Aerial photo of a natural gas–fired power station near Hull, England. The EU Emission Trading System, a CO2 cap-and-trade system adopted in 2003, is the world's largest environmental pricing regime.
"The Sordid History of Congressional Acceptance and Rejection of Cap-and-Trade: Implications for Climate Policy"
March 7, 2013
Belfer Center Programs or Projects: Harvard Project on Climate Agreements
In both his second inaugural and his fifth state of the union addresses this year, President Obama renewed his commitment to address the risk of global climate change, due to increased concentrations of greenhouse gases in the atmosphere, largely (but not exclusively) a consequence of carbon dioxide (CO2) emissions linked with burning fossil fuels to generate energy. Given the president's attempts since his first inauguration in 2009 — and subsequent Congressional failure in 2010 — to establish an economy-wide CO2 cap-and-trade system, it may be valuable to reflect on the Congress's great success two decades earlier in enacting the path-breaking sulphur dioxide (SO2) allowance-trading programme to cut acid rain by 50%.
The sulphur dioxide success story
In the late 1980s, there was growing concern that acid precipitation — the result of SO2 and, to a lesser extent, nitrogen oxides (NOx) reacting in the atmosphere to form sulphuric and nitric acids — was damaging forests and aquatic ecosystems, particularly in the northeast US and southern Canada. In response, the US Congress passed (and President George HW Bush signed into law) the Clean Air Act Amendments of 1990. Title IV of this law established the SO2 allowance-trading system.
By the close of the 20th century, the SO2 allowance-trading system had come to be seen as both innovative and successful (US Council of Economic Advisers 1998, 156–80). In addition, it has become exceptionally influential, leading to a series of policy innovations in the US and abroad to address a range of environmental challenges, including the threat of global climate change. Most prominent among these innovations has been the EU Emission Trading System, a CO2 cap-and-trade system adopted in 2003 that is by far the world's largest environmental pricing regime (European Commission 2012).
However, the successful enactment and implementation of the SO2 cap-and-trade system in 1990 combined with the subsequent Congressional defeat of CO2 cap-and-trade legislation 20 years later has produced a striking irony (Schmalensee and Stavins 2013). Market-based, cost-effective policy innovation in environmental regulation — in particular, cap-and-trade — was championed and implemented by Republican administrations from that of President Ronald Reagan to that of President George W Bush. But in recent years, Republicans have led the way in demonising cap-and-trade, particularly as an approach to limiting carbon emissions.
For a long time, market-based approaches to environmental protection, such as cap-and-trade, bore a Republican label. In the 1980s, President Ronald Reagan's Environmental Protection Agency put in place a trading programme to phase out leaded gasoline. It produced a more rapid elimination of leaded gasoline from the marketplace than had been anticipated, and at a saving of some $250 million per year, compared with a conventional no-trade, command-and-control approach. Not only did President George HW Bush successfully propose the use of cap-and-trade to cut US SO2 emissions, his administration advocated in international forums the use of emissions trading to cut global CO2 emissions, a proposal initially resisted but ultimately adopted by the European Union. In 2005, President George W Bush's Environmental Protection Agency issued the Clean Air Interstate Rule, aimed at reducing SO2 emissions by a further 70% from their 2003 levels. Cap-and-trade was again the policy instrument of choice.
Clean Air Act Amendments
When the Clean Air Act Amendments were being considered in the US Congress in 1989–1990, political support was not divided on partisan lines. Indeed, environmental and energy debates from the 1970s through much of the 1990s typically broke along geographic lines, rather than partisan lines, with key parameters being degree of urbanisation and reliance on specific fuel types, such as coal versus natural gas. Thus, the Clean Air Act Amendments of 1990 passed the US Senate by a vote of 89-11 with 87% of Republican members and 91% of Democrats voting yea and passed the House of Representatives by a vote of 401-21 with 87% of Republicans and 96% of Democrats voting in support.
The sordid story of climate-change legislation
However, twenty years later when climate change legislation was receiving serious consideration in Washington, environmental politics had changed dramatically, with Congressional support for environmental legislation coming mainly to reflect partisan divisions. In 2009, the US House of Representatives passed the American Clean Energy and Security Act of 2009 (H.R. 2454) — often known as the Waxman-Markey bill — that included an economy-wide cap-and-trade system to cut CO2 emissions. The Waxman-Markey bill passed the House by a narrow margin of 219-212, with support from 83% of Democrats, but only 4% of Republicans. In July 2010, the US Senate abandoned its attempt to pass companion legislation. In the process of debating this legislation, conservatives (largely Republicans and some coal-state Democrats) attacked the cap-and-trade system as 'cap-and-tax', much as an earlier generation of liberals had denigrated cap-and-trade as 'selling licences to pollute'.
Many conservatives in the Congress undoubtedly opposed climate policies because of disagreement about the threat of climate change or the costs of the policies, but instead of debating those risks and costs, they chose to launch an ultimately successful campaign to demonise and thereby tarnish cap-and-trade as an instrument of public policy, rendering it 'collateral damage' in the wider climate policy battle. This 'scorched-earth' approach could come back to haunt conservatives if future environmental initiatives with widespread support are enacted without making use of the power of the marketplace to reduce compliance costs. It is truly ironic that conservatives chose to demonise their own market-based creation.
Implications for climate policy
What are the implications of this somewhat sordid history for future climate change policy? The bad news seems to be that 'cap-and-tax' rhetoric may make it hard to use this approach in the US to deal with climate change. Emissions of CO2 from coal-fired power plants will no doubt be reduced by Environmental Protection Agency rules on SO2, NOx, mercury, coal fly-ash, and cooling-water withdrawals that are working their way through the regulatory process, and that will drive up the cost of generating electricity with coal. But these rules, and those likely to be adopted by Environmental Protection Agency in response to the recent Supreme Court requirement that it regulate CO2 under the Clean Air Act, are unlikely to be cost-effective policies for reducing greenhouse gas emissions from the economy as a whole in the long run. At a time when environmental protection in general and climate policy in particular have become highly partisan in the US Congress, the outlook for an efficient and effective national climate policy is not very promising.
The good news, however, is that cap-and-trade is no longer just a subject for academic seminars and journal articles: it is a proven, viable option for tackling large-scale environmental problems. It is now being used around the world, including for addressing CO2 emissions linked with global climate change. Even if the SO2 allowance-trading programme's performance was enhanced by unanticipated benefits and declines in coal prices, and even if it has been essentially wiped out by later policy changes (Schmalensee and Stavins 2013), the fact is that the allowance-trading programme achieved its target emissions reductions rapidly and cost-effectively. Few other environmental programs of any sort have performed as well.
European Commission (2012), Emissions Trading System (EU ETS).
Schmalensee, Richard, and Robert N. Stavins (2013), "The SO2 Allowance Trading System: The Ironic History of a Grand Policy Experiment', Journal of Economic Perspectives, 27(1), 103–122.
US Council of Economic Advisers (1998), "Economic Report of the President", Washington, D.C., US Government Printing Office.
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