Who Killed Cap-and-Trade?

In a recent article in the New York Times, John Broder asks “Why did cap-and-trade die?” and responds that “it was done in by the weak economy, the Wall Street meltdown, determined industry opposition and its own complexity.”  Mr. Broder’s analysis is concise and insightful, and I recommend it to readers.  But I think there’s one factor that is more important than all those mentioned above in causing cap-and-trade to have changed from politically correct to politically anathema in just nine months.  Before turning to that, however, I would like to question the premise of my own essay.

Is Cap-and-Trade Really Dead?

Although cap-and-trade has fallen dramatically in political favor in Washington as the U.S. answer to climate change, this approach to reducing carbon dioxide (CO2) emissions is by no means “dead.”

The evolving Kerry-Graham-Lieberman legislation has a cap-and-trade system at its heart for the electricity-generation sector, with other sectors to be phased in later (and it employs another market-based approach, a series of fuel taxes for the transportation sector linked to the market price for allowances).  Of course, due to the evolving political climate, the three Senators will probably not call their system “cap-and-trade,” but will give it some other creative label.

The competitor proposal from Senators Cantwell and Collinsthe CLEAR Act — has been labeled by those Senators as a “cap-and-dividend” approach, but it is nothing more nor less than a cap-and-trade system with a particular allocation mechanism (100% auction) and a particular use of revenues (75% directly rebated to households) — and, it should be mentioned, some unfortunate and unnecessary restrictions on allowance trading.

And we should not forget that cap-and-trade continues to emerge as the preferred policy instrument to address climate change emissions throughout the industrialized world — in Europe, Australia, New Zealand, and Japan (as I wrote about in a recent post).

But back to the main story — the dramatic change in the political reception given in Washington to this cost-effective approach to environmental protection.

A Rapid Descent From Politically Correct to Politically Anathema

Among factors causing this change were:  the economic recession; the financial crisis (linked, in part, with real and perceived abuses in financial markets) which thereby caused great suspicion about markets in general and in particular about trading in intangible assets such as emission allowances; and the complex nature of the Waxman-Markey legislation (which is mainly not about cap-and-trade, but various regulatory approaches).

But the most important factor — by far — which led to the change from politically correct to politically anathema was the simple fact that cap-and-trade was the approach that was receiving the most serious consideration, indeed the approach that had been passed by one of the houses of Congress.  This brought not only great scrutiny of the approach, but — more important — it meant that all of the hostility to action on climate change, mainly but not exclusively from Republicans and coal-state Democrats, was targeted at the policy du jour — cap-and-trade.

The same fate would have befallen any front-running climate policy.

Does anyone really believe that if a carbon tax had been the major policy being considered in the House and Senate that it would have received a more favorable rating from climate-action skeptics on the right?  If there’s any doubt about that, take note that Republicans in the Congress were unified and successful in demonizing cap-and-trade as “cap-and-tax.”

Likewise, if a multi-faceted regulatory approach (that would have been vastly more costly for what would be achieved) had been the policy under consideration, would it have garnered greater political support?  Of course not.  If there is doubt about that, just observe the solid Republican Congressional hostility (and some announced Democratic opposition) to the CO2 regulatory pathway that EPA has announced under its endangerment finding in response to the U.S. Supreme Court decision in Massachusetts vs. EPA.

(There’s a minor caveat, namely, that environmental policy approaches that hide their costs frequently are politically favored over policies that make their costs visible, even if the former policy is actually more costly.  A prime example is the broad political support for Corporate Average Fuel Economy (CAFE) standards, relative to the more effective and less costly option of gasoline taxes.  Of course, cap-and-trade can be said to obscure its costs relative to a carbon tax, but that hardly made much difference once opponents succeeded in labeling it “cap-and-tax.”)

In general, any climate policy approach — if it was meaningful in its objectives and had any chance of being enacted — would have become the prime target of political skepticism and scorn.  This has been the fate of cap-and-trade over the past nine months.

Why is Political Support for Climate Policy Action So Low in the United States?

If much of the political hostility directed at cap-and-trade proposals in Washington has largely been due to hostility towards climate policy in general, this raises a further question, namely, why has there been so little political support in Washington for climate policy in general.  Several reasons can be identified.

For one thing, U.S. public support on this issue has decreased significantly, as has been validated by a number of reliable polls, including from the Gallup Organization.  Indeed, in January of this year, a Pew Research Center poll found that “dealing with global warming” was ranked 21st among 21 possible priorities for the President and Congress.  (It should be noted some polls are not consistent with these.)  This drop in public support is itself at least partly due to the state of the national economy, as public enthusiasm about environmental action has — for many decades — been found to be inversely correlated with various measures of national economic well-being.

