The following post was originally published on The Nation’s guest blog, Passing Through, where I was in residence throughout February.
It is a rudimentary introduction to cap-and-trade and the question of allocating permits, an argument (or three) in favor of auctioning permits, and a review of the political state of play around the question. The point is to get people up to speed on the crucial debate over permit auctions, which should be a central focal point for grassroots pressure on the process.
It is long. I recommend printing it out and reading it on the toilet.
Good morning, class! Today we’re going to talk about auctioning emission permits under a carbon cap-and-trade system!
[groans, sound of spitball hitting blackboard, shoes scuffling]
Wait, lemme try again:
Good morning, class! Today we’re going to talk about looking out for the little guy and sticking it to The Man!
Ah, the ears perk up.
The progressive grassroots has not been fully engaged in the fight over climate legislation. There are any number of reasons for this state of affairs — I could write volumes — but the main one is that to most progressives, it’s opaque. There are lots of arcane, wonky details involved, and not much in the way of gut feeling or visceral connection. "Save the Earth" is pretty damn abstract compared to war, government surveillance, economic inequality, and other issues you find eliciting passion on dKos et al. Those battles seem to involve animating progressive principles like fairness and personal liberty in a way that climate doesn’t.
But I’m here to tell you, friends: climate policy does involve those principles. Crucially. Centrally. If progressives don’t start paying attention, they’re going to allow the poor to get royally, royally screwed. Again.
The climate legislation before Congress — America’s Climate Security Act (ACSA), co-sponsored by Sens. Joe Lieberman (I-Ct.) and John Warner (R-Va.), likely to be introduced to the Senate floor in April or May — is just as much about social and economic justice as it is about the atmosphere. Billions of dollars are at play. Who pays? Who benefits?
Let’s briefly review what ACSA would do. The bill would establish what’s called a cap-and-trade system, whereby the government caps the greenhouse-gas emissions permitted in a given year and then ratchets that cap down over time, toward some target. (Most greens, and scientists, favor 80 percent reductions by 2050, or even higher. Obama, Clinton, and the Congressional Dem leadership are all on board with that number as well, at least rhetorically. ACSA’s target is 70 percent by 2050.)
The amount of GHGs under the cap is divided up into permits, which are distributed at the beginning of each year and can subsequently be bought and sold like any commodity. As the number of available permits declines over the years, they become more expensive and in more and more cases it will be cheaper to reduce emissions than to buy permits.
The idea is to create a market in GHG emissions, with all the attendant market efficiencies. The invisible hand will make the cheapest emission reductions first, and thus the long-term reductions will come at least possible cost. (The same basic approach worked quite well to reduce the chemicals that cause acid rain.)
Show me the money
Now, let’s take a step back. Remember, the point of all this is to place a value on something (GHG emissions) that had previously been free. What happens when the government places value on an abundant commodity that was once free? Well, for one thing, there’s suddenly lots and lots of money in play.
That’s where progressives come in. It’s our job to make sure that big corporations don’t make out like bandits at the expense of the working class.
The key juncture where this plays out is in the initial allocation of the permits. There are two ways to distribute them: give them away or sell them.
The big polluters, especially coal-based utilities, think permits should be given out based on historical emissions — i.e., that the biggest polluters should get the most. They need a shit-ton of free permits to "ease the transition" to lower-carbon technologies, you see. Not coincidentally, if this advice were taken it would amount to enormous windfall profits for those polluters.
The alternative is for the feds to sell the permits — or more specifically, to auction them, and allow competitive bidding to establish the market price. This way, polluters pay to pollute, and instead of windfall profits for them, the money goes to the government as revenue.
(Side note: obviously, you could mix the two, giving some permits away and selling some. We’ll return to that later.)
So that’s the question here: who should get all this money? Industrial polluters, or government?
A cap-and-trade system with no auctions — call it "cap-and-giveaway" (PDF) — amounts to a highly regressive tax. Poor and working class families spend a greater portion of their income on energy and will be hardest hit when energy providers raise prices.
The regressivity can be reduced and even eliminated if the feds auction the permits and use the revenue wisely. One way to do so is to straight up buy people off. (A proposal called "cap-and-dividend" would simply divide up the auction revenue equally among every citizen, along the lines of Alaska’s oil fund.) Another way is to reduce other regressive taxes (like the payroll tax). There are other options as well.
