One of my regular readers recently suggested I write a post on this subject. Initially I resisted because it's rather complicated, not widely understood, and, more importantly, most likely not one that most readers are currently very interested in. However, after some research and reflection, I decided to go ahead because I value the reader's input and it's an issue that can ultimately have a very significant impact on our overall economy and our quality of life. What's it all about, why is it important, and where does it stand? To start off, "cap and trade" has to do with concerns about climate change and global warming, but it's also connected to our energy sources and desire for more energy independence.
"Cap and trade," also known as emissions trading, is a flexible environmental regulation mechanism that sets an overall mandatory limit on allowable emissions of one or more undesirable pollutants (greenhouse gases), but allows companies which can more easily reduce emissions to sell credits to other companies for which such reduction would be more difficult. For example, the U. S. government, working through the Environmental Protection Agency (EPA), might set a national limit on emissions of selected pollutants, such as carbon dioxide, for a particular year or years and then allocate a portion of that total limit to major utilities (especially coal-fired power plants), refineries and other manufacturing companies which historically were deemed to have been responsible for the bulk of the emissions in this country.
Utilities and these manufacturing companies would become incented to reduce emissions each year to reduce their costs and potentially add revenue by selling (trading) unused parts of their cap to other companies who may have temporary or more permanent difficulties in staying within the emission cap established for them. These buying companies would become incented to work harder at reducing their emissions, since it would presumably reduce their costs and perhaps ultimately an opportunity to earn more revenue if they came in the position over time of having room within their caps. The private sector is incented to lower costs and become more efficient, while the public and our ecosystem benefits from a lower level of pollutants in the air we breathe and water we drink. Sounds sensible, right?
Cap and trade was first tried on a significant scale twenty years ago under the first Bush administration as a way to address the problem of airborne sulfur dioxide pollution - known widely as acid rain - from coal-burning power plants in the eastern United States. A limit was imposed on emissions from the power plants, and utilities were allowed to buy and sell permits to comply. It's generally considered one of the most effective environmental initiatives we've had, and both environmentalists and our industrial sector have in recent years supported the idea of cap and trade as a centerpiece of government initiatives to address global warming and the growth of our oil imports. Less than a year ago, cap and trade seemed to be the policy of choice for dealing with the issue of climate change.
Environmental groups and their foes in industry joined hands to support the approach. President Obama praised the concept in his first federal budget and the House of Representatives' climate and energy bill passed last June was largely built around it. However, in recent months it seems cap and trade as an economy-wide government measure is currently virtually dead! What's happened?
The answer appears to be partisan Washington politics energized by our weak economy, very low public opinion polls for Congress and President Obama, upcoming mid-term elections, concern with higher front-end costs for industry compliance and U. S. competitiveness, and the general complexity of how cap and trade would work and its net benefits. Another factor was likely the impact of lawsuits filed by a handful of utilities in North Carolina in 2008 where the U. S. Court of Appeals for the District of Columbia Circuit ruled that the EPA had over-stepped its authority in expanding cap and trade markets and that parts of new rules conflicted with existing Clean Air Act regulations.
Despite these concerns, Senate Majority Leader Harry Reid is still trying to put together a comprehensive climate and energy bill to introduce to the Senate during the week of July 26th, less than two weeks away. Reid's current draft apparently has four parts: an oil spill response in the wake of the BP disaster in the Gulf which will likely increase the financial liability of oil companies in the event of another spill; clean energy job creation and consumer savings; reducing oil consumption and increasing energy independence; and reducing pollution among utilities, presumably with some type of a more limited cap and trade component. When questioned about the latter two days ago, Reid declined to elaborate. However, one can assume it will be a cap and trade compromise approach that environmentalists will modestly applaud and that utilities will generally be able to live with.
Ther expectation is that Reid's bill would set a cap on annual emissions over the period 2012 to 2050 and would require the regulated companies to hold allowances to emit the pollutants or greenhouse gases. After allowances are initially distributed, companies would be free to buy and sell parts of their cap to others who are interested in buying them. Electric utilities are expected to be required to meet 20% of their electricity demand through renewable energy sources by 2020, sources such as solar, wind, geothermal or hydroelectric. There's also an expectation that the bill would provide subsidies for new clean energy technologies and energy efficiency. To an unknown extent there will probably also be some protection for consumers on energy price increases.
Until one has an opportunity to read the entire final bill, or at least an executive summary, it's impractical and difficult for interested parties to conclude specifically how they feel about the legislation and its prospects for approval in Congress. Certainly there's a chance, due to its expected complexity, controversial language and lobbying pressures, that voting in the House and Senate on a final bill that has a reasonable chance of approval will be postponed until next year. But it's fairly certain that Obama and congressional Democrats will push hard for approval before November to enhance prospects for their candidates in the mid-term elections.
In evaluating the final bill, I think the focus should primarily be on anticipated impacts of the following important factors: clean energy job creation, national energy independence, air quality, national debt and federal budget, U. S. unemployment rate, energy costs for U. S. consumers, and the competitiveness of our major industries. Obviously there are many other relevant factors that should be taken into account, such as the scientifically determined impact on climate change and what other major developed and developing economies are doing or expected to do on this subject. One can assume that, like with the health care and financial overhaul bills, most of the Democrats will vote for approval for obvious reasons and most of the Republicans will disapprove for various reasons, some very legitimate and some not. Again, support of the Independents will likely be key to success.