Cap and Market This Year
New York City — Later today, the House Energy and Commerce Committee is expected to release the Chairman’s Mark of the American Clean Energy and Security Act of 2009, also known as the energy and cap and trade bill, for markup next week. The new text will reflect a deal made Tuesday on the key issue of giving out versus auctioning of allowances for greenhouse gas emissions. With those agreements — which give out 35% of the credits to local utilities and 15% to trade-intensive industries — the bill clears a major hurdle and is now more likely to pass the House than not. The question is what does the compromise on auctioning credits mean? In my view, it is secondary to the greater goal of moving a bill forward. Accordingly, the deal reached by Chairman Henry Waxman and Congressman Ed Markey with other Members should be hailed as a victory by everyone who cares about the climate.
The auctioning issue is not unimportant. When permits are given out, polluting is free and there are no immediate financial incentives to reduce emissions. On the other hand, forcing polluters to buy permits at auction places an immediate price on carbon, similar to a carbon tax, that creates an incentive to reduce emissions from the get go.
Like a carbon tax, auctioning permits also raises immediate revenue that can be used to invest in new technologies or offset the otherwise negative impact on the economy of higher carbon prices by reducing taxes elsewhere.
The downside of auctioning permits, however, is the immediate economic impact on industry and consumers of higher prices. For this reason, most cap and trade proposals have included, at a minimum, a transition period when permits are given out. The EU scheme allowed only 5% of credits to be auctioned in its rollout phase.
When permits are handed out free, no immediate incentive is created to reduce emissions. However, as emissions approach the cap, depending on the penalties for exceeding it, the cost of the permits will begin to impact the marginal cost of energy and energy or emissions-intensive products, creating an incentive to reduce emissions. Thus as the cap is approached, the system will begin to affect behavior. In the EU, while countries have begun to auction off more credits, the system still largely works on grandfathered credits and hinges on the cost of buying credits once the cap is reached.
The key point here is that auctioning is not an absolute requirement.
Far more important in the scheme of things is that failure to pass climate legislation this year would postpone action on climate change, perhaps indefinitely. There could be no more propitious time than now in this unique year in modern political history with a new Democratic president in his first year in the White House — who has made clean energy a key priority — and large Democratic majorities in both the Senate and House. Add to that the timetable created by Copenhagen. Next year things could be quite different, meaning the time to act is now.
Throughout American history, Congress has generally only passed major legislation either when conditions were especially propitious as they are now or in the midst of a major crisis. Since climate change is so gradual, we may not see a crisis that can be directly attributed to greenhouse gas emissions until it is too late to act.
Finally, some make the argument that no plan is better than a weak or flawed plan on the theory that Congress will only take this up once.
I disagree. In general, Congress is more likely to adjust something that exists than create something new and experience shows that regulations, once established tend to tighten, not the reverse.
Accordingly, today’s bill is an important step forward in addressing the challenge of climate change.
Cross posted on the NDN blog.