Cap-and-trade is/isn’t dead – and what it could mean

A New York Times story late last week looked at why cap-and-trade died as the climate policy tool of choice. The themes will be familiar to readers of this blog:

The short answer is that it was done in by the weak economy, the Wall Street meltdown, determined industry opposition and its own complexity.

In fact surveys suggest that even in the good times, few were enthusiastic about cap-and-trade beyond economic, financial trading and policy wonk circles. And a crucial voting constituency those groups do not make. The arguments that capping is necessary (it’s difficult to achieve an actual reduction target without one) and trading saves money (it allows emissions to be reduced in the cheapest possible way) either weren’t made clearly or were lost amongst a growing suspicion of derivatives, and loud opposition to any form of carbon pricing from some energy lobbyists.

Senator Lindsay Graham, the key Republican supporting a bipartisan climate bill, has recently declared cap-and-trade ‘dead’, (possibly twice) – but he’s also opined that failing to put a price on carbon is just ‘kicking the can down the road’, in terms of reaching a real target.

The US power sector, which needs long-term certainty on emissions policy so it can plan its large investments in new infrastructure, wants cap-and-trade. Other sectors are less keen – particularly the oil and gas industry, which says it prefers a carbon tax. So it appears that under the bill being proposed by Graham along with Senators John Kerry and Joe Leiberman, each sector will get its own preference, while measures for the rest of industry, and the economy, are a little fuzzy.

Harvard’s Robert Stavins argues that cap-and-trade is not necessarily dead, pointing to efforts in Japan, Australia and New Zealand (although we note that at least two of those are very far from guaranteed; in Australia an emissions trading system will struggle to pass with a lack of bipartisan support, and Japan has allowed itself room to adopt any form of carbon pricing).

However he acknowledges that climate change so far lacks the sorts of dramatic and visible disasters that helped bring in strong environmental laws in the past:

Until there is an obvious and sudden event — such as a loss of part of the Antarctic ice sheet leading to a disastrous sea-level rise — it’s unlikely that public opinion in the United States will provide the bottom-up demand for action that has inspired previous Congressional action on the environment over the past forty years.

Meanwhile, the Cantwell-Collins proposal is gaining some ground with a University of Massachusetts study finding it would yield economic benefits.

Stavins back in February criticised the conventional wisdom that cap-and-trade legislation was dead and argued that it perhaps needed to be more politic – something he said the Cantwell-Collins proposal seemed more likely to do, by eschewing giveaways and handing out

What Stavins – along with many other critics – doesn’t like is the plan to limit the tradable allowances to the upstream oil and gas sectors.

Does anyone really believe that if a carbon tax had been the major policy being considered in the House and Senate that it would have received a more favorable rating from climate-action skeptics on the right?  If there’s any doubt about that, take note that Republicans in the Congress were unified and successful in demonizing cap-and-trade as “cap-and-tax.”

Well, quite. In fact despite the oil sector saying it wants a carbon tax, a reported comment from the American Petrolem Institute implying that it would use signs at the gas pump to tell drivers they were paying more because of climate taxes did not go unnoticed by us and others.

Related links:

Cap-and-trade: Perennially unpopular - FT Energy Source
Cap-and-trade versus everything else – FT Energy Source

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