Common Tragedies

Thoughts on Environmental Economics

Bubbling with Anticipation

Posted by Danny Morris on March 30, 2009

For all you wonky folks out there who get excited about such things, tomorrow appears to be the day when Chairman Henry Waxman is going to drop his much-anticipated cap-and-trade bill. While there have been a few climate bills released in the 111th Congress (including a carbon tax bill from CT Rep. John Larson), this one is probably going to dominate legislation discussions much like Lieberman-Warner did last session, and has already begun to define the debate in the Senate. Originally, Senate Majority Leader Harry Reid said he wanted separate bills to address energy and cap-and-trade, but changed his mind after some hardcore lobbying from Waxman. What does that mean? It means you can expect a big, hulking bill that will spawn spectacular histrionics from Republicans and the Wall Street Journal about how the country will suffer under the boots of  the government’s carbon fascism. There will be plenty to talk about over the next few weeks and months, but here’s a quick list of some things to keep your eyes on (for a more complete and eloquent review, check out Daniel Hall’s RFF swan song):

Allocation: Sorry industry, but auctions are going to definitely going to be a part of this bill. The question is how many many credits are going to be on the block. Lieberman-Warner started over auctioning around 27%, then gradually increased up to 70%. President Obama, however, has said he wants a 100% auction and planned for a lot of revenue in his budget ($646 billion over 10 yrs, which even in our post-TARP world, is not a trifling amount). Since the House is not restrained by to passing bills with a super-majority, expect some aggressive auctionable credits totals.

Incidence: Incidence is a fancy economic word that means ‘how much are people going to have to pay.’ Whatever revenue is generated by a credit auction is going to be tugged at by approximately 301,345,892 different interests, and not everyone will get what they want. Congress members are definitely going to fight to ensure their favorite hometown industries don’t take a big hit, but they also need to worry about their constituents as well. No one is going to want to enter the 2010 elections saying they voted to put a price on carbon without being able to also say how they plan to put money back in people’s pockets. How the bill divvies out auction revenues could become a critical argument point and may provide a lot of ammo for opposition to climate legislation.

Cost containment: Last I checked, markets and prices can be volatile. Carbon price volatility seems to frighten industries, which in turn frightens legislators. A smooth price path, especially one that doesn’t go too high, is what emitters want. There are reasonable and unreasonable ways to deal with this issue. For a potentially disastrous solution, look at H.R. 1666, which sets up a Climate Oversight and Coordination Board in the Treasury Department that would set carbon prices for the first ten years of a cap-and-trade market. If Congress gets too cute and clever with their solutions, it could seriously muck things up.

Offsets: Industry loves them because they are cheap and easy. Environmentalists like them because they can protect forests and lead to restoration. Does Congress believe they have a role? Some legislators seem pretty skeptical, but 21 reps sent a letter to Waxman last Friday asking him to include offsets in the bill.

    There are obviously many more issues I’ve left out that will crop up over the next little while, but I think these ones will be some of the most contentious/infuriating/amusing. It feels a little bit like Christmas Eve, and yes, I am fully aware of how nerdy of a statement that is. Don’t kill my excitement. That would be like telling me there’s no Santa Claus.

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