The Rest of the Story of Cap and Trade

Recently, we’re hearing another round of questions about the cap and trade approach to curbing global warming pollution. For instance, there’s an entertaining cartoon going around called “The Story of Cap and Trade” questioning whether climate legislation based on cap and trade will do the job.  Scientist James Hansen and economist Paul Krugman offer opposing perspectives on the wisdom of cap and trade in dueling columns in today’s New York Times

We have enormous respect for Jim Hansen, but NRDC sides with Krugman on this one.

Let’s start with clarity about what NRDC is for.  We’re pushing for comprehensive energy and climate legislation that combines a cap on carbon pollution – one that declines steadily year after year – with complementary performance standards and incentives to bring about the rapid deployment of energy efficiency, renewable energy, and key low-carbon technologies such as carbon capture and sequestration.  This is a combination that will cut pollution, create jobs, and enhance our security.  It is the best approach to get the job done and done right.

And there’s no time to waste.  We have to enact this legislation in this Congress.  The threats from global warming are so urgent that we have to act now – we have to get started.  And there’s not likely to be a more favorable Congress and a stronger champion in the White House than we have right now. 

The bill passed by the House of Representatives last June was a strong start, and the Senate has to complete the job next spring.  The House bill would cap and cut America’s carbon emissions every year, reaching a 17 percent reduction from 2005 levels by 2020 and an 83 percent reduction by 2050.  Cap and trade is a central element of this legislation, along with performance standards and economic incentives. 

The most important reason we favor cap and trade is that we’ve used it before and we know it works.  We’ve used this approach to curb the pollution that causes acid rain, to get the lead out of gasoline, and to get rid of chemicals that deplete the ozone layer. Today, a full-scale carbon cap and trade system is successfully cutting emissions in the Europe Union.  Ten Northeastern states, California, and several other states are operating or setting up similar programs. 

Let’s look at the criticisms leveled at cap and trade, and at the main alternatives that the critics are offering in its place.    

Despite a record of successes, some claim cap and trade programs don’t actually cut pollution.  The acid rain, lead, ozone-depletion, and emerging carbon programs are strong evidence to the contrary. 

Critics often point to problems that occurred in the start-up stages of the European carbon program, but those problems have been remedied by now.  For example, the Europeans began their program in 2005 without good data on actual emission levels; as a result, they initially overestimated emissions and set their cap too high.  They have that emissions data now, and their current program now rests on a solid foundation and is working as expected. 

In any case, we won’t repeat that start-up mistake in the U.S., because EPA has already established the rigorous emission monitoring and reporting rules the Europeans initially lacked.  For example, we have more than a decade of hour-by-hour CO2 monitoring from power plants, and next year (before the legislation’s first cap takes hold in 2012) some 13,000 companies representing 85 percent of U.S. emissions will start providing their data as well.

Critics also note that the Europeans initially gave away their valuable carbon allowances to electricity generating companies with no strings attached, and that led to unwarranted rate increases and windfall profits.  The EU has reformed its allocation system, and started a transition to auctioning allowances. 

We won’t repeat that start-up mistake either, because our legislation is written differently to protect electricity customers and to make sure that they, not the power companies, will get the financial value of the pollution allowances through energy efficiency programs and lower bills.  Despite claims that the pending cap and trade bills give away too many of the allowances, Harvard economist Robert Stavins has calculated that more than 80 percent of the pollution permits are used for genuine public purposes over the life of the program, like protecting consumers and low-income families, developing and deploying low-carbon technologies, and helping the most vulnerable people here and abroad cope with climate impacts.  Eventually, nearly all of the allowances will be auctioned.

Cap and trade critics also point to problems with pollution offsets – credits for carbon-cutting actions taken outside the cap, on American farms or in other nations.  It’s true that offsets under the existing international system (called the Clean Development Mechanism) have sometimes been faulty, with credit given for actions that never really happened, or actions that would have happened anyway.  To make sure that the offsets used here are real, we’re pushing legislative safeguards that are the tightest in the world.  If we pass this law, we’ll effectively set the standard for offset quality world-wide. 

The bills before Congress also have strong safeguards against another frequently voiced fear – that pollution trading will be manipulated by Wall Street speculators.  The answer isn’t to abandon markets.  The incentives of the marketplace are critical to rewarding new clean technology innovation, creating new jobs, and curbing carbon pollution at the lowest cost.  The right response is to build in strong safeguards and watchdogs to make sure that no one can manipulate or corner markets.

Many cap and trade critics argue for a carbon tax. While we respect that position, we see no evidence that a carbon tax can get enacted, and we don’t think it would be as effective in protecting the planet even if it could be. 

Some say a carbon tax would be simpler or purer than cap and trade.  The tax idea may be simple in concept, but so is cap and trade.  Things get complicated when you try to pass real legislation of either kind.  A glance at the Internal Revenue Code will disabuse you of the notion that actual taxes are simple.  Turning a carbon tax into reality would run into the same real world forces that have made the cap and trade bills complex. 

