Cap And Trade Passes The House

by hilzoy

From the NYT: 

"The House passed legislation on Friday intended to address global warming and transform the way the nation produces and uses energy.

The vote was the first time either house of Congress had approved a bill meant to curb the heat-trapping gases scientists have linked to climate change. The legislation, which passed despite deep divisions among Democrats, could lead to profound changes in many sectors of the economy, including electric power generation, agriculture, manufacturing and construction.

The bill's passage, by 219 to 212, with 44 Democrats voting against it, also established a marker for the United States when international negotiations on a new climate change treaty begin later this year.

At the heart of the legislation is a cap-and-trade system that sets a limit on overall emissions of heat-trapping gases while allowing utilities, manufacturers and other emitters to trade pollution permits, or allowances, among themselves. The cap would grow tighter over the years, pushing up the price of emissions and presumably driving industry to find cleaner ways of making energy.

President Obama hailed the House passage of the bill as "a bold and necessary step." He said in a statement that he looked forward to Senate action that would send a bill to his desk "so that we can say, at long last, that this was the moment when we decided to confront America's energy challenge and reclaim America's future."

Think about it. Cap and trade is completely in line with standard market economics: you identify an externality that the market does not capture, design a market system to capture and price that externality, and rectify a market failure. The Democrats, who favor the bill, have a huge margin in Congress. They water it down in various ways to make it more palatable to various wavering people. And after all that, it still only passes by seven votes.

That's sad. I hate to think what will happen to it in the Senate.

It's also a testament to the power of special interests. Consider the bill's emissions credits. President Obama proposed to auction them all, which would have allowed them to be distributed to those businesses to whom they were most valuable; the proceeds from the auction would have gone both to rebates to consumers and to funding a continuation of the middle class tax cuts. Oh no! shrieked various utilities and other corporations that would have had to pay for those auctioned credits. And lo! our representatives caved, which means that the money that would have paid for our tax cuts is no longer there.

I'm really glad it passed: it's a lot better than nothing. But it could have been better still.

Comments

[Brett Bellmore]

Of course, the whole process was about as transparent as a yard of lead. And, hey, Obama has now dropped that promise about posting bills before signing them, instead of just breaking it. But at least we know a bill called "cap and trade" has passed.

And the name is important enough, that what's in it can't really matter, right? Must be, because that's the only way you could know this bill is better than nothing. Since the name is the only thing you're sure about at this point.

[Zerada]

Brett, for goodness' sake. The text of the bill is available right here: http://www.rules.house.gov/111/LegText/111_hr2454.pdf. You can knock yourself out reading it, so that you and anyone else in the world with an Internet connection can be sure of something else regarding this bill besides its name.

And since the bill has only passed the House and not yet the Senate, there is no guarantee that Obama will ever get to sign it. And yet, here the bill is, already posted online! Considering that the campaign promise was to make sure bills are posted online before they end up on his desk for signing, I'd say this is an instance of a promise kept.

[Point]

it will have to go into conference committee; House tends to have more clout in this process anyway, and the President is usually pretty involved as well.

Of course, there's the whole question of "Does the bill do enough?", but two points in defense of HR 2454 if I could:

1) While the bill gives away a large portion of the credits, losing a lot of potential capital (as hilzoy points out), this weakness does not really weaken the legislation's environmental impact.

(tbc)

[Point]

(con.)

2) This reduction in state revenue has meant less state investment in green technology; but, as long as there are financial incentives for green innovation, people will invent and invest in it.

3) As to whether a 20% reduction in greenhouse gases over a decade is sufficient legislation, I think we need to remember that even the boldest action on climate change the American economy could take would prove futile if it was not followed up across the globe, especially in developing economies.

This actually makes this legislation all the more compelling -- it sets up this future international agreement on climate change (Kyoto 2.0 if you will).

[Point]

Sorry, last two posts were supposed to begin:

"Me, I'm cautiously optomistic: even if the Senate significantly waters down the bill..."

and pick up at 9:36

[David Sucher]

"...you identify an externality that the market does not capture, design a market system to capture and price that externality, and rectify a market failure."

