In early May, anxiety among climate activists about the fate of cap-and-trade legislation erupted into a full-throated roar with the release of a scathing open letter by Dr James Hansen. In it, the NASA scientist called a bill by Representatives Henry Waxman and Ed Markey a “temple of doom”, savaging it for being complex, corrupt, and “a minor tweak to business-as-usual”. Hansen called for a carbon tax in its place, one that would establish a “substantial and rising price on carbon emissions”.
Hansen was right about Waxman-Markey. It will do little to reduce US emissions, will transfer billions to incumbent energy interests in the form of free pollution permits, and will send billions more to timber, agriculture, and other interests, here and abroad, in the form of dubious “offsets”. But Hansen’s analysis of why climate legislation has gone so terribly off the rails is wrong.
Hansen argues that the problem has to do with the mechanism by which Waxman-Markey would establish a carbon price - a cap-and-trade system. In this, Hansen is joined by many other greens and economists, who argue that cap-and-trade is a cumbersome and economically inefficient means of establishing a carbon price, one that is particularly vulnerable to manipulation by polluters and politicians.
On the other side of this debate stand many business interests, some prominent climate scientists, and green groups like the Environmental Defense Fund and the Natural Resources Defense Council. They argue that cap-and-trade is a superior approach, because it guarantees certainty of actual emissions reductions, and a more pragmatic one, because it does not require politicians to vote for a new tax on pollution. They say taxes are just as prone to manipulation by politicians and polluters and that simple carbon taxes exist only in the ivory tower equations of academic economists, not in the real, rough-and-tumble world of politics and legislating.
The truth is, however, that neither of these approaches will lead to significant reductions in carbon emissions, and for a basic reason: Both Hansen and those he criticises focus on pollution regulation and pricing to make fossil fuels more expensive, rather than on innovation to make clean energy cheap. This approach ignores the history of technological breakthroughs, which has primarily been driven by public investment. And public investment in clean energy is what is needed today, because no effort to achieve deep reductions in carbon emissions, domestic or international, will succeed as long as low-carbon energy technologies cost vastly more than current fossil fuel-based energy.
The power of positive thinking
For more than a decade, the cap v tax debate has taken on a ritual quality, with carbon tax advocates conveniently ignoring the reality that the reason that capping and trading carbon has been so ineffectual has been the unwillingness of politicians to establish a high price on carbon. Similarly, cap-and-trade advocates have ignored the fairly obvious fact that carbon caps are not binding and provide no certainty of reductions if policies substantially limit the maximum amount that emitters will be required to pay to reduce greenhouse gases.
Ironically, both sides share the same pollution paradigm, which views the massive transformation of the global energy economy as fundamentally the same as past pollution battles over acid rain and air pollution. In fact, the debate pits one central objective of that paradigm, the establishment of strict pollution caps, against another, making industries pay to pollute.
But the debate between carbon tax and cap-and-trade proponents is a false one. The problem is that no government in the world so far has been willing to establish and sustain a high price on carbon, whether through taxes or caps. This is due to at least four substantial and interlinked issues: the political power of incumbent energy interests, low consumer tolerance for high energy prices, the economic impacts that substantially raising energy prices will have on key energy-intensive sectors of the economy, and - most importantly - the substantial price gap that continues to exist between fossil fuels and clean-energy alternatives.
Yet so powerful has been the mental model imposed by the pollution paradigm that neither party to the tax v cap debate has much acknowledged either the ways in which the climate crisis differs from past environmental problems or the larger socio-political context in which any climate policy must function. Clean energy technologies cost much more than fossil fuels. Binding caps requiring deep and rapid reductions in carbon emissions must allow carbon prices to rise to whatever level they must (read: very high) in order to comply with the cap. As a result, no society has been willing to establish high carbon prices, regardless of the mechanism.
The serial failures of the European Emissions Trading System, the recent rollback of emissions reduction commitments in Australia, and the looming passage of the Waxman-Markey legislation in the United States are evidence not that carbon trading is the “temple of doom”, but rather that most political economies are highly resistant to high carbon prices. Yet when confronted with this reality, proponents of traditional cap-and-trade or tax schemes have had three responses. The first has been to produce a blizzard of economic models that downplay the economic impacts of high carbon prices. But even when these models show that long-term benefits outweigh the costs, someone will still have to pay in the short-term, and those interests - whether consumers or industries - are well-represented in the US Congress.
Others, such as Peter Barnes of CapandDividend.Org, have proposed refunding to consumers all revenues generated by auctioning pollution allowances, under the assumption that doing so would blunt consumer opposition to high carbon prices and the energy price increases they bring. But there is no evidence that rebates would have this effect. Moreover, the strategy would do nothing to soften the impacts on regional economies and energy intensive industries.
Another strategy, prominently championed by author Bill McKibben, argues that it will be necessary to build a much more powerful movement to mandate the deeper emissions reductions and higher carbon prices needed to stabilise the climate. But there is strong evidence that as long as such a movement is predicated on deeply cutting carbon emissions, no matter the cost, such a political tipping point is unlikely to arrive - at least not before climate catastrophe is so close at hand that substantial mitigation actions will be largely beside the point.