Cap and Trade 101: A Climate Policy Primer, from the Sightline Institute, in the Pacific Northwest, is must reading for anyone interested in climate policy, and in particular the cap-and-trade approach to reducing carbon emissions.
As I've been saying in earlier posts in this Cap and Trade topic, the American Clean Energy and Security Act, a.k.a. Waxman-Markey, is currently before the U.S. House of Representatives. If it becomes law, it would create a cap-and-trade system to put a price tag on spewing carbon pollution into the atmosphere from the United States. Carbon compounds, particularly CO2, are greenhouse gases that hang around in the atmosphere, trap the sun's heat, and ratchet up global temperatures. When we burn fossil fuels such as coal, natural gas, and petroleum products, we produce greenhouse gases by the ton. Any further increase in man-made "global warming" will have disastrous consequences, scientists say, so we need to reduce our dependence on, or find alternative energy sources to, coal, natural gas, and petroleum products such as gasoline and diesel fuel.
Waxman-Markey would set a "cap" on the total number of tons of "CO2 equivalents" that electric utilities, oil refineries, and the like are directly (through burning fossil fuels) or indirectly (through providing fossil fuels for others to burn) responsible for emitting into the atmosphere. This cap, whose total size would be ratcheted downward over the course of several years, would be divided up into "allowances" or "permits" that are either sold at an auction run by a designated governmental authority or given away for free to historically high-volume sources of greenhouse gases. After being auctioned or given away, the permits would then be "traded" — bought and sold in a market for them — until they were finally used by whoever ultimately owned them to sanction carbon emissions in the amount associated with the permit.
The Sightline Institute paper is a primer on cap and trade. It doesn't address Waxman-Markey specifically, but it does provide clearly written insights into what C&T is all about. More that that, it discusses the various ways in which C&T might conceivably be set up, giving reasons why certain options are better choices than others.
For example, there is a policy decision to be made as to whether the permits will be given away free ("grandfathered") to bigtime polluters, or sold at auction. The Sightline position, with which I at least tentatively agree, is that all permits should be auctioned. (Waxman-Markey auctions only 15 percent of the permits, giving 85 percent away for free.)
Why auction all permits? The main reason is that giving them away does not, as many people intuitively imagine, hold down consumers' added monetary costs of buying energy that would likely occur in a C&T system.
For one thing, Sightline asserts that the supposedly greatly elevated energy costs due to C&T will not materialize, since carbon-based energy costs are already much elevated due to relatively low supply and relatively high demand. C&T would simply redirect the high profits now accruing to carbon-based energy's sources to a revenue stream that the government could dedicate to one or more of several good purposes that are described in the primer.
Even more convincing is the other reason to auction all permits, not give them away. If utilities, refineries, and other big players in the energy economy get free permits, the fact that the permits first emerge with no price tag does not set their value in the marketplace. Their market value is actually quite substantial, and it accrues as massive windfall profits to the fat-cat shareholders of the energy titans.
The analogy is drawn to a scalper selling World Series tickets. He sells them at whatever high price the market will bear, based on supply and demand ... regardless of whether he originally found the tickets lying on the ground! The selling price that he receives for the tickets is his windfall profit on those tickets.
On the other hand, if all permits are auctioned for a price set by the dynamics of the auction process itself, billions of dollars will flow into public coffers that can be used (among other uses) to reimburse the low-income families that would be hardest hit if energy prices go up.
The Sightline primer is, as I say, a must read ... even for every latter-day Harry and Louise who are now poring over the various proposals Congress is sorting out for health care reform!
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