Can Carbon Trade Save the World (or Does the World Need to Be Saved from Carbon Trading)?

This panel was part of the 2009 ABA Section of International Law Spring Meeting, held 14-18 April 2009 in Washington, D.C. The session, sponsored by the International Environmental Law Committee, focused on the pros and cons of proposals to limit carbon dioxide emissions: carbon cap-and-trade, carbon tax, command and control, and voluntary markets. Carbon dioxide represents one of the most important greenhouse gases. The 20-30 attendees included foreign lawyers from Brazil, Canada, the Netherlands, Mexico, and Portugal.

Left to right: Joseph Dellapenna, Michael Gerrard, Jeffrey Gracer, Kenneth S. Rivlin

Speakers:

Michael Gerrard, Columbia University School of Law, New York, New York
Jeffrey Gracer, Sive, Paget & Riesel, P.C., New York, New York
Kenneth S. Rivlin, Partner, Allen & Overy LLP, New York, New York
Joseph Dellapenna, Villanova University School of Law, Philadelphia, Pennsylvania (Moderator)

ABA-provided description: Within the past year, support has emerged for cap-and-trade as the most politically viable technique for reducing or eliminating the emission of heat-trapping gases. Yet, we live in a world in which markets have rather spectacularly failed with the dot.com bubble, the California energy fiasco, and the current financial meltdown. Would a carbon market, or markets for other greenhouse gases, really solve the problems for which they are proposed? Markets could harness private capital and ingenuity to address the most serious crisis currently facing humanity, but carbon trading is so fraught with uncertainties and contingencies that perhaps no amount of regulation can manage adequately the potential for gaming the system. Between these positions are a range of views about how to frame measures to create and maintain a properly functioning carbon market.

Obama’s Cap-and-Trade Proposal

The panelists assumed attendees had a working knowledge of the current proposals. The day before this panel, Obama spoke on the economy at Georgetown University. He said: “Transitioning to a clean energy economy will not be easy. But we can no longer delay putting a framework for a clean energy economy in place. That needs to be done now.” For background purposes, here is a brief summary of President Obama’s platform for a market-based cap on carbon pollution.

President Obama’s proposal calls for an “economy-wide cap-and-trade program” to reduce greenhouse gas emissions. A “cap” establishes a maximum limit of carbon dioxide emissions. The cap(s) could be across sectors and/or specific to individual sectors of the economy. Obama’s “trade” proposal would involve auctioning off so-called “credits” that companies can buy to exceed their emissions limits. Obama has proposed that the funds from the auctions, which could be $300+ million annually, could be spent on health care.

In his speech on the 2010 budget, Obama stated that the United States will invest $15 billion per year for 10 years, for a total of $150 billion, on alternative green technologies, such as wind power and solar power, and “and to build more efficient cars and trucks right here in America.” On The White House website, Obama’s energy policy statement states that the goal is to reduce emissions by 80%. Under his urban policy initiatives, Obama has committed to reducing carbon emissions from buildings because they account for 40% of the overall carbon emissions and represent one of the fastest growing segments of the economy.

On Capitol Hill, the House Energy and Commerce Committee will hold four days of hearings 21-24 April 2009 to discuss a 648-page draft bill, the “American Clean Energy and Security Act of 2009,” sponsored by senior House Reps. Waxman and Markey. The hearings come days after the Environmental Protection Agency (EPA) declared carbon dioxide and other greenhouse gases that contribute to air pollution a possible danger to public health and welfare. The EPA’s proposed finding has been construed as political maneuvering by the Executive Branch to pressure Congress to act.

Obama likely needs to demonstrate domestic progress on climate change to increase U.S. credibility and political legitimacy before the convening of the UN Climate Change Conference (COP15), to be held 7-18 December 2009 in Copenhagen, Denmark. By engaging Congress now, Obama also will likely gain a better understanding of what the United States is willing to commit to as an international obligation.

Session Summary Notes

Here are some notes that I took during the session.

Dellapenna remarked that the Waxman & Markey bill likely will pass the House this summer but will have difficulty in the Senate. He referred to the bill as a mere 468 pages, which means that it apparently grew by roughly 200 additional pages over the weekend. He asserted that the real test is whether any measure actually reduces the emissions. He also noted that the Republicans keep referring to Obama’s cap-and-trade proposal as a “tax.” Calling it a tax, he believes, could backfire on the Republicans and make it more politically viable.

Michael Gerrard then presented the current legal and regulatory landscape. Jeff Gracer and Ken Rivlin identified the pros and cons of the different approaches to curb greenhouse gases.

Rivlin agreed with Gracer that a carbon tax is the most efficient solution but the least politically viable. Both expressed concern related to Obama’s recommendation to use the profits for health care. Gerrard disagreed with the other panelists that a hybrid approach, combining both carbon cap-trade and carbon tax approaches, could be used. He pointed out that carbon caps can control the maximum emissions, whereas carbon taxes can control the pricing. The bottom-line, he argued, is that “you cannot have both.”

