CAP&TRADE, THE HISTORY AND THE REALITY

From a Theory to a Consensus on Emissions
John M. Broder, May 16, 2009 (NY Times)

SUMMARY
A cap&trade system is President Obama’s choice as the way to get the U.S. into the international fight against global climate change. It is the most contentious element in a wildly contentious energy bill now being debated by the House of Representatives Energy and Commerce Committee. And it is scheduled for an equally contentious fight later this summer during the Senate’s energy bill debate.

4 decades ago, cap&trade emerged as an obscure academic construct. Now the lynchpin in the Democrats' energy and climate crisis legislative strategy and opposed by Republicans as too costly to the U.S. public, 2 decades ago cap&trade was rejected by Democrats as too expensive and inferior to an energy tax and embraced by Republicans as the solution to a different environmental crisis.

The Problem of Social Cost, a 1960 paper by University of Chicago Professor of Economics Ronald H. Coase, evaluated government options when a private entity does public harm. It is considered the origin of cap&trade theory.

Cap&trade became widely known in 1989 as a method for fighting acid rain.

It was used effectively by the 1st Bush administration against SO2 emissions... (click to enlarge)

C. Boyden Gray, counsel to President George H. W. Bush, realized the environmetal harm done by acid rain, the byproduct of coal plant sulphur dioxide (SO2) emissions, could not be ignored. He and his staff also knew power companies and their Congressional allies would fight a tax or new regulations to cut back SO2 emissions.

Daniel J. Dudek, an Environmental Defense Fund economist who had long tried to sell Gray on the idea of cap&trade, finally convinced him by suggesting that even with something good like money an uncapped supply would be destructive.

After a political fight in Congress (mostly with liberal Democrats who regarded cap&trade as a big business scam) and a series of compromises (between moderate Republicans and conservative Democrats) to sustain a majority coalition, a cap&trade system to control SO2 emissions became a key to the Bush administration’s 1990 Clean Air Act amendments.

The plan is considered by many political and environmental observers to be “the most successful domestic environmental legislation ever enacted.” The hard cap resulted in the emergence of cleaner technologies, a 50% reduction in SO2 emissions over 10 years and compliance that was almost 100%, according to the Environmental Protection Agency (EPA).

In 1992, among the progressive policies defeated in the overreach that followed President Clinton’s election was an effort to impose an energy tax. Many Democrats who say a carbon tax is not politically feasible (including former Clinton Vice President Al Gore) are remembering that proposal’s defeat. A tax system would surely be a better choice, many veterans of that energy tax effort observe wistfully, if the world was ruled by Plato’s philosopher-king.

As a result, the eminently pragmatic President Obama and his Congressional allies have become cap&trade advocates.

...And it worked. (click to enlarge)

COMMENTARY
Representative Henry Waxman (D-Calif), Chair of the House Energy and Commerce Committee and Representative Ed Markey (D-Mass), Chair of the House Energy Subcommittee, co-wrote H.R. 2454, the American Clean Energy and Security Act of 2009 (ACESA), the current House energy and climate bill that includes a cap&trade system to control greenhouse gas emissions (GhGs). Their plan is partially modeled on the acid rain cap&trade system and their arguments follow those of the first Bush administration when they were selling their system to Congress and the public.

Getting votes for a carbon tax – or any tax – from politicians in general and especially from members of the House of Representatives who have to run for re-election every 2 years is very unlikely. The proof of how politically objectionable a tax is is evident in how hard House Republicans are fighting to label the Waxman-Markey cap&trade proposal a tax in disguise.

The political appeal of cap&trade, when presented as a way to let the free market set limits and choose winners, can be seen in the final vote on the Bush administration 1990 acid rain cap&trade plan. It passed 401 to 25 in the House and 89 to 10 in the Senate.

The European Union (EU) Emissions Trading Scheme (ETS) has revealed some of the ways cap&trade presents bigger problems in dealing with GhGs and global climate change.

Crucial lesson #1 learned from the EU ETS experience: Allocations matters. (click to enlarge)

Acid rain was a localized problem involving a few industries and relatively few players and a very few kinds of emissions that were entirely byproducts of coal burning. Global climate change is international, involves an almost uncountable number of emissions sources and GhGs, its cause, are not a mere byproduct but the main product of burning fossil fuels.

Although the EU ETS has illuminated the problem areas in managing a cap&trade system, it has also revealed how difficult it will be to bring emerging economies into the system, to quantify and regulate for GhGs and to find technologies that will facilitate compliance.

The challenges make many yearn for what seems like the relative simplicity of a tax on burning fossil fuels.

Crucial lesson #2 learned from the EU ETS experience: Caps matter. (click to enlarge)

W. David Montgomery, vice president at consulting firm Charles River Associates International, has been working on cap&trade since he was an economics graduate student in 1971. He favored it for the limited circumstances of the acid rain problem but prefers the tax as a means to deal with the much bigger problem of global climate change, especially because to him the Waxman-Markey cap&trade system is nothing more than a disguised carbon tax.

Yet a tax would still be difficult to impose internationally, compliance and regulation would still be a challenge and the development of a New Energy economy would still have to happen. Redistribution of a tax, if it was successfully collected, would still need to be administered and monitored. And there would be no hard cap to make certain GhGs did not rise.

Former Vice President Al Gore is something of an ultimate arbitrator of what is right in the field of climate change because of his early, ongoing and passionate leadership. He believes a revenue-neutral tax would be best but cap&trade is what is presently within political reach.

Vice President Gore is an advocate of what is politically possible. (click to enlarge)

QUOTES
- John M. Broder, NY Times: “Many members of Congress remember the painful political lesson of 1993, when President Bill Clinton proposed a tax on all forms of energy, a plan that went down to defeat and helped take the Democratic majority in Congress down with it a year later. Cap and trade, by contrast, is almost perfectly designed for the buying and selling of political support through the granting of valuable emissions permits to favor specific industries and even specific Congressional districts.”
- Daniel J. Dudek, economist, Environmental Defense Fund: “I told Boyden: ‘Imagine you just fired up the government printing presses and dumped an endless stream of money into the system. You’d have no way of controlling the money supply’ … He understood totally and intuitively the importance of maintaining the cap, the key ingredient in our acid rain policy.”

10 minutes on cap&trade. From EnvironmentalDefenseFund via YouTube

- Representative Jim Cooper (D-Tenn), early supporter of the SO2 cap&trade system: “Our proposal was at first ridiculed by environmentalists as little more than a license to pollute…But today, few dispute it is one of the government’s most successful regulatory programs ever.”
- Robert Hahn, Bush administration acid rain cap&trade system advocate, global climate change cap&trade system skeptic: “If a philosopher king could design a system, he or should might pick a taxation system…”
- Al Gore, former Vice President and Nobel laureate: “Tax what you burn, not what you earn…”
- W. David Montgomery, vice president, Charles River Associates International and 38-year-long student of cap&trade: “It is a steel fist of regulation covered by a velvet glove of emission trading…Why not just impose a carbon tax?”