Climate-change politics

Cap-and-trade's last hurrah

The decline of a once wildly popular idea

Gaia lent an unhelpful hand

IN THE 1990s cap-and-trade—the idea of reducing carbon-dioxide emissions by auctioning off a set number of pollution permits, which could then be traded in a market—was the darling of the green policy circuit. A similar approach to sulphur dioxide emissions, introduced under the 1990 Clean Air Act, was credited with having helped solve acid-rain problems quickly and cheaply. And its great advantage was that it hardly looked like a tax at all, though it would bring in a lot of money.

The cap-and-trade provision expected in the climate legislation that Senators John Kerry, Joe Lieberman and Lindsey Graham have been working on, which may be unveiled shortly, will be a poor shadow of that once alluring idea. Cap-and-trade will not be the centrepiece of the legislation (as it was of last year’s House climate bill, Waxman-Markey), but is instead likely to apply only to electrical utilities, at least for the time being. Transport fuels will probably be approached with some sort of tax or fee; industrial emissions will be tackled with regulation and possibly, later on, carbon trading. The hope will be to cobble together cuts in emissions similar in scope to those foreseen under the House bill, in which the vast majority of domestic cuts in emissions came from utilities.

This composite approach is necessary because the charms of economy-wide cap-and-trade have faded badly. The ability to raise money from industry is not so attractive in a downturn. Market mechanisms have lost their appeal as a result of the financial crisis. More generally, climate is not something the public seems to feel strongly about at the moment, in part because of that recession, in part perhaps because they have worries about the science (see article), in part, it appears, because the winter has been a snowy one.

The public is, though, quite keen on new initiatives on energy, which any Senate bill will shower with incentives and subsidies whether the energy in question be renewable, nuclear, pumped out from beneath the seabed or still confined to research laboratories. So the bill will need to raise money, which is why cap-and-trade is likely to remain for the utilities, and revenues will be raised from transport fuels. A complex way of doing this, called a linked fee, would tie the revenues to the value of carbon in the utility market; a straightforward carbon tax may actually have a better chance of passing.

Energy bills have in the past garnered bipartisan support, and this one also needs to. That is why Senator Graham matters. He could bring on board both Democrats and Republicans. Mr Graham’s contribution has been to focus the rhetoric not just on near-term jobs, but also on longer-term competitiveness. Every day America does not have climate legislation, he argues, is a day that China’s grip on the global green economy gets tighter.

He also thinks action on the issue would be good for his party. While short-term Republican interests call for opposition, the party’s long-term interests must include broadening its support. Among young people, for example, polling suggests that the environment, and the climate, matter a great deal.

Unfortunately for this argument, tactics matter, and young voters are unlikely to play a great role in the mid-term election. Other Republicans may think it better to wait before re-establishing the party’s green credentials. Lisa Murkowski of Alaska, for example, is happy to talk about climate as a problem, and talks about the desirability of some sort of carbon restriction—perhaps a tax, or some version of Maria Cantwell’s “cap-and-dividend” scheme. But she expresses no great urgency about the subject. And she has introduced one of two measures intended to curtail the power the Environmental Protection Agency (EPA) now has to regulate carbon, on the ground that that is a matter for legislation sometime in the future.

The EPA’s new powers undoubtedly make the charms of legislation greater. Some industrial lobbies may decide that the bill will provide the certainty they need to decide about future investment, and get behind it. The White House has been supportive of late, inviting senators over to talk. But it remains an uphill struggle, and the use of reconciliation to pass health care could greatly increase the gradient of the hill, as Mr Graham has made abundantly clear.

If the bill does not pass, it will change environmental politics in America and beyond. The large, comparatively business-friendly environmental groups that have been proponents of trading schemes will lose ground, with organisations closer to the grassroots, and perhaps with a taste for civil disobedience, gaining power. Carbon-trading schemes elsewhere in the world have already been deprived of a vast new market—Waxman-Markey, now dead, would have seen a great many carbon credits bought in from overseas—and if America turned away from cap-and-trade altogether they would look even less transformative than they do today. And as market-based approaches lose relevance, what climate action continues may come to lean more heavily on the command-and-control techniques they were intended to replace.