In Defense of Cap and Trade
Points to be argued during the Dec. 10th, 2009 Kehilla Synagogue Debate
Following the lead of Europe, a US Cap and Trade system would function as an important next step in establishing a global emissions trading system. A global Carbon Tax is not politically feasible, because of the wealth disparities between nations. A global market in GHG emissions credits, however, is possible, as has been demonstrated in heterogenous Europe with its poor Eastern states pledging to reduce carbon emissions in the new phase of the Emissions Trading System (ETS).
Cap and Trade is the only method whereby diverse economic and political regions in the United States can agree to share in the pain of converting from an energy intensive lifestyle to one of conservation and efficiency.
The United States in its different geographic regions reflects the diverse cultural, economic and policial heritage of our nation. It is nearly impossible to get the United States to agree on major reform of a system that most acknowlege is badly broken: health care. By the same token, trying to impose a carbon tax on regions of the country that are fundamentally opposed to change will be an effective declaration of political war. A cap and trade system, where offsets and emissions credits can be distributed in greater proportion in the regions where structural reform will be most painful (for instance the coal-intensive southeastern US), will be much more likely to succeed by gaining the support of climate change advocates from all parts of the country, and not just the well-to-do progressive hubs.
We should not underestimate the difficulty in getting all 50 states to agree to any system that will increase the cost of energy. Imposing a price on carbon (either through a carbon tax, or cap and trade) involves a fundamental restructuring of the built environment and with it the existing culture in certain parts of the US, similar to the change that occured in the 19th century when slavery was abolished. Cheap energy was the foundation for many region's planning and zoning, and in much of the US, the strip-mall character of the landscape will take decades to unravel.
Response to Auctioning Proposal
(source: "The European Union’s Emissions Trading System in Perspective," A. Denny Ellerman, Paul L. Joskow, Mass. Instititue of Technology, May 2008)
A commonly advocated remedy for windfall profits is auctioning allowances instead of allocating them freely to existing units (Sijm, Neuhoff, and Chen, 2006). This remedy would not cause electricity prices to be any lower, but it would end the granting of the scarcity rent associated with the free allocation of allowances to fossil generators. Advocates advance two main virtues of auctioning. It would ensure that carbon prices are passed through into retail prices where electricity markets have not been liberalized (thereby improving efficiency) and it would raise substantial revenue for the government that could be used for other purposes some of which could improve efficiency and equity. In opposition, it is argued that auctioning raises equity issues for suppliers who made investments when there were no constraints on CO2 emissions and whose profits may be adversely affected by unanticipated carbon emission costs (“windfall losses”). If these suppliers are not compensated in some way, they are likely to oppose efficient market-based CO2 emissions control mechanisms or to lobby for complicated tax credit, deduction, and other mechanisms to protect themselves.
Response to the "Windfall Profits" critique
(source: Ellerman and Joskow, MIT)
In member states with fully liberalized electricity markets the market value of allowances was included in wholesale prices regardless of whether these allowances were received for free or purchased. Research conducted by Jos Sijm at the Energy Research Centre of the Netherlands and his collaborators finds that CO2 costs have been passed through to wholesale electricity prices but that generators have not been able to recover the full market value of their free allocations. In a careful study of wholesale electricity markets in Germany, the Netherlands, Belgium and France from January through July 2005, Sijm et al. (2005) estimated that the average pass-through rates varied from 40 percent to 70 percent depending on the country and whether it was a peak or off-peak demand period.
