“Cap-and-Trade Is Dead” — Long Live Cap-and-Trade?

Last week, GOP Senator Lindsey Graham (R-SC) declared “Cap-and-trade is dead.” There is no way the Senate will pass the Waxman-Markey climate change bill that passed the House. But Sen. Graham is working with Senators John Kerry (D-MA) and Joseph Lieberman (I-CT) on an alternative proposal to control greenhouse gas emissions and promote the development of alternative energy sources. ClimateWire describes the outlines of their approach:

The Kerry-Graham-Lieberman draft to be circulated this week starts with an overall goal of reducing U.S. greenhouse gases by 2020 in the range of 17 percent below 2005 levels. . . .

Rather than include all major industrial sources of greenhouse gases in one broad economywide cap-and-trade system, the Senate trio will propose different types of limits for different sectors of the economy, beginning with electric utilities and then turning later to manufacturers such as chemical plants and pulp and paper mills.

“The bottom line with utilities is they’ll assume a compliance obligation from day one of the program,” the Senate staffer said, adding that no decisions have been made on how to allocate valuable emission allowances to the power companies except to incorporate an industry recommendation to shuttle revenue toward consumers to help pay for higher energy bills.

Transportation fuels can expect a carbon tax that rises based on the compliance costs faced by the other major emitters. Several major oil companies, including Shell Oil Co., ConocoPhillips and BP America, floated the original idea on Capitol Hill, and the Senate trio has evolved their plan by funneling revenue toward transportation projects, reducing fuel consumption and lowering domestic reliance on foreign oil. The Highway Trust Fund is also a potential recipient of the carbon tax revenue, Senate aides said.

Manufacturers would face a series of greenhouse gas limits after power plants, but talks are still ongoing over when the phase-in begins and what specific industries fall into the suite of restrictions.

The senators plan to present several other energy-related proposals to their colleagues, including ideas to promote the development of nuclear power and carbon capture and sequestration at coal-fired power plants. Agreements are also in sight on how to incorporate agriculture and forestry offsets into the mix, as well as other cost-containment mechanisms to brace industry and consumers from higher prices.

Based on the outlines reported in the press, Ron Bailey thinks the Graham-Kerry-Lieberman approach “may be good politics, but it is bad economics.”  According to Bailey,

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.

I think this is right.  Bailey prefers an alternative proposal.

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. . . . 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.

I largely agree, but believe that a revenue-neutral carbon tax, such as those proposed by Rep. Bob Inglis (R-SC) and Arthur Laffer or NASA’s James Hansen are better still. Such proposals would be more efficient, more transparent, and easier to implement.  The purported policy benefits of cap-and-trade over a carbon tax are illusory — and now it appears cap-and-trade’s purported political advantage is evaporating as well.  Perhaps there’s still hope for a rational climate policy.

[Note: In anticipation of the inevitable comments that the truly rational climate policy is to do nothing, I think there are plenty of independent reasons to prefer taxing consumption over taxing income even if one is unconcerned about carbon dioxide and other emissions.]