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The News That Wasn’t: The Senate Climate Bill

Monday, April 26th, 2010
Elbert Ventura


Elbert Ventura is the managing editor of Democracy: A Journal of Ideas. He formerly served as the managing editor of the Progressive Policy Institute.

by Elbert Ventura

This morning’s biggest story is about what’s not happening. This weekend, Sen. Lindsey Graham (R-S.C.) announced that he could not support the tripartisan climate bill in the Senate that he is co-sponsoring in the wake of reports that Democrats will be prioritizing immigration reform. Graham’s surprise move led to the scuttling of the bill’s long-anticipated rollout today — and grim predictions that the legislation may have breathed its last.

What ticked Graham off? Graham called the decision to move immigration to the top of the legislative agenda “nothing more than a cynical political ploy.” He expressed his belief that with immigration taking up badly needed bandwidth in the Senate, the chances for climate policy’s passage would be slim. “I’ve got some political courage, but I’m not stupid,” he said.

For their part, Democrats are continuing to push forward with both priorities. Senate Majority Leader Harry Reid underscored his commitment to passing climate legislation this session, saying that “energy could be next if it’s ready.”

Iffy though its chances of passage may be, it would be a real shame if the climate bill were to not get a chance at all. For weeks, Graham, Sen. John Kerry (D-MA) and Sen. Joe Lieberman (I-CT) have been working to put together a workable compromise that could get 60 votes. The bill they were to present today seemed promising, their efforts winning the support not just of progressives but of energy companies like Exelon, ConocoPhillips and Duke Energy. It’s a wobbly coalition that may not be easily put back together, especially if the Republicans reduce the Democrats’ margins in Congress (or take it back altogether) this November. If climate change legislation doesn’t move this year, it will be a while — a long while if Obama loses in 2012 — before it gets revisited.

As others have pointed out, Graham’s hissy fit over immigration seems mighty hypocritical given that he wrote about the urgency of passing immigration reform just over a month ago in the Washington Post. But that doesn’t make his criticism incorrect. He’s right that the decision to devote Senate attention to another, no less divisive priority is going to dim the prospects for the climate bill.

While the political calculus of fast-tracking immigration makes sense — it’s clearly intended to fire up the Hispanic base, which has felt neglected under Obama — it’s also a shortsighted decision. Both issues are important, of course, but momentum was already behind climate legislation. The House had already passed it, Kerry, Graham and Lieberman had lined up crucial industry support, and an environmental community that was growing disillusioned with the administration could at least rally behind a bill that would put a cap on carbon. If the administration fails to throw its full weight behind getting climate over this one last hump, then the disappointment of the environmental community will have been earned.

A Larger Failing

But the death of climate policy — and, yes, we shouldn’t shovel dirt on it quite yet — speaks to a larger failing. Sen. Sherrod Brown (D-OH), who considers the issue one of his top five priorities, told the Washington Post that when he’s back home talking to constituents, “nobody talks about this. I never hear about it.” His experience is borne out by polls, which show increasing public apathy about solving our energy and climate problems.

It’s understandable that an abstract threat like climate change would give way to more narrow concerns in a time of economic crisis. And to be sure, the media and our leadership — particularly on the right — bear some of the blame for the public disinterest. For their part, progressives perhaps haven’t done the best job of framing the issue and selling it to a skeptical public.

But the pattern of the past year has been worrisome. Despite the scale of our public problems, we shown little appetite for bold, collective action. We’ve seen it in our quivering in the face of health reform’s passage, in our refusal to accept the connection between taxation and benefits, in our willingness to be gulled by cynical entertainers.

When he came into office, President Obama promised to bring an end to the “smallness of our politics.” Despite some signal accomplishments, he hasn’t succeeded in reforming the mindset of our political class. But Washington isn’t the only problem. To overcome the smallness of our politics, it’s not just our politicians who need to think big — the American people do, too.

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Cheat Sheet for Climate Policy: Part II – What’s Important for a Good Climate Bill

Friday, April 23rd, 2010
Danny Morris


Danny Morris is a research associate for the Center for Climate and Electricity Policy at Resources for the Future. The views expressed here are his own.

Nathan Richardson


Nathan Richardson is a visiting scholar at Resources for the Future. The views expressed here are his own.

by Danny Morris and Nathan Richardson

How to tell a good climate bill from a bad one? This series will guide you through the main issues that are likely to arise in the coming weeks as the Senate takes on climate change. In this post we highlight issues that are very important — but not quite essential — in climate policy. These ideas will likely play a key role in the eventual passage of legislation from the Senate. (To read the other posts in the series, click here.)

In our last post we identified the two absolutely critical issues for any climate policy: putting a price on carbon and targeting meaningful emissions reductions. Pricing carbon imposes costs on emitters, thereby changing behavior and encouraging innovation, but it will also generate revenues. Once they are generated, who receives them and how they are spent are important elements of climate policy.

Category II Issues: Key Elements of Climate Policy

#1: Public revenue or private giveaways?

If carbon is priced with a tax, it will generate new government revenues. If, as seems likely, carbon is priced with some form of cap-and-trade, things get a little more complicated. For cap-and-trade to work, emissions allowances must be allocated in some way. The two simplest ways to allocate allowances are to give them away for free, or to auction them to the highest bidder. Only the latter would generate any new public revenues. Allowances are assets with real value, so giving them away is no different from a government subsidy to the recipient.

Auctioning allowances is generally more efficient than giving them away — society as a whole is better off the more allowances are auctioned. Nevertheless, many groups of emitters or industries have made arguments (and will continue to do so) that they should be given free allowances. They argue the impact of climate policy on their industries will be too onerous or that they represent the interests of their consumers. Generally speaking, these claims are old-fashioned Washington handout-seeking behavior.

Fights over allowance allocation were predictably rampant when the House considered its bill, Waxman-Markey, last year. Comparatively few allowances would be auctioned under Waxman-Markey, especially before 2020, and substantial allowance handouts (35 percent of allowances) would be given to local gas and electricity distribution companies, ostensibly to protect consumers from increases in electricity prices. It is very likely that allocation will again be a central (possibly the central) political issue in the Senate debate.

