Cap-and-Trade Is the Way to Deal With Climate Change

Cap-and-Trade Is the Way to Deal With Climate Change appeared as a letter to the editor in The Washington Post of May 26. By Dirk Forrister, leader of the White House Climate Change Task Force under President Bill Clinton, it was in response to a May 18 Post editorial, "Cold Reality."

Mr. Forrister makes some telling points in championing a cap-and-trade approach to limiting carbon emissions — as opposed to an out-and-out carbon tax, a policy option which this blogger preferred in Waxman-Markey Climate Legislation but thought better of in Caps, Trades and Offsets: Can Climate Plan Work?.

First, some background: the American Clean Energy and Security Act, a.k.a. the Waxman-Markey bill, is being considered by the full House of Representatives after recently being vetted by Rep. Waxman's own House Energy and Commerce Committee. Waxman-Markey would, as I said in Caps, Trades and Offsets, effectively "tax" carbon-gas sources such as power companies and oil refineries. They would have to obtain allowances, also called credits or permits, to cover the amounts of "greenhouse gases" — carbon dioxide and methane, mainly — they are directly or indirectly responsible for putting into the atmosphere, thereby adding to global warming and climate change.

85 percent of the government-created allowances would be given away for free under Waxman-Markey, while the remaining 15 percent would be sold at auction to the highest bidders. The monies thus raised by Uncle Sam could be thought of as a "tax" on carbon emissions.

The total number of units of greenhouse gases America could emit would be reflected in the sum total of the allowances issued; this is the "cap" part of "cap-and-trade." The "trade" part would arise from the ability of the allowances, once issued, to be bought and sold in a marketplace, such that a polluter who cleans up its act promptly and winds up with extra allowances could sell the excess allowances — possibly via Wall Street financiers — to another polluter which cannot (yet) afford to reduce its carbon emissions.

Proponents of cap-and-trade such as Liz Martin Perera of the Union of Concerned Scientists say it will "harness the power of the market, to find the cheapest reductions first. If it's going to be cheaper for me to reduce [emissions] than you, then I'm just going to go ahead and reduce and sell you my permit."

As I said in my earlier post, Waxman-Markey seems to be a way to create a tax burden on carbon pollution, carve it up into tiny pieces, and sell the pieces in a marketplace, thereby engendering implementation efficiencies.

That means it offers something to both conservatives and liberals. Conservatives extol the efficiency-engendering benefits of marketplaces. Liberals love to use taxes to engineer changes in how things work in America.

But many liberals (apparently including the Post editorial writer) want a straight-up carbon tax. Mr. Forrister is also a liberal, but he prefers cap-and-trade.

He says a carbon tax fails three tests: environmental effectiveness, political possibility, and simplicity:

1. Environmental effectiveness: "Some companies would undoubtedly pay the tax rather than lower emissions, and the cost of the tax could be passed on to consumers." Since there is no hard-and-fast cap on emissions, if companies could pass along the tax to their customers, emissions levels might come down too slowly, if at all.
2. Political possibility: "With the country looking to emerge from its economic struggles, it is unlikely that any legislation involving a new tax will be passed."
3. Simplicity: "The U.S. tax code stretches for thousands of pages and includes endless exemptions and loopholes. A carbon tax would be no different." (I personally doubt that. Waxman-Markey makes provision for "offsets" as well as allowances. These would allow polluters to demonstrate ways in which they have forgone or otherwise made up for hypothetical carbon emissions, and to use these claimed "offsets" to reduce their need for allowances. Offsets equate in my mind to exemptions and loopholes, so I think Waxman-Markey would end up being at least as complex as a carbon tax to administer.)
   

Be that as it may, I continue to believe (following my recent conversion) that cap-and-trade à la Waxman-Markey is the way to go.