National Climate Change Policy: A Quick Look Back at Waxman-Markey and the Road Ahead

Like any legislation, the Waxman‑Markey bill has its share of flaws, but its cap-and-trade system has medium and long‑term targets for reducing greenhouse gas emissions that are sensible, and the cap‑and‑trade system is -- for the most part -- well designed. With some exceptions, the bill's cap‑and‑trade system will achieve meaningful reductions of carbon dioxide and other greenhouse gas emissions at minimal cost to the economy.

There has been much lamenting about the corporate give-away in the bill, but this is unfounded, as I explained in detail in my May 27th post on The Wonderful Politics of Cap-and-Trade: A Closer Look at Waxman-Markey. Concerns have also been expressed -- such as by a number of Republican members of Congress during last Friday's floor debate in the House of Representatives -- about negative impacts on the international competitiveness of U.S. firms. The only real solution to the international competitiveness issue in the long term is to bring non‑participating countries within an international climate regime in meaningful ways. (On this, please see the work of the Harvard Project on International Climate Agreements.) But that solution is fundamentally outside of the scope of the domestic policy action of any individual nation, including the United States.

In the meantime, the Waxman‑Markey approach of combining output‑based updating allocations in the short term for select sectors with the option in the long term of a Presidential determination (under stringent conditions) for import allowance requirements for specific countries and sectors was sensible and pragmatic (see my June 18th post on Worried About International Competitiveness? Another Look at the Waxman-Markey Cap-and-Trade Proposal).

That's the good news. But the bad news is that last-minute changes in the bill changed what was a Presidential option regarding long-term back-up border adjustments (tariffs) to a requirement that the President put such tariffs in place under specified conditions. This moved the legislation considerably closer to risky protectionism, as President Obama rightly noted in comments to the press on Sunday.

Also, the compromise amendments with the House agriculture committee that provide for generous numbers of potential offsets from the agricultural sector (regulated not by EPA, but by USDA!) are troubling -- not in terms of driving up compliance costs, but in terms of reducing the real environmental performance of the system. This is because of the general problem of limited additionality of claimed reductions under offset (or emission-reduction-credit) systems, as opposed to cap-and-trade systems, plus the well-known difficulties of measuring non-point emissions, let alone emissions reductions, from agriculture.

These and other design issues will be important topics when the Senate takes up its own climate legislation, although the debate in that body on some of these issues will likely be quite different. For example, there is likely to be more interest in the Senate in the use of a "price collar," a mechanism to constrain both the maximum and the minimum market price of allowances over time. This would be a move beyond the safety-valve mechanism that is provided in the House legislation.

When the action moves to the Senate, the greatest attention and the greatest skepticism should be directed not to the cap‑and‑trade mechanism, which is -- for the most part -- well designed in Waxman‑Markey, but rather to other elements of the legislation, some of which are highly problematic. While the titles of Waxman‑Markey that create the cap‑and‑trade system are ‑‑ on balance ‑‑ sensible, and will result in meaningful emissions reductions cost effectively, the other titles of the bill include a host of conventional standards, many of which (under the cap‑and‑trade umbrella) will have minimal or no environmental benefits, but will limit flexibility and thereby have the unintended consequence of driving up compliance costs. That's the soft under‑belly of this legislation that needs to be selectively, surgically repaired.

It is the fault of economists -- myself included -- that we have given so much attention to the cap-and-trade system that we have ignored these other important elements of the legislation, elements that unfortunately can degrade significantly the cost-effectiveness of the package while providing little if any incremental benefits to the environment. Even the Congressional Budget Office, in its excellent economic analysis of HR 2454, focused exclusively on the bill's cap-and-trade program. Going forward, CBO, EPA, and independent analysts need to examine the bill's other elements, and assess what those elements provide at what incremental cost.

A broader question -- also raised by House Republicans in the floor debate -- is whether the United States should be moving towards the enactment of a domestic climate policy before a sensible, post‑Kyoto international agreement has been negotiated and ratified. Such an international agreement should include not only the countries of the industrialized world, but also the key, rapidly‑growing economies of the developing world ‑‑ China, India, Brazil, Korea, Mexico, South Africa, and Indonesia ‑‑ which are and will increasingly be major contributors to emissions.

