The following comment, submitted in response to Romm’s July 9 story about Hansen, was censored:

July 9, 2009 at 11:25 pm

For all of Waxman-Markey’s faults, I think it gets two things right: (1) allowance set-asides to fund tropical forest conservation, and (2) a meaningful price floor. These measures move U.S. policy closer to the rational and pragmatic goal of minimizing emissions within limits of cost acceptability. However, they leave W-M with no coherent policy foundation, because its other regulatory mechanisms — the cap, trading, economy-wide linkage, banking, borrowing, and offsets — all operate to achieve the converse objective of minimizing costs within limits of a predetermined (and unsustainable) emission cap.

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The irrationality of the latter objective is demonstrated by the U.S. SO2 trading system, which continues to focus regulatory incentives on further cost reductions — not emission reductions — even when allowances are selling at a fraction of what was expected when the cap-and-trade system was enacted, and even when quantifiable benefits of further emission reductions would exceed costs by a factor of 25.

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[Note to JR re “… So they do more than is necessary …”: That is because of banking, which has the effect of shifting the over-allocation into future compliance periods. They do more now only so they can do less later.]

Suppose that the SO2 allowances had been sold at fixed price (no emission cap), with sales revenue distributed according to the same proportionate allocation formula that was used for allowance allocation (or any other preferred formula). If the price were set at the lower limit of the original expectation level (about $650/ton, compared to the actual market of about $200/ton) then SO2 scrubber technology would have been adopted much sooner, and the more ambitious goal of the EPA’s recent Clean Air Interstate Rule might have been achieved years ago without further regulatory intervention.

But that’s not the kind of program that Hansen and other carbon-tax advocates are propounding for GHG regulation. Their proposals are very similar to Obama’s original 100% auction, 80% tax dividend plan, the main difference being that allowances would be sold rather than auctioned. Obama, to his credit, knows how to recognize a brick wall when he sees it and he backed off on his original plan. The carbon-tax lobby, by contrast, is still banking its head against the wall in its insistence that carbon taxes operate primarily to extract revenue from the regulated industry. In my view, it is this dogged and dogmatic adherence to a “punitive” regulatory approach that leaves W-M as “the only game in town”.

However, if tax revenue is used only to finance or incentivize emission reductions in the taxed industry, then I think there would be three consequences: (1) Industry costs would be dramatically lower (even if emission-reduction incentives are much higher than cap-and-trade’s), so pricing instruments would lose their political stigma. (2) Price certainty, in addition to low costs, would make pricing instruments much more attractive to industry. (3) Pricing instruments would be more compatible with sectoral policies having limited scope, and hence limited political opposition. (Monolithic, economy-wide policies like W-M’s tend to lead to “monolithic, economy-wide” political opposition, but the rationale for economy-wide linkage disappears when the policy objective is minimum emissions — not minimum costs.)

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Passage of W-M is not a sure bet, so it would be prudent to start thinking about some kind of viable “Plan B”.