National Climate Change Policy: A Quick Look Back at Waxman-Markey and the Road Ahead

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Like any legislation, the Waxman‑Markey bill has its share of flaws, but its cap-and-trade system has medium and long‑term targets for reducing greenhouse gas emissions that are sensible, and the cap‑and‑trade system is — for the most part — well designed.  With some exceptions, the bill’s cap‑and‑trade system will achieve meaningful reductions of carbon dioxide and other greenhouse gas emissions at minimal cost to the economy.

There has been much lamenting about the corporate give-away in the bill, but this is unfounded, as I explained in detail in my May 27th post on The Wonderful Politics of Cap-and-Trade: A Closer Look at Waxman-Markey. Concerns have also been expressed — such as by a number of Republican members of Congress during last Friday’s floor debate in the House of Representatives — about negative impacts on the international competitiveness of U.S. firms.  The only real solution to the international competitiveness issue in the long term is to bring non‑participating countries within an international climate regime in meaningful ways. (On this, please see the work of the Harvard Project on International Climate Agreements.)  But that solution is fundamentally outside of the scope of the domestic policy action of any individual nation, including the United States.

In the meantime, the Waxman‑Markey approach of combining output‑based updating allocations in the short term for select sectors with the option in the long term of a Presidential determination (under stringent conditions) for import allowance requirements for specific countries and sectors was sensible and pragmatic (see my June 18th post on Worried About International Competitiveness? Another Look at the Waxman-Markey Cap-and-Trade Proposal).

That’s the good news.  But the bad news is that last-minute changes in the bill changed what was a Presidential option regarding long-term back-up border adjustments (tariffs) to a requirement that the President put such tariffs in place under specified conditions.  This moved the legislation considerably closer to risky protectionism, as President Obama rightly noted in comments to the press on Sunday.

Also, the compromise amendments with the House agriculture committee that provide for generous numbers of potential offsets from the agricultural sector (regulated not by EPA, but by USDA!) are troubling — not in terms of driving up compliance costs, but in terms of reducing the real environmental performance of the system.  This is because of the general problem of limited additionality of claimed reductions under offset (or emission-reduction-credit) systems, as opposed to cap-and-trade systems, plus the well-known difficulties of measuring non-point emissions, let alone emissions reductions, from agriculture.

These and other design issues will be important topics when the Senate takes up its own climate legislation, although the debate in that body on some of these issues will likely be quite different.  For example, there is likely to be more interest in the Senate in the use of a “price collar,” a mechanism to constrain both the maximum and the minimum market price of allowances over time.  This would be a move beyond the safety-valve mechanism that is provided in the House legislation.

When the action moves to the Senate, the greatest attention and the greatest skepticism should be directed not to the cap‑and‑trade mechanism, which is — for the most part — well designed in Waxman‑Markey, but rather to other elements of the legislation, some of which are highly problematic. While the titles of Waxman‑Markey that create the cap‑and‑trade system are ‑‑ on balance ‑‑ sensible, and will result in meaningful emissions reductions cost effectively, the other titles of the bill include a host of conventional standards and subsidies, many of which (under the cap‑and‑trade umbrella) will have minimal or no environmental benefits, but will limit flexibility and thereby have the unintended consequence of driving up compliance costs. That’s the soft under‑belly of this legislation that needs to be selectively, surgically repaired.

It is the fault of economists — myself included — that we have given so much attention to the cap-and-trade system that we have ignored these other important elements of the legislation, elements that unfortunately can degrade significantly the cost-effectiveness of the package while providing little if any incremental benefits to the environment.  Even the Congressional Budget Office, in its excellent economic analysis of HR 2454, focused exclusively on the bill’s cap-and-trade program.  Going forward, CBO, EPA, and independent analysts need to examine the bill’s other elements, and assess what those elements provide at what incremental cost.

A broader question — also raised by House Republicans in the floor debate — is whether the United States should be moving towards the enactment of a domestic climate policy before a sensible, post‑Kyoto international agreement has been negotiated and ratified. Such an international agreement should include not only the countries of the industrialized world, but also the key, rapidly‑growing economies of the developing world ‑‑ China, India, Brazil, Korea, Mexico, South Africa, and Indonesia ‑‑ which are and will increasingly be major contributors to emissions.

It’s natural for such a question to be raised about the very notion of the U.S. adopting a policy to help address what is fundamentally a global problem.  The environmental benefits of any single nation’s reductions in greenhouse gas emissions are spread worldwide, unlike the costs. This means that for any single country, the costs of action will inevitably exceed its direct benefits, despite the fact that the global costs of action will be less than global benefits.  This is the nature of a global commons problem, and this is the very reason why international cooperation is required.

The U.S. is now engaged in international negotiations, and the credibility of the U.S. as a participant, let alone as a leader, in shaping the international regime is dependent upon our demonstrated willingness to take actions at home.

Europe has put its climate policy in place, and Australia, New Zealand, and Japan are moving to have their policies in place within a year. If the United States is to play a leadership role in international negotiations for a sensible post‑Kyoto international climate regime, the country must begin to move towards an effective domestic policy ‑ with legislation that is timed and structured to coordinate with the emerging post‑Kyoto climate regime.

Without evidence of serious action by the U.S., there will be no meaningful international agreement, and certainly not one that includes the key, rapidly‑growing developing countries. U.S. policy developments can and should move in parallel with international negotiations.

So, the Waxman‑Markey bill has its share of flaws, but it represents a reasonable starting point for Senate deliberation on what can become a national climate policy that will place the United States where it ought to be -‑ in a position of international leadership to help develop a global climate agreement that is scientifically sound, economically rational, and politically acceptable to the key nations of the world.

