Can carbon 'cap and trade' make a comeback?

The recession has dampened enthusiasm for cap-and-trade legislation.

By , Guest blogger

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    Marathon Oil Corp. employees Craig Boe, unit operator, and Don Robicheaux, safety coordinator, speak in front of a new platformer that is part of the company's estimated $3.2 billion expansion in Garyville, La., March 25. Marathon it has brought its vastly expanded Louisiana refinery up to full production, turning out nearly 20 million gallons of gasoline and other fuels a day despite the industry chill from possible carbon legislation coming from Congress and growing competition overseas.
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Harvard's Rob Stavins asks "Who Killed Cap and Trade?". The NY Times is asking the same broad question .

The recession has not helped the push to internalize the carbon externality. Hummer drivers, meat eaters, electricity consumers, cement makers are all not eager to face higher input prices at a time when their earnings are down. Matt Kotchen and I have figured out a credible strategy for measuring this "recession chills the ardor for Carbon policy" effect and we should have a serious NBER paper ready in 2 months or so.

Last year, Mike Cragg and I served up our basic answer to Rob Stavins' question in this NBER paper . In that paper and in this better version of that paper, we document that there is clear evidence that Congressional representatives from high carbon, poor, conservative areas are not going to support such legislation. Our statistical model can be used to identify the "marginal fence sitting" representatives who Nancy Pelosi would need to form a coalition of the willing on carbon. For generations, environmental economists have spoken about the coase theorem (when property rights are well defined --- bargaining will take place and an efficient allocation of resources will emerge --- intuitively --- a vegetarian never ends up with a meat pizza) --- so in this case; liberal wealthy states such as California should make side payments to the West Virginia type states to encourage their leaders to vote pro-green. These aren't "bribes" to politicians. These would be transfers to the people of such states to help them cope under the new anti-carbon incentives that would be built into cap and trade.

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So, you don't have to be a Nobel Prize winner to think through the narrow self interest of each of these Representatives and Senators from such states as Indiana and Missouri. Each will ask himself; "what are the benefits of adopting a carbon cap and trade and what are the costs?" Do the benefits to my district exceed the costs?

Of course, both are very difficult to quantify; on the benefits side -- it has become clear that the U.S enacting cap and trade is unlikely to set off a "chain reaction". Imagine if China and India said that they would match any regulation we sign, that would be a "chain reaction". The Congress may believe that the rest of the world can't credibly commit to "match" the U.S. If other nations do not respond to our unilateral actions, then given that we are 25% of world emissions --- a major 50% reduction by us does dent global emissions but not for long as China and India's share of emissions grows.

On the costs side, we need economists to generate credible estimates of how household well being for heterogeneous households will be affected by pricing carbon. This is a classic incidence question. In low carbon states such as California, households will face less of this carbon incentive then in a humid, sprawling, large home, coal fired power plant region. California could make side payments to these states' leaders to compensate them for the anticipated higher costs brought about by carbon legislation. I don't know if this was discussed.

Permit me to end with some optimism. Assume that California's AB32 is implemented and that over the next 10 years that California's innovation sector makes serious directed green technological progress --- these new "google" ideas can be adopted by the rest of the county and this lowers the cost of complying with a cap and trade mandate. Such substitution possibilities will make leaders in Missouri more willing to sign such legislation. Under this scenario, cap and trade will make a comeback when its anticipated price tag falls. Now will this be too late? Will Jim Hansen and 350 ppm and the general doom and gloom caused by climate change already have taken place? I do not know.

Shifting gears, the Stavins piece mentions that greens need booms and disasters to achieve political goals. Folks should read my 2007 paper in the Journal of Risk and Uncertainty that discusses the "silver lining of disasters" point using Congressional voting data before and after 5 major environmental disasters.

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