{note: I am not Congressman Kennedy. This diary is crossposted at my blog BlueClimate}
Today in the Washington Post there is an op-ed by Daniel Esty who uses the TXU buyout as a launching point to argue that using the market to obtain environmental results in the fight against global warming is preferable to using a "command and control" approach where EPA employees would determine how environmental results should be obtained.
This deal shows that we are in the midst of a revolution. Environmental progress no longer depends on hundreds of bureaucrats at the Environmental Protection Agency mandating what piece of pollution-control equipment will be on each smokestack. Government must continue to set standards. But the burden of innovation and technology development will shift to the private sector.
Moving from "command and control" regulations to a market approach to environmental protection means that there will be real costs for pollution -- including a price to be paid for greenhouse-gas emissions -- for every business. But these costs sharpen the economic incentives for pollution control research and development, and create big opportunities for companies that come up with solutions for society's environmental problems.
Actually I think we have been in midst of this revolution for awhile now. Voluntary actions and some market-based regulations in support of green goals have been around for awhile. What is really new is that the market, in conjunction with mandatory requirements, is now being used by governments in Europe and, hopefully soon here in the United States, to address the greatest environmental threat we have ever faced: global warming. My own view is that in many cases, perhaps most cases, it is preferable,as Esty says, to set environmental standards and let the market determine how they are met. I don't believe voluntary standards are up to the job of making the large greenhouse gas emission reductions we must make but mandatory requirements, working through the market place, can be more effective. Putting in legislation that requires emission reductions but allows the market flexibility in how reductions occur is probably the fastest and most efficient means of achieving the environmental results we want. Of course government, either through legislation or regulations, still plays a large role. Government will ultimately set the rules by which businesses and the rest of us play. Among other things, government will:
- write the laws and regulations that will determine who will pay the cost of reducing greenhouse gas emissions
- write the groundrules that will determine who the winners (efficiency, renewables, new clean technology) and losers (fossil fuels, old dirty technology) will be
In short government will still set the rules. If that is the case and the market place is to work, what is the single most important thing we, and the market, needs from government? Here are some hints. It isn't the choice between a carbon tax or an emissions trading system. Or, really getting into the weeds, it isn't how much support ethanol made from corn should get or what the budget of the Department of Energy will be.
The single most important ingredient the market needs to reduce the emissions of greenhouse gas pollution is the political will to tell businesses and us constituents that we must change our fossil fuel-dependent ways.
To illustrate why political will is the most important ingredient in climate legislation lets look at a Newsweek article that went up today by Emily Flynn Vencat. The article is about the problems the emissions trading approach to reducing greenhouse gas emissions, a market-based approach, has been having in Europe and elsewhere where it is currently be used. In my opinion the article is too negative because it focusses on growing pains with the emissions trading approach and only devotes one paragraph explaining that many of the problems it has identified are being remedied. Nevertheless the article does provide some useful insights into problems that can arise in a market-based approach to reducing greenhouse gas pollution.
The same Daniel Esty who wrote the WaPo op-ed is also quoted in the Newsweek article. (The WaPo company owns Newsweek. Coincidence??)
"Carbon trading is a promising strategy for reducing greenhouse-gas emissions," says Dan Esty, director of Yale's Center for Environmental Law and Policy, "but the current structures have serious flaws."
The Newsweek article went through several problems that the emissions trading approach has been experiencing. I want to focus on one of them.
One reason emissions trading is so politically popular is that it's vulnerable to lobbying.
I know for a lot of people, this by itself is reason enough to oppose the emission trading approach to controlling greenhouse gas emissions. I am not one of those people. However, if emissions trading is to be successful there are pitfalls that must be avoided. Europe provides an example.
...the European Commission issued a limited amount of carbon credits. These caps are supposed to bring emissions down across the EU to a level 8 percent below those of 1990 by 2012. But most European governments, under pressure from lobbyists, were too generous in handing out targets to specific industries. As a result, many companies weren't forced to make any cuts, or buy any credits. Indeed, in May 2006, when inspectors began checking the books, they found a surplus of carbon credits which, as soon it became public, triggered a market collapse.
In fairness to the Europeans the article does say at the end this will be corrected in the future.
Europe has set stricter carbon quotas for next year, ...
(As an aside, the quotas for next year are the ones that count for Europe to meet it's Kyoto commitment. The problems described in Newsweek with the European Union Emissions Trading Scheme occurred in the first phase which runs from 2005 -2007. This phase did not count towards the Kyoto commitment.)
What can the United States learn from the European's experience? Europe has learned it must be stingy in handing out emission allowances. Why. Because handing out allowances too generously can wreck the usefulness of emissions trading as a tool to reduce greenhouse gas emissions. There are other ways to wreck emissions trading as well. For example, putting in place a safety valve price cap on emission allowances that is so low as to make it less expensive to continue to pollute rather than reduce emissions. This is another potential problem, associated with lack of political will, to watch out for in U.S. legislation. It is the kind of loophole that you could drive a coal train through.
In the last sentence of the Newsweek article Emily Flynn Vencant makes the most important point (bold is mine).
Emissions trading will succeed to the extent that world leaders can muster the political will to make the caps strict, and make them stick.
Based on legislation currently in congress and in some states, it is probable that when the United States enacts federal climate change legislation it will include an emissions trading approach similar to the one Europe is using. Of course an emissions trading approach won't be the only element of climate change legislation. Things like tighter CAFE standards, building and appliance efficiency standards and much increased support for research and development of new technologies will likely also be necessary. However emissions trading, especially for large stationary sources of greenhouse gas pollution, will probably be a key element if not the center piece of the legislation. Command and control, where specific technologies are required, though it may have limited uses, is probably far too unwieldy to make the economy wide cuts that must be made. The other market-based approach in addition to emission trading is a carbon tax. Many economists have argued that it is preferable over emission trading because it is a simpler and more efficient way to cut emissions. (Would it still be simple after congress finished writing in all the exemptions, rebates etc. ?) However despite support from economists, politically a carbon tax is probably too difficult to get signed into law (i.e. it would require too much political will.)
Finally, what will happen if we don't muster the political will to enact climate change legislation and then even more political will to make a market-based approach work? For a look into that future check out this story (reg. req.) from yesterday by Andrew Revkin of the New York Times. It is based on a leaked government document.
The Bush administration estimates that emissions by the United States of gases that contribute to global warming will grow nearly as fast through the next decade as they did the previous decade, according to a long-delayed report being completed for the United Nations.
Also check out the excellent graphic accompanying the NY Times story. The graphic compares business as usual emissions to Bush administration policy and the emission reductions required under various senate global warming bills. In my opinion, of the approaches shown in the graphic, only the Sanders-Boxer ( Kerry-Snowe is not shown but is similar) and McCain-Lieberman emission reduction trajectories are consistent with what climate scientists warn us we must do to avoid dangerous climate change.