It's natural for such a question to be raised about the very notion of the U.S. adopting a policy to help address what is fundamentally a global problem. The environmental benefits of any single nation's reductions in greenhouse gas emissions are spread worldwide, unlike the costs. This means that for any single country, the costs of action will inevitably exceed its direct benefits, despite the fact that the global costs of action will be less than global benefits. This is the nature of a global commons problem, and this is the very reason why international cooperation is required.

The U.S. is now engaged in international negotiations, and the credibility of the U.S. as a participant, let alone as a leader, in shaping the international regime is dependent upon our demonstrated willingness to take actions at home.

Europe has put its climate policy in place, and Australia, New Zealand, and Japan are moving to have their policies in place within a year. If the United States is to play a leadership role in international negotiations for a sensible post‑Kyoto international climate regime, the country must begin to move towards an effective domestic policy ‑ with legislation that is timed and structured to coordinate with the emerging post‑Kyoto climate regime.

Without evidence of serious action by the U.S., there will be no meaningful international agreement, and certainly not one that includes the key, rapidly‑growing developing countries. U.S. policy developments can and should move in parallel with international negotiations.

So, the Waxman‑Markey bill has its share of flaws, but it represents a reasonable starting point for Senate deliberation on what can become a national climate policy that will place the United States where it ought to be -‑ in a position of international leadership to help develop a global climate agreement that is scientifically sound, economically rational, and politically acceptable to the key nations of the world.

Comments

[valkano]

It's highly unlikely that the Waxman-Markey bill will move in the Senate. When it stalls there, we need a Plan B.

The best Plan B we have is a tax on carbon that returns the revenue to consumers through income and payroll taxes. There were carbon tax proposals in the House authored by both Republicans and Democrats, and so would have a far better chance at passage.

The advantages of the carbon tax over cap and trade are laid out quite well in a piece by the Citizens Climate Lobby that appeared in the San Diego Union on Sunday:
http://www3.signonsandiego.com/stories/2009/jun/28/lz1e28saunder214918-better-way-slow-global-warming/?&zIndex=123419

[research]

Of Course a Harvard Economist loves this Bill!

It's banking banker paradise of Carbon Derivatives including credit default swaps!

80% of the text is banking jargon.

It does nothing to help the most viable energy source we have: rooftop solar at 2$/Wp for 3 cents per KWH!

1.85 per peak watt! retail!
http://www.atensolar.com/14.html
http://www.ecobusinesslinks.com/solar_panels.htm See my profile for complete proof and links.

[DUSAA-1775]

just great. Another bill gets rushed through. yet again we see our law makers voting for a bill without reading it, without knowing what is in the bill. I must have missed the 5 days of public viewing on the bill before voting....

[steamboat]

Not only that, but these tree-huggers have put the kabosh on fossil and nuclear plants and even dams, ethonol, etc. for the future.......And its said with all this solar, windmills, etc. we have and are planning it will supply but THREE percent of the electricity we are going to need.

[jake1492]

"they" are "tree huggers"..... which makes you ..... what? self-hugger? self-lover?
There is no doubt that in the long run we will need to rely on something other than coal and oil for our energy. You may not know it, but solar energy dwarfs fossile fuel as an energy resource. The 3% you mention is a meaningless number, something that is a snapshot in a time of transition.

What is the point in talking about an item from a narrow selfish perspective when it is part of a broad set of interralated issues..... and just ignore all the other valid questions (many of which are just a relevant to you as to "the tree huggers")?

There may or may not be an anthropogenic global warming (AGW) problem..... so the speed and degree to which we should be transitioning to non-carbon energy sources is uncertain.... but in the long run, we will need to do so, and some degree of proving the practicality of those sources is most wise.

Nuclear is an important variable in this. It is non-carbon based energy.... and very well could dominate in the future. Factors such as nuclear weapon proliferation and fear of nuclear disaster and radiation contamination will affect the balance between renewable and nuclear power.

[jake1492]

The kind of arrogant dismissive attitude with which you regard "tree huggers" demonstrates incredible ignorance of the complex issues that these well meaning people at least try to grapple with. Perhaps in some cases there is less than ideal understanding or practicality in the proposed solutions, but you certainly offer no great example of deeper understand... and certainly less humanity in your offensive presentation.

[Cunningham]

The bill passed the House, but hasn't even gone to the Senate yet. You must have missed a lot.

