Taking the Legislative Temperature: Which Federal Climate Change Legislative Proposal is “Best”? (Part II)

By Victor B. Flatt[*]

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[Editor's Note:  We are pleased to present Part II of Professor Flatt's piece on climate change legislative proposals (Part I was posted here).  To read the piece as a whole, you may download the pdf or view the persistent html version.]

II.  What is the best method of reaching our goal?

The next question that must be addressed is how to best reach the goal that we have set.  Professor Rose discussed four broad methods to implement policy goals in environmental legislation, which she colloquially refers to as “do-nothing,” “keepout,” “rightway,” and “property.”[52]  “Rightway” has sometimes been characterized as command and control and “property” may also be identified as market mechanisms; moreover, other thinkers and writers may further divide and clarify policy implementation devices, such as feasibility or education.[53]  The pluses and minuses of each of these methods have been explored and debated, and sometimes they are linked to what the ultimate goal of the regulation should be.[54]

A.  Is A Market-Based System Best?

Interestingly all of the climate change legislative proposals would be considered market-based control regimes, with Bingaman-Specter, Udall-Petri, Lieberman-McCain, Kerry-Snowe, Waxman, Feinstein-Carper, and Alexander-Lieberman, all envisioning a cap-and-trade scheme for CO₂, and Stark and Larson proposing an economy wide tax.

A tax system can control pollution by setting a tax on emissions (such as for CO₂) at a high enough level to discourage such emissions.  For instance, one could presumably set a tax on CO₂ emissions (or energy production associated with CO₂ emissions) that would discourage emissions enough to reach a CO₂ reduction target.  Cap-and-trade systems adopt the target first and then allocate the overall amount allowed by the target to parties in the market to use, sell, or buy (trade) as they please.  Cap-and-trade can be an efficient pollution reduction mechanism because the trading allows the private sector to control emissions at the lowest possible cost (to the private sector) and also encourages innovation.

Currently, none of our environmental laws attempt to control pollution through a tax and we have only one cap and trade system, the one for sulfur dioxide ("SO₂") to control acid rain that was passed in 1990.[55]  That all of the climate change legislative proposals embrace a tax or cap-and-trade system shows just how much these systems have gained in respectability in the last seventeen years.  But there are disadvantages to such a system that indicate the issue must be examined more closely.

There are several good critiques of market-based systems to control pollution and comparisons of market based regimes, command and control regimes, and other regimes.  The primary critiques of market-based systems are that they may create hot-spots of pollution which hurt specific groups, usually the poor or politically powerless; that they are not fair because they do not necessarily penalize a polluter with the money to purchase pollution rights; that they send the wrong moral signals; and that they are difficult to enforce.[56]

Of these criticisms, three do not appear to be of much concern when addressing the regulation of CO₂ specifically.  Because CO₂’s harm is worldwide and dispersed, there are no “hotspots” for concern.[57]  Moreover, concerns over moral signals seem lessened with CO₂ as compared to almost any other pollutant because CO₂ historically has not been seen as a “bad” thing, so producers are not said to have historically engaged in a bad behavior.  Fairness is not as large a concern since all high-energy sector use usually has direct benefit to the general public.

The enforcement issue, however, could be more important than the others for the regulation of CO₂.  One of the unique features of the cap-and-trade market in SO₂, is that only large coal-fired power plants are involved in the market.  These are relatively limited in number, and already regulated.[58] Therefore, the enforcement and administration costs as well as the possibility of costs from regulatory failure are relatively low for the benefit that can be derived from the system.[59]  CO₂ regulation would be a different animal altogether.  First, CO₂ and other greenhouse gases are not limited to coal-fired power plants, though they are a major source.  Mobile sources play a large role, and if a system were to include offsets (see discussion, infra), the entities that must be monitored and regulated mushroom exponentially.