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10 Responses to National Climate Change Policy: A Quick Look Back at Waxman-Markey and the Road Ahead

  1. Pingback: FT.com | FT Energy Source | The Source: Iraq’s oil, accident in Italy, BG goes into shale gas, more Waxman-Markey (again)

  2. Young Economist says:

    For environmental economics, the tax or subsidy for environmental purpose can improve the efficiency on the negative and positive externality. I agree on the climate change bill can improve the environmental issue but it is wrong to tax only the domestic producers, rather equally both domestic and foreign producers by sale tax or other kinds of tax. This bill cannot improve the environment but it will destroy the domestic businesses and jobs because, under trade theory, the cost of production of domestic producers will increase from climate change bill or it is like subsidy for foreign producers and the domestic producers will lose the competitiveness and they have to close their businesses. The foreign producers still have the more carbon emission without control and they can produce more with more carbon emission.

    Therefore, the domestic business will have to close the business in US and move to produce elsewhere or they just close the businesses. Surely, first consequence is American will be more unemployed. The price of consumption will increase from lower supply from domestic producers and the foreign producers get the higher profit from this subsidy policy. US government revenue will decrease because the foreign subsidy program and government debt and budget deficit will increase. Finally, the US still faces the ongoing trade deficit.

    I start to believe whether we are having the government for American or Asian or foreigners? Federal reserve reduce interest rate to zero and government spoil the taxpayers’ money to cause the jump in oil price and shoot up in the long-term interest rate. Expenditure related to oil price will be around 10-15% of income and now the zero rates and reckless spending cause double in oil price or 10-15% higher cost of living and now the long-term rate is higher or higher borrowing cost. This is not the way to solve or reduce cost of living for American who face the risk of unemployment and lower salary. But this is the policy to create the wealth for the oil producer countries and the countries who lend us the money like China to get more income.

    And now the climate change bill is the way to subsidy the foreign producers. I think if we tax equally both domestic and foreign producers, it can solve environmental problems and protect the jobs and competitiveness of domestic businesses.

    I am tired with the say of trade protection from government but now they use trade subsidy for foreigners and tax for domestics. I think now American is the second-class businessman and Chinese is the first-class businessman.

    Jokily, now US dollar is not controlled by US policy makers but controlled by foreign countries like China, Japan or Russia. Russia, China say reserve currency is needed, dollar drop. One day they said we do not need reserve currency, dollar is up. Bernanke and Geithner say strong dollar, but dollar is down. I think now this government is showing American are like beggar, rather than the most power countries in the world like other past governments.

    Why don’t we show that if we do not want to buy imported products? The foreigners must beg to sell us the goods. How can that foreign country survive if we do not wish to buy imported goods? Stupid policy and stupid action from this government will make American like joke nowadays.

  3. hapa says:

    “This means that for any single country, the costs of action will inevitably exceed its direct benefits, despite the fact that the global costs of action will be less than global benefits.”

    but this is also why top polluter countries in less-vulnerable locations are engaged in ecological warfare, by increasing the future economic burdens of competitors. a country like the USA which has very low domestic adaptation costs relative to GDP can (have) come to the conclusion that this is an important strategic advantage to press as long and hard as possible, if there’s a way to avoid being seen as anathema, which is simpler given this hypothetical country’s central role in world finance and security.

  4. Gary Howorth says:

    Great points –
    I agree, Politics plays a great role in shaping this and we have forgotten this in much of the analysis that we have done so far. In analysis that i have perfromed it is clear that many of the addtional points will create unintended consequences such as rasing the cost oif compliance.

    I still like the idea of offsets but undersatnd your point on additionality and compliance and proof. I think there are ways to more simply prove the emission creditworthyness of these offsets eg using satellite technoilgy, but that we have to recognize the unceratinty in them with some sort of discount factor.

    Lastly If we want to be a credible negotiator in the upcoming climate deabates then we need a credible carbon plan . As you say “Without evidence of serious action by the U.S., there will be no meaningful international agreement, and certainly not one that includes the key, rapidly‑growing developing countries.”

    This is important for two reasons
    1/it will allows us to better control this debate. Many US companies have major interests abroad
    2/the development and leadership of technolgy is inextricably linked to the climate debate both directly and indirectly. Cap and trade domestically will provide long term incentives to develop domnestic technology – but the real value of this technology will come from deployment overseas.

  5. e says:

    Robert,
    Any comment on the work of Larry Lohmann of The Corner House, who writes with a political-economy perspective on carbon trading? A bunch of writing is here: http://www.thecornerhouse.org.uk/subject/climate/
    My poor paraphrase of his argument is that carbon-trading is worse than nothing because it entrenches fossil-fuel dependence in the global North and distracts us from the urgency of the long-run necessity for investment in non-fossil technology. Furthermore, emissions will not actually be reduced due to impossibility of proper regulation, which guarantees abuse and rent seeking in the global South (via offsets and the like). He claims EUETS and Kyoto have been totally ineffective and we cannot rely on copenhagen to produce anything better.

    I am finding his arguments quite convincing — my paraphrase does not do it justice — but i find yours convincing as well. I would love to hear you address his work directly.

  6. I am not familiar with the work of Mr. Lohmannn, and so I will not comment on his assessment. For an honest analysis of the EU ETS experience, see the work of Denny Ellerman of MIT, such as his article in volume 1 number 1 of the Review of Environmental Economics and Policy.
    RS

  7. Pingback: Carbon cap: Be careful what you wish for | Stand-Up Economist

  8. Pingback: Seeley Conference keynote discusses cap & trade « Ellison Chair in International Floriculture

  9. Great points –when the Senate takes up its own climate legislation, although the debate in that body on some of these issues will likely be quite different.

  10. Pingback: Farm Policy » Blog Archives » Climate Issues; Budget; Jobs Bill-Biofuels; and WASDE Update

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