Cap and trade: it’s never worked, so let’s try it on a massive scale

Why exactly do people believe that cap-and-trade is going to be effective in reducing greenhouse gas emissions? Let’s face it: cap and trade is a nice idea that simply doesn’t work in practice. The one success story that proponents have held up was the successful effort to control acid rain. However, that program involved a relatively straightforward technological fix for a few hundred power plants to switch to low-sulfur coal.

But more importantly, cap-and-trade and other government efforts to create “markets” (think of California’s energy deregulation spawning Enron’s “Operation Death Star”) have failed badly. In Los Angeles, the RECLAIM cap-and-trade program to control ground-level ozone was an unmitigated disaster, as the cap eventually had to be reset after permits for more pollution were issued than were actually being emitted. RECLAIM regulators were duped by industry reps who scared them into keeping the cap absurdly high. Meanwhile, over in Europe, the EU cap-and-trade program has been mostly a vehicle for generating windfall profits for utilities and has failed to actually reduce greenhouse gas emissions. One of the primary causes of the EU failure was the decision to freely allocate pollution credits rather than auctioning them off.

You would think the Waxman-Markey plan would have learned from these lessons. But instead we have a cap-and-trade plan that only auctions 15 percent of the credits and allows over 2 billion tons of offsets, all in a program that covers a “mere” 7400 companies. No wonder Goldman Sachs has been drooling over cap-and-trade for years, reportedly spending $3.5 million to lobby for it. The reality is that industry will game this system with no shame, and government regulators and enforcers will always be twelve steps behind.

Worse, the Waxman-Markey cap-and-trade program preempts two likely sources of effective greenhouse gas regulation. First, EPA’s actions to regulate greenhouse gases would cease under Waxman-Markey. EPA is institutionally more competent and well-suited to devise a plan to limit GHG emissions than Congress, a body compromised by coal and agricultural interests that have already forced brutal concessions from the bill’s sponsors. Second, Waxman-Markey currently puts California’s cap-and-trade program under AB 32 on hold for five years. While I’m clearly no fan of cap-and-trade, my bias as a Californian makes me think that the state’s air resources board at least has a fighting chance of devising a successful cap-and-trade program compared to the United States Congress conference committee. And perhaps whatever California does could be replicated in other states and perhaps nationally, were it to actually work.

I would much prefer to see cap-and-trade erased from Waxman-Markey and have EPA regulate greenhouse gases as it does many other harmful pollutants. Let’s take this program as far outside of politics as we can, and forget about cap-and-trade as a vehicle for reducing greenhouse gas emissions.

Reader Comments

19 Replies to “Cap and trade: it’s never worked, so let’s try it on a massive scale”

  1. Suppose you’re right. Does anything else have a fighting chance of getting through Congress? And do you want to risk having the U.S. go to Copenhagen and lecture the Chinese when we haven’t done bupkis ourselves?

  2. I’m most worried about the unknown environmental consequences of Waxman-Markey, the reliance on offsets, the protection of coal (mining, coal burning)and the expansion of bio-fuels. Correct me if I’m wrong, but didn’t most power plants meet the requirements of the 1990 acid rain program by switching fuels rather than installing pollution control devices? That is why the costs were lower than anticipated. But that also boosted surface coal mining in Appalachia, with the tragic irony that the law meant to save those Appalachian forests from acid rain is leading to the destruction of the mountains beneath them.

    An interesting thing about California’s GHG reduction plan–cap and trade only accounts for 20% of the reductions. The other 80% comes from more efficient energy use, a low carbon fuel standard, things like that. (A low carbon fuel standard is missing in Waxman-Markey. That bill mostly focuses on emissions from the electricity generating sector, even though emissions from transportation are roughly equal.)

    The Washington Post said that, now, even liberal senators are going to demand something in return to support cap and trade.

    An interesting article I saw yesterday, “At Center Ring in Senate Climate Debate: Coal vs. Natural Gas”.

    http://www.nytimes.com/gwire/2009/07/13/13greenwire-at-center-ring-in-senate-climate-debate-coal-v-32201.html

    Someone from the AEI (the AEI!) calls Waxman-Markey, “The Sleight-Of-Hand Coal Preservation Act.”

    David Pettit–

    It doesn’t matter how we cut emissions, it just matters that we do it. I think we need a more modest, less controversial bill. Such a bill would probably do as much over the next decade as a scaled-back, but terribly complicated Waxman-Markey, and without all the uncertainty. Keep all the efficiency parts of Waxman-Markey. Those parts aren’t controversial. EPA should start regulating large new point sources, making new coal more expensive. Do what ever else we can to make old coal more expensive. Sue power plants that spew emissions across state lines. Push a bill for power plant performance standards (power plant efficiency standards) to go along with New Source Review. Don’t spend so much on the promise of CCS. That has just given big coal an excuse to postpone action. Reductions via power plant efficiencies and fuel changes will cut CO2 emissions and clean the air now. Invest in research, but let the market sort out CCS. Change regulations at all levels government so utilities can buy electricity from gas-fired plants when it is priced close to coal. Push for electricity decoupling.

