July 2008

Cap-and-trade: Time for America to pay its way

After years of denying its existence and now understanding the importance of global warming, the U.S. is becoming part of the solution.

The first step is a landmark bill that principal sponsors and U.S. Senators Joe Lieberman and John Warner introduced.

If it ever makes it through both houses of Congress and if President George W. Bush does not veto it, the bill will represent the first shot in the war against global warming.

The dynamics of the legislation are complicated, the economic ramifications are unclear at best and conservative industrialists say disastrous, at the very worst.

The automation industry will be very near the heart of this environmentally oriented future. Technology will play the leading roll in squeezing more from less, separating the toxic from the good.

Analysis, controls, and instrument professionals have big futures should they recognize and seize the opportunities of change.

The Lieberman-Warner Climate Security Act sees the problem as the Nobel-prize winning Intergovernmental Panel on Climate Change (IPCC) does. The IPCC estimated if we fail to begin substantially reducing our greenhouse gas emissions, the global average surface air temperature will increase by three to seven degrees Fahrenheit by the end of this century.

As a result, sea levels will rise, snow cover will contract, and sea ice will recede. Heat waves will become more frequent. Hurricanes and typhoons will become more intense.

Many millions more people will be exposed to flooding while hundreds of millions of people will be exposed to increased water stress as a result of decreased melt-water from glaciers and snowpack.

Because greenhouse gases remain in the atmosphere for long periods of time and technology takes time to deploy, the sooner we start reducing emissions and incentivizing technology, the easier it will be to achieve the overall goal of protecting the economy and our environment.

The bill places limits (a "cap") on the greenhouse gas emissions of regulated companies. This cap, which gradually tightens over time, ensures the bill achieves the emissions reductions needed to protect the environment.

Companies can then buy and sell ("trade") allowances to emit greenhouse gases. Companies that cannot reduce emissions as cheaply can purchase allowances from others who have found cost-effective solutions.

The result is market forces harness American ingenuity to find the most efficient path to reduced emissions.

The Lieberman Warner Climate Security Act also works to ensure the technologies needed to meet the requirements of the cap are available. The largest portion of the proceeds from the auction of allowances goes toward the domestic development of low and zero carbon technology.

The cap-and-trade scheme in the bill further accelerates technology development by placing a price on carbon dioxide emissions. This strong market signal encourages investments in these new energy technologies.

The Wall Street Journal reported the government would set a limit on emissions that declines every year. The goal of Warner-Lieberman is to return to 2005 levels by 2012, and to reduce that by 30% by 2030.

Allowances for emissions would go to covered businesses-power, oil, gas, heavy industry, manufacturing, and the like. If they produced less than their allotment, the companies could sell the allowances or trade them.

Cap-and-trade limits on energy appear to be part of a free market policy that would create the flexibility for CO2 reductions, how and where they are least expensive.

However, the limits are still a huge tax.

The politicians favor cap-and-trade because it is an indirect tax. A direct tax-say, on gasoline-would be far more transparent, but it would also be unpopular.

Cap-and-trade is a tax imposed on business, disguising the true costs and thus making it more politically palatable. In reality, firms will merely pass on these costs to customers, and ultimately down the energy chain to all Americans.

Higher prices are what are supposed to motivate the investments and behavioral changes required to use less carbon.

The other reason politicians like cap-and-trade is because it gives them a cut of the action and the ability to pick winners and losers. Some of the allowances would be free, at least at the start, while the rest would go at auction, with the share of auctions increasing over time.

The Congressional Budget Office estimates these auctions would net $304 billion by 2013 and $1.19 trillion over the next decade. Since the government controls the number and distribution of allowances, it is also handing itself the political right to influence the price of every good and service in the economy.

The Environmental Protection Agency estimates the act would cause a cumulative reduction in the growth of GDP by between 0.9% and 3.8% by 2030. Add 20 years, and the reduction is between 2.4% and 6.9%-that is, from $1 trillion to $2.8 trillion.

Nicholas Sheble (nsheble@isa.org) writes and edits Government News.