European Affairs

U.S. Shelves "Cap and Trade" -- Policy Shift (And Congressional Opposition) Sink EU-Style Climate Exchange-Market In U.S.     Print

Without so much as a farewell tip of the hat, President Barack Obama has pulled the plug on his Dan Morganmuch-promoted goal of comprehensive climate-change legislation. In his agenda-setting State of the Union address, he dropped any U.S. move toward EU-style cap and trade. Significantly, the word “climate” was never uttered. 

No accident, the omission merely confirmed a development that has become obvious: the big idea of a U.S. “cap and trade system” to limit greenhouse-gas emissions is dead for this administration and even more clearly, anathema to the new Republican-leaning Congress.  For the remaining two years of the President’s mandate,  the Obama administration has clearly concluded that the pursuit of a national carbon ceiling – in effect, a price tag on pollution – has to be abandoned as a policy approach that is currently unworkable. In the U.S, the opposing view is too strong: that pollution limits will constrain economic growth. The Result? Without any prospect of a government-mandated “cap,” there can be no U.S. national system of emissions-trading as a way to ratchet down carbon-caused greenhouse gases.

Its demise does not bury hopes that the U.S. will still work for “clean energy” to curb carbon pollution, reduce greenhouse gas emissions and combat climate change. But, it does deliver a severe blow to longstanding hopes for transatlantic convergence on “cap-and-trade” as a potentially global model for “decarbonizing” economies.

For a decade, this approach has been a point of common transatlantic purpose among U.S. and European climate-change negotiators, who saw it as the most flexible and pragmatic approach to global cooperation in curbing greenhouse gases. The EU has pioneered this approach: its Emissions Trading Scheme (ETS) started in 2005 and is the world’s largest market of this kind. Even though the ETS has suffered severe teething problems, its operations have been steadily improving, making it a paradigm for other nations to join.

Now the concept has been orphaned. While the EU will continue operating the ETS, there is no realistic prospect of seeing the U.S. join this initiative, certainly not before new elections in 2012, and perhaps never. As the EU persists alone, European industrialists can be expected to complain that the system makes them less competitive internationally. And, of course, the absence of a common transatlantic stance will ease diplomatic pressure on China and other nations that are growing global sources of carbon pollution.

In practice, the impact of the EU’s ETS as a world exemplar always depended on being joined by a similar U.S. system with real teeth. The ETS excludes agriculture and many other non-industrial sources of carbon pollution, many of which would have been captured by the proposed U.S. system.  A big exception would still have been American agriculture, whose emissions were ignored in the U.S. draft bill. Even so, the U.S. version of the cap-and-trade bill was still strongly opposed by the American farm lobby: this block of largely Democratic legislators worked tirelessly in the Democratic-conrolled Senate to keep the bill from coming up. Indeed, the measure died there. The U.S. farm sector lobbied so strongly because the sector is highly sensitive to any rise in electricity and gas prices and feared that cabon caps, especially on refineries in the Middle West, would drive up these costs. In contrast, EU farm groups had little to fear, at least at this stage, from the weaker ETS system when it was adopted.

Despite its global significance, the U.S. burial of the concept was anti-climactic when it finally came after telltale retreats in recent months. “Cap and trade” stopped appearing on the White House web site months ago – a sign that the administration realized that the battle was over. U.S. business had also moved on. The Chicago Climate Exchange—once seen as a future trillion-dollar private market for industries to buy and sell carbon-emission permits – has effectively stopped trading carbon credits. This shut-down was announced in November just after the Democrats’ defeat in Congressional elections; by that point, the price of “carbon rights” had plummeted from several dollars a ton to pennies. The exchange will still “facilitate” moves on carbon curbs, mainly by maintaining a voluntary registry of “off-sets” claimed by businesses and other entities. But that is a drastic fall from its original scope and ambition.

