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Postmortem on the waxman markey cap and trade bill
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Postmortem on the waxman markey cap and trade bill


A set of slides discussing the cap-and-trade approach to control of carbon emissions and the political implications of the failure of the Waxman-Markey cap-and-trade bill.

A set of slides discussing the cap-and-trade approach to control of carbon emissions and the political implications of the failure of the Waxman-Markey cap-and-trade bill.

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  • 1. Free Slides from Ed Dolan’s Econ Blog Postmortem on Waxman- Markey: The Politics of Cap-and-Trade Post prepared July 28, 2010 Terms of Use: These slides are made available under Creative Commons License Attribution—Share Alike 3.0 . You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics , from BVT Publishers.
  • 2. The Death of the Waxman-Markey Cap-and-Trade Bill
    • As recently as 2008, prospects for cap-and-trade climate legislation looked good, with support from both major-party presidential candidates
    • By July 2010, cap-and-trade is officially dead. The Senate will not bring the House-passed Waxman-Markey bill to a vote, nor will it propose a substitute
    • What have we learned about the politics of cap-and-trade?
    Post P100728 from Ed Dolan’s Econ Blog Source:
  • 3. The Basic Economics of Carbon Emissions
    • The case for controlling carbon emissions is based on evidence that they cause harmful externalities in the form of climate change
    • The economically optimal level of emissions would be achieved where the marginal cost of abatement equals the marginal external cost of carbon emissions
    Post P100728 from Ed Dolan’s Econ Blog
    • Definitions of terms:
    • Carbon emissions: Quantity of carbon dioxide or equivalent other greenhouse gas released into the atmosphere
    • Marginal cost of abatement: Cost of reducing emissions by one additional ton (increases as emissions decrease)
    • Marginal external cost: The damage done by the climate change associated with one additional ton of carbon emissions
  • 4. Controlling Emissions with a Carbon Tax
    • One way to control emissions would be impose a tax of a fixed amount per ton of carbon
    • Firms would eliminate any emissions for which the marginal cost of abatement was less than the tax
    • Result: Emissions would be reduced from the “business as usual” level to the optimal level
    Post P100728 from Ed Dolan’s Econ Blog
  • 5. Controlling Emissions with Cap-and-Trade
    • Instead, emissions could be controlled using cap-and-trade
      • Government sets a cap on carbon emissions (e.g. 50 tons)
      • Permits are issued allowing one ton of emissions each
      • Permits are bought and sold until an equilibrium price is reached
      • Firms with high marginal abatement costs are buyers, those will low costs are sellers
    • Result: Emissions are reduced to the optimal level
    Post P100728 from Ed Dolan’s Econ Blog
  • 6. Comparison of Effects on Emissions
    • Either a carbon tax or cap-and-trade could be used to reduce emissions to the optimal level
    • Many economists think that carbon taxes are better in one important respect
      • Under cap-and-trade, the price of permits could vary widely from year to year as market conditions changed
      • A carbon tax would be constant from year to year
      • A more predictable price might provide a stronger signal to firms to invest in pollution control technology
    Post P100728 from Ed Dolan’s Econ Blog
  • 7. Comparison of Effects on Government Revenue
    • Each $10 per ton of carbon tax (equivalent of 10 cents per gallon gas tax) could bring in $50 billion revenue per year*
    • Possible uses of tax
      • Pay down federal debt
      • Subsidize clean energy
      • Reduce payroll tax or other taxes
    • If cap-and-trade permits were sold at auction by the government, the same revenue would be generated
    Post P100728 from Ed Dolan’s Econ Blog *Estimate by Carbon Tax Center
  • 8. Political Advantages of Cap-and-Trade: Building Coalitions
    • Some have argued that cap-and-trade makes it easier than a carbon tax to build a coalition for action on climate change
    • Instead of selling all permits by auction, some permits could be awarded free based on past emissions
    • This “grandfathering” approach would make it attractive for some polluters to support the coalition needed to pass a cap-and-trade bill
    Post P100728 from Ed Dolan’s Econ Blog Source:
  • 9. Political Advantages of Cap-and-Trade: Avoiding Tax Resistance
    • Others have argued that cap-and-trade would meet less political resistance because it is not a tax
    • If permits are auctioned, they produce revenues, but the revenues do not have to be called taxes
    • If permits are given away as incentives to promote desired behavior (pollution abatement, improvements in energy efficiency, research, etc.) they achieve desired results without passing through the budget at all
    • Until recently, some Republicans in the U.S. House and Senate supported cap-and-trade even though they oppose tax increases
    Post P100728 from Ed Dolan’s Econ Blog Source: http:// ;
  • 10. Results of Coalition Building in Waxman-Markey
    • The Waxman-Markey bill achieved a majority coalition in the House but only at great cost to its effectiveness
    • 85% of permits were given away free, leaving little revenue gain
    • Special provisions of the bill prevented electric utilities from passing the costs of pollution abatement through to consumers, thereby limiting the impact on energy demand
    • Command-and-control provisions (e.g., renewable energy mandates for utilities) departed from the efficiency of a market-based approach
    Post P100728 from Ed Dolan’s Econ Blog HR 2454, The American Clean Energy and Security Act or Waxman-Markey bill, passed the House in 2009 but failed to come to a vote in the Senate and is officially dead as of July 2010
  • 11. Collapse of the Cap-and-Trade Coalition in the Senate
    • It proved impossible to put together a majority coalition for cap-and-trade in the U.S. Senate
    • So much was given away to build the House coalition that little room was left for further bargaining
    • Senate Republicans chose to characterize cap-and-trade as a disguised tax, calling it “cap-and-tax”
    • Former Republican supporters of cap-and-trade withdrew their backing
    Post P100728 from Ed Dolan’s Econ Blog Under current rules of the U.S. Senate, a 60% majority is required to pass most legislation. Picture source:
  • 12. Lessons of Waxman-Markey
    • The coalition-building power of the cap-and-trade approach did not prove as strong as supporters had hoped
    • Cap-and-trade has now been rebranded as “cap-and-tax,” reducing its future political appeal
    • Attempts to assemble a coalition for cap-and-trade led to extensive departures from the simple market-based version found in economics textbooks
    • Although prospects are dim for any near-term action on climate change, the case for carbon taxes, rather than cap-and-trade, may have been strengthened as a long-term strategy
    Post P100728 from Ed Dolan’s Econ Blog