    Get the message out: Americans need to know that old coal plants are terrible conventional polluters. Coal says the air is cleaner, but they are mixing emissions from new plants and other cleaner sources with emissions from old plants. Start the dialog about a carbon tax.

  3. Ethan Elkind said:
    “…Let’s face it: cap and trade is a nice idea that simply doesn’t work in practice…”

    Dear Ethan:
    It is refreshing to find a voice of reason in this debate. We are seeing encouraging evidence that our leaders are retreating from cap & trade legislation.

    Regulating carbon dioxide is problematic for scientific, technical, economic, and political reasons, and such efforts will probably be abandoned within a few years.

  4. The only possible positive I can see out of Waxman-Markey is the idea that we can now comfortably lecture the Chinese and Indians. But this seems like a weak reason to support a cap-and-trade program that may potentially make emissions worse, as happened in Los Angeles. I am in complete agreement with Red Desert that a scaled back Waxman-Markey would be much more beneficial. We can still get on our high horse with developing nations once the EPA begins to regulate. Maybe I’m too high on what EPA can accomplish, but I’m certainly not high on the sausage that is likely to come out of Congress. I’m all in favor of limiting GHG emissions, but cap-and-trade is not the way to do it.

  5. Ethan said;

    “…I’m all in favor of limiting GHG emissions, but cap-and-trade is not the way to do it…”

    Dear Ethan,
    Those of us who question the veracity of regulating the earth’s climate, may be better persuaded if our friends on the other side would demonstrate a committment in their personal lives to do what they ask of others.

    For example, if you are in favor of limiting GHG emissions then you should minimize your use of motor vehicles that consume fossil fuel, and minimize personal consumption of hot water and electricity that is generated by fossil fuels such as coal and natural gas.

    This would demonstrate that you truly are in favor of limiting GHG emissions and it would set a good example for other people to follow.

  6. Jim — I agree, and although I don’t have the lowest-carbon footprint in the world (you would have to be an extremely poor person in the third world to fit that bill), I do my part by not driving regularly and living in a compact house in the city. But the reality is that even for those of us who would like to reduce our GHG emissions, the choices are limited. For example, California simply does not provide the range of housing options necessary for people to live without cars. You would have to live in the few cities in the state that are easy to get around without a car. And most of those neighborhoods are either very poor or very expensive. Similarly, many products that are necessary for a productive and comfortable life are not made as energy efficient and sustainable as they could be. So many of the things people would have to do to lower their carbon footprint are beyond their individual control.

  7. Ethan,

    I’m curious what you think of Matt Taibbi’s assessment, in a recent Rolling Stone, that Goldman Sachs and their $3 million lobbying effort is the reason we are going with cap-and-trade. He calls it a carbon tax where the government doesn’t collect the revenue. I would have thought somebody on the blog would have commented on this by now, though perhaps you pointy-headed academic types don’t buy magazines with the Jonas Brothers on the cover.

  8. Ethan–

    I actually found the Grist article linked in your post to be a reassuring defense of W-M. But I still have my doubts. This letter to Move-on has lots of good information:

    http://www.moveon.org/r?r=51620&id=16596-5318683-wr9nXPx&t=10

    Most interesting is that Waxman-Markey postpones real reductions until after 2020–defeating the idea that we need to begin emissions reductions today. Also, once the offset market is established, it will become another huge lobby. In 2005, there was an agricultural lobby but not much of an ethanol lobby. That all changed with the 05 and 07 energy bills.

    Dumb question: Is it possible to cap without trade? Issue permits and reduce the number of permits over time. Again, start making modest cuts now.

    Evil–

    Ethan’s post did link to a discussion of the Rolling Stone article.
    Something like half of Americans don’t even believe climate change is real. Voters they see a bill like W-M handing out billions to industries–like finance–with powerful lobbies. All this after the big bank bailouts. Deal making may make sense politically in DC to pass legislation, but I think it increasingly disillusions the public at large. Ultimately, this could be a political setback for the environmental movement.

  9. Red Desert: the Grist article was encouraging on balance, although I found the first point about the large offset allowance being potentially fatal to the whole program to be the most discouraging point, and that was from someone who is generally positive about W-M. Thanks for the MoveOn letter. It echoes my point that EPA could do a much better job regulating GHG emissions than the United States Congress and the Dept of Agriculture. No wonder the business lobby wants cap-and-trade. It protects them from EPA regulation that would give them little way out. Cap-and-trade, on the other hand, preserves many options for them, including a full-on gaming of the system. And we can definitely do cap with no trade: that’s called command and control regulation, and it’s what EPA does best.

