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Monday, September 28, 2009

Pass ACESA I: Cap and Trade Works

[On Thursday, September 24, I had an enjoyable conversation with Matthew McGovern and Rick Hauffe from Repower South Dakota and Matt McLarty from the Environmental Law & Policy Center. This post is Part 1 of a series based on that interview.]

Regular readers know that, after some doubts, I've come down in favor of the American Clean Energy and Security Act (H.R. 2454—ACESA). The bill is frequently referred to, usually by opponents, as the "cap-and-trade" bill. ACESA covers much more than that single issue, such as energy efficiency, alternative energy, and smart grid technology.

But cap and trade is a big part of the bill, and it's worth looking at.

Cap and trade is the creation of a market mechanism to limit carbon emissions and impose a cost to capture the externalities those emissions create. Right now, I can fire up a coal plant and emit all the carbon I want, without paying for the harms that carbon causes (like fewer Pacific island tourist destinations, dead people, and sickly squid and other marine life, not to mention "storms, drought, mass migration, and pandemics" that might trigger terrorism and armed conflict.). Cap and trade creates a system where I either pay for the damage my carbon emissions are doing or invest in better technology that reduces my emissions and maybe even makes me money on the side as I sell my unused quota of carbon allowances to other companies that can't make reductions as easily as I can.

(Nobel laureate Paul Krugman gives an Econ 101 explanation of how cap-and-trade works and how Glenn Beck gets it wrong.)

Cap and trade may sound familiar: as noted here previously, the United States has done it before. Cap and trade is the policy we used to successfully eliminate acid rain. The Clean Air Act of 1990 created a cap and trade system for sulfur dioxide emissions, one of the main causes of acid rain. The program achieved 100% compliance at 20–30% of the projected cost in the 1990s.

The 1990s—you remember that decade, right? Low unemployment, economic boom, a federal budget surplus. What happened to the million of jobs the National Association of Manufacturers said sulfur dioxide cap and trade would kill? The job losses never happened. Industry always cries wolf over enviromental regulations, and time and time again, those self-interested predictions of economic ruin never come true.

As policy gravy, according to Matt McGovern of Repower South Dakota, the EPA calculates that the 1990 Clean Air Act was also a cost-effective public health measure: for every dollar spent, the United States has enjoyed $40 of public health benefits in the form of lower health care costs and fewer missed workdays. I'll leave it to more actuarial heads to calculate the cost-benefit ratio of not having to move a quarter of the world's population to higher ground—think Hurricane Katrina times a thousand.

The United States has used cap and trade before to reduce acid rain and improve public health. We can use it again to reduce carbon emissions and promote innovation in clean energy technology.

[Stay tuned for more on ACESA this week on the Madville Times!]


  1. It appears that EVERY legislative mandate presented by the Democrats involves a large tax increase or some sort of new tax.

    Congress and the Senate have the power to mandate, through passed laws, any and all regulations to clean up the air, get better fuel economy, fix health care issues and control emissions by simply passing the new requirements.

    It seems many of these ideas and mandates have traction, but the added tax cost is something that baffles me. Why not simply pass stricter laws and regs without the added tax burden to already hurting American families?

  2. What tax? Keep in mind that cap and trade is not a straight carbon tax. Conceivably, every business emitting carbon could choose to adopt new tech and efficiencies that would reduce their carbon emissions to their allowance and thus avoid paying anything to Uncle Sam for carbon emissions.

    And is there inherently anything wrong with government's proposing funding sources to cover the government's mandates? I would think that's actually good fiscal responsibility.

  3. With the fallout of Big Stone II and the slowdown of the Hyperion refinery, the best path for energy independence is on a micro scale. Rooftop solar panels and wind turbines for household use will replace the need for involving the state p.u.c.'s Waiting for permission from Minnesota, Wisconsin, and Illinois to upgrade transmission lines takes to long. This has to be accomplished on an individual level.

  4. Isn't it true that individual home owners can get significant credits (i.e., "negative taxes") from the federal government if they install alternative energy systems such as wind turbines and solar panels? I thought I read somewhere that it's up to 35 percent of the cost of the system.

    Too bad my house is sheltered from the wind and sun. The view of Lead is great from the dining room, though!

    I just closed on 5.5 acres west of town with lots of downed trees and underbrush on it. Could burn that stuff in my basement stove. Obviously, doing that would liberate carbon. But wouldn't the carbon go back into the environment anyway, through natural decay, controlled burns, or (heaven forbid) wildfire? Just wondering ...

  5. You're always thinking, Stan, and making me think! If you burn that wood, you release the carbon into the atmosphere immediately. Let it rot or mulch and compost it, and the carbon is released slowly... and I'll go out on a limb and suggest less goes into the air in the form of CO2 (but I welcome any biologist's opinion on this). If the choice is burning it yourself or waiting for a wildfire to break out, you might as well do a controlled burn yourself and minimize the physical danger.

    Sheltered from wind and sun... hmmm... can geothermal do you any good? Otherwise, we might just have to install a nuclear reactor at the lab.

    "Negative taxes" -- I don't have the breakdown on that, but I've read you'll enjoy good return on the efficiency improvements. But yes, for increased power rates that will cost you a postage stamp a day, you will get back a number of other savings from using energy more efficiently thanks to the smart grid, building upgrades, and other ACESA improvements. (And I'm still looking -- where's that tax Rod mentioned?)

  6. And Thad -- micropower! energy independence! That's the ticket!

  7. Krugman is being a dope, as usual, by making the entire analysis in a vacuum. Unless he believes that every other country in the world is going to adopt our policies, he ignores the cost of driving industry overseas. He also assumes the number of permits auctioned isn't going to be too high or too low, rendering the function of the program useless. He limits the economic cost artificially by looking at the benefit industry gains by polluting above the cap...a vague guess at best unless you believe the government understands how a business would continue to operate without producing the pollution inherent in its normal operation (he must be thinking of that gggrrrreat technology Cory refers to that will exist and be available for every industry imaginable). He completely ignores the price of the permits in the economic cost by little more than saying 'it isn't so'. In the end it will drive out more energy production from the US and make us more dependent on foreign sources (which always works to our advantage). All to prevent a non-pollutant from NOT warming the planet.

    So Beck is wrong, the economic cost is actually more than the Krugman's blue triangle

  8. " Setting aside for the moment the question of whether it is justifiable to call carbon dioxide a pollutant, companies of course do not simply absorb these extra costs. Instead, they pass them on to their customers who are also, by and large, taxpayers. Not only does the taxpayer carry the cost of any cap and trade scheme, but their money also provides profit for a whole new industry: the new carbon trading sector,..."
    And thus make Al Gore the first carbon billionaire with his hedge fund that trades in carbon


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