Cap-and-Trade Legislation: A Chance for Bipartisanship?

One of the virtues of teaching at an upper-echelon liberal arts school is that I am surrounded by very smart people doing interesting research. One of those is my colleague Chris Klyza, whose research spans the fields of environmental and political science. Two weeks ago I had the opportunity to hear Chris present a paper summarizing a portion of his latest book (co-authored with David Sousa) titled American Environmental Policy, 1990-2006: Beyond Gridlock, (Cambridge, MA: MIT Press, 2008).  In this paper Chris cast a critical eye on the status of the environmental movement in the United States.  In contrast to many recent polemics sounding the death knell of environmentalism, such as the highly publicized paper by Michael Shellenberger and Ted Nordhaus titled “The Death of Environmentalism,” Chris argues that the “green state” is alive and well. The reason why, he argues, is that the foundation of environmentalism is too deeply situated in our political and cultural context to be removed by those who oppose this movement. That foundation was laid down in a series of legislative acts in the 1960s and ‘70’s that established the first national curbs on air and water pollution, and protected endangered species. With the development of  interest groups devoted to protecting and building on that foundation, environmental interests now occupy a privileged space that resists opposing efforts to scale back environmental policy. Moreover, Chris suggests that additional – albeit incremental – gains in environmental policy are almost inevitable given the durability of this green state.

It was after listening to Chris present his paper that I argued, in a previous post, that one area in which Obama has an opportunity to enact bipartisan policy is in the current debate in Congress regarding the use of a cap-and-trade system to reduce greenhouse gases.  This may not seem intuitively obvious, given the polarizing views that often seem to characterize environmental debate on issues such as climate change. But if one looks back at the origins of the use of cap-and-trade systems, one sees clear evidence of an environmental learning curve that suggests the possibility of developing a bipartisan consensus to pass current legislation.

Cap-and-trade systems were first advocated by economists during the initial debate over clean air legislation in the 1970’s.  The idea is simple in principle: the government issues limits, or “caps” on how much air pollutants (such as greenhouse gases) individual polluters/companies can emit.  These companies must purchase permits in order to emit pollutants – say, $15 for every metric ton of pollutants produced. Or, the permits can be issued initially for free, or auctioned off, by the government (different proposals exist) with revenues either returned to the public, or to companies (again, there is ongoing debate on this issue).  Over time, the government gradually tightens the total amount of pollutants allowed under these permits. Now, some companies – due to better technology, cleaner fuel, etc. – may emit fewer pollutants than their allowable amount.  If so, they can sell their unused portion to other companies who may need the extra allotments in order to meet government-mandated limits.  In effect, then, a market for reducing greenhouse emissions is established, creating incentives for companies to reduce the amount of pollutants they produce.

Ironically (in light of later events), it was environmentalists who initially opposed the use of cap-and-trade systems, arguing that they in effect gave businesses a “license to pollute.”  And many environmentalists remain opposed to them today.  As it became clear, however, that the environmentalists’ preferred policy of relying on mandatory curbs on air pollutants simply led to endless litigation without much progress in reducing those pollutants, Congress finally overcome environmental resistance and implemented a version of a cap and trade system in the 1990 Clear Air Act amendments, designed to reduce the sulfur dioxide that caused acid rain. It proved remarkably successful at reducing the acid rain more quickly and at less cost than even its stronger supporters had predicted.

With that initial success, much (but not all!) opposition to the use of cap-and-trade systems in principle evaporated, and similar systems have been put in place both in the American northeast with a regional compact among 10 states, and in Europe (with admittedly mixed success).  In the 2008 presidential campaign, Obama campaigned in support of a cap and trade system to reduce greenhouse gases, and climate legislation recently introduced in Congress incorporates a cap-and-trade system as part of the overall effort to reduce climate change.

So, given the fact that climate change is a lightening rod for controversy, why do I suggest that cap-and-trade legislation might be ripe for bipartisan support?  In part, for the reasons Chris lays out in his paper:  the public is in favor of clean air – it’s a nonpartisan issue – and politicians recognize this. And, because of the durability of the “green state”, the question is not whether greenhouse gas legislation or regulation is going to pass – it’s the form that it’s going to take that’s still to be determined.  But if Congress doesn’t act, the courts – prodded by environmental groups – likely will.  And almost everyone would prefer that the courts not get involved since judicially-imposed solutions are almost never very efficient or practical, and often simply lead to more litigation. Second (and this is my point, not Chris’), although extremists on the Right and the Left still oppose cap-and-trade systems, there is generally support among moderate legislators for a system that relies on flexible market mechanisms for reducing pollution, as opposed to strict emission limits or the implementation of a broad-based carbon tax.   If you look at the swing voters in Congress, many of them, such as Olympia Snow and Susan Collins in Maine, or Arlen Specter in Pennsylvania, represent states that have strong constituent support for reducing greenhouse gases but which also don’t want to impose a carbon-based tax on major employers.  And several of these moderates, including John McCain and Joe Lieberman, sponsored versions of cap-and-trade legislation in the 110^th Congress.  (By my count, there were at least 7 different climate bills incorporating cap-and-trade provisions submitted to Congress in the last congressional session.)

Of course, this is a far cry from suggesting that cap-and-trade systems are without controversy.  The devil is in the details, particularly regarding whether permits should initially be given out for free, or instead allocated through auctions, or something in between.  Electrical utilities and other manufacturers, not surprisingly, want the permits issued for free, at least initially.  Obama campaigned on the promise of auctioning off all emission permits at the outset of implementing a cap-and-trade system, but sources suggest that he is now willing to back away from that if necessary in order to get the legislation passed. My guess is Congress will come down somewhere in the middle. And there is also the issue of where to send the revenues from the auctioning of permits. Again, my guess is Congress will in the end rebate some of the revenue to states hardest hit by a cap-and-trade plan.  Legislators also disagree on how to establish an overall ceiling on pollutants, what that ceiling should be, and how quickly to lower it in subsequent years.

My point, however, is that the larger issue regarding whether to use a cap-and-trade system is no longer a sticking point for most participants in this legislative battle.  Instead, the battle is over the details of implementation – who pays the initial costs?  Who gets the revenue benefits?  What caps will be implemented, and when? But these are the types of issues that Congress is ideally suited to address, through logrolling and compromise.  As long as the debate doesn’t get bogged down in ideological issues, but instead centers on the nitty-gritty of costs and benefits, Congress is capable of resolving these differences and producing cap-and-trade legislation. Not surprisingly, the Obama administration seems to have ceded debate on these issues to the key congressional committees in the House and the Senate, while keeping a watchful eye on its progress.  Of course, given the current economic climate, any legislation that appears to impose costs on businesses is going to face rough sledding in Congress.  And cap-and-trade legislation may still get tripped up in the larger debate over a climate bill, of which it is a part.  Finally, there is always the worry that Congress simply can’t digest this bill while also chewing on health care reform, entitlement reform and the host of other policy initiatives Obama has indicated he wants Congress to address.

Nonetheless, I think this is an issue that has the potential to attract the support of a bipartisan coalition in Congress.  As such, it may be an area in which the Obama administration is willing to invest some political capital to produce legislative agreement.   If so, Obama may yet be able to claim that he introduced a modicum of bipartisanship to the 111^th Congress.