Economic crisis rattles cap-and-trade debate
Posted on September 29th, 2008By Darren Samuelsohn
Greenwire: With both presidential candidates vowing to proceed with aggressive climate agendas next year despite titanic economic woes, many experts are warning that those ambitious plans must be changed to reflect a diminished national appetite for new programs with hefty price tags.
“They have to keep it front and center in a way, but clearly the fiscal straitjacket already there will be strapped and pulled considerably tighter,” said Norman Ornstein, a congressional expert at the American Enterprise Institute, a conservative think tank.
Several ideas could gain traction as promising revenue-neutral alternatives for curbing heat-trapping greenhouse gas emissions — including carbon taxes or a “cap and dividend” system that recycles the program’s revenue to taxpayers while promoting energy conservation.
Climate legislation was never a sure thing for 2009, but the presidential nominations of Republican John McCain and Democrat Barack Obama bred expectations that cap and trade was inevitable in the next administration.
But economic turmoil resulting from the housing-market collapse and the severe credit crunch has created uncertainty about the next president’s priorities. Along with climate, he also must address wars in Iraq and Afghanistan, the energy crisis, health care, education and immigration and do so with a depleted Treasury.
“As important as it is, it’s going to have some serious competition,” said Dallas Burtraw, a senior fellow at Resources for the Future.
Given the uncertainties of the federal financial rescue plan, experts warn against jumping too far ahead in trying to size up where lawmakers and the next president will be next year.
“As it is, neither president would come in with a wealth of political capital to solve global warming by imposing energy costs on Americans,” said David McIntosh, a former aide to Sen. Joe Lieberman (I-Conn.) who helped draft cap-and-trade legislation debated earlier this summer on the Senate floor.
McIntosh said the climate effort will depend on how quickly Washington’s response to the Wall Street debacle works its way through all sectors of the economy. “Does it stabilize the markets for the intermediate term?” he asked. And for taxpayers, “Is it something they feel immediately and acutely, or is it a slow burn?”
Economic woes aside, McIntosh said the next president will nonetheless face pressure to act from environmentalists, scientists, more than a dozen states and U.S. EPA through its authority from the 2007 Supreme Court decision, Massachusetts v. EPA. Plus, he said, there is also international pressure for the next president to speak up on global warming next year.
“I don’t see how the new administration would meet their expressed goal to get along with the world if they failed to show up at the meetings with something positive to propose,” McIntosh said.
‘Crisis to crisis’
Lawmakers who worked on climate change this year say they are not sure where the issue will fall in next year’s schedule.
“I hate to predict where we’ll be in January,” said Republican Sen. Bob Corker of Tennessee. “You’ve seen how quickly things change. Two weeks ago, the biggest issue on the Hill was energy. And now it’s a footnote. We tend here to sort of lurch from crisis to crisis.”
Some House Republicans are likely to dig in with their opposition to mandatory curbs on emissions because of the tight U.S. economy.
“I hope and pray they don’t move in the direction that they seem to be talking about moving in,” Rep. Wally Herger of California, the second ranking Republican on the House Ways and Means Committee. “We have enough problems with our economy right now without dumping on top of it.”
But proponents of climate legislation say curbing greenhouse gas emissions will stimulate the economy and address energy problems.
“Thousands and thousands of companies will be created,” said Rep. Ed Markey (D-Mass.) last week at a panel discussion hosted by the Washington Post. “The job growth will be there. The opportunity to make a recovery from an economic crisis will be there in the technology sector.”
Markey predicted that House Speaker Nancy Pelosi (D-Calif.) will remain dedicated to climate change despite the economic slowdown. “It won’t have any impact on it at all,” he said. “The speaker has said it’s her signature issue. Her flagship issue. There’s nothing that will take her eye off achieving what she believes is a moral duty of this generation to solve this problem.”
While Markey said the burden will be on the next president to lead on global warming, others warn that the bully pulpit is not all-powerful.
