Common Tragedies

Thoughts on Environmental Economics

Can you simplify cap-and-trade?

Posted by Daniel Hall on September 23, 2008

There is a nice article from Darren Samuelsohn today in E&E Daily that addresses one of the fundamental obstacles that any climate legislation will face in moving through Congress: namely, the size and complexity of any legislation is going to make it difficult to pass, but ‘simplifying’ the legislation seems impossible given political exigencies.

At the end of the day I don’t see any bill getting passed that is significantly simpler than Lieberman-Warner.  As the article notes, legislators are not going to hand EPA a blank check to write regulations for the biggest piece of environmental legislation in history.

And I think the bill did many things right: for example, it was economy-wide (covering most emissions in the economy) and it moved towards auctioning most allowances (although perhaps too slowly).  But I do think there are many ways future legislation could be improved:

  1. Auction all allowances, and then specify how to carve up the money.  Yes, you are going to have to buy off some industries and special interests in order to get legislation passed but it would be more transparent to structure this as a straight subsidy.
  2. Use more of the revenues to offset other taxes.  Per capita rebates would make the policy less regressive.
  3. Fund R&D, particularly early stage basic and applied research.  Limited funding, if any, for technology deployment.
  4. Fund infrastructure: get in place the networks that will enable technology deployment.  Upgrade the electric grid, fund mass transit, consider funding CO2 pipelines (depending on the results of carbon capture and storage research).
  5. Link domestic targets to international actions, particularly from China and other major trading partners.  Promise to do more if they take action to reduce emissions.

That would be a good start.  Readers, do you have suggestions?

I’ve excerpted a good bit of Darren’s excellent article below the fold…

Global warming legislation faces many obstacles on its way to passage. But none may be bigger than the size and complexity associated with a cap-and-trade program that budget experts say could cost trillions of dollars over its half-century lifetime.

Describing a cap-and-trade bill on the Senate floor this summer, Republican Leader Mitch McConnell of Kentucky may have summed it up best when he declared, “This proposes to be the largest restructuring of the American economy since the New Deal.”

Several months later, the 548-page Senate bill sits on the cutting room floor, a long way from becoming law. And as lawmakers, lobbyists and advisers study what went right and went wrong, more and more people are talking about how to make global warming legislation “simpler” the next time around. …

But how does the next president and Congress write a “simple” climate change bill when the political reality requires coalition building and more than a few special items inserted to capture different voting blocs? …

“Giving lots of benefit to a family coal mine in Alaska to get two votes in the Senate, if that’s what it takes, that’s what it takes,” said Robert Stavins, director of Harvard University’s environmental economics program. “That’s the nature of a representative democracy.” …

Page counts are not normally a strong indicator of successful legislation. …

..try comparing it [the Lieberman-Warner bill] to Senate Energy and Natural Resources Committee Jeff Bingaman (D-N.M.), who produced his own cap-and-trade plan at 54 pages. Offering an alternative approach, the carbon tax, Rep. Pete Stark (D-Calif.) wrote a bill that took only six pages to demand an 80 percent cut in emissions by midcentury, a target that stands out even higher than the Lieberman-Warner-Boxer approach. …

Sen. Lamar Alexander (R-Tenn.) said the best way to come at the issue is through a focus on specific industrial sources of emissions. He supports capping carbon dioxide emissions from power plants only as part of a cap-and-trade program that deals with the traditional forms of air pollution, including nitrogen oxides, sulfur dioxide and mercury. …

Another idea to simplify things comes from Sen. Dianne Feinstein (D-Calif.), who suggests that President Bush’s successor take global warming head on by first starting direct negotiations with China. “If this can be done by whoever is the next president, it I think simplifies the situation and creates a kind of road map,” she said.

Feinstein said the U.S. policy could mirror California’s climate law, Assembly Bill 32, that Gov. Arnold Schwarzenegger (R) signed in 2006. The bill left the heaviest lifting to state government agencies. …

Back in Washington, a straightforward California bill has almost no chance of passing given the deep distrust lawmakers from both parties would have in allowing U.S. EPA to write the most critical pieces of a climate package, even if it was being done by a sympathetic administration.

“Turning the whole thing over? I don’t think it passes the straight-face test on the Hill,” said former Bush EPA air pollution chief Jeff Holmstead. …

Other suggestions to make things simpler deal with core design features of a cap-and-trade plan. …

Peter Barnes, a senior fellow at the Tomales Bay Institute in Point Reyes, Calif. … has been making the rounds on Capitol Hill promoting the idea of distributing 100 percent of the emission credits via an auction and then using all the revenue to send back to U.S. consumers through tax rebates.

The premise is very similar to how Alaska residents get annual checks from the state government for oil and gas proceeds, said Barnes, the founder of the Working Assets long-distance telephone company. Here, Barnes contends that since Americans own the atmosphere, they should bank all the revenue that comes when the government auctions away the right to release greenhouse gases there. …

Barnes shrugged off questions about how he would build the political support to make his approach a reality in Washington, saying that is a decision best left to policymakers.

Indeed, this is where the political argument comes roaring back into play, as different interest groups line up for their piece of the pie. “If you have $300 billion to be distributed through auction revenues, the people who think they are claimants probably add up to $1 trillion,” said David Montgomery, a climate expert and researcher at Charles River Associates.

Next time through the process, expect considerable debate among the groups that took home promises of funding through the Lieberman-Warner bill. They’re likely to push for that same legislation as a starting point. Or at the very least, they’re not going to want to end up with anything less than what was in the earlier measure.

Consider that in Lieberman-Warner, sponsors tried to divide up trillions of dollars in emission allowances across many different needs. State wildlife officials got $237 billion through 2050 to help with adaptation. More than $1.7 trillion was set aside for tax cuts and deficit reduction. And national forest firefighters would have received some $1.1 billion per year.

“I don’t know who’s going to become Solomon and divide it up and make everyone happy,” Montgomery said. “The allocations are throwing a tremendous monkey wrench into it. The more complicated they get, the more invitations to give to California firefighting funds, the harder it gets.”

Alas, it is also the proven method lawmakers use to craft a deal — simple or not.

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