Two recent Star Tribune pieces address the need for comprehensive energy/carbon policy. The first argued that congressional indecision is counterproductive for both investment and the environment ("Midwest hurt by energy dithering," Dec. 27). The second, from two Copenhagen participants, urged enactment of federal cap-and-trade legislation ("Copenhagen a good first step," Dec. 28).
Certainty on carbon is needed to accelerate renewable investment. But cap and trade is the wrong way to achieve it.
Instead, efforts need to be redirected toward a better approach: a carbon tax.
In theory, cap and trade works by setting a limit on overall emissions (the cap), requiring emitters to purchase emission permits, then allowing those permits to be bought, sold, arbitraged, etc., on a newly created "carbon market" (the trade). A market is said to produce reductions more efficiently than traditional command-and-control regulations.
Supporters point to the success of a similar scheme for sulfur dioxide emissions. While sulfur emissions have decreased, addressing greenhouse gas emissions through cap and trade is orders of magnitude more complicated. And Europe's experiment with carbon markets suggests it won't reduce carbon emissions.
So why is cap and trade favored by many? Two reasons:
First, supporters aren't motivated by an unbending confidence in free markets. Instead, they support cap and trade because they don't have to call it a tax -- which they have accepted from the start to be politically impossible.
Second, Wall Street supports cap and trade. The "evolving carbon market" is predicted to become the world's largest commodities market -- far bigger than corn, citrus, gold or pork bellies -- supposedly growing to more than $3 trillion by 2020.
U.S. Sen. Kirsten Gillibrand of New York recently argued in the Wall Street Journal that we should support cap and trade because it will be good for Wall Street. "We must allow the market to provide the ability to customize products. ... New York's financial industry is ... well positioned to provide the legal and financial expertise necessary for these new products."
Credit default swaps were Wall Street's last "customized" product. As columnist Thomas Friedman wrote: "If you liked credit default swaps, you are going to love carbon offset swaps."
Whether climate change is permanent or we can actually control it will be undeterminable for many years. The risks it and American energy insecurity pose, however, are high. And when risk is high but immeasurable, it's prudent to buy insurance.
A carbon tax is a far preferable insurance policy. It's more transparent. It can be set up under the existing tax code. It doesn't need new bureaucracies to police it. It is more equitable, because it will cover the entire economy vs. cap and trade's selective "regulated source" targets. It can be made revenue-neutral through tax reductions elsewhere. And it can be temporary through sunsets, much like existing renewable incentives. Presumably, Congress would renew it only if it were actually working.
And what about its political impossibility?
There are already many key stakeholders who recognize the superiority of a tax -- Exxon Mobil, for instance.
Besides, cap and trade is unlikely to happen in any event. It has been just around the corner for the last 10 years, and judging from its lack of support in the Senate, it won't be turning that corner anytime soon.
Leaders need to be straight that decarbonizing our economy is going to be massively expensive. There is no free lunch. We rely on fossil fuels because they are currently the most efficient. They don't have to be forever. But the public is much more likely to support change when they understand that the sacrifice and benefits will be shared by all.
Finally, a tax provides more control over where funds can be directed. The public wants assurance that its money would be plowed back into wind, solar, biomass (and, yes, corn ethanol), and other renewable efforts in a massive effort to build clean energy and infrastructure technologies that can transform our economy and for export to others, not provide bonus opportunities for Wall Street.
Cap and trade may be good in theory, but it won't work in practice. It's time we abandon it and focus on a simple, and honest, commitment to cleaner energy.
Todd Guerrero is an attorney in Minneapolis.