A carbon price won’t affect every person, firm, or industry equally. In particular, low-income households will feel the effects of a carbon price far more than wealthy households, and an equitable climate policy should compensate the losers to offset that disparity. The best way to do so would be to compensate them with cash (through direct rebates or tax cuts) raised from auctions – yet another factor in their favor. Under a giveaway scenario, the government could hand out free allowances to utilities, hoping that they pass along savings in the form of lower energy prices. That may help consumers, but they would still be better off if they receive the savings directly out of auction or tax revenues and can make their own choices about how to spend that compensation—more on how these revenues could be spent in the next section. Besides, lower consumer energy prices can blunt the price signal a cap sends, leading to increased energy usage.

However attractive auctioning all allowances is, it’s probably not politically realistic. Handouts will probably have to be made to some industries to get votes for the bill (though there’s still hope, on both the right and left, that the general welfare can prevail over handouts to special interests ) In any case, auctions are the most desirable distribution mechanism, and should be a major component of any climate legislation.

#2: What do we do with the money?

Assuming you’ve auctioned at least some allowances (or have revenues from a carbon tax), what should the government do with the money? There is no easy answer here, but in general we have three options:

a) Reduce existing taxes

If the government receives revenues from a carbon price, one response is to cut the taxes already on the books. Reducing other taxes shifts the U.S. tax burden from those who currently bear it (primarily income earners) to carbon emitters and, indirectly, to consumers of carbon-intensive goods and services. In general, this is a good thing, for the simple reason that you are lowering taxes on something you generally want people to do (work) and raising them on something you don’t want them to do (emit carbon). In economic terms, you move from taxing something we generally think has positive externalities to something we know has negative externalities. And politically, who doesn’t like lower taxes? One drawback is on that you may end up reducing progressive income taxes in favor of carbon pricing, whose costs might be harder to bear for those who can least afford it.

b) Dividends to consumers

If you’re troubled by the possibly regressive character of tax cuts, but think returning carbon price revenues to the people ultimately affected by increased prices is a good idea, then a good alternative is direct payments to consumers. This is the “cap-and-dividend” approach taken by the Cantwell-Collins bill in the Senate that Danny wrote about recently. Under cap-and-dividend, revenues generated by an allowance auction (or a carbon tax) are used to make payments directly to consumers. In other words, every household would get a check. Because all households would get equal payments, the plan turns a somewhat regressive carbon price scheme on its head by transferring money from those with a large carbon footprint (often the wealthy) to those with a smaller one (often the poor). Politically, it’s broadly appealing—even conservatives that tend to oppose redistribution of wealth find a lot to like, in large part because dividends “cut government out of the picture.”

Instead of sending everyone the same amount, it’s also possible to try to identify specific losers from climate policy and compensate them directly. One example of such relative losers might be trade-exposed industries, who would stand to lose competitive ground against foreign firms not subject to a carbon price (more on this issue later in the series). Making payments to industries instead of households isn’t usually characterized as cap-and-dividend, but the difference is only distributional—who gets the money. One disadvantage is that direct dividends pose a bureaucratic challenge — there is no clear mechanism for distributing them.

c) Public goods

Alternatively, the government could spend the revenues from an auction. In some cases, the government can create greater benefits by spending revenues than by giving them back. Restricting ourselves to climate-related spending, good examples might be energy R&D, investments in adaptation to climate change, or efforts to reduce emissions internationally or verify international emissions offsets. Indeed, the federal government will need to spend money in some of these areas regardless because the private sector may underinvest in energy R&D, and will almost certainly underinvest in climate change adaptation and international mitigation efforts. The Waxman-Markey bill devotes auction revenues to many of these areas, and a Senate bill probably will (and, in large part, should) do the same.

Of course, carbon price revenues could also be used for any other government expenditure, from education to infrastructure or defense. Revenues could also be used to pay down the debt. Any of these might be worthwhile expenditures, but it’s important to remember that any revenues that are not returned through dividends or lowering other taxes represent a tax increase on anyone who uses carbon—that is, everyone. Opponents of action on climate often characterize it as a major tax increase. To the extent that revenues from a carbon price are dedicated to unrelated government expenditures, this criticism isn’t dirty politics, it’s a fact. Taxing and spending on a given project may or may not be a good idea, but bringing carbon into the picture doesn’t change the fact that it’s taxing and spending.

#3: Market design: banking and borrowing

A major policy and political priority for climate legislation is to reduce emissions as effectively and cheaply as possible. Whether this goal proves to be attainable or not depends greatly on how cap-and-trade markets are designed. While these issues tend to fly under the radar of the political debate — partially because they are complex and partially because they are not very sexy — they have major implications not only for how firms will behave under a cap-and-trade system, but the timing of actual emissions reductions.

There are multiple options for controlling the costs of climate legislation compliance (most of which will covered in our next post), but the key aspects are the closely related concepts of banking and borrowing of allowances. The general concept of banking isn’t terribly complicated: firms ‘bank’ allowances by overcomplying with the cap (they reduce their emissions more than is required) throughout the program, thus building a surplus of allowances that they can use at a future date. Similarly, firms may choose to ‘borrow’ allowances, by using an allowance from a future year, then repaying that allowance with future reductions (possibly with interest).

Polluting firms have two reasons why they want to be able to bank and borrow. First, the path of the lowering cap (established by legislation) will likely not be set in a way that is optimal for regulated parties. Banking and borrowing credits gives them the flexibility to take an emissions-reduction path that is most cost effective, either by filling their bank with credits through overcompliance in the early years of the market or by borrowing in later years if they expect some kind of efficiency increase to come through at a certain future time. Second, banking and borrowing can protect firms against unforeseen shocks to their compliance paths. For instance, a company may have unanticipated problems that force it to use a more carbon-intensive energy source, increasing its emissions above the number of allowances it possesses. Borrowing allows the firm to get more allowances now in exchange for stronger future reductions.

While some may claim that banking and borrowing look like a way to game the system, they are simply mechanisms to help firms control costs and reduce their emissions as efficiently as possible. A strict cap-and-trade system where firms can only trade amongst each other would be more expensive. Banking and borrowing helps reduce costs while still achieving the cumulative emissions reductions desired. A study by Resources for the Future scholars Harrison Fell and Dick Morgenstern contends that borrowing generates significant cost savings, especially when the cap is being lowered at some rate (which is the case in all serious climate proposals). If borrowing is restricted, costs go up.

