The Resurrection of Cap-and-Trade

Cap and Trade may yet become realityThe recession has delayed the passage of energy legislation and it has stymied hopes for cap-and-trade. The current conventional wisdom is that cap-and-trade legislation is dead. However, rumours of the death of cap-and-trade may have been greatly exaggerated.

Resistance to cap-and-trade comes from energy intensive industries and Congressional representatives from high carbon, poor and conservative areas. Senate moderates from both parties are pushing Obama to accept an energy-only approach without putting a price on carbon emissions.

Alternatives to current cap-and-trade include an energy-only bill that would focus on regulatory initiatives. Some members of Congress favour the hidden costs associated with the regulatory approach because these measures are easier to sell to the voting public. However, this approach is expensive and small in scope.

Another modified cap-and-trade plan could capitalize on the prevailing mood in America. Popular resistance to new taxation and anti-corporate sentiments are addressed in what has been called an upstream cap-and-trade system or cap-and-dividend. In this system, all of the needed allowances are sold (auctioned) to fossil-fuel producers and importers, and a very large share of the revenue is rebated directly to American households, the remainder would go towards certain energy-intensive and trade-sensitive sectors. Such an approach would be difficult for politicians to oppose.

This approach is similar to the “Carbon Limits and Energy for America’s Renewal (CLEAR) Act,” sponsored by Senators Maria Cantwell (D-Washington) and Susan Collins (R-Maine).  Many economists have long favoured the variant of cap-and-trade whereby allowances are auctioned and the auction revenue is used to cut taxes (on capital and/or labour), thereby reducing the net social cost of the policy.

Massachusetts Senator John Kerry has been working with Senators Lindsey Graham and Joe Lieberman on a bipartisan proposal for a “comprehensive” climate and energy bill to bring to the Senate floor later this year.

A March statement from 20 climate and environmental lobby groups said that they were “encouraged” by the progress being made. Proposals for a 17% reduction in carbon dioxide emissions by 2020 and an 80% reduction by 2050 are being discussed.

There are indications that Senators are also working on sector-specific emissions caps. Power plants emitting more than 25,000 tons of greenhouse emissions per year would be regulated from 2012, and major industrial sources would be phased starting in 2016 to give US manufactures time to recover from the recession.

The proposed cap and trade scheme could see a ”hard collar” imposed on carbon prices, a maximum level of $30 per ton set. The system would see a government reserve set up to monitor the market, flooding it with reserve carbon credits if prices veered over the $30 per ton level.
There could be a carbon tax on transport fossil fuel, as well as a “carbon tariff” on imported goods from countries that do not regulate their greenhouse emissions.

Throughout the industrialized world (Europe, Japan Australia, New Zealand), cap-and-trade is emerging as the preferred policy instrument to address climate change emissions. Given the fact that the US is responsible for 25% of world emissions, US cap-and-trade is crucial to an effective global climate policy.

Cap-and-trade is scientifically sound and economically sensible, but high unemployment and looming midterm congressional elections have eroded its political viability. However, given the efforts to revive cap-and-trade, the obituaries may prove premature.
Richard Matthews is a consultant, eco-entrepreneur, sustainable investor and writer. He is the owner of  THE GREEN MARKET, one of the Web’s most comprehensive resources for news, information and tools on sustainability. He is also the author of numerous articles on sustainable positioning, green investing, enviro-politics and eco-economics.

Richard Matthews
Richard Matthews
Richard Matthews is a consultant, eco-entrepreneur, sustainable investor, and writer. He is the owner of THE GREEN MARKET, one of the Web’s most comprehensive resources on the business of the environment. He is also the author of numerous articles on sustainable positioning, green investing, enviro-politics, and eco-economics.

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  1. I hope that cap-and-trade can be reborn like a phoenix from the ashes, it is important to a comprehensive carbon management strategy. It is tragic how politically motivated misinformation has obscured the facts.


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