Will Economic Recession Kill Cap and Trade?

October 14, 2008 |

Everyone's talking about the prospects for cap and trade legislation in the context of economic recession and financial uncertainty. Greens are arguing that cap and trade would provide revenue for investments in technology and infrastructure. Is legislation that would raise energy prices politically feasible now? Breakthrough senior fellows and staff discuss. This conversation was sparked by a recent column in Slate, "Save the Economy, Save the Planet", by Eric Pooley of Harvard's Kennedy School of Government.

The participants in the discussion were Michael Shellenberger of the Breakthrough Institute, Steve Rayner, professor at Oxford's Said Business School, Chris Green, professor of economics at McGill University, Roger Pielke, Jr., of UC-Boulder, and Peter Teague, director of the environmental program at the Nathan Cummings Foundation.

Michael Shellenberger (the Breakthrough Institute):

The Slate piece epitomizes conventional thinking on climate and energy. The idea that handing over climate change policy to the same people who brought us subprime mortgages and a $45 trillion market in credit default swaps will be viewed on Capitol Hill as either good policy or good politics is almost as hilarious as Pooley's view that consumer opposition to higher energy prices will be allayed with promises of rebates. Focus groups and polls show that voters don't trust they'll ever see a rebate, and cap and dividend was the least popular of three policy proposals tested in an EMC poll we commissioned last year.

Professor Steve Rayner (Oxford University):

My answer to [the] question "Do we want carbon trading" run by the same corrupt crowd who have been milking the carbon economy through CDM and offsets is "Fuggedaboutit!" It simply cannot deliver the innovation necessary in the time available but gives people the comfortable delusion that everything is under control - the same comforting message that we got as we slipped into the current global financial meltdown. I predict that the carbon price will collapse catastrophically once people realize that it cannot deliver and is simply enriching the fat cats.

It took a global meltdown to get the world's governments to take financial collapse seriously and the response has been strategic (who knows if it is the right strategy, but politicians have at least now acknowledged the magnitude of the task.). What we need is an energy modernization strategy of the same order, directed towards converging goals.

We may be stuck with carbon trading as part of this because of the sunk political costs, but let's not encourage it.

Professor Chris Green (McGill University):

I cannot imagine governments, at least not ones already committed to a cap and trade system, adopting one after what is now happening. The only sure winners from cap and trade are those who gain from price volatility--the same crowd that has brought us the present financial debacle. (If "offsets" are allowed, then hucksters will also be winners.)

I read the U.S. presidential campaign as moving slowly toward agreement on long term funding of research and development of carbon emission-free energy technologies. Two questions arise: The first is how to finance a R&D commitment, given the budgetary constraints that the US now faces. Cap and trade with auctioned permits will be even less politically acceptable and auctioning opens the door to large purchases by non-covered entities (including financial market ones) who may be in a position to manipulate prices.

Would the U.S. buy a low carbon tax to pay for the R&D expenditures? $5/tCO2 would more than pay for Obama's plan to spend $150 billion over a 10 year period. While $5/tCO2 would be $14/tonne coal, it would hardly make a ripple where oil and natural gas is concerned. If someone can find a way of credibly treating the $5/tCO2 a user fee (not a tax), it might be sellable.

The second question is how to slow emissions growth and even decrease emissions in the near term. The long-lived economic doldrums that the severe financial market problems are likely to produce (neither a short recession nor a depression) will probably do that job. For the longer term, having the "user fee" rise gradually over time, say at a 10% rate per year (so that the fee doubles in 7 years to $10/t and to $20 in 14 years) would send a forward price signal that can help induce deployment of effective, scalable, non-inferior carbon-emission free technologies as they reach "the shelf". In time, this "model" might be acceptable to China, India and other major emitters. At least it holds out more hope for the world than a transatlantic rescue of a faltering/flawed EU ETS.

Professor Roger Pielke, Jr. (University of Colorado):

One reality is that historically on this issue, presidential leadership hasn't mattered much ... since the Bush then Clinton then Bush policies differed much more in tone than in substance.

Presidential leadership will be a lot easier when politically tractable solutions are available. The odds of such solutions will be increased (but not guaranteed) with more RD&D. If leadership is defined simply as tone or exhortation, then regardless of who is elected there will be a marked change in the next administration.

One key to pay attention to is if the next president focuses on technology over science. Bush 1, Clinton, Bush 2 all emphasized science over technology.

I don't expect adaptation to be part of the discussion, unfortunately...

Peter Teague (The Nathan Cummings Foundation):

I hope you're right 1) about the assumptions underlying C&T; and 2) that this shift will open the door to the kind of public investment we all agree is needed. But the conventional wisdom is that the bailout makes additional government spending less, not more likely, and given the Obama [cap and trade] plan it doesn't sound like sufficient dollars for RD&D are likely to be in the offing from a Democratic administration. If it's true that responses to the financial crisis could lay the foundation for either greater fiscal restraint or a more Keynesian approach, the question is what can we do to push in the direction of increased investment? Is there any hope of creating a budgetary distinction between spending and investment?


So the breakthru is nothing more than today's U.S. do nothing policies. Thanks but no thanks. Such a group of lite-waits.

By Jay Alt on 2008 11 03

So you want taxpayers to foot the bill rather than polluters? Kind of obscene. Also, how would your scheme do anything about tropical deforestation, 20 percent of the world's emissions? And why do you think politicians can do a better job of deciding what will reduce greenhouse gas emissions than the market? Not what Resources for the Future's new study says: We need a combination of approaches to solve this problem, including cap-and-auction, investment, and clean energy mandates. http://www.rff.org/Publications/Resources/Pages/Green-Power-Introduction.aspx

By Glenn Hurowitz on 2008 11 01

no question that "R&D expenditures will save us" is a politically expedient message -- more popular than taxes and less complex than cap & trades. is it enough?

seems like good ol' fashioned "command and control," ban & regulate is another option to revive. If you say "thou shalt sequester or offset new carbon emissions," you get a solid start on what needs to be done.

By Steve beers on 2008 11 01

If mitigating climate change wasn't already a daunting task, it seems apparent to the well respected members of the round table discussion that prominent policy options aren't feasible or even possible.

It seems the consensus of the discussion is to move towards technological innovation, such as the $300 billion over 10 years Apollo-like approach.

With that in mind, is the more pressing issue then who the next President chooses to be his science adviser, Directors of OSTP, Cabinet officials in the Dept. of Energy, and so forth?

Has there been a discussion on such choices? Should science policy experts focus more on creating recommendations for the next science leaders of the incoming administration and not necessarily just the President?

By Matthew Stepp on 2008 10 15