Breakthrough: The End of an Era for Cap and Trade?

Michael and Ted have the lead article in the new, summer 2008 issue of the Democracy Journal (free log-in required) this month. "Scrap Kyoto" argues that with the failure of Kyoto to reduce emissions in Europe, and China's steadfast rejection of emissions caps, anyone concerned about climate needs to re-think the conventional wisdom that we can price our way to a new clean energy economy.

If Kyoto is such a failure, why on earth are American political and environmental leaders clamoring for similar legislation here?

Conventional wisdom in Washington and in Europe holds that with American leadership, international efforts to achieve deep reductions of global carbon emissions will quickly get back on track. Congress will pass, and the president will sign, "cap and trade" legislation that will mandate emissions reductions. The next president will have the moral standing to negotiate a successor to Kyoto, which will require wealthy nations to reduce their emissions not by five percent but rather 80 percent by mid-century. In the face of renewed American leadership, China and India will agree to binding reductions as well, and the world will be well on its way to reducing its combined emissions 50 percent by 2050.
But these plans are wildly optimistic -- and unrealistic. The entire global framework for reducing carbon emissions, and indeed the entire conceptual and policy framework for addressing global warming, is a failure, based on an older paradigm of pollution control that won't slow global warming.

At bottom, global warming is not so much a pollution regulation challenge as it is an energy development one. To understand how different this challenge is from past pollution quandaries, consider that by 2050 global energy consumption will more than double, even as we face the challenge of reducing greenhouse gas emissions by 50 percent. This transformation will not be accomplished by affixing scrubbers on smokestacks or catalytic converters on tailpipes -- technical fixes that required little change to the underlying processes and technologies that they mitigated. Rather, it will require fundamental changes to the underlying technologies and fuel sources that power the global economy.

The problem with Kyoto, cap and trade, and most other policies aimed at enacting this transformation is that they focus primarily on the pollution problem, not the energy supply problem. As such, they attempt to enact the necessary transformation of the global energy economy through the indirect mechanism of pollution regulations and carbon markets, rather than through the direct deployment of new clean-energy technologies.

What's the matter with cap and trade? Michael and Ted explain,

To achieve deep reductions in global carbon emissions, regulatory approaches like Kyoto will need to make dirty energy sources like coal not a little bit more expensive, but a lot more expensive. Given the energy mix of most economies in the world, this means that these approaches, if they are faithfully implemented, will result in very substantial increases in overall energy prices. And therein lies the Gordian Knot created by the pollution regulation paradigm: increase energy prices too much and face a political backlash from individual consumers and industry alike as rising energy prices result in economic pain. But increase them too little and you'll make no significant impact on emissions. This is the reason EU efforts to reduce emissions have failed.

The piece takes a cold, hard look at the limitations of cap and trade, but it stops short of recommending we abandon it and never look back:

This is not to suggest that the presidential candidates should abandon cap-and-trade-far from it. Even a modest cap-and-trade or cap-and-lease program has the potential to raise the money needed. But such efforts must be re-conceptualized as a clean energy investment program, not a pollution-regulation regime. And the revenues they raise should be directed exclusively to technological advancement so that it does not spark a feeding frenzy by cash-starved programs, which are better funded through other sources of revenue.
If cap-and-trade cannot raise the $30 to $80 billion annually that energy experts say is needed, then the next president should seek other ways to raise the money. The presidential bully pulpit should allow the next president to win a modest carbon or electricity tax if the revenue were solely dedicated to bringing down the price of clean energy-a proposal voters say they are ready for. Moreover, in early 2008, leading energy executives privately told environmental leaders and others that they would not oppose such a tax if it were dedicated to clean-energy innovation.

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