of the Sloan School of Management from 1998 to 2007. Also, he served as a Member of the Council of Economic Advisers in the George H. W. Bush administration from 1989 to 1991.
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The Power of Cap-and-Trade
by Richard Schmalensee and Robert Stavins
The Boston Globe, July 27, 2010
LAST WEEK, the Senate abandoned its latest attempt to pass climate legislation that would limit carbon dioxide emissions, putting off any action until the fall at the soonest. In the process, conservative Republicans dubbed the cap-and-trade system "cap-and-tax.'' Regardless of what they think about climate change, however, they should resist demonizing market-based approaches to environmental protection and reverting to pre-1980s thinking that saddled business and consumers with needless costs.
In fact, market-based policies should be embraced, not condemned by Republicans (as well as Democrats). After all, these policies were innovations developed by conservatives in the Reagan, George H. W. Bush, and George W. Bush administrations (and once strongly condemned by liberals).
In the 1980s, President Ronald Reagan's Environmental Protection Agency successfully put in place a cap-and-trade system to phase out leaded gasoline. The result was a more rapid elimination of leaded gasoline from the marketplace than anyone had anticipated, and at a savings of some $250 million per year, compared with a conventional no-trade, command-and-control approach.
In June 1989, President George H. W. Bush proposed the use of a cap-and-trade system to cut by half sulfur dioxide emissions from coal-fired power plants and consequent acid rain. An initially resistant Democratic Congress overwhelmingly endorsed the proposal. The landmark Clean Air Act amendments of 1990 passed the Senate 89 to 10 and the House 401 to 25. That cap-and-trade system has cut sulfur dioxide emissions by 50 percent, and has saved electricity companies -- and hence shareholders and ratepayers -- some $1 billion per year compared with a conventional, non-market approach.
In 2005, George W. Bush's EPA issued the Clean Air Interstate Rule, aimed at achieving the largest reduction in air pollution in more than a decade, including reducing sulfur dioxide emissions by a further 70 percent from their 2003 levels. Cap-and-trade was again the policy instrument of choice in order to keep costs down and achieve the rapid reductions at minimum economic pain. (The rule was later invalidated by the courts, and is now being reformulated.)
To reject this legacy and embrace the failed 1970s policies of one-size-fits-all regulatory mandates would signify unilateral surrender of principled support for markets. If some conservatives oppose energy or climate policies because of disagreement about the threat of climate change or the costs of those policies, so be it. But in the process of debating risks and costs, there should be no tarnishing of market-based policy instruments. Such a scorched-earth approach will come back to haunt when future environmental policies will not be able to use the power of the marketplace to reduce business costs.
Virtually all economists agree on a market-based approach to reduce carbon dioxide emissions. Some favor carbon taxes combined with revenue-neutral cuts in distortionary taxes, whereas others support cap-and-trade mechanisms -- or "cap-and-dividend,'' with revenues from auctioned allowances refunded directly to citizens.
Conventional approaches advanced as "painless alternatives'' -- a plethora of standards, special-interest technology subsidies, and tax breaks -- won't do the job, and will be unnecessarily expensive. While we are struggling to revitalize the economy, we simply cannot afford to turn our backs on markets and impose unnecessary costs on businesses and consumers.
A price on carbon is the least costly way to provide meaningful incentives for technology innovation and diffusion, reduce emissions from fossil fuels, and drive energy efficiency. In the long run, it can reduce our use of oil and drive our transportation system toward alternative energy sources.
Market-based approaches to environmental protection - including cap-and-trade - should be lauded, not condemned, by political leaders, no matter what their party affiliation. Demonizing cap-and-trade in the short term will turn out to be a mistake with serious long-term consequences for the economy, for business, and for consumers.
Lowell Feld: Stop the Senate from Gutting the Clean Air Act!
Just when you thought the U.S. Senate couldn't do any less for clean energy and the environment than it's (not) done so far, we now face the real possibility of what would amount to a "stop-work order" on the Clean Air Act.
Gene Karpinski: The Fight Continues
We are angry and disappointed. The battle must and will continue -- but it is time to shift our focus. The U.S. Senate will not take up comprehensive clean energy and climate legislation prior to the August recess.
We need to immediately stop emitting carbon, so the law needs to basically be "you can't emit carbon." When the EPA said "DDT [or thalidomide] is killing and maiming, you need to stop using it," they didn't set up a market to trade in ongoing DDT use - they said "knock it off and figure out a better way." This then caused market innovations.
In stark contrast, we look at the "gas price crisis" of 2 years ago, or the mortgage meltdowns - what used to be a (heavily subsidized but relatively) "free" market turned into a disembodied hustle with no relationship to basic market principles of value, supply, demand, innovation or risk management. Both resulted in grotesquely disproportionate social and economic disasters for this country, without a single redeeming value to any of us except the parasites who produce nothing but wealth for themselves. This is where I see the manipulations of "carbon trading" taking us, not to immediate reductions, which are needed.
Cap and trade is designed so that Wall Street can manipulate the outcomes and provide no environmental benefits. It stinks. It's time to CAP and innovate.
Leaded petrol, smoking, CFCs and acid rain problems were effectively communicated to a less polarised population by a capable group of real leaders via a supportive (rather than disingenuous) media. We're light years away from that these days.
But even if these kinds of abuse were fixed, the problem remains that emission permits are given to companies based on their present levels of pollution, meaning that the worst polluters get most of them, while as yet non-existent companies get nothing at all. It means that a lean, mean, energy-efficient startup will have to buy credits from an old coal-powered plant, skewing the market in favor of the latter. It also means big companies which can afford tons of paperwork get an unfair advantage over small companies which can't.
Cap-and-trade is not the only market-based approach to carbon emissions; it's just the worst available option. It wasn't conceived to reduce carbon emissions more quickly than any other system; it was conceived to appease big polluters by locking in their market share until the end of time.
Cap and trade is a socialist tax on the American people to redistribute our wealth to other countries.That money should stay here in the USA and poured into research and development.
The entire fleet of commercial trucks used for transport here should be refitted with hydrogen fuel cells first, then moved onto replacing the entire fleet of personal vehicles should be turned over.
The use of gasoline would be greatly reduced by doing these two things and reduce the American "carbon footprint". It would also minimize the political and economic power of or enemies.
All houses could be fitted with small windmills rather than centralized farms which are ugly, dangerous to migrating wildlife, and would eliminate the need to have massive power lines from a centralized source distribute the energy. It would also provide jobs for people to maintain, de-ice and generally care for them.
The above would also create jobs for American workers, and keep our money here.
Improving property values through local point of use clean power production within our built environment, creating well-paid local jobs, keeping money in our communities through the successful Feed In Tariff program that 60 other countries already use, DEMOCRATIZING and stabilizing the existing grid, reducing consumption without reducing quality of life - these are things that are simply GOOD FOR AMERICA, no matter where you stand on "global warming."
Thanks for pushing for this solution from your end of the spectrum. Together, I think we can make a difference!
I would wager actual money that soon there will be comments denying cap and trade has ever been attempted, much less successful (there have been several in other cap and trade threads). And the perfectly sensible arguments of a person who clearly knows their field will be dismissed as an ivory tower delusion, or part of the aforementioned Marxist plot.
It's very sad how incapable we've become in recognizing and adapting to threats to both our nation and our species.