Allowance banking and borrowing are key issues for climate policy because they will not only play a major role in the behavior of firms in the cap-and-trade market, but they will also have a strong influence on the actual path of emissions reduction. This gets back to the point we made in the last post, where we said that specific reduction targets don’t matter as much cumulative emissions reductions. The ability to bank means that carbon polluters may strongly overcomply, meaning that they will reduce far beyond the 17-20 percent reduction goals in 2020. Analyses from the EPA and the EIA back this up. The flipside, however, is reductions in later years may be less than the cap as companies start to cash in their banked allowances. As long as the cumulative emissions over the life of the regulation come in under the cap, it’s fine for the year-to-year levels to be ruled by how regulated parties bank and borrow.

The Bottom Line

In the last post, we presented three issues that we deemed essential to any climate bill. Here we discuss the merely important:

  1. How are emissions allowances allocated—are they auctioned, or given away?
  2. How are the public revenues from climate policy spent?
  3. Is the allowance market designed for economic efficiency—does it allow banking and borrowing?

In our next post, we will travel further down the rabbit hole and address some further issues climate policy that are still relevant and meaningful, but less important than what we’ve talked about so far.

Photo credit: http://www.flickr.com/photos/uwehermann/ / CC BY-SA 2.0

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Plan B for Climate Policy?: A PPI Series

Thursday, April 22nd, 2010
Danny Morris


Danny Morris is a research associate for the Center for Climate and Electricity Policy at Resources for the Future. The views expressed here are his own.

by Danny Morris

PPI has long been a proponent of an economy-wide cap-and-trade system to confront the problem of climate change. But as the fortunes of cap-and-trade legislation in the Senate fade, we need to begin looking at other options before Congress. In the first post of this series, we looked at the Cantwell-Collins “cap-and-dividend” bill. This post examines the Carper-Alexander “3P” plan introduced this February, a bill that regulates only non-greenhouse-gas pollutants that some have suggested could be expanded into an electric-sector carbon cap-and-trade plan.

In early February, Sens. Tom Carper (D-DE) and Lamar Alexander (R-TN) introduced what we will call the “3P” (P for pollutant) bill, which tightens emissions of SO2, NOx and mercury from coal and oil-fired power plants through cap-and-trade markets. While the bill covers only non-greenhouse-gas pollutants, it has been discussed as a possible template for a climate bill targeting the electricity sector — or “4P.”

Carper-Alexander is nothing radically new. Considering how knowledgeable the American public is about cap-and-trade in general, it’s a safe bet to say most people don’t know that there is already a cap-and-trade market working to reduce air pollution from fossil fuel-fired power plants in the U.S. as we speak.

If you’ve ever had any discussions about market solutions to pollution problems, then chances are you’ve heard about the 1990 amendments to the Clean Air Act, which established a pollution reduction market to address acid rain in the Northeast. Specifically, it created a cap-and-trade market for sulfur dioxide (SO2: primarily responsible for acid rain, not a greenhouse gas) and nitrogen oxides (NO and NO2, both commonly labeled NOx: harmful to humans, primary precursor to ground-level ozone, which is a greenhouse gas) for the eastern half of the country. Since its inception in 1990, it has impressively reduced acid rain problems at much lower costs than initially predicted. It is the example advocates and economists point to when discussing how cap-and-trade can help control greenhouse gas emissions. This program was further strengthened in 2005 when the Environmental Protection Agency (EPA) issued the Clean Air Interstate Rule (CAIR), which established permanent caps and aggressive reductions for SO2 and NOx emissions beyond the Clean Air Act.

Designed to protect human health, CAIR is in poor health itself. A D.C. Circuit Court in 2008 found it failed to follow Clean Air Act statutory mandates and vacated the rule. The court then reinstated it under the stipulation that the EPA make some significant changes. The EPA is currently retooling CAIR to bring it in line with the court ruling. Just like with carbon emissions, however, it would be nice if Congress stepped up to the plate and made a law that clearly told the EPA how to administer these regulations. Unlike on carbon emissions, there’s a chance Congress can act relatively quickly.

The Basics

The Carper-Alexander bill sets a 3.5 million ton cap for a national market of SO2 emissions in 2012, then ratchets it down to two million tons in 2015 and 1.5 million tons in 2018, an 80 percent reduction of 2008 emissions. This final limit would remain unless after 2021 the EPA finds a lower cap is needed to protect public health.

The NOx market would operate slightly differently, as the country would be split into two zones, with the eastern states and western states each getting their own NOx market. The eastern market will face a cap of 1.39 million tons in 2012, which will tighten to 1.3 million tons by 2020. The western market will be capped at 510,000 tons in 2012, cranking down to 320,000 ton by 2020. When combined, the two markets will reduce NOx emissions from 2008 levels by 53 percent. The bill calls for mercury to be reduced by 90 percent by 2015, but it is not regulated in a market. Rather, the bill sets a cap for mercury (no trading) and leaves it to the EPA to promulgate the program rules.

A 4P bill could be very similar to the 3P proposal. Likely, the bill would establish a single market for CO2 emissions from power plants with reduction goals for future years, likely extending out to 2020. The bill could possibly call for New Source Performance Standards on all four pollutants for new plants. It might also include offset provisions for CO2 production. This legislative approach could be appealing if a more comprehensive proposal fails to gain support in the Senate and legislators begin to look for smaller-scale, more piecemeal approaches to emissions reduction.

The Good

The 3P bill takes aggressive action to reduce harmful air pollutants that derive from the combustion of fossil fuels, namely coal and oil, for electricity generation. Even though it targets only non-greenhouse gas pollutants, 3P could actually lead to indirect climate change benefits. While pollutants capped under the bill can be lowered through the use of filters and other technologies, a 3P scheme could also spur plant upgrades, the retirement of older (and dirtier) plants, and fuel-switching to less carbon-intensive sources, including natural gas, renewables, nuclear and hydropower — all of which would lead to lower carbon emissions. By successfully applying a cap-and-trade system for mitigating environmental damages, 3P also reinforces the notion that these systems can work in the real world without harming the economy.

