Myths About the Death of Cap and Trade

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With obituaries still being written about the officially dead Senate climate bill and endless theories being offered as to where to lay blame, what is most important now is to reflect on the real culprit behind the death of cap and trade. What follows is a Q&A about that attempts to identify the real reason for cap and trade's demise.

July 23, 2010 | Yael Borofsky, Jesse Jenkins, Devon Swezey,

With many obituaries still being written about the now-dead Senate climate bill and theories offered as to who is to blame, it's important to examine the most prevalent theories regarding the demise of cap and trade and see how well they stack up against the evidence.

Here is a Q&A wherein we find reason to be skeptical with several of the theories commonly cited in the last 48 hours and discuss the real culprit behind the death of cap and trade.

Myth: Cap and trade failed because of Republican opposition.

Fact: While it's undisputed that Republicans almost unanimously opposed cap and trade, Democrats, themselves, have never been united in their support of the policy. As Breakthrough's Jesse Jenkins and Devon Swezey pointed out in their coverage yesterday, there is no conclusive evidence that Senate Democrats ever had enough votes to signify a high likelihood of passage:

There is little evidence that Senate Democrats had substantially more votes for cap and trade this year than they did in 2003 (when it failed with 43 votes), 2005 (failed again with 38 votes) or 2008, when Reid also pulled the bill before it could go down in embarrassing defeat and insiders put the final tally at only 35-40 votes in support of the bill.

Waxman-Markey passed the House by the slimmest of margins (219-212) with 44 Democrats in opposition, and Senate Democrats were even less willing to come together in unified support. Throughout the Congressional cap and trade debate, key Senate Democrats, including Evan Bayh, Jay Rockefeller, Ben Nelson, Mary Landrieu, and the late Robert Byrd remained in consistent opposition while many more, such as Sherrod Brown, Byron Dorgan, Jeff Bingaman, Jon Tester, Max Baucus, Michael Bennett, Jim Webb, and Mark Warner, working to find a bill they could support but unable to fully embrace cap and trade due to concerns about impacts on their constituencies.

The endemic voting challenges also somewhat diminish the argument that the filibuster is really to blame. Although Democrats might have achieved majority support for some kind of climate bill if they hadn't needed a 60-vote super-majority, given that Democrats didn't have the certainty of even 50 votes and that whatever climate bill might have passed would still have been seriously compromised, the filibuster probably didn't prevent transformative climate and energy legislation from becoming law.

Myth: Cap and trade failed because well-funded industry lobbyists opposed it.

Fact: From the outset, a number of key industry interests supported and even lobbied for passage of cap and trade legislation in the 111th Congress. The United States Climate Action Partnership (US-CAP), a coalition of environmental organizations and businesses including major utilities (e.g. Duke Energy), oil and gas companies (Shell and BP), and major energy consumers like Alcoa, worked together to create the framework that eventually became the Waxman-Markey bill. In fact, as various Senate iterations of the legislation were crafted, numerous major energy industry participants (including the Edison Electric Institute, the largest association of U.S. utilities) eventually came to support and lobby for cap and trade, not against it, with the notable exception of major coal production companies. In reality, cap and trade arguably had more industry support than any other environmental policy in history, yet was still unable to secure passage.

Myth: Cap and trade failed because Obama didn't fight hard enough for it.

Fact: As Breakthrough's Michael Shellenberger noted in an interview with Ezra Klein, no additional amount of presidential addresses or political arm twisting would have changed the cap and trade vote count significantly.

As a Democratic president, Obama exerted little influence over Republicans on this issue, yet it was always true that the support of at least a handful of Republicans was necessary to pass a bill. Furthermore, no amount of wrangling within his own caucus could have convinced Democratic Senators from states dependent on cap-affected industries to put aside their concerns about the potential impacts of cap and trade on their constituencies. Yet with Republican support never forthcoming, near-unanimity amongst Senate Democrats was always prerequisite to successful passage of cap and trade.

Myth: Environmentalists are to blame

Fact: Environmental groups spent at least $100 million over the past two years executing what was arguably the best environmental mobilization in history. It was not a lack of effort or a tactical blunder on the part of environmental campaigners that led to cap and trade's failure. It was the cap and trade proposal itself that was impossible for this Congress, and any Congress in recent memory, to pass.

So then, why did cap and trade fail?

Cap and trade has encountered serial failure because it doesn't address the main barrier to the widespread deployment of clean energy technologies: the technology-based price gap between new clean energy and mature fossil fuels.

Unlike fossil fuels, which are energy dense and low cost, many renewables, like wind and solar power, are expensive, intermittent, and difficult to scale, while nuclear power is extremely capital intensive and faces substantial local opposition.

