Cap and Trade: The Steps to Finding Common Ground
Amid growing congressional concern about manmade climate change, the U.S. Senate is slated this week to take up legislation on the issue. The leading proposal, sponsored by Sens. Joseph Lieberman (I-CT) and John Warner (R-VA), seeks to return U.S. greenhouse-gas emissions to 2005 levels by 2050 — a change that scientists say is necessary to avert global warming’s worst effects.
The measure would cap emissions from electricity generators, large industrial sources, and oil. To set the system in motion, the government gives away or sells pollution allowances. Companies that cut their emissions can sell their excess allowances to those that cannot. To meet the 2050 emissions target, the cap declines gradually each year, which in turn raises the price of carbon allowances.
Although there is growing support across the political spectrum for this kind of “cap and trade” approach to address climate change, there are three key sticking points. The first of these is a fear of fossil-fuel price hikes that could cripple the U.S. economy. In response to this concern, Sen. Jeff Bingaman (D-NM) introduced a bill in 2005 to contain costs by ensuring that U.S. companies pay no more than $12 for every ton of CO2 they emit. This price ceiling would change each year to account for inflation. Some environmental groups say such a measure would stymie clean-energy investment and retard meaningful emissions reductions.
A second point of contention is whether companies should get greenhouse-gas trading allowances free of charge — or be compelled to pay for them. Heavy carbon emitters, such as coal companies, want the government to give them allowances for free. The amount of allowances that the government hands out would be based on each company’s recent greenhouse-gas emissions. Such formulations mean that big emitters receive large numbers of free allowances. Some prominent green groups, as well as some companies that have made clean-fuel investments over the years, contend that free allowances add up to a business windfall that holds little or no benefit for consumers.
A third sticking point involves the degree to which the Lieberman-Warner bill supports the expansion of nuclear power. Environmental groups want revenues from an auction to support clean, renewable fuels such as solar, wind, and biomass. Some leading conservatives say they will thwart any measure that fails to include subsidies for nuclear power.
Notwithstanding these controversies, the Progressive Policy Institute (PPI) views the Lieberman-Warner measure as the most plausible vehicle for congressional action. Over the last decade, PPI has taken a leading position in calling for a cap-and-trade system to address the devastating effects of manmade climate change. In keeping with that tradition, this policy brief advances three principles to help break the present impasse over how to price carbon emissions, how to allocate emissions permits, and how to weigh nuclear power’s contribution to America’s clean-energy portfolio. As evidence continues to mount that ice is melting above the Arctic Circle far more rapidly than scientists initially expected, the world cannot afford continued American foot-dragging on this issue. Principles that PPI advocates include:
Balance environmental and economic goals. To smooth out price volatility, PPI endorses a creative idea advanced by the National Commission on Energy Policy (NCEP) and Duke University’s Nicholas Institute. The staff proposal seeks to ensure that the price of carbon does not go too high (or too low). The NCEP-Duke plan calls for a reserve of extra carbon allowances borrowed against future reductions in carbon emissions. The reserve helps to provide greater certainty that carbon prices will not spike in the early years of a cap-and-trade system, while strict payback provisions guarantee that the system will reach its overall reduction target.
Keep consumers in mind when distributing emissions allowances. Some coal-fired utilities want free allowances, while other companies and leading environmentalists contend that such measures are tantamount to a government give-away, with little or no benefit to consumers. PPI urges Congress to adopt a hybrid system of free and auctioned allowances designed to generate savings in both emissions and cost, rather than creating another corporate windfall.
Leave no fuel behind. Containing costs will require significant use of biomass, wind, and solar energy — energy sources that do not rely on carbon-containing fossil fuels — as well as on clean coal and a significant expansion of nuclear power.
After a lost decade of denial and evasion, Congress seems achingly close to enacting a national cap-and-trade system for carbon emissions. Now that conservative opposition to cap-and-trade seems to be waning, it would be tragic to see progress blocked by disagreements among its supporters. These differences are not trivial, but-as this paper suggests-with imagination, good will and a sense of urgency, they are surmountable.