Another political step back, which coincided with the President’s speech, was an announcement of the impending departure of White House energy and environment “czar” Carol Browner. She has been the administration’s principle voice in advocating climate-change legislation – and as such, she became a target for Congressional opposition to cap-and-trade. Browner had been closely associated with the administration’s “plan B” for getting carbon “caps” after its climate bill failed in Congress in 2009. In an attempt to get around this problem, the White House sought to use the Environmental Protection Agency (EPA) to impose carbon ceilings, using its regulatory authority under the Clean Air Act to set climate-change goals. Now Republicans -- who have a majority in the budget-setting lower house of Congress -- are reportedly gearing up (with help from some right-leaning Democrats) to strip the EPA of funding for these powers.

A U.S. cap and trade system was the centerpiece of the administration’s 2009 climate bill (known as Waxman-Markey) that was passed by the House of Representatives after a bruising struggle but died in the Senate, where agriculture, coal and oil interests are stronger than in the lower house. The issue remained hot in last year’s Congressional elections, and many rural Democrats who voted for Waxman-Markey in the House battle were defeated in the electoral campaign, in which Republicans branded Waxman-Markey "cap and tax." The cap and trade idea also took hits from the left: some environmentalists complained about a plan that would create a market in which big carbon emitters could purchase (sometimes questionable) offsets and keep right on doing what they had been doing. (Some critics of cap and trade contended that it would be simpler and “cleaner” to adopt a straight carbon tax that could be levied on the biggest polluters.) Now such ideas of “making polluters pay” have fallen by the wayside for a U.S. administration that wants to emphasize, not penalties, but economic growth and job creation.

The at least temporary death knell of climate change legislation based on ceilings was noticed by many observers who pinpointed the change from his 2010 speech on the State of the Union, where Obama argued that a shift away from fossil fuels merited the support even of “those who disagree with the overwhelming scientific evidence on climate change. ”Strong words,” noted Hedrick Hertzberg in the New Yorker magazine, “but now they are not even whispered... The climate bill, like hundreds of others less consequential, met its fate in the legislative terminal ward that is the U.S. Senate...[where] contributing causes included the economic crisis, which made it easy to stoke fear; the power, money, and regional clout of sectors that benefit from the greenhouse-gas-producing status quo, especially the coal and oil industries; the Republican congressional leadership’s determination to forgo compromise in favor of a disciplined drive to block anything that might resemble a victory for Obama; the rise of the Tea Party right and the baleful influence of talk radio and Fox News; and, as always, the filibuster. But Obama and the White House cannot escape blame. They botched delicate negotiations in the Senate, were neglectful at key moments, and expended little of the courage, imagination, and resources they brought to health-care reform." This demise of cap and trade is viewed by Hertzberg and other left-leaning critics as the greatest failure of Obama’s first two years in office.

On the positive side, Obama offered a new visionary goal – “clean-energy technology” – that is not just a better-sounding slogan (to American ears), but also a vision of a real alternative approach to curbing greenhouse gas emissions . Rhetorically, it brings a “rebranding” of climate change away from being a dire and unfair penalty for Americans. Instead, Obama is putting forward a positive-sounding, promising message of solving the “energy challenge” in ways that could produce cleaner air and more jobs as a “win-win” of the sort that voters relish.  This new mantra in Washington can be encapsulated in a succinct syllogism: it is politically impossible to put a price tag on pollution, but climate change remains an imperative, so it’s time to invest our muscle – and our money – in breakthrough innovation to bring down the price of renewables, nuclear power and other clean-energy alternatives. So the new rhetoric of the President eschews talks of “climate” in favor of “energy” – defined as clean energy – and “innovation.” In other words, greenhouse gases can be curbed, not by political fiat, but by to-be-invented clean-energy technologies. As the President hammered home in his speech, this approach can generate jobs and exports for the U.S. – while effectively curbing climate change without using the politically damaging “c” words of “climate” or “curbs.”  It is a gamble, of course, but the President seems to have had no better option than to move to this change, which many people view as smart and already overdue, given the economic situation since 2008. As described by environmental reporter Bryan Walsh in the current issue of the American magazine, “Good renewables have advantages aside from the climate – cleanliness, freedom from the grid, energy security – but right now they cost significantly more than fossil fuels in most places,” certainly in the U.S. The cap-and-trade model counted on closing this gap by putting a price on carbon fuels that made it more attractive to the market to switch to alternatives. Now the Obama administration seems bent on putting the government’s rhetoric and money behind a different approach to curbing carbon -- promoting renewables, including nuclear.  By promising to invent and spread new technologies from power generation to vehicles and smart grids to storage batteries, the administration hopes that it can spend money on clean energy in ways that are politically acceptable in the U.S. Globally, this approach could be powerfully beneficial in shaping the way the world meets growing demand for energy, including in poorer nations. They will opt for cleaner energy if it is cheaper than the traditional fuels.