You might argue, as the coal industry does, that if permits are given away to utilities, they will pass the profits along to consumers in the form of lower prices. You might claim, in that sense, that giving away permits is more progressive.
You would, however, be wrong. The fact is that utilities are going to raise energy prices regardless.
It has to do with features of the electricity market — for more on this, see Congressional testimony from Ian Bowles (PDF), Mass. Secretary of Energy & Environmental Affairs, and Dallas Burtraw, Senior Fellow at Resources for the Future. Said Bowles:
It is tempting to think that, if you make generators pay for the emissions they produce, it will drive electricity prices up, but if you give allowances away for free, it won’t. But it’s not true. The price impact is the same either way. (my emphasis)
This isn’t a theoretical concern — the experiment has already been run, in the European carbon trading system, and sure enough corporations profited and prices rose anyway.
To repeat: Under any system that puts a price on carbon, energy bills are going to go up. The difference is that in a system with auctions, gov’t will have the resources to cushion the blow to the most vulnerable.
That is as simple and urgent a question of economic justice as you’re likely to find.
Some folks treat permit allocation as if it’s a side issue, tangential to the success of the core emission reduction system. That is extremely short-sighted. The success of a climate system depends as much on social support as it does on proper technocratic design.
If people at the low end of the income scale feel like they’re getting screwed, the middle class sees their bills go up with no tangible benefit, and big corporations make out like bandits, the public will turn on the program and punish the politicians who passed or supported it.
The only way to build a broad, sustainable base of support for the climate fight is to ensure that both the costs and the benefits are distributed equitably. We’ve got to play the long game.
According to the nonpartisan Congressional Budget Office, in a report called "Approaches to Reducing Carbon Dioxide Emissions" (PDF), not only would auctioning permits serve economic justice, it would also reduce the total aggregate economic cost of meeting emission targets. Here’s what CBO head Peter Orszag said in his testimony to Congress:
Selling allowances could also significantly lessen the macroeconomic impact of a CO2 cap. Evidence suggests that the macroeconomic cost of a 15 percent cut in U.S. emissions (not counting any benefits from mitigating climate change) might be more than twice as large if policymakers gave allowances away than if they sold the allowances and used the revenue to lower current taxes on labor or capital that discourage economic activity, such as income or payroll taxes. (my emphasis)
The CBO, along with many energy wonks on the left and right alike (see: Pigou Club), says that a carbon tax would be the most efficient, lowest-total-cost option for reducing emissions. At least for the time being, a carbon tax is politically impossible, so it’s worth noting that a cap-and-trade system with 100 percent auctions is functionally identical to a carbon tax (at least in a perfect world — one of the arguments for a tax is its simplicity and transparency, which a complicated system like cap-and-trade is unlikely to match).
In short: Given a cap-and-trade system, 100 percent auction is the most socially just and economically efficient option.
The political playing field
Now we leave wonkville and enter the grubby, eternally disappointing realm of politics. Let’s take a look at the political state of play on the auction question.
Both Obama and Clinton have come out in favor of 100 percent auctions, and include it in the plans released by their campaigns. This is one of the great and underacknowledged acts of political chutzpah on the Democratic side of the aisle in this election, thanks largely to the trailblazing courage of John Edwards. (If you’d told me two years ago that every contender for the Democratic nomination would support 80 percent reductions by 2050 via 100 percent auctions, I would have laughed. Bitterly. It’s worth pausing to note how far, how fast, the debate has moved.)
But campaign plans are not bills. In Congress, Obama and Clinton have been less coherent and less courageous. Both have signed on as co-sponsors, not only of Lieberman & Warner’s relatively weak America’s Climate Security Act (ACSA), but of the even weaker McCain-Lieberman bill, and simultaneously the much stronger, gold-standard Sanders-Boxer bill. They are sponsoring indiscriminately, playing all the angles.
The bill that actually has a chance of passing is ACSA, and it is at the center of a rather heated dispute in the green community. Congressional Dems, including the presidential candidates, have been virtually unanimous in their support for the bill. Sen. Sanders half-heartedly tried to strengthen the bill in committee, but expressed support for it even when his amendments were rejected. Sen. Barbara Boxer, chair of the Environment & Public Works Committee, called voting the bill out of committee "the greatest legislative accomplishment of my political career of thirty years." Given the brick wall of obstructionism the Dems have faced in the Senate, they are palpably hungry for a public victory going into campaign season. They want this bill, badly.