Because of higher costs and technical barriers to widespread clean energy adoption, efforts to move the U.S. energy system away from fossil fuels towards clean energy alternatives inevitably comes with a significant price tag.

Once a price tag is attached to cap and trade proposals, public support drops substantially, particularly at the high carbon prices necessary to actually impact the deployment of clean energy technologies.

The result is that every country in the world has been unwilling to raise the price of fossil fuels -- either through a carbon tax or a cap and trade system -- high enough to close this price gap. Placed in the context of the worst recession in seventy years, this dynamic doomed cap and trade to defeat.

Despite facing inherently strong opposition to higher energy prices, cap and trade is predicated explicitly on raising energy prices to reduce greenhouse gas emissions, an objective that has never been politically salient to American voters. Even as the rhetoric shifted to creating green jobs and a clean energy economy, cap and trade offered little in the way of a tangible connection between carbon pricing or reducing greenhouse gas emissions and creating new clean energy industries and jobs.

But isn't it true that cap and trade would have reduced emissions and moved us to a clean energy economy?

Even if cap and trade legislation had secured narrow passage, the compromises needed to overcome the inherent obstacles to this policy strategy would have rendered its impact on both CO2 emissions and clean energy deployment negligible, and it would have directly invested very little in clean energy technology.

As we showed in our analysis of the House-passed American Clean Energy Security Act (ACESA) -- a bill considered to be stronger than any legislation seriously considered in the Senate -- regulated firms would have been legally permitted to continue business-as-usual emissions and practices through much, if not all, of the next two decades. Firms were permitted to use up to two billion tons per year of dubious carbon offsets instead of reducing their own emissions or changing their energy practices, rendering the Waxman-Markey "cap" effectively non-binding.

Furthermore, because of offsets and other cost containment mechanisms in the bill, the carbon price signal established by the cap and trade program would have been insufficient to pull emerging clean energy technologies into the market or spur significant investment in clean energy innovation. The Environmental Protection Agency (EPA) forecasted an allowance price of just $15 per ton over the first ten years of the program, the equivalent of less than 15 cents on a gallon of gasoline, and much too low to encourage demand for most clean energy technologies, which remain more expensive.

Lastly, at a time when the U.S. is being massively out-invested in global clean energy industries by countries like China, both ACESA and the Senate's American Power Act (APA) would have invested very little in clean energy technology. ACESA would have invested just $9 billion per year in clean technology and just $1 billion per year in energy R&D, far lower than the $15 billion per year in R&D funding proposed by President Obama and called for by leading energy scientists and high-tech business leaders. Similarly, the Senate's American Power Act would invest as little as $2.2 billion per year in energy R&D and would not be sufficient to keep the U.S. competitive with other nations in the clean energy race.

But isn't passing cap and trade in the U.S. essential to inspiring China to do the same?

It is often asserted, in the absence of evidence, that the enactment of an economy-wide cap and trade system in the United States is the necessary element to secure a global agreement to reduce carbon dioxide emissions that both China and India would sign.

But the Copenhagen climate negotiations showed that China, India, and other major emitters in the developing world would not agree to emissions caps as part of any global treaty. This doesn't mean that China is dragging its feet on clean energy.

On the contrary, China has moved aggressively in recent years to become a leader in the clean energy industry; with timing so perfectly ironic it seems almost planned, China announced yesterday that the national government would level a staggering $74 billion in annual investments over the next ten years (5 trillion yuan) to adopt clean fuels and build the nation's clean energy industries. But even while establishing itself as the dominant global clean energy power, China's energy demand is so large that the nation's demand for fossil fuels continues to rise almost unabated.

In the end, the key to encouraging greater clean energy adoption in China and elsewhere in the developing world is an effective clean energy innovation and technology policy. Until we make clean energy cheap enough to be widely available and affordable throughout the world, countries like China will continue to satisfy the majority of their increasing energy demand with fossil fuels.

Will cap and trade be reconsidered in the fall, in 2011, or 2013?

By now it should be clear that if cap and trade can't pass with 59 Democrats in the Senate and a Democratic President that came into office promising to make climate change a flagship issue, it is not going to pass. It's clear that this is the end of cap and trade for a long time.

Until clean energy technologies are made much cheaper than they are today, substantially reducing carbon emissions will remain expensive, and cap and trade will continue to fail.

This moment demands a fundamentally new strategy designed to overcome the inherent political obstacles to carbon pricing and simultaneously achieve the primary objective upon which our climate future hinges: making clean energy cheap in real, unsubsidized terms.