With this approach, the President prophesied in his speech, the U.S. can reach environmental goals surpassing any that the country has ever adopted. While Washington never signed up to the Kyoto protocol and now seems unlikely to have any political appetite for a significant follow-on international agreement in 2012, the Obama administration did help elaborate some non-binding resolutions on carbon cutbacks as an environmental fig-leaf salvaged from the ill-fated UN climate-summit in Copenhagen.

So if climate is the word one dare not speak in Washington these days, President Obama left no doubt he is still wedded to the idea of a less carbon-dependent economy. In his State of the Union speech, he proceeded to set newly ambitious marquee goals for the U.S. – for example, a target of having 80 percent of all U.S. electricity generated from clean sources by 2035. Even to environmentalists, this is bound to sound unrealistic. This target is even more ambitious than the comparable one in Germany, where environmentalism is a quasi religion on a scale that has scant parallel among most Americans. The President’s new credo – clean energy instead of carbon caps – led to some perhaps inadvertent irony in his speech calling for a new era of “clean” energy when, for example, he issued a “challenge” for the U.S. to put one million electric cars on American highways by 2015. In practice, of course, in the absence of some breakthrough technology for electric cars in the U.S. for the foreseeable future, these will depend heavily on power from coal-burning, carbon-emitting electric utilities. (So, by the way, will Internet usage.)

Similar hard facts seem likely to limit the chances of America, in its present mood, to live up to the President’s new agenda for decarbonizing the economy by innovation instead of penalties. Consider the context of Germany’s overall goal of 80 percent clean-energy electricity (which Berlin envisages only in 2050 – allowing 15 years more for change than Obama’s call). Germany’s push is based on economic self-interest. It has little or no oil or gas of its own, and its coal is extremely high-priced.   (In contrast, the U.S. has abundant cheap coal and natural gas.) Reflecting this natural resource base for fuels and the political will imparted by German environmental sensibilities, Germany is already well ahead of the U.S. in working toward greater use of clean renewables. Solar energy, biomass power-generation and wind power now account for 17 percent of German energy output – more than double the eight percent share of renewables in the U.S. fuel mix. (Moreover, half the U.S. renewable output comes from biofuels that require heavy inputs both of gasoline to operate refineries and of fertilizer made from fossil fuels to grow crops – factors that make it harder for the U.S. to curb overall carbon releases.)  To date, Congress has rejected the idea of requiring utilities to use a minimum amount of electricity from renewable sources – a practice that is well-established in Germany and other EU nations such as France. (In a 2007 energy bill, the House of Representatives set a 15 percent minimum requirement for renewables, but the provision was stripped out of the version finally accepted by the Senate.)

That said, in its own disorganized way, America is stumbling toward a cleaner energy future.  It won’t get there through “big government” solutions, which are the punching bag of the surging Republican Party. But “government” will play a part in the solution, particularly state governments and local authorities. Many Republicans like the idea of seeing their states and constituencies getting government incentives for innovative solar, wind, and biofuel producers. There is bipartisan support among Midwest members of Congress for annual ethanol subsidies in the $6 billion range that will go to the agro-agricultural sector in their corn-farming States. Significantly, ethanol is the big-ticket item in this entire sector: aside from ethanol, federal spending on all other credits and incentives for clean-energy development amount to only $4 billion – a relative pittance. Indeed, since early 1980s, around the time climate change began becoming a concern, federal investment in energy research and development has generally shrunk. European governments do not do better in this regard, and private companies have not picked up the slack. Now, in the new Obama approach, the driving idea has been reset to focus primarily on innovation over regulation. This approach may help bridge the partisan divide in U.S. politics. In any event, it could be a new beginning that delivers effective results. Time will tell.