Greens aren’t so excited, noting several serious flaws in the bill. The targets are on the low end of acceptable and the bill doesn’t cover the full economy, but the main objection is that it is frontloaded with grandfathered permits and would, according to an analysis by Friends of the Earth (PDF), offer some $1 trillion in giveaways to fossil fuel industries between now and 2050.
FoE has launched an ad campaign urging legislators to Fix It or Ditch It. The group was out on its own for a while — it even got badmouthed by Boxer — but has recently gotten some support from the Sierra Club. Most green groups are tepid at best on the bill, except for establishment-friendly Environmental Defense, which has staunchly supported the bill (and slagged FoE behind closed doors). As for the green netroots, it’s fair to say most folks oppose the bill as currently constituted and expect it to be further weakened during floor debate.
Here are a few key tactical questions:
- Could a better bill get through next year, when there will likely be a larger Dem majority in Congress and possibly a Dem president (or, failing that, a reasonably climate-friendly Republican)?
- Would Bush sign anything that gets through Congress this session? (Don’t laugh — lots of his big corporate contributors are getting nervous, thinking this might be the best chance they’ll ever have to shape climate legislation.)
- If a weak bill is passed, what are the chances it will be revisited and revised in coming years?
Groups like ED think getting the process started is important. Legislative staffs need to study up on this stuff; the details need to be hashed out; supporters and detractors need to be sussed out and put on record. ED has argued that greens shouldn’t let the perfect be the enemy of the good, that the political situation will be largely the same next year anyway, and that the price of waiting is too high (delaying the start of the program means faster, steeper cuts will be required).
Others emphasize the worst case scenario: the bill gets further weakened on the floor, to the point that Republicans are willing to pass it and Bush is willing to sign it into law. Suffice to say, it’s virtually axiomatic that anything Bush would sign would be awful.
Then we’d be stuck with a crappy bill, and once climate is checked off the national priority list, it’s going to be extremely difficult to work up the will to revisit it any time soon. That’s why FoE and others are willing to hold the line this year and wait until next year to get a bill. It is vitally important that this bill be designed well — we’re rapidly running out of time for second chances.
One thing worth noting: Big Coal is gearing up to launch an enormous PR campaign to defeat climate legislation. The core of the campaign will be Harry & Louise-style fear mongering: a climate bill will raise your energy costs and put you out on the street, not to mention your sweet-faced elderly auntie. Meanwhile, behind closed doors coal executives — and the legislators they own — are lobbying heavily against auctions, the one policy mechanism that could prevent the hit to consumers. Classy.
What you should do
Sorry if all this was a little complicated and discursive. To simplify matters, here’s your Enviro-Blogger Expert Advice©:
Support Friends of the Earth.
Call your legislators today and tell them you think 100 percent of the permits under a cap-and-trade system should be auctioned. If they don’t know what that means, explain it. Tell them that if they cannot eliminate or at least substantially reduce the giveaways to big polluters in ACSA, they should be willing to let the bill go down to a Republican filibuster or a Bush veto. Congress can return to the issue next session, with a strengthened hand and a supportive president.
Some folks call this approach dippy idealism, willing to sacrifice tangible progress to dreams of the Perfect Bill. I admit this line of criticism confuses me. Take a step back and look at the bigger picture here: 100 percent auction in a cap-and-trade system is better for the working class, better for the general public, and, in a macroeconomic sense, cheaper. There is no substantive policy rationale for giving away permits. The only reason to do so is to buy the support of fossil-fuel industries and the legislators who represent them.
Now, I get it: politics is politics. Some bribing of big corporate players will likely end up being necessary. Compromise is part of the job … if you’re a politician.
But concerned citizens are not politicians. It’s not their job to compromise, certainly not before the battle is joined. It is the job of the grassroots to push, and keep pushing — to speak up for constituencies that have no political voice, to defend those who don’t have lobbyists in D.C.
As it stands, the details of climate legislation are being hashed out by lobbyists and legislators behind closed doors. In that unhealthy situation, yes, a lot of horse trading is inevitable.
But if a genuine public groundswell arises and publicizes the issue, pushing a simple message (100 percent auctions!), the dynamic can change.
This is crunch time — time to call your friends, your neighbors, your legislators. Time to make noise. It is long past time for the progressive grassroots to take up this fight in earnest.