[rattler99]

It seems to me that common sense would indicate that we first establish beyond doubt that there is, in fact, climate change occurring and that man's activities can influence any change. If so, THEN maybe we could consider spending trillions and adding $2-3,000 per year to each family's tax burden

[RonGallion]

I'm surprised no one here is in favor of Cap and Trade. Is this not the CHANGE you wanted? Wheres the HOPE? I thought Obama stated no additional taxes for incomes under 250K? Now he wants to tax your health benefits. He Raised taxes on tobacco, not just on the 250K smokers that's on everyone. Now he wants Cap and Trade, or Cap and Tax whatever, this will raise taxes on everyone.It will result in millions of jobs loss, and the cost of energy will skyrocket. Please help me, did he lie? Did he over speak? Perhaps he underestimated the job of President. Remember this will be the largest tax increase in history.

[jake1492]

There are also issues of vanishing primary sources of energy, reliance on belligerent countries, and the health and quality of life problems of air and water pollution.

It is unrealistic to cheat forever and ignore the costs of these things that we pretend don't exist, but in fact do, and affect all of us. They are debt like credit cards, national debts to other countries, and unfunded obligations such as medicare and social security.... eventually unsustainable.

The cap and trade measure fails the "smart politician" test by making some of these real costs visible. Preoccupation with one's own perceived self-interests and an unwillingness to make the effort to grapple with complex subjects prevents some from understand that these revealed costs have an important purpose.... to motivate our ingenuity and human energy to provide real solutions to reduce those costs.

For many years a host of dishonest politicians have lied to you and told you that you could have your cake and eat it too. You believed them then, and you believe them now so completely that you may not be capable of seeing these revealed costs for what they are... an opportunity to improve our mutual future.

[RonGallion]

I know no one that wants dirty air and water, our air and water are cleaner than in the 30's through the 60's. Could it be better, yes but at what expense? Example if we had a cure for cancer but it killed 97% of patients we would consider that too expensive. If we want cleaner air at the expense of a 90% increase in electric that to is expensive. If solar and wind technologies were great the private sector would invest in them, they are only viable because of governmental subsidies, these investments are a sure looser for the private investor and they know it.

Although I'm not sure you are for cap and trade?

[mikecal]

Prof. Stavins unfortunately is an advocate and I feel, an apologist for cap and trade, of which he is a prime proponent. Waxman Markey is quite a miserable example of a species of policy (cap and trade) that is designed to fool around with a complex system of permit auctions, permit trading and offsets when either direct regulation of carbon emissions or a carbon tax would be preferable. Also government direct investment in clean technologies is more effective. So Prof. Stavins has I believe misrepresented Waxman Markey's prospects to cut emissions.

It is too bad that in an era when almost all sectors of the economy are attempting to "de-financialize", the climate action community has plunged into advocating the use of a carbon derivative with the help of economists such as Stavins.

[AndSoItGoes]

Have a big problem with the last minute 300 page amendments. Who attached this? And ... why are they voting on it without reading it?

[RonGallion]

That would be Pelosi.

[Garybot]

And all for just a power grab (human power, that is)?

[research]

This bill is another TARP giveaway to big energy and the bankers. read the bill. It's 80% credit default swaps and banking language.

NOTHING for rooftop solar for the individual, the most viable of all the electric energy sources at 3 cents per kwh.

Obama is owned by the banks.

Please prove me wrong.

Kucinich/Dean 2012!

Throw out all conservatives! GOP and DLC!

[Garybot]

I'm not sure we'll be getting too much help from other countries, if this article is correct:


http://online.wsj.com/article/SB124597505076157449.html

[noneIn2008]

Let's see how everyone feels this fall as food prices skyrocket. They can try to blame others, but they will be driving food prices through the ceiling, starving the poor and elderly. How will you personally feel, knowing you are taking steps that WILL starve the poor and elderly. Those who look can see. Stop the madness now, before it is too late.

[gdogs]

President Obama is going to luck out on this one. The Senate isn't going to vote on this, or any other cap and trade bills. That means the Prez isn't going to have to explain his reversal on taxing Americans making less than $250k a year. And the moderate senate Democrats won't have to answer for voting for a bill their constituents don't want. I'm not sure how the house Dems got screwed like they did/are going to, but I guess it has something to do with how inept they are. None the less, voting for this bill will certainly end a few political careers in 2010.

[evilconservative]

http://www­.24thstate­.com/2009/­06/suppres­sed-epa-re­port-on-gl­obal-warmi­ng-now-in-­public.htm­l

Have any of your read this? Doubtful.