Although the lagging economy (and consequent unemployment) is likely the major factor explaining the fall in public support for climate policy action, other contributing factors have been the so-called Climategate episode of leaked e-mails from the University of East Anglia and the damaged credibility of the Intergovernmental Panel on Climate Change (IPCC) due to several errors in recent reports.

Furthermore, the nature of the climate change problem itself helps to explain the relative apathy among the U.S. public.  Nearly all of our major environmental laws have been passed in the wake of highly-publicized environmental events or “disasters,” ranging from Love Canal to the Cuyahoga River.

But the day after Cleveland’s Cuyahoga River caught on fire in 1969, no article in The Cleveland Plain Dealer commented that “the cause was uncertain, because rivers periodically catch on fire from natural causes.”  On the contrary, it was immediately apparent that the cause was waste dumped into the river by adjacent industries.  A direct consequence of the “disaster” was, of course, the Clean Water Act of 1972.

But climate change is distinctly different.  Unlike the environmental threats addressed successfully in past legislation, climate change is essentially unobservable.  You and I observe the weather, not the climate (note the dramatic difference of opinion about the reality of climate change between climatologists and television weathercasters).  Until there is an obvious and sudden event — such as a loss of part of the Antarctic ice sheet leading to a disastrous sea-level rise — it’s unlikely that public opinion in the United States will provide the bottom-up demand for action that has inspired previous Congressional action on the environment over the past forty years.

Finally, it should be acknowledged that the fiercely partisan political climate in Washington has completed the gradual erosion of the bi-partisan coalitions that had enacted key environmental laws over four decades.  Add to this the commitment by the opposition party to deny the President any (more) political victories in this year of mid-term Congressional elections, and the possibility of progressive climate policy action appears unlikely in the short term.

An Open-Ended Question

There are probably other factors that help explain the fall in public and political support for climate policy action, as well as the changed politics of cap-and-trade.  I suspect that readers will tell me about these.


Author: Robert Stavins

Robert N. Stavins is the A.J. Meyer Professor of Energy & Economic Development, John F. Kennedy School of Government, Harvard University, Director of the Harvard Environmental Economics Program, Director of Graduate Studies for the Doctoral Program in Public Policy and the Doctoral Program in Political Economy and Government, Co-Chair of the Harvard Business School-Kennedy School Joint Degree Programs, and Director of the Harvard Project on Climate Agreements.

13 thoughts on “Who Killed Cap-and-Trade?”

  1. It couldn’t possibly be that the Climategate Scandal and revealations after it showed serious flaws in the science.? Micheal Mann’s explaination of the “hide the decline” memo is as bas if not worse than the memo reads on the surface. He is basically saying he discarded about 40% of the data because it didn’t agree with the real temperatures. Since he has no explaination on why that happened it makes the whole graph line invalid. If it was wrong 40% of the time when you know what the temperatures were, why couldn’t it be wrong when you don’t know what the temperatures were? Before he had to go to parliment and becoming liable to perjury charges Phil Jones admitted the following: 1) There hasn’t been any statistically signifigant Global Warming in 15 years 2) There has been statistically insitnifigant Global COOLING in the last seven years 3) That the 80s-90s warming was very simular to the previous 3 warming periods 4) That there was a Medival Warming Period in the Northern Hemisphere at least. It doesn’t rule out the Southern Hemisphere as he says there is not enough data there.. The IPPC admitted its Himylayan glacier report was incorrect, that the Amazon Forest data was based soley as a result of a WWF report which is an environmentalist group. That even the UK Gaurdian was wondering where the Chinese weather monitoring stations really were. The Russians claim that most of their cold weather station data was ignored by the CRU. 3/4 of the weather monitoring stations are gone with most of those closed being in cold weather areas. The IPPC couldn’t even get the percentage of Denmark being below sea level right when that figure has been known for a long time.

  2. It s a nice point that ” all of the hostility to action on climate change, mainly but not exclusively from Republicans and coal-state Democrats, was targeted at the policy du jour “. Ironically, this hit permit trading as such in the US, where this instrument has been strongest. Something rather similar happened more than a decade ago in Europe when carbon taxes were tried and discarded.
    Many people still remember this and say “carbon taxes: we tried that but it doesn’t work”. Yet this judgment is clearly not fair, carbon taxes were tried in Europe at a time when people had not understood the gravity of the climate issue and resistance to ceding any sovereignty in matters of taxation was stronger than the desire for climate policy.
    Yet the damage to the reputation of taxes as an instrument has been quite long-lived.

