As U.S. climate legislation creeps forward, Senators now have two frameworks to choose from. One is from Sens. John Kerry (D-Mass.), Joseph Lieberman (I-Conn.) and Lindsey Graham (R-S.C.); the other is from Sens. Maria Cantwell (D-Wash.) and Susan Collins (R-Maine). Both begin with descending carbon caps that, along with supplementary policies, promise to reduce carbon dioxide emissions at roughly the same rate, and both protect domestic industries by imposing fees on carbon-intensive imports from countries that don’t limit emissions. But from there the two approaches diverge markedly.
The Kerry-Lieberman-Graham framework is based on the Waxman-Markey bill that narrowly passed the House. It would create a complex and opaque cap-and-trade system riddled with favors for utilities and Wall Street. Roughly 85 percent of the initial carbon permits would be handed free to utilities and other entities, which could sell them for cash. In theory, utilities would return much of this cash to their customers, but exactly how they would do this, along with all the monitoring and enforcement, is left to the 50 states.
Kerry-Lieberman-Graham would also create a worldwide trading system for carbon “offsets” and other carbon-based securities. Offsets are different from government-issued permits or allowances. They are assertions by private parties, often in foreign lands, that they will sequester or avoid emitting a quantity of carbon dioxide that otherwise would wind up in the atmosphere. Such claims are conjectural at best and potentially fraudulent at worst. They played no part whatsoever in the successful cap-and-trade system for sulfur dioxide, and are just as unnecessary for carbon dioxide. Indeed, they would seriously weaken a carbon cap by allowing polluters to continue polluting despite the cap — just pay someone, somewhere, not to cut down trees, and you can burn carbon as in the good old days. For that reason offsets are avidly sought by polluters, who want to buy them, and by Wall Street firms, who see a large market for selling them. Kerry-Lieberman-Graham would create a copious supply of offsets (up to 2 billion tons a year), along with complex rules for regulating them.
By contrast, Cantwell and Collins would establish a simple, transparent cap-and-dividend system that returns higher carbon prices directly to consumers and allows only minimal carbon trading. It would cap fossil fuel suppliers like Exxon-Mobil and Peabody Coal, rather than emitters like utilities and steel plants, because it’s much easier to catch carbon when it enters our economy than when it leaves. It would auction all carbon permits and avoid giveaways, market distortions and offsets. And it would put a ‘collar’ on the price of carbon permits in order to limit market volatility.
Revenue from Cantwell and Collins’ auctions would be split two ways: 75 percent would be returned to the American people to compensate for higher energy prices, and 25 percent would be used for transition assistance and public investments, subject to annual appropriations.
The arguments for and against each framework can be divided into two categories: merits and politics.
On the merits, the nod goes to Cantwell-Collins by a comfortable margin. Its foremost advantage is simplicity: it’s less than 50 pages long (compared to about 1,500 for Kerry-Lieberman-Graham), it’s much easier than Kerry-Lieberman-Graham to understand, and would be far simpler to administer. For example, it requires no monitoring of smokestacks or verification of offsets in distant lands.
Another virtue of Cantwell-Collins is its transparency. Its permit auctions are competitive and open, and the public can readily see where all the revenue goes: 75 percent to everyone equally and 25 percent to climate-related programs. Moreover, because offsets are not allowed, financial shell games are virtually impossible. By contrast, it’s virtually impossible to tell where the money will go under Kerry-Lieberman-Graham, and financial shell games are as certain as oversized Wall Street bonuses.
A third advantage of Cantwell-Collins is its dividends. These guarantee that middle class families won’t be screwed. Indeed, a majority of households in all states will come out ahead because their dividends will exceed their higher carbon costs. This will sustain consumer spending and spur our ailing economy. It will also retain popular support for a declining cap as carbon prices rise over time.
Kerry-Lieberman-Graham does promise to return some money to consumers through savings on utility bills, but such returns will vary widely from utility to utility and will be largely unnoticed by ratepayers. Moreover, the returns won’t cover higher prices at the gas pump or the indirect costs of carbon in food and other products. And, since the returns will come in the form of lower energy bills, they’ll defeat the whole point of putting a price on carbon — to spur energy users to conserve.
Merits notwithstanding, getting 60 votes is what counts in Washington these days, and Kerry-Lieberman-Graham backers are quick to dismiss Cantwell-Collins as a political non-starter. I’m not so sure.
There are 40+ solid votes for carbon capping in almost any form; the remaining votes needed for passage must come from about a dozen centrist Democrats (most of whom represent coal-dependent states) and half a dozen moderate Republicans. Kerry, Lieberman and Graham seek to win these votes by adding to the Waxman-Markey giveaways further incentives for nuclear power, offshore oil drilling, and so-called clean coal. That certainly is one way to go, but not the only way. It also risks losing environmental support if it goes too far.
Cantwell and Collins’ appeal to moderates is based first of all on their bill’s merits. Believe it or not, there are Senators on both sides of the aisle who prefer policies that can be explained to constituents in a few sentences to Rube Goldberg schemes that can’t be explained at all. There also are Senators who would rather not help Wall Street concoct another financial bubble.
Then there are the dividends. Conservatives have derided cap-and-trade as a middle class tax hike — which, effectively, it is. But dividends flip that around — they turn an erstwhile tax into a recurring and highly visible benefit to average families that is potentially as popular as Social Security. With elections coming in 2010, that’s not a bad political move.
The strongest political argument against Cantwell-Collins is that it favors coastal states, which generate more of their electricity from hydro, nuclear, and natural gas, over Midwestern states, which rely more on coal. Those disparities exist, but are much smaller than alleged: a majority of families in all states come out ahead under Cantwell-Collins. In addition, regional disparities can be tempered with money from the 25 percent public investment pot.
The wild card in all this is President Obama. Up till now, he’s been supportive of Waxman-Markey and its offshoot because that has been the only game in town. But now that there’s a bipartisan alternative, a post-Copenhagen Obama could play a different role. Cantwell-Collins is essentially the policy Obama campaigned on — it auctions 100 percent of pollution permits and protects middle class families by returning higher carbon prices directly to them. If health care reform passes and Obama gets his mojo back, he just might push climate policy in the right direction.