We all have a moral imperative to get climate policy right. To achieve that, the incoming administration and Members of the 111th Congress will have to carefully weigh all the serious options being proposed to reduce carbon emissions. However, it seems that some politicians have already made up their minds before real debate has even begun.
As last Thursdays House Energy and Commerce Committee hearing illustrated, a number of lawmakers are narrowly focused only on cap-and-trade the same kind of futile approach thats failed to lower emissions in Europe.
While well-intentioned, cap-and-trade systems are riddled with daunting problems. These regimes may offer the path of least current, political resistance, given its support by some environmental groups and a number of European governments. But basic economics punctuated by the developments now gripping the U.S. and global financial systems clearly point in a different direction, toward a carbon-based tax program with most of the revenues recycled in forms of tax relief.
Under cap-and-trade, the government sets an annual cap on greenhouse gas emissions, gives away or auctions permits to produce those emissions, and lets a new market sort out the messy job of determining the prices of emissions. The core idea is that businesses that can cut their emissions targets most cheaply will do so and sell permits to those who cannot, leaving everyone better off.
This was the approach then-Vice President Al Gore proposed at the climate summit in Kyoto, Japan, in 1997, to break a deadlock and gain support from Russia and other developing nations that were effectively exempt from reducing their emissions, but still allowed to sell excess permits to us and Europe. Burned by the political firestorm over his proposed BTU tax in 1993, my former boss, President Bill Clinton, still pushes forcefully for a cap-and-trade scheme, arguing : I tried [a carbon tax] once. It didnt work for me.
But heres the catch. A cap-and-trade system is very unlikely to reduce global greenhouse gas emissions and more likely to introduce new, trillion-dollar risks for the financial system.
The clearest illustration of the problems with cap-and-trade is the European Trading Scheme, based on the Kyoto protocols covering most of Europe. According to a new report by the Government Accountability Office, theres little if any evidence that the ETS has had any effect at all on emissions in Europe. One reason is that major emitters such as Germany simply exempt many of their facilities generating greenhouse gases. Another factor is the offset permits that European transition economies, themselves exempt from caps, can sell to other ETS members. According to a recent study in Nature, once we set aside those offsets, emissions under the ETS have actually increased by 10 percent.
The system also has failed to establish a stable price for carbon a goal widely considered a prerequisite for any effective climate change effort. To the contrary, the prices for ETS permits are highly volatile. In the first two years of the EU cap-and-trade system, for example, permits prices moved up or down by an average of 17.5 percent per month, with daily price shifts as great as 70 percent.
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