Cap-and-trade mess

Published: June 28 2009 18:12

The US House of Representatives has passed a bill to limit greenhouse gases. The White House lobbied hard for it: “A bold and necessary step,” said Barack Obama. Many hailed its passage as a triumph. In fact there is little to celebrate.
Recall that cap-and-trade was expected only recently to pass in the House without difficulty. It scraped through by 219 votes to 212, with 44 Democrats voting against. Opposition to cap-and-trade in the Senate is stronger, so the chances of this bill or anything like it becoming law look slim.

To make matters worse, the bill makes political compromises that undermine its effectiveness. Even so it passed by just seven votes. What this says about the prospects of a more forceful measure – one that dares to confront consumers with significantly higher energy costs – is discouraging.
To curb climate change, the world needs to cut carbon emissions. It needs US leadership on the issue too. But this bill is not the way. A bewildering combination of cap-and-trade, mandates, new regulation, and every kind of open and disguised subsidy, it is too complicated, too prone to subversion and in many ways downright self-defeating.
To soften its impact, the House first adopted undemanding targets for emissions. Debate made them milder still. Instead of auctioning emissions permits, the bill would give nearly all of them away, so the measure does little to raise needed revenue. Permits will be handed to electricity producers on condition that the windfall be passed to consumers, many of whom would see their electricity bills fall as a result.
Learning nothing from Europe’s experience, the bill relies heavily on offsets, which let companies pay someone else to plant trees or cut emissions, so they do not have to. The still-unsolved problem is policing the system to ensure the offsets are real. The bill gives oversight of domestic offsets in farming to the Department of Agriculture – good news for farmers seeking a new trough of subsidy. To defend US competitiveness, it proposes subsidies for exporters and penalties on importers. In principle, cap-and-trade does require border adjustments, but the bill is careless and creates a gateway for protectionism.
In short, it is a mess. The key to a better plan is understanding that you cannot cut carbon without making carbon-based fuels more expensive – an obvious point, you would think. But it is one that US policymakers still cannot face.
Copyright The Financial Times Limited 2009