In the short run, opponents of the Obama view were quick to denounce his energy “investments” as just more “government spending” of the sort that has successfully been targeted in recent elections by Republicans, especially the fiscal hardliners known as the Tea Party. So there are other battles to come in Washington and the country. Despite Republican opposition, the EPA still plans to propose rules for limiting greenhouse gas emissions from big power plants in July and from oil refineries in December. Promisingly, actions continue at the state level. California now requires utilities to increase procurement of renewable power by one percent of their overall retail sales annually until the share reaches 20 percent – a plan that ties any “cost” of introducing renewable to overall growth in energy consumption, and therefore presumably of economic growth.

In a little-noticed, but highly significant action last month, the California Public Utilities Commission directed the state’s three large investor-owned utilities to procure one gigawatt of electricity from localized power projects over the next two years.  The move will be a boon to the state’s growing solar power industry.  Again, however, the conditions will reflect the distinctly American approach: unlike German solar producers, who have been receiving heavily-subsidized rates for selling power into the grid, California solar operators would have to auction their electricity to operators at the going market-rate so as not to distort electricity prices.

But the newly Republican-leaning Congress wasted no time in attacking these surviving prongs of any regulatory approach based on caps. Influential Republicans in both the House and the Senate have started draft legislation to stop the EPA from regulating greenhouse gases – and to contest the authority of individual states such as California to take action of this sort. Congressional hearings that started shortly after the new Republican-controlled House of Representatives in early February were aimed at stripping the EPA from its authority to regulate greenhouse gases. Some commentators quickly predicted that “if the Obama administration wants to get legislation done this year on energy that would support his clean-energy goals, he will have to consider compromising on the EPA and greenhouse gas emissions.”

At the first of these hearings before a subcommittee of the Energy and Commerce Committee, Lisa Jackson, the new EPA administrator, sought to fend off attacks on her agency’s ability to regulate greenhouse gases. But in an apparent bid to mollify charges that the agency was over-reaching on its mandate, she told the committee that she did not believe that EPA actions under the Clean Air Act would ever go so far as to generate moves to a cap-and-trade program. She did pledge to carry out the regulation of large coal-fired utilities and oil refineries on the basis of a Supreme Court ruling that authorized regulatory actions of this sort against greenhouse gases. Jackson made clear she was just carrying out the Supreme Court ruling. Ed Markey, a Democrat who co-sponsored the ill-fated climate bill blasted proposed Republican anti-EPA legislation as "a polluters protection act." Republicans claimed an EPA overreach and "power grab" will cause the loss of tens of thousands of jobs, higher heating bills, movement of companies overseas, higher food costs, and great hardship in rural areas.

Obama officials have repeatedly said since last year that the president would veto any legislation seeking to clamp down on the EPA, and U.S. officials have stressed repeatedly that they are not backing away from commitments to reduce greenhouse-gas emissions as part of a global climate-change initiative. Muddling through may be a possibility. In a study last year, the highly regarded World Resources Institute in Washington suggested that the U.S. could come close to meeting targets comparable to Europe’s by utilizing a combination of regulatory authority, incentives and actions by individual states, notably California.

But the demise of cap and trade, which was aimed at raising the costs of emitting carbon, removes a major economic impetus for cleaner energy in the U.S. and a hope for convergent transatlantic political action on the issue. It may be too soon to write the epitaph of a U.S. national cap on carbon. But given the political drift among Americans away from government mandated solutions, this nation’s effort to reduce carbon in the atmosphere is only likely to get harder.

 

 

Dan Morgan is an author and analyst who was a staff writer at the Washington Post.