One small part of this post — the phrase "design a market system" — jumped out at me.

I was struck by the idea of "designing a market system" for emissions but apparently it already exists: the Chicago Climate Exchange, which I assume does what you are talking about.

[chamblee54]

Zerada
I copied the url you provided into my browser and it did not work.
Could you provide a link to that site, please.

[chamblee54]

One day I will learn not to speak until I am fully awake.
I copied a period at the end of the url. That is the reason it did not work.
Anyone wanting to see hr2454 can now do so.

[Sebastian]

I'm disappointed by the magnitude of the emissions credits. Also the further farm subsidies make me ill. Farm credits if input prices go up? The whole point is to make input prices go up if they are big carbon emitters. If you don't do that, it can't work.

[wj]

David, I think perhaps what hilzoy intended was "...design a market-based system..." Thus the Chicago Climate Exchange (or any other similar one) would be a place to do the buying and selling of the permits that the bill creates.

[Davis X. Machina]

.you identify an externality that the market does not capture.

No correctly-oriented cadre could believe such revisionist nonsense.

There are no externalities that the market does not capture.

The market captures and prices everything, and at the correct price. If the market does not capture it, it is because it doesn't exist.

[Pithlord]

The glass is half full if (and it's a big "if") some bill passes the Senate. By the Coase theorem, the initial allocation doesn't matter - it's correct to do whatever is necessary to get it passed. It's not even clear that auctions are fairer since incumbents made investments based on the status quo. And the cap doesn't matter that much either, since it will have to be revised when there is more political will in the future.

The point is to get the structure in place.

[Ben Alpers]

I'm really glad it passed: it's a lot better than nothing. But it could have been better still.

Depends on what you mean by "could have been."

I think we are often prone to see the way these things play out politically in Congress as more contingent and flexible than they are.

In fact, on issue after issue, Congress, even with a large Democratic majority and a Democrat in the White House, waters down and barely passes important pieces of legislation.

This kind of result was entirely predictable given the current state of American politics. Indeed, I'm not sure it could have been otherwise.

To change that state of affairs we would need some pretty fundamental political reforms. And--to ride my favorite hobbyhorse--the Democratic Party would need to be fundamentally reformed, too.

No, that doesn't mean that it would need to become the Ben Alpers Party. As I've already said on another thread, even I fear that the votes for such a party would be limited. FWIW, the Green Party was my party for a good long time, and we all know how many votes we got.

But a Democratic Party that actually does even what it currently says it stands for would need to be less beholden to monied interests and that in turn would require a further series of structural reforms of a scale similar to those undertaken by the party in the late 1960s and early 1970s. (If that ever happens, perhaps I'd be able to hold my nose and call myself a Democrat again, even if the party is still not quite where I'd like it to be.)

[superdestroyer]

Looking at section 727, it looks like that a company that is not currently emitting greenhouse gases from a stationary source (what used to be called point source) will first have to purchase the right to pollute and then apply to the government to get an emissions permit.

I wonder if the EPA will then have to do a record of environmental consideration since the new permit would be a government action not covered as a categorical exclusion under the National Environmental Protection Act?

[Nescio]

You write:

"They water it down in various ways to make it more palatable to various wavering people."

And then you attack people who opposed it and are critical about the fact that it only passed by a margin of seven votes.

What does that statement even mean? Is it meant to hide the fact that some of the so-called special interests who opposed it were environmantalist groups and economists who are pushing for policy to combat climate change and effective cap-and-trade? We give away 85% of the permits: there goes your quick, inaccurate comment that "Cap and trade is completely in line with standard market economics". Of course the idea of cap-and-trade is. But this bill is not that by any means. And environmentalists oppose it for all number of reasons.
Of course, there are the other entrenched, ingenuine special interests as well. But try being a little more honest, and watch your words.

[Pithlord]

Nescio, standaed market economics would say it doesn't matter how you allocate the permits initially. That's a one-time wealth transfer issue, and standard welfare economic isn't interested in those.