Cap & Fail: The Collapse of our Climate Policy Paradigm

August 4, 2010 | Jerome Roos,

Cap and trade has died. Last week, Democrats pulled the plug on an ill-fated climate and energy bill. The climate policy paradigm that reigned supreme for over a decade has finally collapsed under its own weight. And - believe it or not - that is a good thing for us all.

Cap and trade was structurally flawed from the outset. From Kyoto to Copenhagen, it left a trail of failed climate conferences, false promises and stillborn bills in its wake. It is time to move on and embrace a bold new approach in our fight against climate change - one revolving around epic government investment aimed at unleashing a clean energy revolution. Rather than trying in vain to make fossil fuels more expensive, we should focus our efforts on making clean energy cheap.

As obituaries are pouring in from every corner of the political constellation, the blame game is only just getting started. Some Greens are lambasting Obama for not showing enough leadership on the issue, while others are pointing their fingers at the filibuster and the loss of the Democratic supermajority. Democrats are bashing Republicans for being obstinate, while Republicans are accusing Democrats for drawing up a bill that would imperil job creation and lead to higher energy prices for consumers.

But within this cacophony of opinions, very few people seem to consider the possibility that cap and trade was unworkable and undesirable to begin with. A brief overview of its recent history will confirm this new inconvenient truth.

In the U.S. alone, cap and trade has now died a total of four agonizing deaths. In 2003, it failed to pass the Senate, receiving only 43 votes. In 2005, it failed with 38 votes, and in 2008 - just like this time - the bill was abandoned before even going to the Senate floor, as it had become obvious that it would receive no more than 35-40 supporting votes.

Last month, Prime Minister Kevin Rudd of Australia, who had enjoyed approval ratings well over 70 percent just two years ago, lost his job largely because of cap and trade. Rudd had successfully campaigned on a climate action platform, yet was forced to abandon his cap and trade plans in April in the face of immense political opposition. In response, Rudd's own party staged a revolt and had him replaced, but Australia has still not moved an inch closer to taking decisive action on climate change.

So far, Europe has been the only major player to introduce a cap and trade system, but various reports have exposed the European Union Emissions Trading Scheme to be a travesty at best - and a massive hand-out to the most polluting companies at worst.

Under immense pressure from industry, the EU greatly over-allocated carbon permits, causing the carbon price to plummet and thereby rendering its carbon cap virtually non-binding. The inevitable result is that Europe's cap and trade scheme has systematically failed to reduce emissions enough to meet its ambitious reduction targets.

Similarly, an extensive analysis of the U.S. cap and trade bill by the Breakthrough Institute, has shown it to be so riddled with loopholes and cost containment mechanisms that it would hardly have contributed to climate change mitigation in the first place.

The fundamental problem underlying cap and trade's history of failure is the wide price differential that still remains between clean energy and fossil fuels. To bring clean energy to price parity with fossil fuels would require a carbon price so high as to be impossible to enact politically. Any President or Senator supporting a truly effective carbon price would simply be ousted from office in the next elections.

The only way to make a carbon cap politically feasible is by making clean energy cheap. This means that the overarching goal of climate policy should be to unleash a clean energy revolution through epic government investment in research and development, demonstration, deployment, procurement and infrastructure. A small, politically realistic carbon levy of $5 per ton would raise $30 billion per year for such a public investment agenda.

Only a visionary project for the transition to a clean energy future can replace the flawed cap and trade paradigm that has condemned yet another climate bill to the dustbin of history. As Chris Nelder has rightly observed, "as long as we're agreeing to play by the rules of capitalism and relying on business lobbyists to craft policy, then you have to harness that beast in order to rebuild your energy infrastructure. You have to incentivize, not penalize."