[zipowitz]

At least this author can admit that the CBO's numbers were not correct yet everyone for it kept touting how it's only going to cost us $175 a year . They were calling anyone who said otherwise, basically full of BS and of course the usual line of saying that they were backed by the Oil company shills. When reality sets in and people start reading what was passed they now realize the numbers are way off. Typical of any bill that is proposed. In the future, take the projected cost and multiply by 10. That might make it close.

[rmwarnick]

Let's look ahead. Waxman-Markey is doomed, because this bill barely crawled out of the House and the Senate will finish it off. No legislation at all would be better anyway. It would have eliminated the EPA's existing authority to regulate greenhouse gases under the Clean Air Act. Waxman-Markey would have created licenses to pollute, and given them away-- tens of billions of dollars to Wall Street billionaires.

[expired]

Dear MoveOn member,
The U.S. House passed a huge energy bill Friday. Lots of good people are applauding the passage of this legislation. But here's the ugly truth:

Big Oil and Coal lobbyists, working in cahoots with some conservative Blue Dog Democrats, weakened the bill terribly—it now falls far short of President Obama's campaign vision to transition America's economy to clean energy and create millions of new jobs.

In fact, the bill repeals a key part of the Clean Air Act and doesn't do nearly enough to shift America to renewable energy—so instead of a boom in solar and wind, the bill locks us into dirty coal power for another generation.1

Working with progressive champions in the House, we were able to achieve modest gains at the eleventh hour (see details below). But saving the Clean Air Act and fixing other problems with the bill as the fight moves to the Senate will require a massive grassroots outcry.

So we have a decision to make: Should MoveOn launch a full-court press to fix the bill, and turn up the heat on senators who might be tempted to side with Big Oil and Coal?

Click to vote:

"Yes. Let's fight to save the Clean Air Act and fix the energy bill."
"No. I don't think we should do that." (And tell us why.)
We'll go forward if 2/3 of us who vote think it makes sense.

[CentralVA]

I hope MoveOn will think long and hard before falling into line and promoting Waxman-Markey. Right now, many of those who often find themselves on the other side from MoveOn have a lot of respect for the organization's principles and leadership. MoveOn will shred its credibility if it endorses legislation that is designed to enrich powerful corporate interests while doing next to nothing to reduce global temperatures.

[JoanE]

Move-On isn't asking members to fall in line for the bill that passed the House. They're asking if we're up for launching a big campaign designed to make politicians realize there will be consequences from the voters back home unless a better bill comes out of the Senate. I voted yes. We'll see if it gets two-thirds of the members' votes plus enough pledges of financial support to make it happen. Anybody who wants to get behind such a campaign can join MoveOn.

[GHO]

I vote D) "Scrap the whole thing and never speak of such folly again"

Global warming caused by human CO2 emissions exists only in computer models that have already proven themselves wrong. One need only to look at the past 10 years temperature record to see temps declining while CO2 levels continued to rise - thus disproving any causality (of course, one could also look back at the 1940's to see the same thing).

Thus, cap and trade does not accomplish anything. It is nothing but a tax that will be levied on all consumers in the country. All utilities and all goods made from or using oil or coal will increase in price, or "necessarily skyrocket" as our prosident said last year. Even if AGW were real, cap and trade does not work - take a look at Europe. Until the recession slowed production, nearly every country in the EU saw an INCREASE in emissions after implementing a cap and trade scheme. That should be a lesson.

Government should not try to dictate technological advance. When it does, you get the politically viable "answer", not the scientifically or economically viable one. If you have any doubts, I suggest you look at ethanol.

[polackinidaho]

In a similar way of arguing, some say that the Earth circles the Sun only in astronomical diagrams, as anybody can easily see that it is the Sun that goes around the Earth. Much of the confusion about the climate change, as your post aptly shows, comes from not understanding the difference between HEAT and TEMPERATURE. Earth absorbs more heat than it emits, but air temperature does not necessarily increase always and everywhere, because of the cooling effect of the melting polar ice. Locally, temperatures may even decrease, because of the changes in ocean currents and planetary air circulation. CO2 absorbs infrared and transforms it into a dissipated heat, thus increasing the amount of heat retained by Earth - and it is a fact of physics, not some "computer model".

[Garybot]

Excellent post!