Postmortem on the waxman markey cap and trade bill

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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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Postmortem on the waxman markey cap and trade bill

  1. Free Slides from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ 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 <ul><li>As recently as 2008, prospects for cap-and-trade climate legislation looked good, with support from both major-party presidential candidates </li></ul><ul><li>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 </li></ul><ul><li>What have we learned about the politics of cap-and-trade? </li></ul>Post P100728 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Source: http://commons.wikimedia.org/wiki/File:Global_warming.JPG
  3. The Basic Economics of Carbon Emissions <ul><li>The case for controlling carbon emissions is based on evidence that they cause harmful externalities in the form of climate change </li></ul><ul><li>The economically optimal level of emissions would be achieved where the marginal cost of abatement equals the marginal external cost of carbon emissions </li></ul>Post P100728 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ <ul><li>Definitions of terms: </li></ul><ul><li>Carbon emissions: Quantity of carbon dioxide or equivalent other greenhouse gas released into the atmosphere </li></ul><ul><li>Marginal cost of abatement: Cost of reducing emissions by one additional ton (increases as emissions decrease) </li></ul><ul><li>Marginal external cost: The damage done by the climate change associated with one additional ton of carbon emissions </li></ul>
  4. Controlling Emissions with a Carbon Tax <ul><li>One way to control emissions would be impose a tax of a fixed amount per ton of carbon </li></ul><ul><li>Firms would eliminate any emissions for which the marginal cost of abatement was less than the tax </li></ul><ul><li>Result: Emissions would be reduced from the “business as usual” level to the optimal level </li></ul>Post P100728 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
  5. Controlling Emissions with Cap-and-Trade <ul><li>Instead, emissions could be controlled using cap-and-trade </li></ul><ul><ul><li>Government sets a cap on carbon emissions (e.g. 50 tons) </li></ul></ul><ul><ul><li>Permits are issued allowing one ton of emissions each </li></ul></ul><ul><ul><li>Permits are bought and sold until an equilibrium price is reached </li></ul></ul><ul><ul><li>Firms with high marginal abatement costs are buyers, those will low costs are sellers </li></ul></ul><ul><li>Result: Emissions are reduced to the optimal level </li></ul>Post P100728 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
  6. Comparison of Effects on Emissions <ul><li>Either a carbon tax or cap-and-trade could be used to reduce emissions to the optimal level </li></ul><ul><li>Many economists think that carbon taxes are better in one important respect </li></ul><ul><ul><li>Under cap-and-trade, the price of permits could vary widely from year to year as market conditions changed </li></ul></ul><ul><ul><li>A carbon tax would be constant from year to year </li></ul></ul><ul><ul><li>A more predictable price might provide a stronger signal to firms to invest in pollution control technology </li></ul></ul>Post P100728 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
  7. Comparison of Effects on Government Revenue <ul><li>Each $10 per ton of carbon tax (equivalent of 10 cents per gallon gas tax) could bring in $50 billion revenue per year* </li></ul><ul><li>Possible uses of tax </li></ul><ul><ul><li>Pay down federal debt </li></ul></ul><ul><ul><li>Subsidize clean energy </li></ul></ul><ul><ul><li>Reduce payroll tax or other taxes </li></ul></ul><ul><li>If cap-and-trade permits were sold at auction by the government, the same revenue would be generated </li></ul>Post P100728 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ *Estimate by Carbon Tax Center www.carbontax.org
  8. Political Advantages of Cap-and-Trade: Building Coalitions <ul><li>Some have argued that cap-and-trade makes it easier than a carbon tax to build a coalition for action on climate change </li></ul><ul><li>Instead of selling all permits by auction, some permits could be awarded free based on past emissions </li></ul><ul><li>This “grandfathering” approach would make it attractive for some polluters to support the coalition needed to pass a cap-and-trade bill </li></ul>Post P100728 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Source: http://commons.wikimedia.org/wiki/File:Political_volunteers.jpg
  9. Political Advantages of Cap-and-Trade: Avoiding Tax Resistance <ul><li>Others have argued that cap-and-trade would meet less political resistance because it is not a tax </li></ul><ul><li>If permits are auctioned, they produce revenues, but the revenues do not have to be called taxes </li></ul><ul><li>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 </li></ul><ul><li>Until recently, some Republicans in the U.S. House and Senate supported cap-and-trade even though they oppose tax increases </li></ul>Post P100728 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Source: http:// commons.wikimedia.org/wiki/File:Taxprotestorsmis.jpg ; http://commons.wikimedia.org/wiki/File:No_IRS.svg
  10. Results of Coalition Building in Waxman-Markey <ul><li>The Waxman-Markey bill achieved a majority coalition in the House but only at great cost to its effectiveness </li></ul><ul><li>85% of permits were given away free, leaving little revenue gain </li></ul><ul><li>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 </li></ul><ul><li>Command-and-control provisions (e.g., renewable energy mandates for utilities) departed from the efficiency of a market-based approach </li></ul>Post P100728 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ 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 <ul><li>It proved impossible to put together a majority coalition for cap-and-trade in the U.S. Senate </li></ul><ul><li>So much was given away to build the House coalition that little room was left for further bargaining </li></ul><ul><li>Senate Republicans chose to characterize cap-and-trade as a disguised tax, calling it “cap-and-tax” </li></ul><ul><li>Former Republican supporters of cap-and-trade withdrew their backing </li></ul>Post P100728 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Under current rules of the U.S. Senate, a 60% majority is required to pass most legislation. Picture source: http://upload.wikimedia.org/wikipedia/commons/a/a6/US_Senate_Session_Chamber.jpg
  12. Lessons of Waxman-Markey <ul><li>The coalition-building power of the cap-and-trade approach did not prove as strong as supporters had hoped </li></ul><ul><li>Cap-and-trade has now been rebranded as “cap-and-tax,” reducing its future political appeal </li></ul><ul><li>Attempts to assemble a coalition for cap-and-trade led to extensive departures from the simple market-based version found in economics textbooks </li></ul><ul><li>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 </li></ul>Post P100728 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

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