    Nemesis: I would have linked to the Rolling Stone article, but I forgot about it after re-reading the Jonas Brothers article four times. Those boys have talent! But as Red Desert pointed out, my link had a discussion of that article. While I’m personally doubtful that cap-and-trade is solely the result of Goldman Sachs lobbying, I’m sure the business lobby in general has been quietly backing this plan. Their alternative would be to try to influence EPA to issue pathetically weak regulations, which may be harder under this administration (at least I hope). Bottom line: Justice Kennedy handed the environmental movement a gift with Mass v. EPA, and W-M is squandering it.

  10. Apologies to all for the obliviousness of my post. I better keep my head down and mouth shut until after the bar exam.

  11. Anyone who mentions the Jonas Brothers on this blog has a license to post whatever they want.

  12. Nemesisofevil:
    Yes, you definitely should be studying for the bar. I read the Rolling Stone article. While it seems to me that some of the author’s contentions have merit, about both Goldman Sachs’s road to profitability (particularly its role with respect to the mortgage crisis, which Paul Krugman wrote about this week in fewer, less histrionic, and more coherent terms this week in the NY Times, http://www.nytimes.com/2009/07/17/opinion/17krugman.html) and the financial services industry’s interest in cap-and-trade, I would be surprised if Goldman Sachs was the key player in getting the Waxman-Markey bill moving.

    But to me that’s a red herring anyway. It’s possible that cap-and-trade can do some good *and* some companies will make a lot of money off it. It’s also possible that companies will profit while cap-and-trade fails, but the fact that some companies will profit doesn’t itself make cap and trade a bad idea. If Goldman Sachs were betting against cap and trade helping to solve climate change while at the same time pushing cap and trade through its lobbying and other efforts, that would be really bad news, though . . . .

  13. Nemesisofevil: actually, I just realized how late in the month it is. You should be done studying for the bar, and spend the next day just clearing your head and relaxing. Good luck!

  14. Anyone catch this today?

    “House climate bill was flooded with last-minute changes”

    http://www.latimes.com/news/nationworld/nation/la-na-climate-fineprint20-2009jul20,0,5210778.story

    I understand that W-M was to regulate the oil and gas futures market along with the carbon market to reduce speculation. Now this. I seem to remember that Move-On and other liberal groups pushed hard for Melissa Bean’s election.

    The figure in the Rolling Stone article of $646 billion over ten years from cap and trade–that was in Obama’s budget assuming–at the time–a 100% auction of the credits. Am I correct?

  15. Yes, the $646B was assuming 100% auction over the next three years. So there goes that revenue. And thanks for flagging the article. I was oddly encouraged by some of these last-minute changes to the bill. My fear was that they would be more like Bean’s — outright protections for financial gurus and other unrelated or counter-productive changes. But it looks like many of them could provide a strong boost for renewable energy deployment. These changes also indicate that the Senate will be likely to water down W-M tremendously. My guess is that Congress will pass something, as businesses don’t want to face state-by-state regulation as well as EPA rules under Mass v. EPA. But it will probably be weak and counterproductive, at least on the cap-and-trade part of the bill.

  16. Curious to hear your response to EPA Administrator Lisa Jackson’s remarks in a San Francisco Chronicle article published yesterday.

    From the Chronicle–‘President Obama and Jackson have said they would prefer that Congress – rather than the EPA – take the lead in implementing new greenhouse gas limits. Businesses and energy industry leaders also have largely favored congressional action over EPA-imposed limits, because they believe lawmakers are better positioned to combine economic safeguards with any new carbon cap.

    “Legislation is so important, because it will combine the most efficient, most economy-wide, least costly (and) least disruptive way to deal with carbon dioxide pollution,” Jackson said. “We get further faster without top-down regulation.”

    Read more: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/09/01/MNM219GIJD.DTL&type=green#ixzz0Pz6zm4NA

  17. When I hear words like “least disruptive” and “least costly” (not to mention the dreaded “most flexible”), I’m thinking “watered down” and “wiggle room” and “weak legislation.” I’ll give Jackson the benefit of the doubt and assume that she means what she says, but it’s hard to see how the watered-down cap-and-trade bill (soon to be pretty much submerged once/if it’s cleared the Senate) will be as effective as top-down regulation, a la Clean Air Act national standards. I can only suppose that Jackson, like Obama, has bought into the pro-cap-and-trade argument from the “success story” of acid rain. Cap-and-trade used to be the conservative alternative to regulation. We now have a Democratic administration and congress who have moved completely to the right on this issue, and a Republican party that has moved largely into looney-land when it comes to climate change.

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Ethan Elkind

Ethan Elkind is the Director of the Climate Change and Business Program, with a joint appointment at UC Berkeley School of Law and UCLA School of Law. In this capacity, h…

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