Much of the discussion in the environmental community about the climate strategy known as “cap-and-trade” centers on the fact that this strategy sets a hard cap, a maximum level of carbon emissions. Seemingly forgotten is the flip side of the coin: a hard cap also effectively sets a minimum level of carbon emissions. As with a tied-off balloon, the fact that air cannot get in also means that air cannot get out.
The implications of a hard cap are profound. You can buy a hybrid, but in the big picture it will have exactly zero climate benefits under a hard cap. Ditto for student efforts to reduce emissions on college campuses, or for state efforts to promote renewable energy. Because the carbon cap acts as a floor as well as a ceiling, any emissions you don’t use will simply be used by somebody else.
Even federal statutes—such as the energy efficiency provisions in the very same Waxman-Markey bill that creates the cap-and-trade program—will, in the words of Harvard economist Robert Stavins, provide “little if any incremental benefits to the environment.” Trying to reduce emissions in one sector of a capped economy will accomplish no more than pressing into a balloon with your finger.
Once a binding cap is in place, there will be two ways, and only two ways, to reduce the overall level of carbon emissions from fossil fuels. One is for Congress to lower the cap. The other is to lower the cap yourself by purchasing permits and not using them, an approach that is likely to have the same limited appeal as current opportunities to purchase offsets.
As a practical matter, then, the presence of a federal cap means that there will be only one way to reduce emissions. The federal government will have effectively monopolized climate policy, with cap-and-trade playing the role of the schoolyard bully who scares off everyone else.
This would be fine if the hard cap was also a strong cap, because a strong cap would significantly raise the price of fossil fuels. You wouldn’t need an environmental incentive to buy a hybrid because higher gas prices would give you a financial incentive. Governments wouldn’t need to promote renewable energy or energy efficiency because market prices would already be doing the job. Like a carbon tax, cap-and-trade is based on a simple economic idea: the way to get people to pollute less is to make polluting expensive.
The problem is that neither the general public nor their elected representatives seem to have much enthusiasm for making polluting expensive, and as a result Waxman-Markey does a lousy job of it. Over the next twenty years, according to simple calculations based on EPA estimates, the bill will raise the price of gasoline by about 28 cents per gallon (in today’s dollars) and the price of coal-fired power by about 2.8 cents per kilowatt-hour. These would be impressive price changes for 2012, but not for 2030: my educated guess is that they will have negligible direct impact on consumption of gasoline or natural gas, that they will have a limited impact on consumption of coal by existing power plants, and that they might not be enough to prevent the construction of new coal-fired power plants. (So where will the carbon reductions promised by the cap come from? Good question, and I confess that I don’t know the answer. But one scary possibility is that offsets will allow the fossil fuel situation in the U.S. in 2030 to look much the same as it looks now.)
One hundred years ago G.K. Chesterton warned against “the persistent and insane attempt to obtain pleasure without paying for it,” so it is worth stating the obvious: We cannot have price signals without raising the price of fossil fuels. Claims to accomplish one without the other bring to mind Chesterton’s mocking words: “Let us have the pleasure of conquerors without the pains of soldiers: let us sit on sofas and be a hardy race.”
There are of course arguments in favor of the current cap-and-trade proposals—that they’re a good start, that we can tighten the cap later, that politics is the art of the possible, that this is the only chance we’ll have for the next 10 years, etc.—and I respect these arguments and the folks (especially those at Sightline, who also have this handy cap-and-trade 101) who make them. But one of the most common arguments I come across is that “something is better than nothing”, and I think this argument ignores some very real risks.
Chief among these is the risk that a weak cap will paralyze us. Individuals, organizations, and state and local governments will develop a kind of learned helplessness, unable to seriously engage in climate action for the simple reason that their actions will not improve the climate. We will be locked into a weak cap-and-trade program that the general public doesn’t understand and that is founded on a simple economic idea—raise the price of fossil fuels—that its supporters refuse to defend.
It is of course a challenge to figure out how to move forward given the current political situation (and by that I refer not only to climate change deniers on the right but also to politicians on the left who hesitate to raise fossil fuel prices, and most of all to an American public that is not sufficiently concerned about climate change) and I can claim some level of expertise only about economics, not about politics. But my opinion is that a better approach would be to pass the rest of Waxman-Markey—the provisions that promote energy efficiency and establish renewable energy standards—and come back to economic incentives down the road when we’re serious about raising the price of fossil fuels. Right now we’re not serious, we’re just going through the motions, and that could do more harm than good.
One promising development comes from British Columbia, where a right-of-center government is using carbon pricing revenue to finance dollar-for-dollar cuts in existing taxes; by 2012 their carbon price will be about where the EPA expects the U.S. price to be in 2030 under Waxman-Markey! This is exactly the sort of innovative approach that will be locked out if Congress commits our country to a cap. (I know that because I volunteer with a group working to bring the B.C. approach to Washington State, and if a federal cap passes then our group will almost certainly shut down.) I’m not saying that a federal cap should be abandoned because of some grassroots effort in Washington State, but I am saying that a federal cap means putting all of our eggs in one basket, and in my opinion that’s only a good idea if the basket is stronger.