Furthermore, 3P saves the EPA from legal limbo by clearly establishing the reduction goals for SO2, NOx and mercury emissions over the next 10 years and providing clarity for both firms and regulators. The bill also seems politically innocuous — even infamous climate change denier Sen. Jim Inhofe has said vaguely positive things about it. If the Obama administration goes looking for a bipartisan win on the environmental front, it may look to push the 3P.

The Bad

As already mentioned, 3P is not a climate bill, though it may have some indirect climate benefits. But even a 4P climate bill would be less than ideal. If CO2 were added to the 3P’s list of targeted pollutants, the bill would still fall short as it would regulate only the electricity sector — transportation, manufacturing and other carbon-emitting sectors would evade regulation. Electricity generation accounts for roughly one-third of total greenhouse gas emissions in the U.S., meaning that a 4P bill would still be far less preferable than an economy-wide cap-and-trade system.

Additionally, were a 4P bill to be structured similarly to the current 3P bill, it would give a great deal of authority for market design and administration to the EPA as CO2 would technically be regulated under the Clean Air Act. Regardless of your opinion about the EPA’s ability to properly administer a massive emissions market, it’s a political sticking point, as highlighted by current proposals to strip EPA of its authority to regulate greenhouse gases.

The Upshot

The 3P bill could provide a viable pathway for carbon regulation of the electricity sector. If the highly anticipated tri-partisan climate bill from Sens. John Kerry (D-MA), Joe Lieberman (I-CT) and Lindsey Graham (R-S.C.) does not create the kind of momentum for climate and energy legislation the authors are hoping for (more on that in the next entry), one option could be for the Senate to take a more piecemeal, sector-by-sector approach, in which a 4P bill (SO2, NOx, mercury and CO2) moves forward.

Both Carper and Alexander have sponsored carbon emissions legislation specific to electricity generation in past sessions of Congress. Both those bills called for electricity-specific cap-and-trade markets to reduce carbon emissions. Carper has signaled he’s open to incorporating his bill into a broader climate bill, though it’s unclear if he meant including CO2 in the structure of his bill or working the SO2, NOx and mercury caps into another piece of legislation.

The Carper-Alexander bill provides a simple structure, and clarifies existing regulations within EPA. It would not be an ideal approach to emissions reduction, but if all else fails, it could provide a workable jumpstart. The Clean Act Air showed that cap-and-trade can work once before, and it might have a chance to do it again.

Photo credit: http://www.flickr.com/photos/emmajg/ / CC BY-NC-SA 2.0

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Cheat Sheet for Climate Policy: Part I – What’s Essential for a Good Climate Bill

Thursday, April 22nd, 2010
Nathan Richardson


Nathan Richardson is a visiting scholar at Resources for the Future. The views expressed here are his own.

Danny Morris


Danny Morris is a research associate for the Center for Climate and Electricity Policy at Resources for the Future. The views expressed here are his own.

by Nathan Richardson and Danny Morris

How to tell a good climate bill from a bad one? This series will guide you through the main issues that are likely to arise in the coming weeks as the Senate takes on climate change. In this post, we identify the essential ideas that need to be enshrined in any climate bill. These are the provisions that no good climate policy can do without. (To read the other posts in the series, click here.)

With Sens. John Kerry (D-MA), Lindsey Graham (R-S.C.), and Joe Lieberman (I-CT) set to release their climate legislation next week, climate change seems poised to return to the top of the agenda in Washington. One lesson learned from the last big fight on the Hill — health care — is that things can get confusing and ugly quickly for non-expert observers when media attention shines a light on the congressional sausage factory. It becomes hard to keep issues and ideas straight, harder still to understand which are important, and the avalanche of political rhetoric can make it tempting to just tune out.

Our goal for this short series is to help you cut through the noise. These posts are intended to be a climate policy cheat sheet that will help you decode the discussions. The issues we’ll cover are not equally important — some, like a price on carbon, are integral to the success of any climate and energy policy. Others, like expanding oil drilling, are substantially less significant from a climate/emissions perspective, though perhaps more relevant from other angles (energy security, politics, etc.).

To make the relative importance of these issues clear, we’ve divided them into four categories of decreasing significance — the crucial, the merely important, the relatively minor and the distractions. We’ll summarize the issues in each of the four categories in different posts, starting today with the absolutely vital issues. These categories, we hope, will help you figure out whether something is relatively trivial, or if the farm is being given away in the course of the legislative debate.

We want to make it clear that these categories are based only on the policies’ impact on the key issue: reducing emissions as much as possible for the lowest cost. Other policy goals like economic equity, increased domestic energy production, energy security, etc. might all be important, but (at least in the context of climate policy debates) they’re subordinate to the primary aim of emissions reduction. We’ll mention these goals when one of the policies we discuss affects them, but they are not our focus. We also won’t spend much time discussing the relative levels of political support for different policies – we’ll leave the political commentary to others.

We’re sure that not all of you will agree with our judgment of the relative importance of these issues. That’s fine — encouraging and enabling quality debate on climate policy (look elsewhere for a science debate) is the entire point of the list.

Category I Issues: The Sine Qua Non of Climate Policy

#1: A price on carbon

As Nathan’s written here before, a climate policy without a price on carbon isn’t a serious one. Fossil fuels have deep roots in our economy, and only a carbon price can effectively reach all sources of greenhouse gas emissions. Just as important, no other policy can achieve reductions as efficiently as a carbon price can. The price mechanism forces firms to identify inefficiencies that generate excess greenhouse gas emissions, resulting in the cheapest emissions cuts.

A carbon price can come in one of two forms: either tax carbon emissions directly, or cap them and distribute a limited number of emissions allowances. While a carbon price is not the only policy that matters, it is the one that matters most by far. Anyone who tells you a carbon price is not the most important aspect of climate legislation, no matter how well-intentioned, is wrong.

No climate proposal from the Hill, and few media reports, however, will mention a carbon price. Instead, you’ll hear about cap-and-trade or, since that term has become politically unpalatable, any one of a number of rebrandings: “cap and dividend,” “creating a green economy,” “incentives-based mechanisms,” or something altogether new. If there’s one point worth making here, it’s this — none of these names matter very much, at least substantively. They serve a political purpose, not a policy purpose.

