The Cap-and-Trade Bait and Switch

As a candidate for president in April 2008, Barack Obama told Fox News that "a cap-and-trade system is a smarter way of controlling pollution" than "top-down" regulation. He was right. With cap and trade the market decides where and how to cut emissions. With top-down regulation, as Mr. Obama explained, regulators dictate "every single rule that a company has to abide by, which creates a lot of bureaucracy and red tape and often-times is less efficient."

It's no wonder that the House advertises its American Clean Energy and Security Act of 2009 (also known as the Waxman-Markey bill) as "cap and trade." And last Thursday a coalition of environmental groups and unions launched a "Made in America Jobs Tour" to sell it as a ticket to "long-term economic prosperity." But the House bill would, if passed by the Senate this autumn, fail the environment and fail the test of economic efficiency.

Waxman-Markey is largely top-down regulation dressed in cap-and-trade clothing. It purports to set a cap on greenhouse gases, but the cap is so loose in the early years that through the use of cheap offsets the U.S. need not significantly reduce its fossil-fuel emissions until about 2025. Then the bill would require a nosedive in fossil-fuel emissions. This balloon mortgage pledge of big cuts later is unlikely to be kept.

Waxman-Markey is largely top-down regulation dressed in cap-and-trade clothing.

The top-down directives come in three forms. First, electric utilities, auto makers and states get free allowances on the condition that they comply with regulations requiring coal sequestration, alternative energy sources, energy conservation, advanced auto technology and more. Second, many other provisions of the 1,428 page bill mandate outright regulation on subjects ranging from how electricity is generated to off-road vehicles and household lighting. Third, still other provisions provide subsidies for government-chosen technology "winners" such as alternate energy sources, plug-in vehicles and weatherization of old buildings.

Progress on most or all such fronts will be needed, but when, where and how should be decided principally by a cap-driven market, not the "red tape" that candidate Obama deplored.

This government dictation of technology would undermine President Obama's March 19 pledge that, by addressing climate change, we would become "the world's leading exporter of renewable energy." That requires coming up with better, lower-cost technologies than the rest of the world. This won't happen if the government picks the technologies. Recall that, in the 1980s, government established the Synfuels Corporation that spent billions to produce energy alternatives and came up with nothing. More recently, government required refiners to put corn-based ethanol into gasoline on the theory that it's good for the environment. Yet we've learned that wide-scale ethanol production can do more harm than good in regard to air quality and climate change, turn wildlife habitat into corn fields, and raise food prices.

By contrast, the cap-and-trade legislation that Congress applied to acid rain in 1990 produced big dividends for the environment and the economy. It cut the acid-rain causing emissions from power plants by 43% and saved electricity consumers billions of dollars compared to top-down regulation.

A cap and trade can be used to tackle carbon emissions more efficiently than top-down micromanagement of technology. Indeed, cap and trade should be used to regulate major conventional pollutants such as sulfur dioxide and nitrogen oxides. It is not only the smarter way to regulate such pollutants, as Mr. Obama recognized, but it is also necessary because key greenhouse gases and many conventional pollutants come from the same fuel-burning processes. Systems for regulating both kinds of pollutants should work together rather than at cross purposes, as detailed in our recent report for the New York Law School and NYU School of Law: "Breaking the Logjam: Environmental Reform for the New Congress and Administration."

Why has the House turned its back on the cap-and-trade approach? Both parties have played to their bases so that the only way for the Democrats to pass Waxman-Markey was to buy swing votes by picking among technologies such as coal sequestration to please critical constituencies.

While the House represents constituencies, the president must keep the focus on the broad national interest. Candidate Obama's comments on cap and trade came when asked to back up his claim that he would be a "uniter" by naming "a hot-button issue where you would be willing to buck the Democratic Party line and say, 'You know what? Republicans have a better idea here?'" President Obama needs to lead on the principles on which he campaigned and the Republicans in the Senate need to listen. Otherwise, Congress will pass something like the House bill or, worse still, won't legislate at all.

In that case, the Environmental Protection Agency would regulate greenhouse gases under the Clean Air Act. This would involve even more top-down control than Waxman-Markey. Regulators would be required, for example, to impose source-specific emission limits on every major new or modified source. Government would decide who cuts emissions through a complicated process that would undoubtedly produce the very red tape and inefficiency Mr. Obama warned about. Congress should instead apply to climate change the market-based solution that it successfully applied to acid rain nearly 20 years ago.

David Schoenbrod is a visiting scholar at AEI. Richard B. Stewart teaches law at New York University.

Editor's note: The report Breaking the Logjam: Environmental Reform for the New Congress and Administration is available from the New York Law School-NYU School Law project of that name at www.breakingthelogjam.org.

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