Cross-posted from the NRDC Switchboard blog

Cap and tradeTo cap or not to cap? That is the question …

The most important component of an effective climate bill — one that helps the economy recover and assures that greenhouse gas emissions will decline rapidly over the decades to come — is setting a cap on emissions. Opponents of a cap misunderstand how and why the cap will work, and their stated reasons for opposition reflect this misunderstanding.

Typical of these self-described conservative arguments is made by Steve Everley at American Solutions. Everley tries to paint efforts to price carbon through a cap broadly as socialism, and narrowly as a tax. These are common themes of advocates of irresponsible climate policy; neither of which makes sense.

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First a word of assurance to true conservatives who really believe that free enterprise is better than state central planning of the economy. We environmentalists are with you. Protecting against climate change is not a hidden tool to promote big government, as we agree that the economy should promote free enterprise.

The main tools needed to reduce emissions enhance free markets and increase consumer choice. Socialist countries or enterprises such as those that existed in the Soviet Union or that currently exist in China have always been among the worst polluters. Command-and-control economies have proven ineffective at protecting the environment.

In contrast, a comprehensive solution to the climate problem, described in my book, Invisible Energy, relies on policies that extend competitive forces in the economy and remove regulatory barriers to greener action.

The idea that a carbon cap — which results in polluters paying for the right to emit greenhouse gases — is a tax is ridiculous. One might just as well assert that holding BP responsible for the costs of cleaning up oil spilled in the Gulf is a tax.

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Offering industries and households the right to pollute for free is the real big-government policy. Since government will eventually pay a lot of the costs of unmitigated climate change, such as disaster relief for flooding and seawalls to protect valuable properties from encroaching ocean water, why on earth should it fail to charge those responsible?

Everley also asserts that charging for carbon pollution will raise energy prices a lot and that this is the intended outcome: to price consumers out of the market for energy. But this is not how an emission cap works, either in the bill or in states, regions, or countries that have adopted caps. 

The main consequences of capping emissions are that:

  1. People pay attention to emissions — as individual businesses, households, and citizens — and start to take action on the manifold ways to cut emissions through investments in efficiency. These are the sort of investments that are both economic stimulus and austerity because they pay back so quickly. If we, as a nation, borrow a trillion dollars to invest in efficiency measures with a typical payback of less than three years (payback estimate is from the comprehensive efficiency study by the NAS then we can borrow the entire amount this year and pay it back in three years. After six years we will have reduced our debt by a trillion!
  2. The fees for pollution rights can fund policies that help businesses and households to make these investments. Good examples of such policies are the REEP program in the Waxman-Markey bill, and the similar HomeStar provision in the Senate. These programs leverage the $440 billion in investments that are feasible in the commercial and residential building sectors (the amount is taken from the NAS report). These programs build on successful programs operated by utilities and by states that have produced carefully documented and measured results.

Many of the programs that overcome failures of the market in these areas are in the various climate and energy bills currently in play in the Senate. Others are more appropriately enacted by states or regions or the private sector, while still others are yet to be conceptualized and designed.

Encouraging climate emissions reductions that help the economy is not a one-time, one-bill fix. Instead, it requires continuing effort in a wide variety of forums both within and outside the federal government. This, again, is why a cap is so important: it keeps people’s eye on the ball, not just now but for the next 40 years, and not just in Congress or even in Washington, D.C.

When you consider these effects, the net economic result of an emissions cap is highly positive: A good climate bill and the follow-up activities it provokes are the most powerful tools we have for recovering from the recession.

Most economists agree on the nature of the main problems that triggered the Great Recession and that make the prospects for recovery look so bleak and distant. But what is overlooked is how America’s weak policies on energy efficiency are at the heart of most of our current problems, and are implicated in all of them. Unlike any other policy response to the recession that I have heard, strengthening energy efficiency policies will help ameliorate all of the main causes of the recession. These issues are discussed in my NRDC blogs and in Invisible Energy.

The idea of looking more closely at economic recovery ideas and determining whether they address the specific needs of critical sectors of the economy rather than merely whether they are based on stimulus or austerity is also discussed in David Brooks’ latest oped column: A Little Economic Realism.

And a cap on emissions will help draw more attention to these opportunities and get them implemented.

The main effect of an emissions cap is not to raise the price of energy. Indeed, analyses by the Regional Greenhouse Gas Initiative showed that a regional emissions cap raised enough money through sales of permits to fund efficiency programs that reduced the demand for electricity enough to reduce the market price, so the net effect of the program on price was virtually zero. But electricity bills went down due to using less through efficiency.

California is finding the same thing: that 80 percent if the reductions needed to meet the cap are through complementary policies to promote clean energy rather than the direct effects of the cost of emissions permits. The existence of the cap makes these policies easier to enact by elevating their perceived importance.

Setting a cap and beginning to establish clean energy policies nationally not only would cut energy bills but produce jobs, because most efficiency products and all efficiency services are produced locally and cannot be outsourced. This is different from the renewable energy policies in countries like Spain and Germany, which relied on subsidies far beyond what American environmentalists could support.

Promoting renewable energy and efficiency is a good thing, but the incentives must be designed in a fiscally prudent and thoughtful way. Hopefully this is an idea that all parts of the political spectrum can agree with.