Last week brought more bad news for supporters of cap and trade climate legislation. It came in the form of an appearance by House Energy and Commerce Chairman Rep. Henry Waxman's appearance on PBS' "The Tavis Smiley Show." When asked how cap and trade would create technology innovation, Waxman said, "When we raise the price of energy -- which will happen if we reduce the amount of carbon emissions -- and industries have to figure out how to live in a carbon-constrained environment, they are going to have to figure it out because it is in their profitable interest to figure it out."
Waxman's blunt statement that the goal of cap and trade is to raise energy prices was deeply off-message for green groups, which have long insisted that energy efficiency and conservation would prevent energy prices from rising. But it was only the latest in a series of setbacks for climate legislation.
In March, the White House floated the idea of passing cap and trade as part of the budget, in order to avoid having to garner 60 votes to avoid a filibuster. But when moderate Senate Democrats, led by Evan Bayh, D-Ind., whose state is over 92 percent dependent on coal for electricity, joined Republicans in opposing the move, the White House quickly backed off. Then, on March 31, the day after Waxman, D-Calif., and Rep. Edward Markey, D-Mass., introduced cap and trade legislation, the Senate passed a resolution, 89-8, explicitly stating that the Senate will not pass climate legislation that raises energy prices. The next day the Senate passed another resolution, 98-0, which defined cap and trade as a tax.
Meanwhile, the environmental left was busy attacking cap and trade for being full of loopholes and corporate handouts. Friends of the Earth released a report documenting how cap and trade would create "carbon derivatives" markets that could be as dangerous as credit default swaps. A study by Rainforest Action Network and International Rivers Network calculated that because Waxman-Markey would allow firms to meet their emissions reduction target by purchasing dubious "carbon offsets," the bill would result in no emissions reductions before 2026 at the earliest.
Still, most greens were heartened after the White House announced plans to regulate carbon dioxide as a pollutant under the Clean Air Act. But the threat to regulate CO2 will ultimately run into the same political constraints that have hamstrung efforts to cap carbon emissions in the U.S. Congress. The Obama administration is unlikely to propose regulations that will significantly increase energy prices in key political battleground states, at least not in his first term. And subsequent administrations are no more likely to propose or stand behind unpopular regulations that will raise energy prices than will the Obama administration. As such, the threat to regulate CO2 will likely prove empty -- a gesture to environmental supporters and the international community that Obama is serious about climate change, but unlikely to result in substantial reductions in U.S. carbon emissions or break the current gridlock in Congress.
None of this is to say cap and trade can't pass this time. Indeed, the contours of compromise legislation are already visible from the cap and trade proposal that green giants Natural Resources Defense Council and Environmental Defense Fund announced along with coal giant Duke Energy late last year. Their legislation would give away, rather than sell, most pollution permits. Any money raised would be directed to states impacted by higher energy prices, which may help win over senators like Sherrod Brown, D-Ohio, and Bayh. And firms would be allowed to purchase a large percentage of their emissions reductions in the form of carbon offsets.
But such a law would replicate the worst aspects of the EU's Emissions Trading Scheme, which has neither reduced emissions nor, according to the U.S. General Accounting Office, resulted in any technology innovation. Instead of investing in clean energy, European firms bought offsets, many if not most of which were bogus, like paying to build dams in China that would have been built anyway.
Most greens will, in the end, support weak cap and trade legislation because a cap and trade law on sulfur dioxide reduced acid rain in the '90s. Unfortunately, it is an apples to oranges comparison: The 1990 acid rain law did not allow firms to purchase "sulfur dioxide offsets." Nor did it result in any technology innovation: Cheap scrubbers and low-sulfur coal already existed. All the law did was require coal plants to use them, a change that had very little impact on consumers, who were more concerned then about acid rain than they are today about global warming. The problem is that there are no cheap and widely available alternatives to fossil fuels. If there were, then Waxman would not be seeking to raise their price.
All of this is a conundrum if one's policy is centrally focused on making fossil fuels more expensive. Green groups and armchair activists like Thomas Friedman routinely claim that government regulation is the key to unleashing technology innovation, just as it was for the I.T. revolution. But it's a bizarre claim. There was no cap and trade for typewriters to deploy personal computers; there was no telegraph tax to invent the Internet. We got cheap microchips thanks to 10 years of Pentagon contracts. The precursor to the Internet was invented in a Department of Defense lab. Much else -- radios, cheap food, pharmaceutical drugs, solar panels, wind turbines and hybrid cars -- was made possible thanks to large government investments in technology. Before clean energy technologies are widely deployed, especially in developing countries, they will need to become far cheaper.
Expert opinion is overwhelmingly on the side of massive government investment in technology. In June 2008, the International Energy Agency released a landmark analysis that concluded low carbon energy sources "face significant technical and cost barriers" to broad deployment and that "a massive increase [in] energy technology Research, Development and Deployment (RD&D) is needed in the coming 15 years, in the order of USD 10-100 billion per year." Recent reports by British Treasury Secretary Nicholas Stern, McKinsey and Co., and America's top energy experts echo this finding. In February 2009, Energy Secretary Stephen Chu said Nobel-caliber "breakthroughs" would be necessary in at least three critical technologies: solar power, batteries and biofuels.
Happily, it's not too late for policymakers to turn cap and trade into an engine of technology innovation. But first they must do away with the fiction that the market will set the price for carbon pollution. Whether through the use of offsets or pollution permitting, Congress will prevent energy prices from rising by much. Instead of setting the price surreptitiously, Congress should set it explicitly and transparently. The carbon dioxide pollution price should be modest -- between $5 and $10 per ton -- and gradually increase over time.
Having set a low and predictable price for carbon dioxide, Congress could then reasonably require firms to purchase 100 percent of the allowances. This would act as a disincentive for firms to lie about their emissions, and would offer them certainty about future carbon dioxide prices. It would avoid triggering a backlash from voters, who would likely not notice any increase in energy prices.
And it would raise $30 billion to $60 billion a year for technology innovation. This amount of money would allow the government to spend not only the $15 billion per year that Obama wants for laboratory R&D but also for the purchase of next-generation wind turbines, solar panels, car batteries and other technologies, which history shows is crucial to accelerating innovation.
Would such a solution guarantee a steady rate of emissions reductions year after year? No. But neither will any of the cap and trade proposals currently on the table. Two days after his disastrous appearance on PBS, Waxman declared that most of the money raised from auctioning allowances should go to investment in technology. This is a positive shift. If Waxman pursues it, he could bring together moderate Democrats and Republicans who want to do something about global warming but don't want to spike energy prices. Such a strategy could still turn cap and trade into the workhorse for innovation the world needs it to be.