When the Cap Isn't a Cap, the Trades Are a Charade

Many analysts (including myself) have written about the innumerable problems with cap-and-trade, mostly focusing on the bogus nature of the trade. And most of the problems we've predicted have found their way into the current cap-and-trade law working its way through Congress, the American Clean Energy and Security Act of 2009 (Waxman-Markey climate bill).

As was widely predicted, Waxman-Markey has degenerated into little more than a special-interest pork-fest, where the political system is getting ready to give away at least 85% of the valuable emission permits to favored energy constituencies such as electrical utilities, university researchers, low-income households, renewable manufacturers, anti-deforestation programs, and so on. The Obama administration’s pledge to auction off 100% of the emission permits was a joke on the face of it: virtually all emission trading programs feature extensive "grandfathering" of polluters and favored constituencies.

Principled environmentalists have turned their guns on what has emerged. Michael Shellenberger of the Breakthrough Institute, in particular, has explained that it's not only the trade elements of Waxman-Markey that are bogus, it's the cap as well. It turns out that under Waxman-Markey's byzantine provisions, "carbon emissions in regulated sectors of the U.S. economy [are] to rise at business as usual (BAU) rates through 2030."

Here is his explanation and challenge to we'll-take-anything environmentalist groups behind Waxman-Markey:

But whether or not you believe the legislation would result in lower emissions, there appears to be universal acknowledgement that various provisions in Waxman-Markey--including but not limited to off-sets and the strategic reserve pool--prevent the "cap" from being binding. Given this, Waxman-Markey cannot be accurately referred to as establishing a "cap" on U.S. emissions, much less a "binding cap." Probably the most accurate term is "non-binding cap."

Waxman-Markey advocates have offered reasons why they believe the high levels of allowable emissions in Waxman-Markey should not be a concern: a) a 17% reduction in emissions targeted in the bill will be easy and inexpensive to meet, thereby obviating the need for firms to purchase offsets in lieu of reducing their own emissions; b) there aren't enough legitimate offsets available to replace mandated emissions reductions; c) there are other provisions in the legislation, such as renewable energy standards and efficiency standards, that will ensure that targeted reductions are achieved even if the "cap" allows emissions to increase.

While these assertions are debatable, none refute the fact that the "cap" in Waxman-Markey would not legally mandate emissions reductions in regulated sectors of the economy for at least two decades. Instead of capping emissions the legislation sets a "target" of 17 percent reductions by 2020. But a "target" is not a "cap" and the two terms are not interchangeable.

It would also be inaccurate to say that the legislation "would mandate emissions reductions" since firms would be able to increase emissions if they purchased off-sets. And it would be inaccurate to say that the legislation "would reduce emissions" since the reduction of the emissions is by no means guaranteed or even mandated. A more accurate way of describing the legislation as a whole (though not the "cap and trade" provision) might be that it "aims to reduce emissions" or something like that.

Most analysts agree that Waxman-Markey will establish some price on carbon, albeit one that will be highly constrained by free allowances, offsetting allowed above the cap, and the strategic reserve auctions, which explicitly limit how high the carbon price can rise. There is disagreement, however, as to a) what the carbon price would be, and b) how many emissions reductions, if any, these carbon prices would achieve. Whatever your view, these are projections based on various assumptions--the behavior of firms, the future price of low-carbon energy, the potential for efficiency and conservation, the availability of off-sets, etc. They are not guarantees of reductions.

Whatever emissions reductions result from Waxman-Markey will be determined by the various cost-containment mechanisms described above, and the non-cap provisions in the bill, not the "caps" and targets that have dominated most of the debate and press coverage of the bill since it was marked up last month.

I assume that this is something that everyone committed to an accurate description of Waxman Markey would agree with. But in case I'm missing something, I've cc'd NRDC and EDF staff, the lead advocates of Waxman-Markey, in case they think there is a more accurate way of describing what we are reading as a non-binding cap that would aim to reduce emissions.

Waxman-Markey shows one thing clearly: Congress is capable of crafting a bill that is far worse than even the most pessimistic policy analyst could ever envision. There is not only "market failure" but "political failure" in the policy response, requiring the public policy community to balance the two in any policy prescription lest "analytical failure" join the other two.

Kenneth P. Green is a resident scholar at AEI.

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