Thursday, July 9, 2009

Cap-and-Trade. For Adults Only!

Cap-and-Trade Bill: Perspective and Opinion
On June 26th, the US House of Representatives narrowly passed The Waxman-Markey Energy Bill. The Bill now moves to the Senate where it’s future is far from decided.

What is Cap-and-Trade?
Under the Bill’s cap-and-trade system, the government starts with a total amount of carbon dioxide, “the cap”, businesses can emit. Initially, companies buy pollution credits at auction from the government.

If a company reduces their emissions faster than required, they sell or “trade” their excess emission credits to a company unable to meet the requirements. Over forty years, the cap is cranked down to reduce total carbon emissions by up to 80%.

Ideally, by creating a market for carbon dioxide, a gas released by fossil fuel consumption, we’ll reduce the amount of heat trapping gas we emit. If we make the polluter pay for their waste, the logic goes, we’ll pollute less or figure ways to obtain power from cleaner sources.

Big Deal?
Since most of us rely on carbon from fossil fuels for everything from turning on the faucet (electricity to pump water) to eating a meal (growing, harvesting, transporting, preparing) to typing on this computer, this impacts us all.

Proponents claim a future of green jobs, e.g. developing new technologies, insulating buildings and installing solar panels, while critics argue a fossil fuel energy tax will drive us deeper into recession as business passes on their costs to consumers.

Has anything like this been done before?
There are plenty of precedents for cap-and-trade, including in the US.
During the 1980’s, sulfur dioxide from coal-fired power plants created acid rain and ravaged forests, lake and streams of the Northeast. Despite millions of dollars by the coal lobby, The Clean Air Amendment of 1990 included a cap-and-trade provision to reduce coal plant's sulfur dioxide emissions. (it did nothing to limit other emissions, like toxic pollutants).

Nearly twenty years later, even it’s most ardent critics agree it has been an unqualified success. Emissions were reduced at a fraction of the cost the skeptics had argued it would cost. Additionally, the investment meant billions in health cost savings and increases in crop revenue.

For the first time, coal operators and plant managers had an incentive to reduce waste and pollution. Coal plant technology has changed little since the 19th century. In fact, the pet food industry spends more on R&D than does the entire utility industry.

Unfortunately, a comprehensive carbon cap-and-trade is a great deal more complicated than installing scrubbers on smoke stacks and finding cleaner burning coal for about two hundred coal plants.

European Carbon Cap-and-Trade:
Europe instituted a carbon cap-and-trade a few years ago and the results have been less than encouraging. Their biggest mistake, allocating (for free) more pollution credits than was necessary, caused the price of pollution credits to plummet. At the same time, utilities pocketed windfall profits at the expense of consumers.

Supporters of The Waxman-Markey Bill counter they’ve learned their lessons from Europe’s flaws. Yet, in order to win support from manufacturing, coal and industrial agriculture states, they watered down the bill on every front and agreed to give away, rather than auction, the vast majority (75%+ of the initial credits. There goes most of the revenue!) It also provides wiggle room and exceptions for polluters with clout (read: loopholes and subsides). Note: the bill grew from a two-page outline a few months ago to more than 1,000 pages.

Additionally, while the link between sulfur dioxide’s acid rain killing forests is readily comprehendible, most layman don’t make the connection between our fossil fuel waste and resulting costs, e.g. military expenditures, soil erosion, soaring healthcare costs, etc.

• Vast regulatory machine to set-up and administer
• The majority of credits are given away upfront
• Too little too soon: virtually nothing ‘til 2012, and little ‘til 2016

• Revenue collected aimed at provisions to beef up energy efficiency (to save money) and to require large utilities to obtain electricity from renewable sources.
• Regulations in place to beef up the bill and reduce carbon emissions over time.

Carbon Tax: a better option?
Advocates for a simpler plan, with fewer regulatory costs, propose a straight pollution tax, i.e. a carbon tax. Upon closer inspection, it’s not as easy as proponents argue.

Yes, Waxman-Markey chose the cap-and-trade because polluters find it more palatable, but also because the goal is to reduce emissions a specific amount annually and, for this, the cap-and-trade is a better instrument.

Why do we need to reduce carbon dioxide, again?
I’ll agree with the vast majority of climate scientists: our emissions of carbon into the atmosphere cause climate change. I’ll also argue it’s OK to support a tax on carbon even if you don’t agree.

Two hundred years ago, there were fewer than one billion people roaming the land (mostly poor farmers). Today, we’re at seven billion (on our way to nine billion-plus) and more than one billion can’t find work. What changed: the use of fossil fuels.

In the 19th century, when we were short labor and long natural resources it made sense to subsidize the use of natural resources because it contributed to a rise in the standard of living. Times have changed, yet those companies that pollute and externalize their costs, wield more power than ever.

We’ll benefit from eliminating the billions of annual direct subsidies to coal, oil, gas, industrial agriculture and mining industries. Make the oil companies pay the US Naval costs for patrolling Middle East waters. Force coal to pay the clean-up costs of mountaintop removal mining. Demand logging companies pay to cut timber on government owned lands (and pay for the roads to get there). Stop the madness of giving billions to agricultural giants who grow corn with fossil fuel inputs to fatten cattle and fatten kids, read: high-fructose corn syrup.

So what do we do?
Our goal ought to be to increase quality of life, not increase GDP for the sake of increasing GDP. Economic growth, defined by GDP, in the US no longer equates to an increase in the standard of living. Our “happiness” index in the US peaked more than 30 years ago.

What to do about it: Shift subsidies and taxes to fuel a new revolution.

Altering taxes and subsides will affect change. People act on information the market gives them. If we want companies to use less of something, e.g. fossil fuels, eliminate subsidies and begin to tax. If we want to stimulate consumption, e.g. companies hiring workers, remove the taxes.

Reducing waste is good business- just ask some of the companies who aren’t waiting for public policy to change and reaping huge financial benefits from improving design, companies like Interface Global, Dow and Patagonia. Global consultant McKinsey and Company has published extensive reports highlighting the impressive ROIs to be had just by investing in efficiency.

As the Senate debates the cap-and-trade bill, we ought to
1. Work to remove subsidies given to the coal, oil, gas and natural resources industries
2. To encourage creativity and innovation, and reduce our addiction to limited resources, institute a cap-and-trade with teeth.
3. To encourage employment, lower taxes on labor.

Take the time to call your US Senators (and House Rep) and demand they work for you and our futures.

This is a historic time. We have a huge opportunity to move past the 19th century’s Industrial Revolution to smarter ways of producing energy. Now, more than ever, it’s vital our elected officials are working for us and our children, not corporations.