Learning to love cap and trade: The Cantwell-Collins option

Forget Copenhagen for a moment, and turn your attention back to the U.S. legislative process, into which has just been thrown a new option, a "third option" that just might be able to satisfy both the "it's the only game in town so let's support the cap-and-trade bills now before Congress" gang and those who call cap and trade a scam that's doomed to fail.

The cap-and-trade approach to reducing carbon emissions is the core of both the bill passed by the U.S. House of Representatives and the one already circulating in the Senate. It embraces the wisdom of the marketplace set us down the road of a low-carbon economy. There's an emissions cap, but it takes something like 1450 pages (in the House version) to accommodate all the competing interests and we have to trust economists like Paul Krugman when he promises that

Emissions permits aren't subprime mortgages, let alone complex derivatives based on subprime; they're straightforward rights to do a specific thing. It will truly be a tragedy if people generalize from the financial crisis to block crucially needed environmental policy.

and takes on NASA climatologist James Hansen for speaking way beyond his field of expertise by arguing that

Wall Street is poised to make billions of dollars in the "trade" part of cap-and-trade. The market for trading permits to emit carbon appears likely to be loosely regulated, to be open to speculators and to include derivatives. All the profits of this pollution trading system would be extracted from the public via increased energy prices.

Krugman probably has a point, in that Hansen has no real training in economics. (Although considering how poorly most economists understand their own field, maybe that's not a bad thing.) But Hansen certainly has cause to doubt the ability of the markets not to game the system. After all, if the cap and trade mechanism actually is identical in essence to a straight tax, as Krugman posits, why does it take more than 1400 pages to legislate?

What we need is a simpler version of cap and trade that engenders more trust. Enter Sen. Maria Cantwell (D-Washington) and Susan Collins (R-Maine) with their proposal to the Senate: Carbon Limits and Energy for America's Renewal, or CLEAR. You know they're onto to something as the legislation is just 32 pages long.

The basics

It's still cap and trade, but the permits are applied "upstream" at the wellhead, mine mouth, or port of entry.

The miners, drillers or importers will pass on the extra cost that the law will impose on fossil-fuels (unless they come from another jurisdiction with comparable legislation) to power producers and thence to consumers. But consumers get a yearly dividend of something like $1,100 to make up for the increased cost. Almost everyone ends up ahead, except for the extremely wealthy, who suffer a 0.3% drop in income.

Three quarters of the revenues from sale of the permits (100% of which are auctioned) pays for the dividends. The rest go to other emissions projects, R&D for clean technologies and so forth.

Emissions are targets are comparable to the House and Senate competing bills (20% reduction from 2005 levels by 2020; 83% by 2050). That's not what the science says is needed, but the CLEAR bill specifically allows the president to squeeze the cap tighter if he or she feels the science warrants it.

That's it.

But what about that other complaint about the competing legislation -- that it includes such generous carbon offset credits that U.S. emissions won't actually decline for decades? And that many of those offsets will be based on unverifiable projects in countries we can't trust to ensure they are actually carried out? Or that the offsets won't be real -- just imaginary?

Here's the really interesting thing, from a Q & A prepared by Cantwell's office:

Does the CLEAR Act allow for carbon "offsets"?

No, although the CERT [Clean Energy Reinvestment Trust Fund, created from carbon permit auctions revenues] will fund comparable projects on a competitive basis. A portion of CERT funds, determined annually by Congress, will provide competitive funding for offset-like programs in areas such as agriculture, forestry, animal waste management, or other projects, provided they can satisfy key criteria such as additionality and verifiability.

Verifying and monitoring the additionality and permanence of offsets is a significant challenge. Although many certification methods and agencies exist, there is no generally accepted accounting methodology or independent certification body (domestically or internationally) for offsets, further complicating any prospects for their inclusion in legislation. A 2008 report by the Government Accountability Office found that "the scope of the U.S. voluntary carbon offsets market is uncertain because of limited data... Participants in the offset market face challenges ensuring the credibility of offsets, including problems determining additionality, and the existence of many quality assurance mechanisms."

The House-passed bill, according to the EPA's analysis, will send $1.5 trillion overseas to fund roughly 51,115 million metric tons of international offsets through 2050. The CLEAR Act implicitly makes the judgment that those funds would be better invested in domestic agriculture and forestry offset projects and to develop U.S.-based jobs and industry to catalyze a transition to a clean energy economy.

So there you have it. No offsets. And a simple plan that would probably make both Krugman and Hansen happy. (I and my spellchecker are not so sure about the provenance of the word "additionality," but I think I understand what it's supposed to mean.)

Here's how Cantwell's people think the emissions reductions pathways stack up:

156 Gigatons is about one-fifth of what the entire world can afford to emit if we want to keep the risk of exceeding "dangerous" temperature rise to an acceptable limit. (See the trillionth-tonne meme.) Still a bit much for a country with only 5% of the planet's population, but a reasonable start.

It all sounds too good to be true. Which, I suspect, it is. The reason the Waxman-Markey bill is more than 1400 pages long and the reason there are all sorts of offset opportunities and loopholes in the competing bills is that that's the way legislation is written in this country. The chances that the senators and congressmen from the coal states would support a bill with no offsets are slim, for starters.

But hey, stranger things have happened. Recent polls suggest the American people would go for something like this. The trick will be convincing the politicians to pay attention to what the people want.