None of the legislative cap-and-trade proposals would subject every CO₂ source to the market mechanism, but in such cases, significant sources that are left out of the system must still be regulated.  For instance Corporate Average Fuel Efficiency (or CAFE) standards for automobiles, which require an automotive seller’s fleet to have a certain fuel efficiency (which in turn reduces CO₂ emissions) is an effective way of controlling CO₂ from automobiles.  These have been debated in the related energy bill and should be part of the climate change solution.  Consideration of CAFE standards (or other method to control CO₂ from cars, such as a tax) needs to occur at the same time as a consideration of any cap and trade proposal to see how much the relative reductions would cost and how the cost would be allocated.

Even if CO₂ met all of the criteria necessary for the efficient use of cap and trade, some kinds of command and control, particularly those that mandate the adoption of some market standard in certain sectors, can overcome commons problems and “split actor” problems[60] and bring reductions at lower cost because of the ease of enforcement.  For instance, the EU consideration on the ban of incandescent light bulb sales[61] seems a very cost-effective way to increase energy efficiency and thereby reduce the production of CO₂.  Thus, efficient reduction of climate-changing emissions might be accompanied by command and control systems, at least in some arenas, such as automobile design.

In addition, a major nationwide survey demonstrated that a majority of the American public would actually prefer a command and control system rather than a market system to control climate change.[62]  The fact that this has not had a major impact on the legislative proposals to date suggests either that the parties proposing the laws have a better sense of what regulation will be effective, or those who propose the laws realize that market systems may not be as fair and effective but may benefit a particular favored industry or constituency—or some combination of the two.

The difficulty with cap-and-trade enforcement may be why two of the proposals (Feinstein-Carper and Alexander-Lieberman) only apply to the electricity sector.  It has already been demonstrated that this sector can be efficiently regulated in a cap-and-trade system.  However, limiting the law to this one sector means that overall emissions reductions cannot be as large.[63]  Moreover, it raises fairness concerns.  While most Americans use electricity and would presumably share the cost of increases, the public at large will not see equitable distribution of costs to the extent that power plants have their rates set by inconsistent state regulation.[64]

Feinstein-Carper and Alexander-Lieberman could be seen as compromise proposals that anticipate further legislation in other sectors, but propose the electricity generation sector first because of the ease of regulation.  Nevertheless, the very concept of proceeding in sectors raises concern.  First, there is no guarantee that future legislation will occur after one sector passes.  Moreover, as discussed above, experience with cap-and-trade in the electricity generating sector may not be applicable to all industries, requiring individual sector systems in any future legislation.  Sector-by-sector regulation might reduce cheating because trading within sectors will likely be easier to monitor, but the lack of inter-sector trading or offsets would defeat many of the benefits of a market system in the first place.  Economy-wide proposals may be considered the most efficient and the most fair, but this consideration must be balanced against the enforceability of economy-wide limits.[65]

The enforcement problems inherent to a cap-and-trade system should spur a closer look at the legislative proposals that embrace taxation of CO₂ content.  Such taxes are easier to enforce than cap and trade because they are picked up at product and service origination and added to final prices.  Economists generally favor a tax because it internalizes any efficiencies of a trading system (if the price of producing carbon is not recouped in one sector, it will cease production) without having to monitor a complicated trading system.

The main objection to a tax system seems to be the belief that the American public abhors any “tax” and will punish any legislator who proposes or votes for one, even if the tax is incorporated into final prices.[66]  Representative Dingell has recently challenged this assumption[67], and I leave it to political scientists to further analyze this question and educate the public.  There is also some concern that the appropriate level of “tax” will not be selected to reach the intended reduction target, a problem that one need not worry about in cap-and-trade.  This is considered an economic science problem, but a general aversion to taxes may mean that this “target” gets set by other considerations than the most efficient production of CO₂.

Nevertheless, because of ease of administration, a tax system is probably superior with respect to enforcement and fairness and could be tweaked to provide relief for the poor or others whom we feel deserve relief from regulatory impacts.

B.  How Should Cap-And-Trade Allocations Be Made?

If a cap-and-trade system is chosen, legislators must choose how to best distribute the initial allocations that will be subject to trade.  Allocations for the right to emit carbon dioxide and equivalent greenhouse gases will be very valuable.[68]  There is already much jockeying for this windfall. Whether allocations are auctioned or given away will have little effect on the ultimate economic efficiency of the policy, since trade will efficiently allocate the allotments.[69]  But, this decision will have a large effect on the United States treasury, consumer prices, and distribution of costs.