  3. It would be interesting today to ask the public in the US after the Madoff Scandal, the bank bail-out coupled with banker bonuses, whether they trust Exxon-Mobil and Peabody COal more or less than they trust Goldman Sachs. In such an environment, I suspect that people prefer what they believe is less open to manipulation and fraud.

  4. Thanks for the interesting points. Here is something I have recently observed in China that, if overlooked, could severely damage the progress of collectively combating climate Change by US and China. As you pointed out, the climate-gate and several errors made by IPCC have also contributed to eroding public trust on climate change in the U.S; it has the same impact in China, of course. What even worse, due to the outside pressures to require revaluation of Chinese Yuan, and things like border tax in the U.S on Chinese imports, some influential economists, whom I would label strong nationalists, are totally tearing apart the global warming fact and ridiculously propagandizing that climate change is entirely a plan faked by developed countries in order to suppress China’s economic development. Larry Lang, a well-known Chinese economist in the world, is doing this. I know that one of the Harvard project, called Breaking the impasses between US and China, has provided insightful suggestions, but how things going on in China should be taken note of; otherwise not only efforts here in the U.S have become weakening, the possibility to have these two biggest emitter to cooperate is getting even smaller.

  5. “Until there is an obvious and sudden event — such as a loss of part of the Antarctic ice sheet leading to a disastrous sea-level rise — it’s unlikely that public opinion in the United States will provide the bottom-up demand for action that has inspired previous Congressional action on the environment over the past forty years.”

    I agree that unless we have an in-your-face crisis, the American people on the whole will continue to loose interest in reigning in carbon. Question is how long will this take. My fear is that it will take too long to meet the crisis head on while we still have time. Some examples of crisis would include back-to-back severe drought in the grain growing areas of the US midwest and Canadian prairies. World food supply is already tenuous, Two years of drought in these areas would be a catastrophe for prices. How about a terrorist take-over of the Saudi oil fields -driving energy prices into the stratosphere? Improbable? That’s what they said about a lot of nasty things that seem to occur on a regular basis.

  6. We are talking as if we have time to make laws that may take years to have serious impact. The example you give that may lead the American public to support GW legislation is one of many possibilities of drastic events. By that time it would be already too late to make much difference on GW. We are forgetting that the amount of GHG in the atmosphere is already so high that we could be close to catastrophic events of mass release of GHG with a positive feedback.
    Are we willing to bank on being wrong?

    The IPCC implied GHG should not go beyond 450 pps to stay within the serious 2 degrees rise, but they were proven too conservative and under powerful political pressure to say the least. Is our government and those of China are so ignorant of the reality we are facing?
    If so, we have little chance of reducing the rapid advance of global warming and the severe damages this will bring.

  7. The problem with Cap and Trade is that the emphasis was put on the profitable/interesting/fun (yes I am being facetious) part (trade) and not remotely enough on the fact that there indeed is a cap and that matters. The reality is that when you walk people through the fact that generous free allocation is nothing more than a ratification of the current status quo but with actual counting and increased emission mitigation responsibility over time, people do understand that if we are indded trying to reduce emissions, a cap combined with technological and economic flexibility makes an enormous amount of sense. But when the policy sell is based upon the “trade” side, you inherently walk into all of the issues around the financial sector and queries around the validity of certain offsets/indulgences

    If you just talked about setting emissions caps without associated policies, everybody would clamor for getting increased efficiency of markets and trading included. The problem is, the selling of this climate policy process has been trying to avoid the conversation of the impact of cap, giving everybody something to beat on in terms of trade (and therefore association with wall street, derivatives, china bashing, and a host of other things)

  8. The major reason that all items Climate change keep hitting stalls and roadblocks, is money and power. Those that have the two now do not wish to relinquish, at least until they’ve figured how to put their hands on the incoming renewable and clean energy resources.
    The country is going through big changes right now. Consider political battles, demographic – race related changes, and just plain ole’ change in general.
    The Renewable and Clean Energy voices need to speak LOUDER than they currently are. However, they also must be willing to compromise and give the other side certain perks such as, the new Oil Drilling initiative that President Obama has just created. The advocates for renewable and clean energy must not entrench themselves to the point that nothing beneficial gets done. There has to be a give and take scenario…
    The truth is that a renewable energy future is going to take some time but, if an eager enough demand were to arise, prices would then come down and the Alternative Energy future could begin. Take a look at a new website trying to create the demand for renewable/clean energy: http://www.reepedia.com
    Thanks, C. Grinn

