Lindsey Graham’s dilemma, part two: Trying to deal a winning hand without ACES
As we saw yesterday, Sen. Lindsey Graham is in a pickle. He wants a climate bill. He wants to put a price on carbon. He wants to bring diverse constituencies to the table. He wants to craft something the public can support. But he can’t use the bill that already did all that stuff!
The American Clean Energy & Security Act (ACES) and “cap-and-trade” have (for reasons only tenuously related to their contents) been irrevocably tarnished. There’s no way they’ll get to 60 votes in the Senate. So Graham, Joe Lieberman, and John Kerry have to come up with something else. They are in effect trying to build a house without using the only tools and techniques that have ever successfully been used to build one.
Can they do it? Can they put together something that’s a) effective and b) sufficiently un-ACES-like to bring centrists and Republicans into the fold? It’s not as easy as you might think.
As Juliet Eilperin and Steven Mufson reported in The Washington Post this past weekend, the KGL triumvirate is considering an alternative to an economy-wide cap-and-trade system like the one in ACES. It will look something like this:
Power plants would face an overall cap on emissions that would become more stringent over time; motor fuel may be subject to a carbon tax whose proceeds could help electrify the U.S. transportation sector; and industrial facilities would be exempted from a cap on emissions for several years before it is phased in. The legislation would also expand domestic oil and gas drilling offshore and would provide federal assistance for constructing nuclear power plants and carbon sequestration and storage projects at coal-fired utilities.
In case you didn’t get the message, Kerry says, “It will be different from anything that’s been put on the table in the House or Senate to date.” Lieberman reiterates: “This is a different bill.” Got it? This isn’t ACES! Repeat: not ACES!
But is it a better bill? Are there substantive economic or policy reasons to break the economy-wide cap-and-trade system into a series of sector-specific policies? That’s where things get interesting. To a nerd, anyway.
The promise and perils of economy-wide carbon pricing
There’s a reason economists favor a single, consistent, economy-wide price on carbon. To the extent the playing field can be leveled — so that a ton of CO2 equivalent costs the same whether it comes from a car, a cow, or a power plant — the market will naturally work to find the lowest-cost carbon reductions. Some people, places, and industries will be harder hit than others, but the net result will be that carbon pollution is reduced at the lowest overall cost to the economy. (The reality is somewhat more complicated, but put that aside for a moment.)
Carbon pricing’s economic merit, however, is precisely its political Achilles heel. After all, politicians don’t want the lowest overall cost to the economy — they want the lowest overall cost to their constituents. Politicians care that some people and industries will be harder hit than others. They have to; it’s their job.
Cap-and-trade has a way to address this: the distribution of pollution allowances, which, as CBO tells us, have cash value. The great political advantage of cap-and-trade is that it enables this kind of vote-buying without weakening environmental efficacy (again: in theory). To get everyone on board, Waxman and Markey distributed free allowances to coal utilities, heavy industry, oil refiners, farmers, and consumers.
When ACES met jokers
Three problems beset ACES in the Senate. First, it turned out people just didn’t understand how it worked. The public, the press, politicians — they came to see an “energy tax” on one side and “giveaways” on the other, never quite connecting that the giveaways would ease the impact of the tax on politically sensitive groups. Indeed, many of the constituencies bitching loudest about the bill stood to get most. (Coal state senators, in particular, never understood how well their House counterparts made out in the ACES negotiations.)
Second, relative to Big Coal, Big Oil got the short end of the stick in ACES. Unlike the utilities, oil companies (or rather, their representatives in the House, who are mostly Republican) weren’t in the room during negotiations, so they didn’t get many favors. But while coal has a lot of power in the House, oil has enormous power in the Senate, particularly over the conservadems and Republicans needed to put the bill over the top. Big Oil’s choke hold on the Senate explains a great deal about the dynamics of climate legislation in that body.
And third, senators — particularly conservadems and Republicans — have an obsession with nuclear power that is nothing short of pathological. It would take a post, nay, a book to dig into all the reasons why, but suffice to say, to get any conservative votes in the Senate will require major sops to nuclear. Again, these particular senators, not being the sharpest pencils in the box, never understood that a cap on carbon would in and of itself provide a massive boost to nuclear. They want something special for nukes. Special and big. Something that will really piss off liberals. And they’ll get it.
A hand without ACES
So now Graham and crew are going to bust up the economy-wide system — “cap-and-trade as we know it” — and kludge together parts. This is not, on its face, a terrible idea; there are many ways to skin a cat. The question is whether the way they’re going to do it makes sense, substantively or politically. I don’t see it.
For one thing, instead of Big Oil, Big Coal is now getting the short end of the stick. Coal utilities fall under a declining cap while Big Oil faces (what I am assuming will be) a modest carbon tax. With only utilities under the cap, the pool of cheap allowances is reduced and compliance costs increased, unless lots more offsets are introduced, which would be terrible on the merits.
Also, it looks like the utility system may be cap-and-dividend, which means coal utility ratepayers will be transferring money to nuke and hydro utility ratepayers; you’ll recall that negotiations over regional variations were one of the trickiest sticking points in House negotiations. All that’s been undone. Big Coal and coal states are now the sole “victims” of cap-and-trade; the deal they worked so hard to get in the House is gone. And they’re not happy:
Michael Morris, chief executive of American Electric Power, a heavily coal-based utility, said one much-discussed proposal for a cap-and-trade plan limited to utilities was “ridiculous” because it would place an unfair burden on coal-based utilities.
That means the bill, if it does clear the Senate, will never get through the House. Rep. Rick Boucher (D-Va.) didn’t go through all that work for nothing. To boot, heavy industry was already getting enormous subsidies in ACES. Now it gets nothing but an uncertain reprieve from the cap and no way to profit from reducing emissions. How is that better?
To summarize, Graham et al. seem set to explode the fragile consensus formed around ACES in favor of a piece of legislation that will cost more. They’ll lose the coal utilities but are unlikely to pick up Big Oil. The broad range of recipients of pollution allowances under ACES, who were set to receive a steady, predictable income over decades, now face a future patchwork of subsidies dependent on the whims of legislators — just the kind of meddling and favoritism carbon pricing was supposed to transcend.
Here’s another way Graham and crew could go.
It’s true that carbon is a somewhat different challenge in different sectors and regions, and there’s nothing wrong with making policy sensitive to those differences. So what Graham and crew should do is lock in a relatively mild economy-wide cap-and-trade system, with low targets and low compliance costs. Then they could complement (rather than replace) that system with sector-specific policies: additional provisions for energy efficiency, electric cars, coal power plants, oil refineries, trade-exposed industries, and international aid and reforestation. They could bring together utilities, big business, and enviros into a winning coalition. They could call it the Senate Centrist Halfsies Moderate American Clean Energy & Security Act, or SCHMACES.
Now that would be a bill!