Playing Politics with Carbon
It's good to be back on the blog. In my absence, the House Energy and Commerce Committee approved--largely along party lines--the American Clean Energy and Security Act. This bill, which creates a cap-and-trade system to regulate carbon emissions, represents the most ambitious and far-reaching climate change bill ever to emerge from a congressional committee. And while it is a very important bill and a fair sight better than nothing (which is all the U.S. has had up to this point), it is a deeply flawed bill in several ways. And the nature of the flaws helps to illustrate the problems that arise when one party totally removes itself from the business of good government.
Among environmental geeks, there is something of a debate about what would be the ideal way to regulate carbon in a perfect world, politically speaking. Some people favor a carbon tax. It is, as it sounds, a tax on every ton of carbon emitted into the atmosphere. It would make pollution more expensive, and as a result it would give businesses and consumers a financial incentive to change their behaviors in ways that reduced emissions. A carbon tax has certain benefits, not least of all its simplicity. The government would just have to figure out how high the tax would need to be in order to have the desired effect on behavior, implement it, and just let the magic of the marketplace go to work.
I've actually become a fan of a cap-and-trade system, however, for several reasons, some of which fall into the realm of political considerations. In a cap-and-trade system, the government sets a limit on the amount of carbon that can be emitted in a given year nationwide. It then auctions off permits to emit carbon, up to that amount. Businesses would not be allowed to emit any more carbon than they had purchased permits for, and businesses that cut emissions below what they had permits for would be able to sell their excess on the open market. As such, the cost of cutting emissions would naturally be borne by the industries that could do it most cheaply: those industries would develop and implement new, carbon-reducing technologies and then sell their excess permits to industries where the cost of cutting carbon is higher. As a result, market forces allow our carbon footprint to be reduced in the most cost-effective manner possible. Cap-and-trade is already used in a lot of places, most notably in Europe.
In a world with perfect information and without political constraints, the choice between a carbon tax and cap-and-trade would be trivial, since both would have exactly the same effects. But that is not our world, and thus I find cap-and-trade to be preferable for several reasons. First is that a cap-and-trade system creates a finite and controllable level of emissions, whereas it's tougher to predict what rate of carbon tax would be necessary to achieve the same result, and legislators would almost certainly set the rate too low. More importantly, congresspeople are inherently susceptible to those special interests that drive their district's economy. In many districts, these industries include some of the worst polluters, like the coal and auto industries. Congresspeople from those districts will, and indeed have, run around willy-nilly demanding that their pet industry get special treatment. With a carbon tax, exemptions for certain industries mean that they pay no tax and have little incentive to reduce emissions. In a cap-and-trade scheme, it just means that those industries get their emission permits for free instead of having to pay for them. While this reduces revenue, it doesn't eliminate the incentive to curb emissions--if the politically connected industries can cheaply reduce emissions, then those permits become a valuable asset that they can resell on the open market as an additional source of revenue. So, given that exemptions are a political fact of life, I'd rather have the cap-and-trade.
The problem, is, however, that you can only take the free permits thing so far, and the House has gone well past that point. As the bill is currently marked up, about 85 percent of the permits are given away for free. That's problematic for several reasons, including the reduction in revenue and the fact that you'd like energy companies to have to absorb some top-line costs as an impetus to cut emissions. But the big reason is that with so many of the permits going to the energy and coal industries, the bill begins to take on some of the government micromanagement problems that cap-and-trade is designed to prevent in the first place. It's not environmentally sound for Congress to favor the coal industry just because West Virginia's senators have more seniority than God. What's sound is for Congress to set targets, provide the financial incentives necessary to meet those targets, and let the market shift the cost of meeting those targets to where they can borne least expensively.