By far the most important question to ask is whether a rebranded proposal puts a price on carbon or not. Is there a cap on emissions and allowances or permits that emitters can trade? Is there a single price (whether it’s called a tax or not) on carbon emissions? If there is, the rest of the proposal is secondary (the details of which may or may not be important). If not, it’s not an honest climate policy.

#2: Breadth of coverage—how much carbon gets priced?

A related issue is how much of U.S. carbon emissions a price mechanism covers. A tax or cap-and-trade system could cover the entire economy, or just one or more sectors. Generally speaking, the broader the coverage of a single emissions market, the greater the possible emissions reductions and the lower the cost per unit of emissions reduction. In other words, broader markets are better. There is some indication that the Kerry-Graham-Lieberman proposal will have an energy-sector only cap, with other measures used to reduce emissions elsewhere. This is useful, but not as good as an economy-wide cap.

A useful rough rule of thumb is that electricity-sector emissions are a third of total U.S. emissions, transportation-sector emissions are another third, and everything else (industry, agriculture, etc.) comprises the remaining third. Since it’s hard to measure emissions from some sectors (like agriculture), a program that includes all U.S. emissions isn’t practical. But including electricity, transportation and industry is feasible and can cover approximately 85 percent of all U.S. greenhouse gas emissions. Policies that cover these sectors are better than those that don’t, and policies that have the same price mechanisms for all three are best of all.

#3: Emissions reduction targets — setting the cap

Setting a price on carbon is critical, but it’s only a means to an end. The goal, of course, is to reduce greenhouse gas (primarily CO2) emissions and limit environmental damages. Once you know that a proposal is a serious one (because it includes a price on carbon), your next question should be how much that policy will reduce emissions. In short, what’s the target?

For a cap-and-trade system, knowing the target is easy: it’s the cap. The concept is pretty simple: set a finite number of emissions allowances and distribute them to actors in the economy in the first year of the program. In each succeeding year, lower the number of allowances available until you reach a desired level of emissions.

For a carbon tax, figuring out emissions reductions is a little more complicated. A rising tax produces similar results as a tightening cap, but you trade emissions certainty (you don’t know exactly how much reduction you’ll get, unlike with cap-and-trade) for price certainty (emitters know exactly how much it will cost for them to emit greenhouse gases). With a cap, it’s the opposite – we know exactly how much we’ll get in reductions, but the market for allowances will determine the price.

More often than not, the first thing highlighted about a new climate proposal are the reduction targets, especially the near-term targets. From an environmental perspective, however, the more important issue is cumulative emissions, not emissions at any point in time. That’s because CO2 and other greenhouse gases are stock pollutants — they accumulate over time. It doesn’t necessarily matter if high or low volumes are released at certain times, just what those volumes add up to over the course of the regulation.

The current global benchmark, to which U.S. action will contribute, is to reach an emissions path that keeps average temperature rises to 2 degrees Celsius. For climate legislation, what matters is the general path of emissions, not necessarily the specific reductions in 2020 or 2040. As we’ll explain in our next post, specific market regulations will determine the exact emissions in any given year, but the market needs a path to follow, which is determined by the lowering cap (or increasing tax). There’s no way to guarantee some set percentage reductions in any year without a direct mandate, which would be extremely costly and restrictive. When you hear lawmakers railing about how 20 percent reductions from 2005 levels in 2020 are unreasonable but 14 percent cuts are attainable, know that they are having a political discussion, not a policy one.

In short, the exact percent emissions targets don’t matter too much year to year. Instead of worrying about whether the goal is to reduce greenhouse gas output by 17 percent or 20 percent in 2020, worry about the trajectory of emissions reduction over the lifetime of the regulation. The long-term outlook is much more important than the short-term benchmarks. Unfortunately, finding out what this long-term outlook is can be hard. It’s a failure of policy leaders and the media that short-term single-year targets are widely publicized while the effect of a given policy on the future stock of greenhouse gases in the atmosphere is rarely discussed.

The Bottom Line

These issues — a carbon price, its reach and the emissions target — are by far the most important parts of a climate proposal. The first questions you should ask of any such proposal are:

  1. Does it create a price on carbon?
  2. How much of U.S. emissions are covered by that price?
  3. What is the path of emissions reduction set by the cap?

The answers to these questions are the most critical to designing effective climate policy. Other things are important, too, as we’ll describe in our next post, but don’t let them distract you. If you care about climate change, keep your eyes on these three ideas.

Photo credit: http://www.flickr.com/photos/evenprimes/ / CC BY-NC-ND 2.0

Update: This item has been corrected.

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Reality Check on Taxes

Friday, April 16th, 2010
Will Marshall


Will Marshall is the president of the Progressive Policy Institute.

by Will Marshall

Americans are increasingly alarmed by the nation’s massive deficits. Yet according to a new CNN poll, 60 percent favor making the Bush tax cuts permanent, instead of letting them expire this year. This doesn’t compute. If President Obama is to make any headway in restoring fiscal discipline in Washington, he will have to inject a note of realism into the debate over taxes and spending.

Here’s the blunt truth: the federal government faces a huge revenue hole – too big to be closed by spending cuts alone. Spending last year reached an astonishing 26 percent of national output, while revenues fell to 15 percent. Full economic recovery is expected to cut that yawning tax gap of 11 percent roughly in half.

Getting federal deficits down to a sustainable level – say 3 percent a year – will require both spending cuts and tax hikes. The president’s deficit-reduction commission will have to look hard at entitlement spending, but we will also need a sweeping overhaul of our tax system to solve our fiscal crisis.

Extending all the Bush tax cuts, of course, will only dig us in deeper. The Congressional Budget Office estimates that extending them through 2017 would cost $1.9 trillion. That doesn’t include the costs of servicing a bigger national debt, or the cost of adjusting the alternative minimum tax so it doesn’t offset the cuts.

Obama pledged during the campaign to keep the Bush cuts for households making under $200,000 a year. He will either have to break that very expensive promise, or turn to other possible revenue sources. What are the options?