“Sometimes it works, and sometimes it doesn’t,” said Sen. Lamar Alexander, (R-Tenn.), citing President Bush’s failure to overhaul Social Security in the wake of his winning a second term.
Former Senate Majority Leader Tom Daschle (D-S.D.), a top Obama adviser, said the climate issue remains front and center because of its connection to energy, national security and international relations.
“I don’t think we have any choice but to consider the interrelationship of all these issues,” Daschle said.
McCain’s longtime climate aide in the Senate, Floyd DesChamps, said global warming policies remain at the top of his boss’ agenda, but also acknowledged that the economic situation will influence future decisions. “There will be a solution over the next few days for the financial crisis,” he said. “But the reality is, that solution will have an impact on climate and how we develop policies in the next administration.”
Recent statements from both candidates satisfy many experts that climate won’t fall off the radar screen.
McCain mentioned his differences with Bush on climate policy in the debate with Obama last Friday in Oxford, Miss. And speaking last week in New York at a conference hosted by former President Clinton, Obama repeated his pledge to curb domestic emissions 80 percent by 2050.
“Things are going to change between now and Jan. 20, and then they’ll change again after that,” said David Gardiner, who ran a White House climate office under Clinton. “But I think what won’t change is that the fundamentals of energy and the fundamentals of climate change and the connection between the two is going to mean that the next president and the next Congress are going to have to be dealing with these issues.”
Cap and trade vs. taxes
During Friday’s debate, Obama and McCain shied away from making many definitive statements about what proposals they would pull back on if elected, given the tight economic times.
McCain said he would consider a spending freeze on everything but defense, veteran affairs and entitlement programs. Obama insisted that “energy independence” remained a priority, but he conceded “there may be individual components that we can’t do.”
Earlier in the week, Obama specifically cited his global warming platform as something that would survive, saying it does not belong in the budget-busting category.
“When it comes to energy, for example, I’ve talked about the need to use a cap-and-trade system that would help generate money that would then be reinvested in clean and renewable energy,” he told reporters. “Again, that pays for itself.”
At its core, Obama’s approach follows the cap-and-dividend concept that would require companies to purchase 100 percent of their allowances at auction. He would then use auction revenue to fund new energy technologies and wildlife adaptation strategies and to provide refunds for low-income communities suffering from high energy costs associated with his program’s new environmental rules.
McIntosh said such an approach may fit perfectly with plans to tackle climate change and boost the economy.
“It’s just convenient that the two highest uses of allowance value in cap-and-trade already are deploying technologies through American business and getting money back to consumers,” he said. “Those happen to be two things you do when you write a stimulus bill. I think that’s very convenient.”
But the cap-and-dividend approach does not generate free allowances, which are seen in some circles as the best way to build up a strong voting coalition that can actually lead to passage on Capitol Hill.
“The only thing to say for [cap and dividend] is it’s unambiguously better for the economy than any of the alternatives,” said David Montgomery, an expert on climate policy and an economist at Charles River Associates. “But it’s not better for most of the constituents who will be pushing for their piece of action.”
Montgomery said proponents of a carbon tax may come out in the best shape when it comes to policy options in an economic downturn. That is because the tax approach potentially generates billions in new revenue that could get distributed back to taxpayers through deductions in payroll taxes or by depositing the money in the Treasury.
“The argument for the carbon tax, because it avoids volatility and gives you certainty about price, becomes even stronger given events that have happened in the economy compared with a year ago,” Montgomery said.
Some see the tax approach picking up steam next year as lawmakers search for a climate solution that is simpler to explain. “Carbon taxes are still a dark horse, but it’s definitely still in the race,” said Burtraw of Resources for the Future.
Yet there is skepticism that a carbon tax will gain a foothold in a debate in which the other leading contender is a cap-and-trade program that the European Union has already adopted as its primary policy for global warming.
“We’ll continue to hear from proponents of carbon taxes all the way until the day when we enact a cap-and-trade program,” McIntosh said. “I don’t think the arguments for a carbon tax will ever go away, because I don’t think economists will ever go away.”