Cap and trade won’t work

When laws are passed in the United States they are usually subject to so many compromises that it is not uncommon for the original intention of the legislation to be lost.

When laws are passed in the United States they are usually subject to so many compromises that it is not uncommon for the original intention of the legislation to be lost.

This appears to be the case with the new version of the American Clean Energy and Security Act, issued on May 15.

The bill sets emissions reduction targets for 2020 at four to seven per cent below 1990 levels by 2020 – considerably less than the 15 to 20% targets set by other jurisdictions, including the EU. While the 2050 target is substantial – an 83 per cent reduction on 1990 levels – setting long-term demanding targets is easier than setting short term targets that will require immediate sacrifice and significant change.

The bill also creates a cap and trade regime in which some 85 per cent of the emissions permits are given away and only 15 per cent of these permits are auctioned.

How will this work? Well, companies that secure permits through either allocation or purchase can then trade them for profit. U.S. President Barack Obama had expected 100 per cent of these permits being auctioned and had planned to use the resultant US $650B over 10 years to pay for a tax credit aimed to offset the higher energy costs expected because of cap and trade and to reduce the number of people moving into energy poverty. But as only 15 per cent of the permits are up for auction these tax credits – an essential part of the low carbon economy – will have to be funded by other means. Think deficit funding.

If 100 per cent of the permits were auctioned, a realistic market value for a tonne of carbon – thought to be $50 or more – could be set. But by giving so many permits away, the price fluctuates in a price range below what it takes to change their carbon emitting behaviour.

The bill, however, will likely achieve several agendas. Congress, for example, could finally pass a bill focused on climate change and head into the December world summit on climate change in Copenhagen with something to work from. Second, its passage will significantly increase energy and supply chain costs, only partly offset by tax credits and other social security payments. Third, it will create a new bureaucracy – regulating carbon emissions – and a new financial services business – carbon credit trading. Finally, it will do little to cut emissions.

Europe has had a cap and trade system for sometime – since 2006 in fact.

Despite this, emissions from industries which are required to cap and trade have actually continued to rise.

The analysis suggest that a major reason for cap and trade’s inability to curb emissions was that governments allocated too many trading permits to polluters when the market was created – a mistake that the Obama administration is about to repeat.

Eventually, the U.S. will see that it is getting no short-term reduction in emissions from its cap and trade and will start to want to sell more permits to create a real market.

What the American Clean Energy and Security Act will do is delay the real debate about emissions and the environment until the next Obama administration, when the environment will likely become a more urgent issue.

Stephen Murgatroyd writes for the Troy Media Corporation.

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