Cap and Trade is Dead

Long live cap and trade.

The great newspaperman H.L. Mencken allegedly once said, "For every complex problem, there is an answer that is clear, simple—and wrong." But in the halls of Congress, complex carbon rationing schemes are multiplying, and they are good counterexamples to Mencken's observation. When it comes to Congress, you can generally bet that its complex solution to a complex problem is worse than the simple solution.

To date, the leading proposal for reducing carbon emissions in the United States has been the Waxman-Markey cap and trade scheme, which passed the House of Representatives last June. The heart of Waxman-Markey is the creation of an economy-wide cap on carbon dioxide emissions requiring that emitters must have a permit for each ton of carbon dioxide they release into the atmosphere. The artificial scarcity of emissions permits would put a price on carbon dioxide produced by burning fossil fuels like coal, natural gas, and oil. This congressionally-mandated carbon market would boost energy prices, forcing consumers and businesses to cut back on their energy use and subsidizing innovators to develop low and no-carbon energy sources like solar, wind, and nuclear. But in order to secure the acquiescence of major industries, the 1,200 page Waxman-Markey bill is filled with special interest deals that dramatically distort the proposed carbon market making energy even more expensive than it would be under a simple cap-and-trade arrangement.

Last fall, Sen. John Kerry (D-Mass.) introduced a similarly convoluted cap and trade bill in the Senate, and after being reported out of Senate committee the bill has stalled. In fact, The Washington Post last week reported that Sen. Lindsey Graham (R-S.C.) has declared, "Cap-and-trade is dead." So to address senatorial intransigence, Graham has joined with Sen. Kerry and Sen. Joe Lieberman (I-Conn.) to devise a new scheme to meet the goal of cutting U.S. carbon dioxide emissions by 17 percent by 2020. Instead of setting an overall national reduction target, the new scheme would apply different forms of carbon rationing to three major industrial sectors: electric utilities, transportation, and manufacturers.

Details of the new scheme are sketchy, but under the Kerry-Graham-Lieberman approach cap and trade is only partially dead. Cap and trade would still apply to electric utilities while a carbon tax would be imposed on gasoline, diesel, and jet fuel. Some sort of carbon rationing would later be phased in for manufacturers.

This divide and conquer strategy may be good politics, but it is bad economics. The virtue of creating an artificial market applying to all greenhouse gas emissions is that market participants can figure out the most efficient way to cut emissions among themselves. Isolating favored segments means that market participants will not be able to find the least expensive ways to cut carbon emissions, raising the overall price of energy more than it would otherwise be. So the Kerry-Graham-Lieberman bill does not initially appear to be much of an improvement on the Waxman-Markey horror.

December's Copenhagen conference collapsed largely because the U.S. and China could not agree on a global plan for reducing greenhouse gas emissions. At the conference, U.S. special envoy for climate change Todd Stern declared, "From our point of view, you can't even begin to have an environmentally sound agreement without the adequate, significant participation of China." China refused to offer any binding commitment, even carbon intensity goals, and further refused to allow for independent auditing of its voluntary pledges.

Yet less than three months later, in January, the Obama Administration sent a letter of intention to the United Nations Framework Agreement on Climate Change pledging to reduce U.S. greenhouse gas emissions by 17 percent from their 2005 levels by 2020. As Reuters reported, when asked if the U.S. would pull out of the Copenhagen Accord if China and India didn't sign on, Stern responded, "No…I don't think it's a question of the U.S. saying 'never mind.'" If that's the case, then the drama in Copenhagen was gratuitous since the U.S. has now given in to China anyway.

Assuming that carbon emissions pose a significant danger to the global climate, there is a much better proposal (cheaper) circulating on Capitol Hill: the Carbon Limits and Energy for America's Renewal (CLEAR) Act. The CLEAR act is a short, sweet bill introduced by Sen. Maria Cantwell (D-Wash.) and Sen. Susan Collins (R-Maine). The CLEAR Act sets a gradually declining cap on carbon dioxide emissions (20 percent below 2005 by 2020). It limits carbon dioxide emissions by requiring producers and importers of coal, natural gas, and oil to buy permits at a monthly auction for each ton of carbon in the fuels they sell in the U.S. The requirement would apply to 2,000 to 3,000 fossil fuel producers and importers.

Unlike Waxman-Markey or the new Kerry-Graham-Lieberman proposal, the CLEAR Act would largely avoid picking winners and losers among technologies, special interest groups, or industries. Seventy-five percent of the proceeds from the auction would be rebated on a per capita basis in equal monthly lump sum payments. Cantwell and Collins estimate that 80 percent of consumers would incur no net costs while the top 20 percent in income would see less than a 0.3 percent decrease in their incomes. The remaining 25 percent of the auction revenues would be used to fund energy research and development, adaptation to climate change, and help workers who lose their jobs because of higher energy prices.

Of course, failing to rebate these auction revenues somewhat undercuts the claim by Cantwell and Collins that they are not picking winners and losers. In addition, it would be more economically efficient (and cheaper) to rebate the entire amount rather than let Congress allocate money to favored projects. These missteps from Cantwell and Collins remind us that Mencken was right to be cynical about the workings of government. But if we must do something—and it seems that Congress and the president believe that we must—the CLEAR Act, clocking in at 39 pages, has more appeal than Waxman-Markey's 1,200. Sometimes simpler is better.

Ronald Bailey is Reason's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is available from Prometheus Books.