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Would Cap and Trade Have Increased U.S. Emissions?

by Michael Levi
October 24, 2012

When the Waxman-Markey cap-and-trade bill collapsed a few year back, advocates of aggressive action on climate change despaired. But a fascinating and provocative new analysis from Dallas Butraw and Matt Woerman at Resources for the Future suggests that people might want to revisit that judgment: by 2020, they write, domestic emissions will “probably [be] less than would have occurred if the Waxman-Markey cap-and-trade proposal had become law”. Whether you believe that depends on some important details.

The underlying logic is relatively simple. Butraw and Woerman identify three main sources of emissions reductions over the next decade: changes in the economy (notably cheap natural gas), state and regional policies, and regulation of carbon dioxide under the Clean Air Act (CAA). They project that those will collectively lead to a 16.3 percent reduction in carbon dioxide emissions below 2005 levels by 2020, with standards under the CAA contributing more than ten percentage points of that. That is close to the target the United States announced at Copenhagen.

Then they make an important observation: Waxman-Markey would have preempted regulation of carbon dioxide under the CAA. The carbon price in the bill would have pushed emissions down, but the lack of new CAA regulations would have pushed it up, with the net impact, in principle, ambiguous. In addition, the impact of state level policies and changes in the economy would have been blunted under Waxman-Markey: by reducing emissions, they would have lowered the price of emissions permits, prompting some offsetting emissions increases elsewhere.

Butraw and Woerman ultimately estimate that emissions would only have declined 13.6 percent by 2020 under Waxman-Markey – more than 2 percentage points less than without it. (This does not include controversial emissions cuts through offsets.) Worse, they observe, Waxman-Markey would have seen participants “bank” emissions permits equivalent to 5.7 percent of annual emissions, in turn allowing them to increase their emissions by that much in later years. If you factor out this sort of emissions-shifting, they observe, Waxman-Markey would only have resulted in a 7.9 percent cut, a full ten percentage points less than without it.

This analysis is intriguing. It is particularly interesting because of what it says about the possibility that the United States could come very close to meeting the 2020 emissions target that it has pledged in international negotiations. But – in the spirit of the fact that the Butraw and Woerman analysis is a “Discussion Paper” – I want to explain why I’m somewhat skeptical of the bottom line.

Start with the issue of banked permits. I think that Butraw and Woerman are incorrect to count these against emissions reductions. Yes, under Waxman-Markey, banked permits would have allowed higher emissions in later years. But those would have been higher emissions than the already reduced emissions mandated post-2020 by Waxman-Markey. Since Butraw and Woerman don’t give any credit to post-2020 emissions reductions in the first place, it’s wrong to penalize anything for undermining them.

My next issue is with the fuel economy regulations implemented by the Obama administration. Butraw and Woerman assume that they would have been preempted by Waxman-Markey. But the cost-benefit analysis in the regulations makes clear that they could have been justified without any reliance on climate benefits. Indeed the Waxman-Markey bill itself called on the administration to strengthen fuel economy standards. Butraw and Woerman show that if you assume that Waxman-Markey wouldn’t have preempted CAFE regulations, then you get a 15.9 percent projected decline in emissions, not a 13.6 percent one, and barely distinguishable from what Butraw and Woerman project without Waxman-Markey.

That leaves one big question: What will happen with CAA regulation of stationary sources? Butraw and Woerman are quite generous, assuming that emissions cuts in this area will add up to the equivalent of a bit more than 7 percent of 2005 emissions. These, they note, are all emissions cuts that would have been preempted under Waxman-Markey. Whether the U.S. government will actually put in place such measures, though, remains to be determined, since most of the CAA regulations that Butraw and Woerman have in their model don’t exist yet. Whether a second Obama administration will pursue those standards (which are admittedly relatively modest) remains to be seen. It’s fairly certain that a Romney administration wouldn’t.

This says to me that whether you think emissions would have been higher or lower under Waxman-Markey depends fundamentally on what you think the prospects for regulation of stationary sources (particularly existing ones) under the CAA are. This is almost entirely a matter of political, rather than economic, projection.

