Saturday, August 04, 2007

Cap and Trade or Carbon Tax?

With the Senate already having voted on an energy bill and the House expected to take up energy legislation this month, the next course of action expected after the August recess will be a debate on emissions reduction legislation. Will Congress favor a cap-and-trade approach or a carbon tax? Are there enough votes in the House and Senate to pass a climate bill? During today's OnPoint, Eileen Claussen, president of the Pew Center on Global Climate Change, discusses Sens. Jeff Bingaman (D-N.M.) and Arlen Specter's (R-Pa.) recently introduced climate bill. She explains why she believes the safety valve option is not the best approach and compares cap-and-trade to a carbon tax.


Monica Trauzzi: Welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Eileen Claussen, president of the Pew Center on Global Climate Change. Eileen thanks for coming on the show.

Eileen Claussen: My pleasure.

Monica Trauzzi: Eileen, Senators Bingaman and Specter recently introduced the Low Carbon Economy Act of 2007. It's a cap-and-trade approach, but it still takes the economy into account with their safety valve provision. How does this new legislation contribute to the overall climate discussion in Congress and what's your take on it?

Eileen Claussen: Well, I mean there are a number of different cap-and-trade bills that have been introduced, and I think the more that are introduced and the more different provisions there are in them the better the discussion will be and the better the bill that emerges will be. I think the Bingaman-Specter bill is important for a couple of reasons. One is that it does get the safety valve on the table and up there for discussion. The second thing it does is that it really provides incentives for carbon capture and storage and for other technology development. And I think that is a very positive thing that wasn't in any of the other bills either. So it may end up by being the right end of the debate, but it's a debate that we have to have.

Monica Trauzzi: The safety valve provision is very controversial on the Hill. What's your take on that?

Eileen Claussen: Well, I mean when you do a cap and trade I think you immediately assume that we are doing something for the environment, but because it's got a lot of flexibility built into it, it will be something that the economy can handle and handle well. But one thing about a cap and trade is that it really provides certainty on the environmental outcome. So when you set a cap, that's the cap you meet. And I think when you introduce a safety valve, particularly if it's a low one, and I would say the Bingaman-Specter safety valve at $12 a ton and going up, going up, but going up relatively slowly, still is something to be concerned about. What you're really doing is setting a price cap rather than an environmental cap. And you're essentially saying the environment, well, we'll get what we can, but only up to $12 a ton or $13 a ton or whatever it is. So you lose the environmental flexibility, but you do gain economic certainty. So, again, it's a trade. I mean from our perspective it's not a trade we should be making, but it is a trade.

Monica Trauzzi: So the other option for addressing climate change would be a carbon tax. If companies have to pay for emissions, won't they try to emit less? Doesn't it just make sense that way? Why don't you think carbon tax is the way to go?

Eileen Claussen: Well, a carbon tax, very much like a safety valve actually, sets a price. You don't know what the environmental outcome will be from setting that price. And it also basically says that the government can determine what the right price is to get to a certain environmental outcome. And, quite honestly, I'd rather put my money on the market, which is what a cap and trade does, because there the market sets the price. The government doesn't set the price. But beyond that, the tax is in many ways just like a cap-and-trade system. The prices will go up. You've got all kinds of people who will want all kinds of special favors. In a cap and trade they'll want you to give them more allowances. In a tax they might want to be exempted from the tax. All the same issues come up in both of these. But I think the final thing about a tax that it's important to point out is that as a political matter I think it's going to be much more difficult to try to get a tax through. So I'm for environmental certainty and something that we can actually make happen. And I'm not sure that a tax does either of those things.

Monica Trauzzi: Proponents of a carbon tax would say it's simpler to implement than cap and trade. It's less controversial once it's in place, individual industries won't be singled out. And also revenues from the carbon tax would go directly to the government. Doesn't that seem like a good deal?

Eileen Claussen: Well, I'd like to ask those people, when they fill out their tax returns how simple it really is, because the bottom line is that a tax is not simple. You have to decide at what levels. Is everyone at the same level? Do you exempt certain people from the tax? What do you do with the revenues? Who do you actually give them to? Those are exactly the same issues that you have in a cap and trade. There it's the allocation of allowances, here it's the amount of the tax and how you distribute it. So that argument, I think, really it's just the same. So, really I think, it comes down to this issue of cost certainty versus environmental certainty. And given what we know about the climate issue and what we know about what really needs to be done, I'd like to have a flexible cap and trade that gives companies a lot of ability to move things around and do what they can do. And those who can do it cheapest can do the most. I think that is actually the best deal for the environment and the economy.

Monica Trauzzi: What about in Europe? They haven't had much luck with the cap and trade there. Are you taking that into account?

