Postmortem on the waxman markey cap and trade bill

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Postmortem on Waxman- Markey: The Politics of

Cap-and-TradePost prepared July 28, 2010

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The Death of the Waxman-Markey Cap-and-Trade Bill

As recently as 2008, prospects for cap-and-trade climate legislation looked good, with support from both major-party presidential candidates

By July 2010, cap-and-trade is officially dead. The Senate will not bring the House-passed Waxman-Markey bill to a vote, nor will it propose a substitute

What have we learned about the politics of cap-and-trade?

Post P100728 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

Source: http://commons.wikimedia.org/wiki/File:Global_warming.JPG

The Basic Economics of Carbon Emissions

The case for controlling carbon emissions is based on evidence that they cause harmful externalities in the form of climate change

The economically optimal level of emissions would be achieved where the marginal cost of abatement equals the marginal external cost of carbon emissions


Definitions of terms:•Carbon emissions: Quantity of carbon dioxide or equivalent other greenhouse gas released into the atmosphere•Marginal cost of abatement: Cost of reducing emissions by one additional ton (increases as emissions decrease)•Marginal external cost: The damage done by the climate change associated with one additional ton of carbon emissions

Controlling Emissions with a Carbon Tax

One way to control emissions would be impose a tax of a fixed amount per ton of carbon

Firms would eliminate any emissions for which the marginal cost of abatement was less than the tax

Result: Emissions would be reduced from the “business as usual” level to the optimal level


Controlling Emissions with Cap-and-Trade

Instead, emissions could be controlled using cap-and-trade1. Government sets a cap on

carbon emissions (e.g. 50 tons)2. Permits are issued allowing one

ton of emissions each3. Permits are bought and sold until

an equilibrium price is reached4. Firms with high marginal

abatement costs are buyers, those will low costs are sellers

Result: Emissions are reduced to the optimal level


Comparison of Effects on Emissions

Either a carbon tax or cap-and-trade could be used to reduce emissions to the optimal level

Many economists think that carbon taxes are better in one important respect Under cap-and-trade, the price of

permits could vary widely from year to year as market conditions changed

A carbon tax would be constant from year to year

A more predictable price might provide a stronger signal to firms to invest in pollution control technology


Comparison of Effects on Government Revenue

Each $10 per ton of carbon tax (equivalent of 10 cents per gallon gas tax) could bring in $50 billion revenue per year*

Possible uses of tax Pay down federal debt Subsidize clean energy Reduce payroll tax or other taxes

If cap-and-trade permits were sold at auction by the government, the same revenue would be generated


*Estimate by Carbon Tax Center www.carbontax.org

Political Advantages of Cap-and-Trade: Building Coalitions

Some have argued that cap-and-trade makes it easier than a carbon tax to build a coalition for action on climate change

Instead of selling all permits by auction, some permits could be awarded free based on past emissions

This “grandfathering” approach would make it attractive for some polluters to support the coalition needed to pass a cap-and-trade bill


Source: http://commons.wikimedia.org/wiki/File:Political_volunteers.jpg

Political Advantages of Cap-and-Trade: Avoiding Tax Resistance

Others have argued that cap-and-trade would meet less political resistance because it is not a tax

If permits are auctioned, they produce revenues, but the revenues do not have to be called taxes

If permits are given away as incentives to promote desired behavior (pollution abatement, improvements in energy efficiency, research, etc.) they achieve desired results without passing through the budget at all

Until recently, some Republicans in the U.S. House and Senate supported cap-and-trade even though they oppose tax increases


Source: http://commons.wikimedia.org/wiki/File:Taxprotestorsmis.jpg; http://commons.wikimedia.org/wiki/File:No_IRS.svg

Results of Coalition Building in Waxman-Markey

The Waxman-Markey bill achieved a majority coalition in the House but only at great cost to its effectiveness

85% of permits were given away free, leaving little revenue gain

Special provisions of the bill prevented electric utilities from passing the costs of pollution abatement through to consumers, thereby limiting the impact on energy demand

Command-and-control provisions (e.g., renewable energy mandates for utilities) departed from the efficiency of a market-based approach


HR 2454, The American Clean Energy and Security Act or Waxman-Markey bill, passed the House in 2009 but failed to come to a vote in the Senate and is officially dead as of July 2010

Collapse of the Cap-and-Trade Coalition in the Senate

It proved impossible to put together a majority coalition for cap-and-trade in the U.S. Senate

So much was given away to build the House coalition that little room was left for further bargaining

Senate Republicans chose to characterize cap-and-trade as a disguised tax, calling it “cap-and-tax”

Former Republican supporters of cap-and-trade withdrew their backing


Under current rules of the U.S. Senate, a 60% majority is required to pass most legislation.

Picture source: http://upload.wikimedia.org/wikipedia/commons/a/a6/US_Senate_Session_Chamber.jpg

Lessons of Waxman-Markey

1. The coalition-building power of the cap-and-trade approach did not prove as strong as supporters had hoped

2. Cap-and-trade has now been rebranded as “cap-and-tax,” reducing its future political appeal

3. Attempts to assemble a coalition for cap-and-trade led to extensive departures from the simple market-based version found in economics textbooks

4. Although prospects are dim for any near-term action on climate change, the case for carbon taxes, rather than cap-and-trade, may have been strengthened as a long-term strategy


Education

Postmortem on the waxman markey cap and trade bill