  9. John B brings up some embarassing recent events that occurred in the rhetoric about climate change. These events bring into question a small amount of the science that had been accepted as fact, where in one case it may be more like fraud. I can comfortably state that there should be nothing less than disgrace for any scientist that selectively choses data to influence results or overexaggerates conclusions and most of us would be in favor of prosecution if fraud had occured. That being said, there is still an extemely fundamental point that is being left out by the comment which is that the science of Global Warming is extremely sound and defensible. We should not postpone actions or dismiss Climate Change because of a debate on what is happening or has happened to this point. We should be acting on a very real threat to our current way of life on this planet that is being caused by our activities. The rhetoric should not be allowed to sway our view from this threat. To make an obvious example of ozone depletion and global (or international) action, if we waited to have skin cancer rates skyrocket and blind sheep in Chile before we acted it would have been too late. Nations and people acted on the threat of ozone depletion, not that it was being depleted. For that insight and effort the planet is rewarded with years of ozone recovery and a comfort that a disaster was avoided by a global awareness and response. We should concentrate our thoughts on the science of global change. Whether it is happening now or how much it is happening now does not in any way take away from the magnitude of the threat of global warming or climate change. Also the issue that the planet always goes through climate change should not even be entertained. The climate will change, but that does not mean we should actively be forcing a change on it.

  10. Is there any intelligent life out there?
    Today down sunny Florida I noticed gasoline prices were closing in from below to $3.00 a gallon. It’s $2.83 for a gallon of Regular.
    So here we are climbing out from the most recent financial collapse, and things are apparently getting better, as I for one do believe that things are getting better. This is not to say however, that the opposing forces to “change” will not be trying there hardest to stop the attempt towards “change’s” success. But, does anyone even realize that overall we are only $1.50 or so away from the most recent highs of gasoline.
    Forget the Politics and the Climate Change talk for minute instead, let’s talk about common sense. This is strictly about the race to the future. The reality is the rest of the World outside the U.S. is racing away from the past and into tomorrow with renewable and clean energy technology sources. And we in the U.S. are “stuck in neutral” and truly losing in this race.
    Everyone needs to please stop for a minute and think, we may have gotten better but yet the truth is, we are still only a dollar fifty away from where we were. We could very well be right back nearing recession in 90-180 days unless we start making some real progress forward. So, why not Renewable Energy…? Imagine the jobs created if we took on the large and major project of revamping our infrastructure which by way is the major obstacle holding us back. We need and should do everything there is to move away from the “status quo” and into the new age of tomorrow. This means drilling for our own oil PLUS, aggressively establishing a market for individual consumers in the use of Solar and Wind technology. While it may seem to cost more in the beginning, when you factor in the jobs and additional revenues created, the inevitable savings in consumer and businesses electric bills, it will balance itself out in the long run. Besides, why wouldn’t anyone especially the “have not’s” in our society want to establish something that benefits them and changes the “status quo”, and benefits the environment we are to pass along to our children, and in addition, strengthens our country against our competitors, our opponents, and our enemies. The simple truth is no one trusts the politicians and most don’t wish to be labeled or thought of as some “environmental greenie”. Yet everyone knows that something MUST be done to alleviate gas prices, keep more money here at home, create new jobs, reduce electrics costs, provide a good environment for our offspring, and strengthen our country for tomorrow’s way of life. If we do not and instead continue the bickering over the things that really are beside’s the point, we will go the way of a previous great Roman society, only in a much quicker time span. The Romans ruled supreme for almost 800 years and we only 235 years in are starting to fold already to the rest of the world in technological advancements. If we lose this race, our children and children’s children will not see the strengths that we ourselves have so enjoyed. We will be taken over, not literally, but politically by those that ran harder towards technology in an attempt to strengthen their economies and independence. The truly unfortunate part is that some of these advancements coming from renewable and the clean energy technologies will so greatly advance the strengths of not only our competitors, but maybe even our enemies. This is a frightening thought.
    So I implore us, let’s stop the bickering and do what intelligent people would do and to a big extent, doing already. Make the major moves necessary NOW to reduce our use of Foreign Oil and Oil in general. Create jobs by committing to the construction of Solar and Wind, Hydro, Geothermal, Biofuels, BioMass, and Nuclear projects today. The ability to do so is already here. Now the Country by the will of its people just needs to demand and accept its inevitable happening. This is what an intelligent life would do, if any were willing to use their Common Sense, instead of their Political and or Environmental sense.

  11. To me all the issues around carbon dioxide emmission, emmission reduction, cap-and-trade, politics. Left and right winger. Republican /Democrats. Coal States /none coal states issues are simply hair spliting differences of the American politics.

    Environmntal concern is not only American issue, it is world wide problem and concern. Weather Political figures, millionares involve or not the issue is not going to go away. Because it is real and it is a fact.

    Millions of people are doing what they got to do by their own intiation. There for the cap-and trade is not dead in reality but it is away from political scene.

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