Rivlin also observed that we need additional studies and the ability to quantitatively verify reductions in order to assess the cost-benefit. He said he is optimistic. He predicted that 20 years from now, carbon will be “just another thing we trade.” Environmental lawyers, he concluded, need to “really think about what your role can be.”

Comparison of Cap-and-Trade and Tax

Gracer identified the pros and cons of cap-and-trade systems. He said that both tax and cap-and-trade involve risks related to political manipulation, possible economic harm, regressive application, squandering of revenue, and lack of effectiveness.

Pros and Cons of Carbon Tax

Gracer’s list of the advantages of a carbon tax included:

Clear price signal.
Predictable revenue.
Upstream tax most efficient way to achieve economy = wide reductions.
Easy to administer.
Uses existing tax collection system.

Gracer’s list of the disadvantages of a carbon tax included:

Politically unlikely.
Tax loopholes and exemptions subject to political manipulation.
No certainty that desired emissions reductions will be achieved.
Periodic adjustments required.
Taxes vulnerable to political rollback.
Global implementation requires international tax harmonization.

Pros and Cons of Cap-and-Trade

Gracer’s list of the advantages of cap-and-trade systems included:

Feeds into existing international framework and will readily link US-EU and others.
More likely to be enacted in the United States.
Regulatory cap provides reasonable assurance of desired reductions.
Regulatory cap less likely to be subject to political rollback.
System design can mitigate concerns.

Gracer’s list of the disadvantages of cap-and-trade systems included:

Price volatility, which could deter long-term investment.
Setting of cap and distribution of allowances are subject to political manipulation.
Auctioning of allowance subject to market manipulation.
Requires new regulatory system.
Relies on unstable and opaque carbon markets.

15 Design Issues of Carbon Cap-and-Trade Systems

Gerrard identified 15 “design issues” of any carbon cap-and-trade system. One attendee remarked that the list was the most comprehensive and useful one he had seen.

1. Size of cap – Gracer remarked that it is important to set the cap appropriately. He said it would be better to take a bit longer to get it right.

2. Timetable to achieve

3. What sectors of economy are covered

4. Point of regulation

5. Auction or allocation of allowances – note: President Obama advocates auctions.

6. Use of proceeds of auction (investment vs. dividends) Note: President Obama advocates that the profits should go toward health care.

7. Fate of existing cap-and-trade programs

8. Role of regulatory tools – other than cap-and-trade

9. Availability of offsets
9(a). Additionality – Whether the actors would be doing it anyway. If the actor is already doing an activity there is no reason to subsidize or incentivize the greening of that activity by the actor.
9(b). Verifiability – Whether the activity or reduction is actually happening. For example, it is hard to verify deforestation in some areas.

10. Banking of excess emissions – Should banking of excess emissions be allowed?

11. Carbon price safety valve – Prices may fluctuate. Do you regulate with minimums and maximums to avoid or tamp down these fluctuations? Yet, we want the price to go up to give market actors the incentive *NOT* to emit.

12. Protection against the creation of hot spots

13. Early action credit – What should happen when entities already are reducing. Credits for achievements prior to enactment of credit?

14. Linkage to non-US cap-and-trade systems – Most importantly, trading with EU emissions trading system to produce global market

15. Remaining role for command and control – This is related to regulatory tools other than cap-and-trade.

Nuclear Energy

Gerrard also reflected on four concerns related to nuclear energy:

Safety. Safety is less of a concern than before, such as prior to the 3-Mile Island accident of 1979.
Waste. It is “profoundly bad” Obama suspended the Yucca Mountain nuclear waste storage project because it means that more nuclear waste will be stored on-site at nuclear power plants, which frequently are located next to water sources.
Security and Nonproliferation. These are under control in the United States and thus non-issues in the policy debate.
Economics. The financial reality of nuclear energy is a really serious issue. For example, it takes $5 billion in investment and 10 years to get the first megawatt of power. He argues that this is investment that could have been used to advance alternative energies in the meantime, with possibly greener and better results. Building nuclear power plant is the best way for a business to go into bankruptcy. Despite the applications filed for new reactors, very few, if any, become new power plants because there are no orders to create the demand for nuclear reactors.

Rivlin responded that nuclear energy may be the answer but that he would not want to have a reactor in his backyard.

Question and Answer

During question and answer, attendee Gabriella Merla advocated for a hybrid approach. David from Vancouver agreed that a hybrid approach is likely the most appropriate outcome. He recommended following the upcoming May 2009 election in Vancouver because the pivotal political issue across the major two parties is the carbon cap-and-trade system versus a carbon tax. Alejandro expressed concerns related to states’ obligations and the possibility of the U.S. imposing obligations on others. Marisa raised the foreign products dilemma, by which the United States needs to address how domestic products will compete with foreign products not subject to the additional eco-costs arising from the carbon caps or tax. David from the United States observed that the financial crisis illustrates that we do not know which institutions should govern, nationally and internationally, and what the role of those institutions should be to ensure good governance.

Resources

2009 ABA Section of International Law Spring Meeting

International Law Resources

ABA Section of International Law Panel Discussion: Can Carbon Caps/Trade/Tax Save the World from Global Warming?