Cap-and-doomed

Obama has come and and said what everyone knew: that cap-and-trade legislation might be split out from other green measures, which are more likely to pass Congress.

There is still a slim chance some form of cap-and-trade might go ahead in the current Congress, but even then it would probably be a pared back version such as that suggested by Republican Lindsey Graham:

Energy and climate legislation being drafted by a bipartisan group of senators may include a “hybrid” approach under which some sectors would be subject to a cap-and-trade program and others may pay a carbon fee, Sen. Lindsey Graham (R-South Carolina) said today.
Such an approach could make the bill better suited to meet the “different needs” of different sectors of the economy, Graham told reporters after speaking to members of We Can Lead, a coalition of 150 businesses pushing for energy and climate legislation.

“At the end of the day we’ve got I think an opportunity here to price carbon using a hybrid system of the old cap-and-trade system,” said Graham, who is working with Sens. John Kerry (D-Massachusetts) and Joe Lieberman (I-Connecticut) on comprehensive energy and climate legislation.

Meanwhile John Kemp of Reuters points out that the two Democrat representatives who this week promised to put forward a bill preventing the EPA from regulating greenhouse gases both voted in favour of the Waxman-Markey climate bill, which included cap-and-trade provisions.

If – and it’s still not clear this is the case – the pair no longer support cap-and-trade either, it is another nail in the coffin of such a system:

Kemp writes:

Neither Skelton nor Peterson is in “chain of command” on climate legislation. But both are among the most senior Democrats in the House and immensely influential.

Crucially both voted for the climate bill first time around last year (Roll Call 477) when 44 other Democrats rebelled and the bill scraped through by a majority of just seven votes (219-212). If Skelton and Peterson now oppose the cap-and-trade component the bill’s majority has effectively disappeared [ID: nGEE5B3146].

Their hostility is significant for who they are and who they represent. Both represent conservative-leaning districts that voted for Senator John McCain rather than Obama in 2008. Skelton’s fourth district in Missouri broke 61-38 for McCain while Peterson’s seventh district in Minnesota broke 50-47, according to data compiled by the Swing State Project.

We’ve written a lot here about the arguments over cap-and-trade. It’s a complex solution with a complex rationale, so many are understandably wary of it. But there is a good reason why cap-and-trade is popular: it can reduce emissions by a specified level, at the lowest possible cost to the economy.

Few would argue that cap-and-trade is perfect. Such systems are complicated and efforts can backfire, as the EU’s early experience highlights. It creates a massive market in allowances and offsets which, although initially fairly simple, has no guarantees that more complex and systemically risky instruments won’t be derived from it. It also fails to create absolute certainty on carbon prices, which businesses need. But none of these problems is insoluble. Nor do they detract from the two big advantages of cap-and-trade:

- It creates an actual cap on emissions, rather than just setting some incentives that may or may not yield the desired reductions.

- It allows the emitters to pursue the most cost-effective ways of reducing emissions.

The IEA yesterday said that some form of carbon pricing (which generally means either a direct carbon tax, or cap-and-trade) is the only way the US will meet the its international commitment to cut emissions by 17 per cent from 2005 levels by 2020.

There are various ideas about variations on the cap-and-trade theme. One is the ‘cap-and-dividend’ introduced to the Senate in December by Democrat Maria Cantwell and Republican Susan Collins, although critics contend this proposal is too narrow – it only covers producers and importers of fossil fuel, not users of fuel.

One thing’s for sure, though: incentives to boost certain industries are vulnerable to all kinds of politically populist moves which might not actually have an efficient, desirable or even possible outcome – look no further than ethanol mandates for an example.

Related links:

Cap-and-trade and cap-and-dividend bills compared (Reuters)
US must adopt carbon pricing system to meet UN commitments (Reuters)

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