Wednesday, January 20, 2010

15. Cap-and-Trade

The current international agreement aimed at curbing anthropogenic global warming (AGW) is the Kyoto Protocol, which was adopted in 1997 and has been signed by 189 countries (not including the United States). The document identifies 38 countries, called Annex I countries, that are supposed to reduce emissions of CO2 by an average of 5% by 2012, with unspecified but much larger reductions in later years. In practice, there has been little or no progress toward these goals.

Annex I includes all the advanced nations that are members of the Organization for Economic Cooperation and Development (OECD) except Mexico and South Korea, plus some former members of the USSR and Soviet client states in eastern Europe. All other countries are exempt from any specific reduction targets.

The stated purpose of the American Clean Energy and Security (ACES) Act (known as "Waxman-Markey," after its sponsors) that is now before the Congress is to impose even more stringent restrictions on US emissions than are specified in the Protocol. The Act would establish a "cap-and trade" regime that would force reductions, compared to the base year of 2005, by 17% in 2020 and 83% in 2050. Achieving the latter objective is unlikely, since it implies that CO2 emissions per capita would fall to a level last seen in 1870.

The Clean Air Act of 1990 introduced a cap-and-trade scheme that has worked quite well in reducing air pollution and acid rain. Proponents of Waxman-Markey argue that this shows that it will be effective in curbing CO2 emissions, but the analogy is false. Installing scrubbers to remove sulfur dioxide or other trace pollutants from the smokestacks of a coal-fired electric power plant is a relatively minor cost, but a substantial reduction in CO2 may require replacing the whole facility.

The basic idea is to force producers or importers of fossil fuels to buy a government permit for each ton of CO2 that will be generated by combustion of their products. In theory, gradually decreasing the number of available permits will then impose a declining cap on national emissions.

Anybody owning permits would be free to sell them, at a market price that is expected to increase as the annual cap becomes tighter. Permits are "bankable" – i.e., speculators can keep those they buy and sell them in a later year, presumably at a profit.

Suppliers will of course add the cost of the permits to the fuels they sell. Since coal produces nearly 100% more CO2 than natural gas for the same thermal energy output, the scheme would presumably give electric power companies incentives to switch to gas-fired plants. The relative price of gasoline would also rise, since it produces 33% more CO2 than natural gas, encouraging the shift to hybrid or plug-in hybrid automobiles. The price of all energy  (and therefore of practically everything) would increase as the annual cap shrank, forcing conservation and undercutting economic growth, and eventually creating serious competition from carbon neutral but expensive renewable sources such as wind or terrestrial solar. As Barack Obama said in an interview in January, 2008, "Under my plan of a cap-and-trade system, electricity rates would necessarily skyrocket."

In the first year under Waxman-Markey, the government would auction off 15% of the permits, and this percentage would gradually grow thereafter. While the cost would be hidden from consumers in the rising price of energy, the Federal revenues from this source would eventually constitute the largest tax increase in the history of the United States. The permits not auctioned would be distributed at no cost to approved fuel suppliers, electricity retailers, and a wide variety of other public and private entities. Since the permits could be traded for money in the market, these handouts would amount to cash payments by politicians to favored constituents, creating a truly staggering potential for bribery and corruption.

It should be obvious that a principal effect of this regime would be to accelerate the export of US companies, jobs and funding to countries that do not impose these crippling penalties on industry. Since Mexico is next door and is exempt from any emission restrictions, it would be a major beneficiary. Companies that moved south of the border to escape the costs and red tape imposed by Waxman–Markey would simply relocate the sources of their CO2 emissions, without reducing them at all. Their emissions might actually increase, because cheap Mexican labor reduces the incentives to pursue energy efficiency. Moreover, environmental laws in Mexico (and in most exempt countries) are much less stringent than in the USA, so a predictable effect of Waxman-Markey would be to increase the global impact of industrial pollution.

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