The first, and most attractive, is to go after the hundreds of billions of tax subsidies that range from specific industry tax breaks to broader provisions – like the health care exclusion and mortgage interest deduction – that benefit all taxpayers. This is the essence of an intriguing bill crafted by Sens. Ron Wyden (D-OR) and Judd Gregg (R-N.H.), which would broaden the tax base by eliminating all itemized deductions except for mortgage interest and charitable deductions.

Another option is to look for new revenue sources. The best would be a charge on carbon, which would raise revenue, boost clean energy investment and protect the earth’s climate all in one fell swoop. The emerging Senate climate and energy compromise, engineered by Sens. Kerry (D-MA), Graham (R-S.C.) and Lieberman (I-CT), would cap carbon emissions, but it appears that the revenues would be rebated to the public. This approach would blunt Republican charges that putting a price on carbon is tantamount to raising taxes in a weak economy, but it wouldn’t close our revenue gap.

That’s why there’s rising interest in a value-added tax (VAT). Paul Volcker, the éminence grise of high finance, floated the idea recently. It’s also been endorsed by leading progressive thinkers like Isabel Sawhill and Henry Aaron of the Brookings Institution. A VAT has traditionally been seen as a harbinger of European-level taxes, but Sawhill believes it may be the only way to finance health care. She adds:

In the end, any tax increase will be a heavy lift in a country that seems allergic to paying its bills. But it will have to happen sooner or later and sooner would be much better. As Larry Summers once noted, Republicans don’t like value-added taxes because they are a revenue machine and Democrats don’t like them because they are regressive. We will get a VAT when Democrats realize they are a revenue machine and Republicans realize that they are regressive.

Photo credit: http://www.flickr.com/photos/rhruzek/ / CC BY-NC-ND 2.0

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Posted in A New Framework for Growth and Equity, Daily Fix | 1 Comment »

The New Pirates of Campaign Financing

Wednesday, April 14th, 2010
Ed Kilgore


Ed Kilgore is a PPI senior fellow, as well as managing editor of The Democratic Strategist, an online forum.

by Ed Kilgore

In a staff post the other day, we noted that one big reason Republicans are willing to put up with the scandals and incompetence characterizing Michael Steele’s chairmanship of the Republican National Committee (RNC) is simply that new campaign finance rules have already undermined the party’s once-central role in funding campaigns.

At The American Prospect, Mark Schmitt has some useful if somewhat disturbing observations about the independent, corporate-funded committees that will dominate post-Citizens United Republican campaign financing.

Schmitt is one campaign finance expert who doesn’t think Citizens United has changed the source and direction of political money all that much. But it will affect control of political money, and strengthen an already powerful trend towards pirate independent operations that function on the margins of the political system:

Unlike parties and candidates, independent committees don’t have to worry about their long-term reputations. They are essentially unaccountable. The Republican Party plans to be around for decades into the future. It has to worry about its long-term reputation. But independent committees can be use-once-and-burn vehicles. There’s a reason we haven’t heard recently from the Swift Boat Veterans for Truth, the independent committee formed to take down John Kerry in 2004 — like a basketball player sent in to commit six fouls, such operations have one purpose only and can disappear when they are finished.

Finally, independent committees are likely to play a more polarizing role. While parties can choose an early strategy of mobilizing the ideological base, by Election Day, they have to build majorities that include swing voters and independents. The incentives for independent committees are different — by mobilizing the ideological base, they generate not just votes but more and more donors. Their clout, unlike the party’s, derives only from money.

Republicans these days certainly don’t need any additional incentives to run negative campaigns or to elevate considerations of ideology over those of practical governing. But that’s what Citizens United may have wrought.

In the meantime, the RNC will trudge along, and the reduced actual clout of its chairman will not immediately translate into less media attention, particularly if he continues to serve up a rich diet of personal gaffes and institutional funny business. It would be nice, though, if media observers began to get a better focus on the people who are actually raising and spending the money that drives Republican campaigns. They’re the ones flying the jolly roger and proudly flouting every convention.

This item is cross-posted at The Democratic Strategist.

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Posted in Daily Fix, Fixing Our Broken Politics | No Comments »

Brain Gain: Why We Should Grant Visas to Immigrant Entrepreneurs

Tuesday, April 13th, 2010
Dane Stangler


Dane Stangler is research manager at the Kauffman Foundation.

by Dane Stangler

A recent post highlighted the importance of new and young companies to job creation in the U.S., implicitly raising an important question for policy makers: How can we increase the number of startups? Assuming it can be done, such an increase would not solve all of the economic challenges facing this country, but it would certainly help. New companies not only create millions of jobs across all sectors of the economy — they also introduce product and process innovations, boosting overall productivity.

Saying startups are important is one thing, of course; actually designing policies to increase their number is something else entirely. Before making any recommendations, for example, we need to know more about the universe of startups. Are they more prominent in some sectors than others? Does the impact of new companies differ across sectors or geographic regions? Should policy focus on encouraging more new firms, or on enhancing the growth of those already in existence? How would any such policies affect established companies, large and small?

Policymaking around entrepreneurship is evidently not clear-cut as there is still quite a bit we do not understand regarding startups. In the coming weeks we will try to explore these questions and illuminate the world of startups for policymakers. We’ll start with the lowest-hanging fruit of all, though one that may seem like poison to some in Washington: immigration.

It’s commonly accepted that the United States is a nation of immigrants, settled and populated by those fleeing persecution, seeking commercial opportunities in a new land or looking for a fresh start. We have always recognized the important contributions of immigrants to the U.S. economy, from entrepreneurs like Samuel Slater (textile mills) to Andrew Carnegie (steel) to Andy Bechtolsheim (Sun Microsystems) to the laborers and workers who built this country with their hands.

Recently, researchers have begun to paint a broader picture of the economic role of immigrant entrepreneurs. For example, Vivek Wadhwa and his research team have found that, from 1995 to 2006, fully one-quarter of new technology and engineering companies in the U.S. were founded by immigrants. In Silicon Valley, the figure was one-half. These firms constitute only a sliver of all companies, yet contribute an outstanding number of jobs and innovations to the economy.