I want to stress at this point that this bill still represents a major step forward for the U.S., and that passing no bill at all would be unthinkable giving the environmental repercussions. But there are other problems with this bill, even more serious than giving away permits instead of auctioning them. Far more worryingly, the bill allows industries to claim emissions reductions by investing in carbon offsets--that is, paying someone else to pollute less so that they don't have to. Allowing industries to meet their limit in this way seriously undermines the effect to the bill because most knowledgeable parties (including the GAO and almost all environmental groups) agree that it's virtually impossible to verify whether carbon offsets represent real emissions reductions. It's an incredibly stupid thing to put into a cap-and-trade bill. So why is Congress doing it? Because, in order to get the votes needed for passage, the authors need to appease certain Democrats from Midwestern states, most of whom are on the more conservative end of the caucus anyway, who insist that industries have an incentive to pay to reduce emissions of farmers, thus allowing their farming constituencies to reap an economic windfall.
Unfortunately, those votes from Democrats in coal-state and farming constituencies are utterly essential to the bill's passage, meaning that the center where a bill can pass goes right through the legislators most insistent on adding amendments that undermine the effectiveness of the bill. And the reason why those votes are essential is that Republicans simply aren't providing any. Republicans in Congress are positioning themselves to do everything possible to obstruct this bill on the chance that no bill will attract the support of enough Democrats to pass. Given how hard the White House is pushing this bill, that's not very likely; far more likely is that some cap-and-trade bill will emerge and be signed into law. And rather than recognize that a bill is going to pass try to influence the bill so that it is as effective as possible and with as little economic cost as possible, Republicans have handed all that influence to the legislators most beholden to the polluters' lobby. And the only justification they can offer is to deny the whole weight of scientific evidence on climate change and pretend that it isn't happening, because acknowledging it would be ideologically inconvenient. So committed are they to that ideology that they would actually prefer that the nation get a flawed bill rather than an effective one, because in order to wield that kind of influence, they would have to be willing to offer some actual votes for passage. This is yet another reason why it would be very helpful, at this critical junction, for our country to have two parties offering solutions to problems instead of having one that has nothing to offer but obstructionism and that the majority always has to work against, instead of with. If a couple Republicans rolled up their sleeves and decided that a good bill (and once upon a time, Republicans were all about harnessing the power of the free market) is better than passing a bad one, we'd get a better bill. But they won't, and so we won't.
Ultimately, a cap-and-trade bill will pass, and it will drastically improve America's credibility in the global effort to combat climate change. But it will be a bittersweet accomplishment, because at the end of the day, Congress' progress is impeded because it is still shackled to the dead weight of the petulant children among it.
Among environmental geeks, there is something of a debate about what would be the ideal way to regulate carbon in a perfect world, politically speaking. Some people favor a carbon tax. It is, as it sounds, a tax on every ton of carbon emitted into the atmosphere. It would make pollution more expensive, and as a result it would give businesses and consumers a financial incentive to change their behaviors in ways that reduced emissions. A carbon tax has certain benefits, not least of all its simplicity. The government would just have to figure out how high the tax would need to be in order to have the desired effect on behavior, implement it, and just let the magic of the marketplace go to work.
I've actually become a fan of a cap-and-trade system, however, for several reasons, some of which fall into the realm of political considerations. In a cap-and-trade system, the government sets a limit on the amount of carbon that can be emitted in a given year nationwide. It then auctions off permits to emit carbon, up to that amount. Businesses would not be allowed to emit any more carbon than they had purchased permits for, and businesses that cut emissions below what they had permits for would be able to sell their excess on the open market. As such, the cost of cutting emissions would naturally be borne by the industries that could do it most cheaply: those industries would develop and implement new, carbon-reducing technologies and then sell their excess permits to industries where the cost of cutting carbon is higher. As a result, market forces allow our carbon footprint to be reduced in the most cost-effective manner possible. Cap-and-trade is already used in a lot of places, most notably in Europe.
