The Energy Grid Blog is managed and written entirely by Seed editors and expert guest bloggers. Read more about them On May 21, the Energy and Commerce Committee of the US House of Representatives passed the American Clean Energy and Security Act, which had been proposed by Congressmen Markey and Waxman. While the bill has yet to pass a number of hurdles before becoming law, the momentum for federal energy and climate legislation is growing significantly in the US. If passed, the bill would establish a cap-and-trade scheme. Such an emissions trading scheme puts a price on carbon dioxide emissions by limiting the absolute amount of emissions. Emitters would be allocated emission permits which they could trade in case they have more permits than actual emissions. If regulated entities emit more than their permits allow them to emit, they would have to buy additional permits.
Emissions trading harnesses market forces to protect the environment. It creates a new financial market that should provide incentives to reduce greenhouse gas emissions and to invest in clean energy technologies. Yet it has long been controversially discussed whether emissions trading is the best way to channel investment into a more sustainable energy infrastructure. Other policy options include carbon taxes, technology standards and subsidies for clean energy investments. Against this backdrop this week's question asks: Is a cap-and-trade scheme a good way to create incentives for a transition into a low-carbon energy future? What would make an effective cap-and-trade system?
Comments
Necessary, but not sufficient:
* a means of accounting for offshored emissions. Otherwise the emissions just move to countries with looser standards, and the (previously) large emitters sell their allotments to a net profit.
Disclaimer: I profoundly doubt that any cap-and-trade system will amount to more than a welfare scheme for major corporations, a barrier to entry by smaller businesses, and another huge bureaucracy whose main accomplishment is an increase in transaction costs. IMHO a real market-based approach would be a carbon tax at the source, but that's apparently a non-starter. The cynic in me suspects that cap-and-trade is primarily preferred precisely because it will be ineffective.
Posted by: D. C. Sessions | May 30, 2009 1:35 PM
For the market to be effective they need market-based pricing. This means that %100 of the carbon permits should be auctioned off. ACES is flawed and compromised. Right-leaning Democrats pressured Waxman into putting all kinds of handouts and loopholes into the bill. In particular, some of the biggest polluters will receive the most handouts, in order to "ease the transition". But what happens to the price of a commodity when the biggest consumers get it for free? It tanks. That's what will happen in the carbon permit market. There won't be genuine pricing for the permits and therefor the market incentive to stop changing the climate will be virtually non-existent.
President Obama campaigned on a %100 auction but has chosen not to make it a priority. To be truthful, his political calculation might be correct. To use market forces to stop climate change means making it more expensive to pollute (i.e., making oil and coal based energy more expensive). It might well be impossible to pass anything in the current economy that would be truly, immediately effective.
Nevertheless, the bill will be a major accomplishment in setting goals and establishing a cap on emissions. Further debate and legislation on climate issues can be framed around the effectiveness in meeting those goals and staying under that cap. So, let's give Obama his first term to deliver on some kitchen table issues and earn some good will with voters; in particular, if he succeeds in lowering health care costs he'll have some political capital to spend. If he gets a second term and does not pressure Congress close the loopholes and eliminate the handouts then I will be greatly disappointed in his failure to follow through on campaign promises. If he doesn't get a second term then I fear the already compromised ACES will be further gutted by Rep rule.
ACES is deeply flawed but takes some important steps forward. It might be the best we can get passed in the current economic climate. I'm patient and optimistic that it will be improved on in coming years. I don't have the time to verify my memory right now, but I think I remember reading that cap-and-trade in the EU was initially flawed in the same way and later strengthened. I hope that we're on that path.
Posted by: jrshipley | May 30, 2009 2:21 PM
Alternately: having Done Something, Congress will congratulate themselves for a generation so this is the best we're going to get.
Here's a reality check: how long was it from the original Air Pollution Control Act until any major revisions improving air quality? How long was it after that until any other significant revisions?
Posted by: D. C. Sessions | May 30, 2009 3:27 PM
Emissions trading succeeded in controlling sulfur dioxide emissions in the US. Granted, that's a smaller system and an easier problem to solve, but it's certainly indicative.
The potential for legislation like this to be passed in ineffective form and essentially just sit and gather dust while costing a little on the side is very real. On the other hand, we could rail against compromise until sea level rises from AGW force us to start paddling instead. Best to pass the compromise we can get through and keep pressure on to improve it. Eternal vigilance, remember?
Posted by: Nils Ross | June 1, 2009 6:46 AM
What would make an effective cap-and-trade system?
Posted by: amcik | September 27, 2009 4:23 PM