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America and climate change
Cap and trade, with handouts and loopholes
May 21st 2009 | WASHINGTON, DC
From The Economist print edition
The first climate-change bill with a chance of passing is weaker and worse than expected
Illustration by KAL
AL GORE calls it “one of the most important pieces of legislation ever introduced in Congressâ€. Joe Barton, a Republican congressman and global-warming sceptic, says it will put the American economy in a straitjacket. For something that practically no one has read, the American Clean Energy and Security Act provokes heated debate. It would establish a cap-and-trade system for curbing carbon-dioxide emissions, thus transforming the way Americans use energy.
President Barack Obama has long argued that America should join Europe in regulating planet-cooking carbon. But he has left the details to Congress. And the negotiations to craft a bill that might actually pass have not been pretty. The most straightforward and efficient approach to reducing carbon emissions—a carbon tax—was never seriously considered. Voters do not like to hear the word “tax†unless it is followed by the word “cutâ€.
So Mr Obama proposed something very similar to a carbon tax, albeit slightly more cumbersome. Industries that emit carbon dioxide would have to buy permits to do so. A fixed number of permits would be auctioned each year. The permits would be tradable, so firms that found ways to emit less than they were entitled to could sell some of their permits to others. The system would motivate everyone to reduce emissions in the most cost-effective way. It would raise energy prices, which is the point, but it would also raise hundreds of billions of dollars, most of which Mr Obama planned to give back to voters. Alas, that plan looks doomed.
On May 15th Henry Waxman and Edward Markey, the Democratic point-men on climate change in the House of Representatives, unveiled a bill that would give away 85% of carbon permits for nothing, with only 15% being auctioned. The bill’s supporters say this colossal compromise was necessary to win the support of firms that generate dirty energy or use a lot of it, and to satisfy congressmen from states that mine coal or roll steel.
Giving away permits creates several problems. First, it generates no money, thereby royally messing up Mr Obama’s budget. Second, it means that the permits go not to those who value them most (as in an auction) but to those whom the government favours. Under Waxman-Markey, electricity-distributors would get the largest share, with the rest divided between energy-intensive manufacturers, carmakers, natural-gas distributors, states with renewable-energy programmes and so on. Oil firms, with only 2% of the permits, feel hard done by. But most polluters, having just been promised hundreds of billions of dollars’ worth of permits for nothing, are elated. So it is not just the owners of ski resorts and businesses with negligible carbon footprints that are queuing up to praise the bill. Duke Energy, a power generator with lots of coal-fired plants, is also enthusiastic.
The grand handout to shareholders is meant to last until around 2030, by which time all permits will be auctioned. In the meantime, the bill’s supporters say that consumers will be protected from higher energy prices because the largest chunk of the free permits will go to tightly regulated electricity distributors. Regulators can simply order these firms to keep prices low. Problem solved.
Not so, says Alan Viard, an analyst at the American Enterprise Institute, a conservative think-tank. If electricity is cheap, Americans will buy more of it, generating more emissions than would otherwise have been the case. Other industries will accordingly have to cut their emissions more, since there are a fixed number of permits. The cost of this will be passed on to consumers. Overall, ordinary Americans will endure price hikes just as severe as they would have under Mr Obama’s plan, while receiving far less compensation. Mr Viard likens giving permits to polluters to handing the proceeds of a tobacco tax to the shareholders of Philip Morris.
Another problem with Waxman-Markey is its complexity. At 932 pages, it is half as long again as an already-bloated previous draught. It includes a dizzying array of handouts, mandates and technical standards for everything from hot-food-holding cabinets to portable spas. It allows for a huge increase in “offsetsâ€â€”where a polluter pays someone else to stop polluting instead of curbing his own emissions. These are open to abuse, as Europe’s experience shows. There is little to stop foreign factories from starting to pollute just so that someone will pay them to stop.
Among environmentalists, support for the bill varies. Some denounce it for doing less to curb greenhouse gases than was once promised. It aims to cut emissions by 17% below the level in 2005 by 2020, instead of 20%. Greenpeace’s American arm says it cannot support the bill in its current state. Other greens reckon that if this is the strongest bill that can pass, the best idea is to pass it now and tighten it later.
That is the most likely outcome, though far from certain. Mr Waxman wants his bill to pass through the House energy committee this week. Republicans such as Mr Barton could slow it down by offering hundreds of amendments or forcing it to be read aloud. (Mr Waxman has hired a speed-reader, just in case.) But they probably do not have enough votes to stop it, either in committee or when it eventually comes before the full House.
The next step will be the Senate, where the minority has more power. It is hard to predict what will happen there. Republicans plan to berate the bill as both a job-destroyer and a handout to big business. Some will also argue that it will make little difference to the climate if China and India do not also curb their emissions.
The bill’s supporters retort that both countries will come on board only if America sets a good example. Time is running out before the big global climate conference in Copenhagen in December. If the United States does not have a cap-and-trade law in place by then, the chance of a global agreement will plummet. The bill may be imperfect, says Steve Tripoli of Ceres, a green business group, but having no bill at all would be unthinkable.
Meanwhile, Mr Obama continues to attack climate change from other angles. On May 19th he announced that he would impose tougher fuel-efficiency standards. Carmakers will have to produce vehicles that go eight miles farther on a gallon of petrol by 2016. Cars must eke out 39 miles (63km) per gallon, on average; light trucks must manage 30 miles. Carmakers, some of whom would be bankrupt if Mr Obama was not pumping them full of taxpayers’ money, meekly applauded. In the past an agreement such as this would have been thought impossible, the president crowed.
Mr Obama admitted that more fuel-efficient cars might cost more. But he promised that motorists would save thousands of dollars by cutting their fuel bills. In fact, they can already cut their fuel bills by buying smaller cars, but most choose not to. Mr Obama could discourage petrol use more directly and efficiently by taxing the stuff, but that would be unpopular. Ideally, politicians who want to save the planet would be honest with voters about how much this will cost. But America’s leaders do not seem to think Americans are ready for straight talk about energy.
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