It makes sense, then, that if we are seeking to increase the number of new companies started each year in the U.S., we might look to immigrants. It turns out that Sens. John Kerry (D-MA) and Richard Lugar (R-IN) are thinking precisely along these lines, introducing the StartUp Visa Act (PDF) in the Senate. This bill would grant a two-year visa to immigrant entrepreneurs who are able to raise $250,000 from an American investor and can create at least five jobs in two years. Without question, such a visa is a good idea and this legislation hopefully paves the way for future actions that would reduce the pecuniary threshold and focus more on job creation.

Quite naturally, however, the promotion of immigrant entrepreneurs arouses suspicion among those on the right who harbor nativist views, and those on the left who perceive progressive immigration policies as a threat to American labor. Such views take the precisely wrong perspective: immigration, as we have seen, is a core American value. Immigrant entrepreneurs, moreover, come to the U.S. to make jobs for Americans, not take them.

Further, many of those who promote immigration as a way to boost economic growth narrowly focus on “high-skilled” entrepreneurs, those who might start technology companies. Clearly, as Wadhwa’s research indicates, such companies are important to American innovation. But we exclude non-technology entrepreneurs at our peril — every new company, including those founded by immigrants, represents pursuit of the American dream. By closing our borders to immigrants in general or welcoming only those with certain skills, we leave out many who will start new firms in other industries. If not in the United States, they will go elsewhere to start their companies and create jobs.

Entrepreneurs are implicit in Emma Lazarus’ poem: “Give me your tired, your poor/Your huddled masses yearning to breathe free.” Entrepreneurs start from nothing and work endlessly to build their companies, expressing their individual freedom through commerce. Why should we want to exclude them from the home of entrepreneurial capitalism?

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Posted in A New Framework for Growth and Equity, Daily Fix | 2 Comments »

Are We Serious About Climate Change? Then Let’s Price Carbon

Wednesday, March 10th, 2010
Nathan Richardson


Nathan Richardson is a visiting scholar at Resources for the Future. The views expressed here are his own.

by Nathan Richardson

Climate policy seems to be returning to the legislative agenda. The Cantwell-Collins “cap and dividend” bill is getting real (and bipartisan) interest. The Kerry-Graham-Lieberman “tripartisan” climate proposal is rumored to be nearly ready. As these proposals indicate, it is likely that the Senate will start its discussions on climate from first principles, despite the presence of a more-or-less complete bill (Waxman-Markey) from the House.

These are interesting times for climate politics, and in many ways similar to how the politics of health care reform played out last year, with likely shifts in the basic ideas and key details over the coming months. I firmly believe Congress will pass a comprehensive climate bill — it’s just a matter of time (though I do hope the endgame is not as protracted as it has been for health care). But what that bill will look like is anyone’s guess.

Major issues will be familiar: how to allocate allowances and revenues, whether to fund nuclear energy or expand drilling, whether and how to include offsets, maybe even whether to scrap cap-and-trade and tax carbon instead (I think there’s a nonzero chance). These debates are all worth having and paying attention to. But we — that is, anyone who cares about climate change, which should be everyone — cannot lose sight of the one element any climate bill must include: a price on carbon.

There is simply no other policy mechanism that can cut emissions, drive the necessary innovation and produce the necessary changes to the U.S. economy. It’s not just that nothing else is as efficient — nothing else will work. Other tools like technology standards, subsidies, and offsets may be useful, but they are secondary in importance. If a proposal does not include a carbon price, it either isn’t about climate or it isn’t serious. None of this is new or surprising: we have a tool, and we know it works.

A Carbon Price Consensus?

To return to the health care analogy, a price on carbon will in some ways play a similar role to that played by the “public option” — it is considered by many to be the necessary core of a meaningful policy, and opposed fiercely by others. I think the similarities end there, however. Pricing carbon is far more important — indeed, necessary — to climate policy than a public option ever was for health care. It is possible to make progress on the basic goals of health care reform (cutting costs, reaching the uninsured, promoting equitable access, etc.) without a public option. The same is not true of climate change mitigation and a carbon price.

Consequently, there is broader and, to some extent, more bipartisan support for pricing carbon than there was for a public option. Despite Sen. Lindsey Graham’s (R-S.C.) recent declaration that cap-and-trade is dead (not exactly what he said, it should be pointed out), a few Republicans and virtually all Democrats alike realize that a carbon price must be part of meaningful climate legislation. The only people who don’t believe this either don’t believe in anthropogenic global warming at all (and are therefore at least principled, if on the wrong side of the science) or are just playing politics with the most important issue of our time. Perhaps this is not surprising, but it is disappointing.

If you care about climate change, the first question you should ask of any proposal is, “Does it put a price on carbon?” Only if the answer is yes is it worth getting into details. As someone once said about soccer, “The ball is round. The game lasts 90 minutes. That is fact. Everything else is theory.”

This holds true for proposals that might be attractive for other reasons, like an “energy only” bill, even if it includes a renewable portfolio standard. This or other measures that don’t include a carbon price are not going to produce significant change in U.S. emissions, and aren’t going to spur the necessary innovation for long-term change in how we produce and use energy. The same goes for incentives and subsidies for “green technology” and creation of “green jobs.” These sound nice, but if you really want the jobs and technology, you need to implement a carbon price. We are likely to see a wide variety of proposals with a wide variety of policy mechanisms over the coming months. All of them will be characterized as pro-climate, pro-innovation, and pro-jobs. It is critical to look past this rhetoric, and even beyond many of the policies included in the proposals, and determine whether there is a carbon price at their core — regardless of how much “rebranding” of climate proposals goes on.

Demanding a price on carbon makes sense regardless of your politics: producing the greatest reduction in emissions at the lowest cost is attractive for everyone. The details of a climate bill do matter, and will surely drive wedges between political groups — but the time has come for a political consensus on pricing carbon. I think progressives should be open to ideas on climate policy from all directions. The proposals that are likely to be at the center of debates in the Senate, Cantwell-Collins and Kerry-Graham-Lieberman, are bipartisan from the start. There will undoubtedly be other proposals and much discussion of the details. But amid all of the political maneuvering, we shouldn’t lose sight of the indispensable core of climate policy. Everyone serious about climate change should be banging the same drum: price carbon.

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Posted in Clean Energy and Modern Infrastructure, Daily Fix | 3 Comments »

NY Lost at the Oscars Last Night

Monday, March 8th, 2010
Mike Derham


Mike Derham is chair of PPI's Innovative Economy Project.

by Mike Derham

“So did you watch the Oscars last night?”

