Will Waxman-Markey Work?

That's the big question: Is the American Clean Energy and Security (ACES) Act of 2009 going to work to reduce greenhouse-gas emissions that are responsible for overheating the globe?

The Waxman-Markey bill, named after Democratic Reps. Henry A. Waxman (Calif.) and Edward J. Markey (Mass.), the bill's two chief sponsors in the House of Representatives, would put a cap on carbon dioxide and other gases emitted into the atmosphere by this country. As a result of burning fossil fuels such as coal, oil, and natural gas, we and the rest of the world derive needed energy to run our lives and our economy. But the combustion of these fuels produces CO2 and other "greenhouse gases." GHGs in the atmosphere act as blankets trapping heat that comes from sunshine. As the amount of GHGs the world produces skyrockets, the average temperature of the earth edges up. The seemingly slight temperature rises that scientists see happening in the near future — they call it "global warming" — might have catastrophic effects. So we seek ways to limit the growth of carbon (and equivalent) emissions before it's too late.

Thomas Friedman's recent book Hot, Flat, and Crowded: Why We Need a Green Revolution and How It Can Renew America tells all about it. In it Friedman talks about how we need to provide our economy with "price signals" that will cause the free market to wean us away from carbon-based energy: "The market will give us what we want, but only if we give the market the signals it needs: a carbon tax, a gasoline tax increase, a renewable energy mandate, or a cap-and-trade-system that indirectly taxes carbon emitters — or some combination of all these" (p. 251).

Waxman-Markey is a cap-and-trade system. If it or any other source of an economic "price signal" is to work, per Friedman it would have to foster innovation in alternative energy. Failure to prompt innovation in alternative energy would be equivalent to failure of the whole cap-and-trade system.

That term, alternative energy, refers to "clean power" from wind, solar, nuclear, geothermal, hydroelectric, biofuels such as ethanol, and other energy sources that are "renewable," meaning that they are naturally, or can be technologically, replenished. They either don't produce carbon emissions at all, or (as in the case of "biomass" or "biofuels" that come from agriculturally grown crops) the carbon they produce when they are burned is, via the "carbon cycle," removed from the air and recaptured in new crops.

Friedman also refers to alternatives to fossil fuels as sources of "clean electrons." Produced by electricity generating facilities that eschew fossil fuels, they move through a new "smart grid" or "Energy Internet" — which sorely needs to be built — to power our businesses, our homes, and even our cars (Friedman assumes next-generation automobiles will be plug-ins).

Right now, our economy runs on relatively cheap fossil fuels — even if oil prices are volatile of late — and "dirty electrons." There's no incentive to change as long as carbon-based non-renewables remain cheap, at least some of the time. To get renewables "down the learning curve" and producible "at scale," there will have to be countless innovations in how they are produced and how energy from them is delivered. Add to that the need for as yet undreamt of types of renewable energy, and you can see that fostering innovation is going to be the litmus test of Waxman-Markey or any other program for weaning us off fossil fuels.

One thing a program like Waxman-Markey would need to do if it wants to be successful, Friedman suggests, is to make sure the price signal set up by the program is a steady, predictable one. For innovation to happen, titans like General Electric, DuPont, and Microsoft need to feel confident that research and development invested in alternative energy sources and in the software that would run the "Energy Internet" will likely pay off. The price of fossil fuels needs to go high and stay high, such that the suddenly relatively low cost of renewables and smart grids looks attractive at all points down the road.

But from what I can tell, may be setting us up for unsteady carbon prices. A cap-and-trade system involves letting a market develop in the allowances required to cover actual or potential carbon emissions. The market puts a price on carbon, but like any market, it would see prices go up and down in response to supply and demand.

What's more, Waxman-Markey would permit allowances to be "banked" and "borrowed" by companies that directly emit, or indirectly engender, carbon emissions. Practices like these might smooth out supply and demand, which is good. But they might also exacerbate price swings, which is bad. If carbon prices fluctuate too much, innovation in "clean electrons" could be stifled.

Sadly, in discussions I have seen thus far, little attention has been paid to Waxman-Markey's ability to promote innovation.