The flawed logic of the cap-and-trade debate

All three strategies have been offered with the best of intentions, but have allowed greens and others to ignore the ways in which economic and political realities constrain carbon pricing. Greens have sunk enormous political and intellectual capital into an emissions reduction framework that simply can’t succeed - at least as long as the price gap between fossil fuels and clean alternatives remains large and so requires the maintenance of high carbon prices to close. This is what we identified in 2007 as “global warming’s Gordian Knot”: price carbon too high and provoke political backlash that results in the evisceration of emissions caps and other policies to reduce emissions; price it too low, and you don’t have a sufficiently high price to drive the innovation and technology investment necessary to make the transition to clean energy alternatives.

For this reason, we argue that environmentalists must shift from looking to high carbon prices to drive private sector energy innovation to using low carbon prices to fund public sector research, development, and deployment of clean energy technologies.

Rather than focusing on emissions reduction targets and timetables, a new framework will establish price declines in the real, unsubsidised costs of clean energy technologies as the explicit objective of climate and energy policy.

Rather than attempting to establish high carbon prices globally in order to create sufficient incentives for private interests to invest in energy technology innovation, this new framework focuses on establishing very modest and politically sustainable carbon prices in developed economies to fund very large public investments in technology innovation and to help bring competitive technologies to market.

Rather than viewing private interests and markets as the primary driver of technology innovation, this framework recognises public investment as the most effective method of driving technology innovation.

Rather than insisting that developed economies “go first” by achieving symbolic but largely irrelevant emissions reductions, the new framework sees developed economies as critical laboratories that will finance and invent the low-cost technologies that will make deep global emissions reductions possible.

The serial contortions of cap-and-trade programs around the world result from the political necessity of containing the costs and price impacts while maintaining the fiction that strict pollution caps are being enforced. Offsets promise cheaper reductions somewhere else. The liberal distribution of free pollution allowances to energy interests and industry promises to ameliorate the impacts of high carbon prices. The various schemes to borrow allowances from future compliance periods promise to keep carbon prices from rising too high.

When all is said and done, what we get is a program where costs are intentionally opaque, implementation is corrupt, and benefits are few. Little wonder that Rep. Rick Boucher (D-VA), who represents a coal-dependent state, recently told reporters that he expected cap-and-trade legislation to “create the opportunity for increasing coal production”.

Far better to accept that the price for carbon won’t be high and implement a simple and transparent program to establish a stable and low price. Such an approach is compatible with either a carbon tax or cap-and-auction with hard price caps and floors. Because the impacts of the price on end users, consumers, and businesses are small, this approach does not require figuring out how to refund the proceeds to consumers, buy off impacted industries, or flood the market with cheap offsets, which is what Rep. Waxman and Rep. Markey have spent the last month doing. And this approach allows all the revenues generated by the program - $30 billion or more annually, even with a low carbon price - to be dedicated to the development and deployment of clean energy technologies and infrastructure.

This approach will not offer certainty of emissions reductions. But neither will carbon taxes or cap-and-trade, as Europe has proven. What it will do is explicitly direct climate and energy policy toward the single variable that holds the key, both politically and economically, to achieving deep reductions in global carbon emissions: the broad availability of low-cost, low-carbon energy technologies.

The end of the pollution paradigm

The Waxman-Markey cap-and-trade legislation represents the final absurd expression of the failed pollution paradigm that has defined climate policy for over a decade. The long obsession with pollution caps, targets, and timetables has produced legislation that, in the name of reducing greenhouse gas emissions by 20 per cent by 2020, will allow regulated industries to emit as much as a third more carbon in 2012 than they did in 2005 and close to 10 per cent more in 2020.

This program will have little, if any, impact on US emissions. But it will allow President Obama to arrive in Copenhagen in December touting a mandatory US program to cap and reduce its carbon emissions, thereby returning the US to the community of good global citizens that have made such commitments without discernibly altering the actual trajectory of their growing emissions. What all share with the United States is an unwillingness to establish carbon prices high enough to drive significant emissions reductions.