This is exactly what happened in 1993, when President Clinton proposed the BTU tax.  First, industries lobbied successfully for exemptions and special-interest provisions.  Then they derided the bill as full of loopholes.  (One clever lobby firm sent Congressmen blocks of Swiss cheese.)  The proposed tax got smaller and smaller, and less and less effective.  Ultimately, the BTU tax failed to pass at all. 

Here’s another advantage for cap and trade.  Its basic premise is to set a firm limit on how much pollution the atmosphere will have to bear. With a carbon tax, Congress could evade the question of how much is too much.  And even with a clear target in mind, Congress would have to guess at the tax rate needed to hit that limit. Remember, politicians like to cut taxes, not raise them.  As a result, there’s every likelihood that Congress would set the tax rate too low to meet the target. Raising the tax in the future would the political equivalent of pushing a rock up a hill.

Some say we don’t need a new law to cut carbon emissions, because we already have the Clean Air Act.  We at NRDC are proud to have been part of the state-environmental legal team that took the Bush administration to the Supreme Court in Massachusetts v. EPA and won the high court’s ruling that CO2 is a pollutant under the Clean Air Act.  We’re happy that the Obama administration has started using its Clean Air Act authority to curb emissions from cars and factories (see here and here).  And just today EPA announced the final “endangerment” determination – a ringing affirmation of the science that shows that global warming pollution is dangerous to our health and the health of the planet.  NRDC will keep doing everything we can to get as much done under existing law as possible. 

But while EPA can take a big bite out of global warming pollution under the Clean Air Act, it cannot reasonably achieve the deep, sustained emission cuts we have to have under existing powers.  That’s why we need the steadily declining cap in this new legislation, ultimately reaching more than an 80 percent reduction.

Critics of pending legislation say it would repeal the Clean Air Act.  Actually, the new law would be the latest version of that law – Clean Air Act 4.0.  But there’s a fair question to be asked about what parts of the existing authority to keep.  Some parts of the current law would not work well (for example, provisions for setting a CO2 air quality standard and meeting it on a state-by-state basis).  But we think the House bill would sweep away too much.  We’re working hard to keep crucial parts of current law that call for performance-based emission standards and permit requirements for the most important carbon emission sources – vehicles, power plants, and big, energy-intensive factories – as a supplement and back-up to the overall pollution cap. 

The “Story of Cap and Trade” cartoon calls cap and trade “a distraction” and suggests we stop and start over with one of these other approaches. But with no consensus for those approaches on even the farthest horizon, where would this lead us?  The global warming crisis is so urgent that we can’t wait for lawmakers, industry, and the American people to spend years hashing out a new approach. We have to act now. 

The clean energy and climate bill that passed the House will get us moving down that path.  It has sets a firm cap on global warming pollution – one that declines year after year – and a strong system to ensure we’ll hit it. The bill protects consumers, especially low-income Americans.  It will also create millions of jobs, help jumpstart our economy, dramatically expand renewable energy, and strengthen our national security. 

This legislation has the support of a broad coalition of environmental, labor, and faith organizations, hunting and fishing groups, and military and national security experts.  Crucially, it also has support from key elements of the business community, from entrepreneurs making clean technologies to some of the largest of the old-line carbon emitters. 

For cap and trade critics, that’s probably the most damning thing.  A bill that even some of the polluters support must itself be polluted beyond redemption.  But let’s get real.  As David Roberts points out, the polluters have power.  To move Congress to action, you simply have to have some of them on your side.  Even with leaders like Speaker Nancy Pelosi, Henry Waxman, Ed Markey, John Kerry, and Barbara Boxer, today’s Congress is not ready to vote for a bill that does all we need to confront global warming. The crucial votes are moderates who listen – perhaps much more than we’d like – to companies that this legislation will regulate.  Without some of those companies supporting, or at least not opposing, that legislation, it will not pass.

The companies’ reasons for coming onboard are complex.  Some corporate leaders are genuinely sold on the science and the need to act.  Others see legislation as inevitable and are determined to shape it, rather than be run over by it.  All of them care about keeping costs under control.  They’ll support a stronger cap if the bill includes the most cost-effective means to meet that cap.  That is what cap and trade delivers.

History tells us that the first legislation to tackle any serious problem does not bring us a complete solution to that problem.  Whether it was civil rights, health care, or clean air, we have had to get started and then come back at it time and time again. 

But we can’t come back for a second bite if we don’t get the first one.  So let’s get started.  Then we’ll be able to show with real experience that our opponents’ claims of economic ruin are wrong.  And in a few years, as the science keeps piling up, we’ll come back and strengthen our law.

Make no mistake: NRDC will continue pressing for the strongest cap and trade bill possible in this first time around. But let’s remember that powerful interests are pushing back.  Getting the bill passed through the Senate will require the efforts of all Americans concerned about clean energy and climate security.  If cap and trade legislation is killed in this Congress – whether by well-meaning critics on the green side, diehard opponents on the right, or a combination of the two – it may be many years before we have another chance for a meaningful climate protection law of any kind.

About the Authors

David Doniger

Director, Climate & Clean Air program

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