Eileen Claussen: I guess I would dispute your assertion that they're not having much luck with it there, because I think we have to put it into perspective. The budget period under Kyoto doesn't actually start until 2008. What the E.U. did was try an early phase to see how to make it work and they didn't make it work perfectly, I mean in that sense. People who say, oh my God, look at it, they're right it didn't work perfectly. They didn't actually know how many allowances to distribute. They exempted certain kinds of people. They learned a lot. They didn't even have a good database to know where the emissions were to get started. But the actual program doesn't go into effect until 2008. And based on what I'm starting to see now from the E.U. they learned a lot from those lessons and I think it will be a system that really works.

Monica Trauzzi: Considering the fact that passing the Senate energy bill was a big battle, RPS didn't make it through, there were debates on CAFE, is this Congress weary of making changes? Are you confident that this Congress will be able to pass any emissions reductions measure?

Eileen Claussen: And my confident? No. Do I think there is a chance, a decent chance? Yes. And I say it understanding how complicated it is and how many people will pulled in how many different ways and it will make it very hard. In the House you only need a simple majority, but in the Senate you need 60 votes. And when I try to count up where the votes could be for a cap and trade it's not going to be a cakewalk. So, I'm not confident that we're going to get something in 2008. I am very confident that if we don't get it in 2008 we will get it in the next year or two after that. Don't forget, this is the first year where there's been a serious debate about how to design a cap and trade system. There have been 105 hearings on climate change since January. I mean we didn't even have 50 hearings in the 10 years - well, added up together, prior to this. Then there was debate about is climate change real and do you do something about it? Now it's about how you actually design a system that will work, so if not by 2008, almost certainly by 2010.

Monica Trauzzi: Chairman Dingell and House Speaker Nancy Pelosi are seemingly going head-to-head on the climate issue. There's a lot of tension in that relationship and she's gone ahead and created a global warming panel to sort of lessen Dingell's impact. Is that proving to be successful? Dingell says that the panel is an embarrassment to everybody.

Eileen Claussen: Yeah. I don't think anything that raises serious issues about the climate issue should be an embarrassment. But that said, I think the bill that gets considered will come out of the Energy and Commerce Committee. And Representative Boucher and Congressman Dingell are the key players in those committees. And I think we look to them for the bill that's maybe changed as it makes its way through the house. But that's really where it's going to come from. But that said, I think the special panel is doing a good job of keeping climate change in people's minds, and that's really what it was created for.

Monica Trauzzi: And on the Senate side another head-to-head we're keeping an eye on is Bingaman and Boxer. They have very different and competing ideas about how we should approach the climate issue. How much of an impact do you think that these inter-parties debates have on the eventual passage of legislation? Does it make it more difficult?

Eileen Claussen: Well, I think it's interesting in the Senate that, yes, you do have the Sanders-Boxer bill, which is essentially the California targets in the California program. You now have Bingaman-Specter, which has been referred to Environment and Public Works. And you've got this effort by Senators Warner and Lieberman to also come up with a bipartisan bill, which I'm guessing is going to end up somewhere between Sanders-Boxer on the hand and Bingaman-Specter on the other. So the Environment and Public Works Committee, and eventually the Senate as a whole, will actually have an array of things to look at. I'm pretty confident that something will come out of Environment and Public Works in the fall. We'll have to see exactly where that middle ground is and what it looks like. But, again, 60 votes in the Senate is not going to be easy even when it comes out of committee.

Monica Trauzzi: Switching gears, internationally President Bush is planning a meeting for this year with the world's greatest emitters. Does this effort add to the discussion about what we should do post Kyoto? Or does it sort of muddy the waters a bit?

Eileen Claussen: I think it depends really on how the administration chooses to frame it. President Bush went into the G8 meeting with a very particular idea of convening this group of major emitters to talk about a long-range aspirational target. That is actually not exactly what came out. What came out is a discussion among the major emitters, and that is the important group to get together, but they're not only going to talk about an aspirational long-term target, they're going to talk about what the framework should be going forward. So, on the assumption that the Bush administration actually takes what came out of the G8 and makes that sort of the agenda for this coming meeting, which I think is going to be the end of October, and any subsequent ones, it could actually be a useful discussion. The President also said, and I think this is quite important, that what comes out of this process will go into the convention process. It won't be an attempt to do something outside and keep it outside. So, if something useful comes out of it, it could actually help the process. If nothing useful comes out of it, which is always an alternative, the process will continue.

Monica Trauzzi: All right. We'll end it right there on that note. Thanks for coming on the show.

Eileen Claussen: My pleasure.

Monica Trauzzi: This is OnPoint. I'm Monica Trauzzi. Thanks for watching.

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