If a cap-and-trade system is ultimately chosen, it is imperative that CO₂ allocations be auctioned or sold, rather than given away.  Current industrial infrastructure has developed under a different legal regime, meaning that additional costs will fall heavily on sectors that rely largely on coal-fired power or utilize other fossil fuel generation, but the additional costs are not so large that they will completely disrupt an industry sector.  Electricity costs will rise in the South and Midwest, which depend heavily on coal-fired power, but according to auction advocates, it should not increase more than 15%.[70]  Some of the money raised through an auction could be set aside to help low income persons who are hit especially hard by a price increase in electricity or other staples of survival (shelter, food, and clothing), meeting the legislative goals of equity.

If the right to emit CO₂ is auctioned off, it will generate money for the US Treasury which could be used for spurring low carbon technology or other purposes.  However, this means that the cost of producing energy (at least for those whose energy production emits large amounts of CO₂) would rise.  That likely will cost consumers more.

Like a tax system, a cap-and-trade system that features allocation auctions sends a better market signal and encourages all users to efficiently price the externalities of CO₂.  It imposes the price hike more specifically on the industries that produce the CO₂, which should send an economic signal to produce less of it.  An auction also avoids the need to decide whether to allocate credits based on CO₂ production or based on energy output.

If CO₂ credits are not sold or auctioned, legislators must decide whether to allocate the credits based on energy output or historic CO₂ output.  Between the two, allocation based on energy output is preferable since it more accurately prices the externalities of CO₂ producing activities and would tilt energy usage towards renewables and efficiency.  An allocation based on energy output would reward those who produce non-CO₂ based power production but still cost consumers of CO₂ intensive energy more, even without money going to the U.S. treasury.  An allocation based on historic CO₂ production, on the other hand, means that CO₂ intensive energy producers will still be able to produce energy for the same cost structure as they have always done, which means that at least theoretically prices would not disproportionately rise in the CO₂ intensive areas.  However, since CO₂ would still be rationed, the price of energy would still eventually go up overall.  It just wouldn’t rise as much in the CO₂ intensive areas and wouldn’t affect the bottom line as much as those who sell CO₂ intensive products (such as coal-fired electricity).

As expected, the electric utilities that already consider themselves energy efficient, or those that produce power without fossil fuels, would prefer either a carbon tax or an allocation based on energy production.[71]  Doing this imposes the cost of reducing CO₂ on the largest producers of CO₂ and puts the producers (and, by extension, the consumers) of non-CO₂ generating energy or more efficiently produced energy at an advantage.  Those that have high CO₂ production, such as coal-fired power plants, would prefer that allocations be distributed based on historic CO₂ production.[72] These producers cite the historic precedent with SO₂ and the costs that would fall on the consumer if allocations are not “given” to coal producers.[73]

Determining how to award allocations also implicates the difficulties of ascertaining information about CO₂ production and energy production and setting a time baseline for making the allocations.  The time period the allocations are based on influences how we deal with prior CO₂ cutbacks.  For instance, credits awarded based on CO₂ production in a time past (like 1997) would temper the unfairness to producers who made voluntary reductions since that time—this would award them allocations that they can then sell.  This would also penalize producers who have created new CO₂ sources for the sole purpose of capturing possible cap-and-trade allocation benefits.

The economy-wide cap-and-trade legislative proposals seem to take a “cut the baby in half” approach to the question of allocation of credits, where some allowances are auctioned and others are awarded for free based on historic CO₂ or energy output.[74]  The Bingaman-Specter bill, for instance, initially gives out 53% of the allocations free to industry CO₂ producers (with reductions in later years), and reserves the rest to encourage low carbon coal development and for auction.[75]  Udall-Petri only gives away 20% of the credits, while the other economy-wide cap-and-trade proposals (Lieberman-McCain, Kerry-Snowe, Waxman, and Sanders) leave the allocation decision to the EPA (with Lieberman-McCain providing some guidance on this decision).