You probably heard that question at least 20 times around the water cooler this morning, and followed it up debating the merits of Avatar vs. The Hurt Locker or Jeff Bridges (who will always be “The Dude” to me) vs. Colin Firth…unless you were one of three million households in New York City, in which case you were fuming that Cablevision and ABC conspired to keep the Academy Awards off your TV screen. In a last-ditch effort to not alienate all their viewers, the two companies — which had allowed ABC service to Cablevision subscribers to expire at midnight the night before the Oscars — got ABC back on Cablevision under an “agreement in principle” about the time Christoph Waltz was accepting the best supporting actor award.

How two of the largest entertainment companies in the country (ABC you know; Cablevision, in addition to being the nation’s fifth largest cable company, owns Madison Square Garden and Radio City Music Hall) could work together to keep the biggest night in entertainment from viewers would seem to boggle the mind.

Cable operators provide local terrestrial broadcast stations over their cable systems under a “must carry” rule, paying carriage fees to provide free-to-air local channels. This arrangement — a leftover from the birth of the cable era in the 1980s — is how you can get your local affiliate on your cable box. But now that “everyone” has cable (87 percent of households in the U.S. subscribe to satellite or cable), terrestrial providers have noticed that they could be charging cable providers for as much as they are paying for the Home Shopping Network. Needless to say, while cable providers want rates to reflect what they feel is the cost of providing a free-to-air channel, local stations want to have the special relationship they have with viewers priced into their carriage fees.

With the conversion of free-to-air analog signal to digital broadcast TV — indistinguishable in quality from the basic cable signal — the stakes seem to have gotten higher. The first shots in this particular war rang out among the New Year’s fireworks, when Fox Television and Time Warner Cable came to a last-minute agreement on providing Fox TV (and the bowl games it broadcast) to 13 million Time Warner subscribers. Fox was looking to get one dollar per subscriber from Time Warner, while the cable provider hoped to continue paying in the neighborhood of the existing nickel-per-customer fee structure.

As local broadcasters are a patchwork across the country, their carriage fee agreements come up for renewal on an irregular basis. The game of chicken was played again this past week between ABC and Cablevision — and with no agreement and neither side blinking, the cars crashed. New York area Cablevision viewers were the losers, though I’m sure Time Warner subscribers and local bars were very popular last night.

The impasse raised the attention of Sen. John Kerry and the Senate Commerce Subcommittee on Communications, Technology, and the Internet — who unsurprisingly thought this was as head-slappingly bad an idea as the rest of us — but the Federal Communications Commission (FCC) has jurisdiction over the issue. FCC media bureau chief William Lake emailed a tepid statement yesterday urging “both parties to quickly reach a resolution for the benefit of viewers.” Rather than taking a passive role with service providers, content providers, and consumers, the FCC should have taken a proactive role in this issue. The goal should have been to keep the players involved from grandstanding in an attempt to gain an undue advantage, and bring them both to the table in search of a solution beneficial to both parties and — most importantly — us viewers.

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Posted in Clean Energy and Modern Infrastructure, Daily Fix | No Comments »

The State of Play on Cap-and-Trade

Thursday, February 4th, 2010
Elbert Ventura


Elbert Ventura is the managing editor of Democracy: A Journal of Ideas. He formerly served as the managing editor of the Progressive Policy Institute.

by Elbert Ventura

Remember cap-and-trade? Progressives now speak of it in hushed, glum tones, the way we do of the recently departed. If the bill was already unlikely to be passed in the wake of a difficult 2009 for Democrats, then Scott Brown’s win all but guaranteed that it wouldn’t be so much as a blip on the Dems’ political agenda in 2010.

Yet there are some out there who continue to hold out hope. Some are even Republicans. Here’s Sen. Lindsey Graham (S.C.) speaking at a D.C. event yesterday:

I don’t think you’ll ever have energy independence the way I want it until you start dealing with carbon pollution and pricing carbon. The two are connected in my view—very much connected. The money to be made in solving the carbon pollution problem can only happen when you price carbon in my view.

So if the approach is to try to pass some half-assed energy bill and say that is moving the ball down the road, forget it with me.

Now, Graham has come out against both the House-passed cap-and-trade bill last year and the bill that passed out of the Senate Environment and Public Works Committee. But he, Sen. John Kerry (D-MA), and Sen. Joe Lieberman (I-CT) are trying to cobble together a compromise that results in some sort of carbon-pricing scheme and, no less important, can get 60 votes.

It’s indisputable that a system that prices carbon is better at curbing greenhouse gas emissions and spurring clean energy development than a stand-alone energy bill with the usual cocktail of subsidies to energy companies – something that some in Congress are now actively pushing. As Bradford Plumer has pointed out, “without a cap on carbon, such a bill might even end up increasing emissions – especially if the proposed new transmission lines merely gave coal-fired plants access to new markets, allowing them to boost output.”

Where’s the administration in all this? President Obama’s budget pointedly left out revenue that an emissions-trading program would have brought in. (Last year’s budget, by contrast, included a revenue forecast of $646 billion over several years from a cap-and-trade system.) The administration insists that the omission shouldn’t be read as a signal of where things stand on cap-and-trade — but it’s sure hard not to. Then again, the budget also includes a $43 million increase for the EPA’s implementation of its carbon endangerment finding, certainly a signal that it intends to move ahead with a Supreme Court-mandated regulatory effort to confront the carbon problem in the absence of legislation.

For his part, President Obama in a town hall appearance in New Hampshire earlier this week gave a strong defense of the concept of pricing carbon to drive incentives for clean energy investments. But he also acknowledged that the Senate might separate the subsidies for clean energy in an energy bill from a carbon-pricing mechanism – which realistically means no cap-and-trade at all.

I understand that the president can’t throw around words like “half-assed.” But a stronger push would be nice. Graham called out an energy-bill-only route for what it is and stood firm on the issue of carbon pricing. It seems like there’s an opening there for the president to make the same argument and embolden Congress to do what’s really needed to spur a clean energy economy and curb greenhouse gases: pass a cap-and-trade system.

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