In a world with perfect information and without political constraints, the choice between a carbon tax and cap-and-trade would be trivial, since both would have exactly the same effects. But that is not our world, and thus I find cap-and-trade to be preferable for several reasons. First is that a cap-and-trade system creates a finite and controllable level of emissions, whereas it's tougher to predict what rate of carbon tax would be necessary to achieve the same result, and legislators would almost certainly set the rate too low. More importantly, congresspeople are inherently susceptible to those special interests that drive their district's economy. In many districts, these industries include some of the worst polluters, like the coal and auto industries. Congresspeople from those districts will, and indeed have, run around willy-nilly demanding that their pet industry get special treatment. With a carbon tax, exemptions for certain industries mean that they pay no tax and have little incentive to reduce emissions. In a cap-and-trade scheme, it just means that those industries get their emission permits for free instead of having to pay for them. While this reduces revenue, it doesn't eliminate the incentive to curb emissions--if the politically connected industries can cheaply reduce emissions, then those permits become a valuable asset that they can resell on the open market as an additional source of revenue. So, given that exemptions are a political fact of life, I'd rather have the cap-and-trade.
The problem, is, however, that you can only take the free permits thing so far, and the House has gone well past that point. As the bill is currently marked up, about 85 percent of the permits are given away for free. That's problematic for several reasons, including the reduction in revenue and the fact that you'd like energy companies to have to absorb some top-line costs as an impetus to cut emissions. But the big reason is that with so many of the permits going to the energy and coal industries, the bill begins to take on some of the government micromanagement problems that cap-and-trade is designed to prevent in the first place. It's not environmentally sound for Congress to favor the coal industry just because West Virginia's senators have more seniority than God. What's sound is for Congress to set targets, provide the financial incentives necessary to meet those targets, and let the market shift the cost of meeting those targets to where they can borne least expensively.
I want to stress at this point that this bill still represents a major step forward for the U.S., and that passing no bill at all would be unthinkable giving the environmental repercussions. But there are other problems with this bill, even more serious than giving away permits instead of auctioning them. Far more worryingly, the bill allows industries to claim emissions reductions by investing in carbon offsets--that is, paying someone else to pollute less so that they don't have to. Allowing industries to meet their limit in this way seriously undermines the effect to the bill because most knowledgeable parties (including the GAO and almost all environmental groups) agree that it's virtually impossible to verify whether carbon offsets represent real emissions reductions. It's an incredibly stupid thing to put into a cap-and-trade bill. So why is Congress doing it? Because, in order to get the votes needed for passage, the authors need to appease certain Democrats from Midwestern states, most of whom are on the more conservative end of the caucus anyway, who insist that industries have an incentive to pay to reduce emissions of farmers, thus allowing their farming constituencies to reap an economic windfall.
Unfortunately, those votes from Democrats in coal-state and farming constituencies are utterly essential to the bill's passage, meaning that the center where a bill can pass goes right through the legislators most insistent on adding amendments that undermine the effectiveness of the bill. And the reason why those votes are essential is that Republicans simply aren't providing any. Republicans in Congress are positioning themselves to do everything possible to obstruct this bill on the chance that no bill will attract the support of enough Democrats to pass. Given how hard the White House is pushing this bill, that's not very likely; far more likely is that some cap-and-trade bill will emerge and be signed into law. And rather than recognize that a bill is going to pass try to influence the bill so that it is as effective as possible and with as little economic cost as possible, Republicans have handed all that influence to the legislators most beholden to the polluters' lobby. And the only justification they can offer is to deny the whole weight of scientific evidence on climate change and pretend that it isn't happening, because acknowledging it would be ideologically inconvenient. So committed are they to that ideology that they would actually prefer that the nation get a flawed bill rather than an effective one, because in order to wield that kind of influence, they would have to be willing to offer some actual votes for passage. This is yet another reason why it would be very helpful, at this critical junction, for our country to have two parties offering solutions to problems instead of having one that has nothing to offer but obstructionism and that the majority always has to work against, instead of with. If a couple Republicans rolled up their sleeves and decided that a good bill (and once upon a time, Republicans were all about harnessing the power of the free market) is better than passing a bad one, we'd get a better bill. But they won't, and so we won't.
Ultimately, a cap-and-trade bill will pass, and it will drastically improve America's credibility in the global effort to combat climate change. But it will be a bittersweet accomplishment, because at the end of the day, Congress' progress is impeded because it is still shackled to the dead weight of the petulant children among it.
posted by Ithakid | 3:22 PM
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