One last observation: Focusing on 2020 can be misleading. It is possible to make substantial short-term emissions cuts without really setting the stage for much deeper ones later. The U.S. emissions goals for 2020 were long believed to be rather weak – even the U.S. negotiating team in Copenhagen often emphasized the 2030 and 2050 goals when defending the U.S. approach.  (I made a similar case in Slate during the talks.) In the end, I believe Butraw and Woerman when they say that the United States might well end up doing better domestically by 2020 than it would have with cap-and-trade. But I worry that if we don’t put long-term signals to the market in place soon, that victory will be ephemeral, as our longer-term climate goals slip further from remaining realistic.

Post a Comment 5 Comments

  • Posted by mememine69

    At least Bush didn’t condemn my kids to their CO2 deaths just for political gain and don’t forget that science also gave us pesticides. The climate blame exaggeration was Reefer-Madness-Science and a liberal virtue that is now costing Dems the White House. Who was the fear monger again here?

  • Posted by Dallas Burtarw

    Michael Levi makes several useful points. The authors reply at:
    http://bit.ly/TaXEad

  • Posted by Mike Wara

    Michael,

    I agree regarding the political nature of the stationary source standards and would emphasize the fact that so far, all we have are draft federal performance standards that cover new plants only.

    It’s also important to point out that the preconstruction requirements that have been put in place (new source review) are administered by the states with substantial discretion. What this really means is that “Best Available Control Technology” is in the eye of the beholder and in this case, that person is a state air regulator. Perhaps its not surprising then that in a survey of these permits that my seminar students conducted this spring, we found tremendous variability in what power plants were in fact being required to do – all the way from nothing to modest efficiency improvements. The EPA has VERY limited authority to second guess these decisions under the CAA. We came away from the exercise not expecting much from NSR of CO2 for power plants.

  • Posted by Michael Berndtson

    Reduction in emissions generated from sources within the borders of the U.S. is an important goal. However, one should look at the reduction in extraction of fossil fuels worldwide as the metric for carbon dioxide control. For instance, the overall (worldwide) production rate of coal, oil and gas is increasing. These resources are not necessarily getting stockpiled or stored, but burned somewhere else, i.e. India and China. So overall carbon dioxide emissions may by stable or dropping in the US – but increasing greatly elsewhere. And since perfect mixing can be assumed for the atmosphere, we’re not really improving the situation planet-wise.

    And now my beef with cap and trade. I’m somewhat familiar with environmental liability transfer. And honestly I really don’t understand it. It seems great, but doesn’t really address the problem. Cap and trade and carbon offsets are simply financial instruments developed by financial folks to move the problem around for a fee. If the problem isn’t addressed, i.e. emissions reduced by the generator, there is not any real long term benefit economically or environmentally. And like many problems that aren’t truly addressed – they may come back to haunt the original problem maker.

    A good way for financial folks and earthlings to prosper is investing in corporations that address waste and excessive energy use in its processes, be it manufacturing, energy production or us car drivers and residential dwellers. Less waste and less energy use equates to higher profits, higher stock price and less CO2. So regulation levels the playing field and prescribes standardization. Waste minimization and energy use reduction truly addresses the problem – increasing carbon dioxide in the atmosphere.

  • Posted by Doug Cotton

    Emissions don’t matter.

    Those who still believe the carbon dioxide hoax need to come to realise that energy balance does not determine climate. It’s the other way round. Climate determines energy balance. Climate itself is determined by the incident solar energy which fluctuates in long term natural cycles probably related to planetary orbits.

    Earth’s surface temperature cools as heat from the Sun is transferred back to the atmosphere. This process is dominated by sensible heat transfer, not by radiation which accounts for less than 30% of such transfers.

    All that backradiation can possibly do (according to physics) is slow that 30% of cooling which is due to radiation. Meanwhile, the other 70% merely accelerates to compensate, thus leaving no net effect on the overall rate of cooling. What comes in from the Sun will get out again by one means or another. When there are long periods of natural warming there will of course be a build up of energy being retained. The thermometers tell us that, without even having to measure the energy balance. But the opposite is the case when cooling sets in.

    Backradiation is not the cause, because it cannot transfer heat to a warmer surface. It can only slow radiative cooling. See my peer-reviewed paper on PSI recently cited by Joseph Postma in his October 2012 paper.

    Doug Cotton

    .

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