With respect to whether any free allocations will be based on historic CO₂ production or energy output, the proposals currently tilt towards the historic CO₂ production.  The Bingaman-Specter bill and the Udall-Petri bill (the only ones to address this legislatively of the economy wide bills) primarily allocate based on historic CO₂ output.[76]  This is also followed in the Alexander-Lieberman bill, which only applies to the electricity sector.[77]  The Feinstein-Carper bill, on the other hand, primarily allocates its credits based on energy output rather than historic CO₂ production.[78]

Many of the legislative proposals which envision a CO₂ allocation do recognize the need to reward early reducers, with Lieberman-McCain basing allocations on 1990 production (the year of the Clean Air Act’s last major amendment), while Boxer-Sanders and Bingaman-Specter choose 1992 (the year of the Rio conference).[79]  The Kerry-Snowe proposal describes “reward[ing] early reductions” as a legislative goal, but does not specify a method to do this.[80]

It is surprising that whether allocation should be based on energy output or historic CO₂ output has not received more attention.  In many of the bills, it is difficult to determine which method is being used (some use terms such as “heat output” rather than CO₂ or energy output), and the legislative press reports do not focus on this distinction.  Even major environmental organizations have been more likely to focus on the “safety valve” issue as the environmental bugaboo rather than the impact that allocation of credits based on historic CO₂ emissions might have on encouraging clean energy.[81] However, since this decision alone is worth billions of dollars to certain segments of the economy and since the initial distribution will have a large impact on how quickly consumers and industry turn to energy with lower CO₂ production, this is a very important point.  Part of the tendency to award based on historic CO₂ production may be a hold over from the use of the SO₂ system as a model or a holdover from what was at one time believed to be politically feasible.  Closer examination of the costs and benefits of the different allocation systems may push the American public towards a different conclusion.

C.  Offsets

Any cap-and-trade system for CO₂ must also address the question of offsets.  An offset is anything that will actually reduce CO₂ production (or sometimes future CO₂ production) at one location, which can then be credited against CO₂ production at another location.  For instance, if a party has 100 credits which allow the production of 100 tons of CO₂, but wishes to emit 110 tons, instead of buying 10 more credits under the cap-and-trade system, that person might “offset” the extra ten tons of CO₂ by eliminating ten tons of CO₂ production elsewhere.  This could be done through retiring a source, creating a physical system to absorb CO₂, or (more controversially) avoiding an increase in future CO₂ production by providing alternate methods of energy that do not produce CO₂.  This is essentially a “purchase” of offsets that takes place outside a cap-and-trade system.

Offsets are very complex, but would add greatly to the efficiency of a system, allowing for faster and cheaper reductions.  They are also a mechanism for transferring some of the benefits of compliance to developing countries.  The main concern with offsets is which ones should be allowed. Presumably, we wish offsets to actually do what they are intended to do.  This means that any offsets will require proper measurement systems, verification systems, scientific consensus and consideration of possible unintended consequences.  With respect to verification, the current state of the CO₂ trading system in the EU is under critical evaluation.[82]  The EU has recently discovered that its initial CO₂ allocations and some offsets were improperly reported by the CO₂ producers, which inflated the number of credits in the system.  Because the EU did not have any mechanism in place to verify what sources were actually producing, the system was improperly designed.

Some proposals for carbon offsets may be scientifically suspect.  Biological carbon sinks, which—theoretically, at least—absorb CO₂, are under increased scientific scrutiny and criticism[83] because some, such as tree planting in the far northern hemisphere, may contribute to warming rather than offsetting it.[84]  Others, such as a plan to seed the ocean with iron filings near the Galapagos Islands to spur plankton, have been blasted as not being based on sound science, harmful, and motivated by nothing but profit.[85]  Lastly, offsets purchased in developing countries under the Kyoto Protocol’s Clean Development Mechanism (“CDM”) are not required to be sustainable or environmentally beneficial, and may only enrich the traders themselves.[86]

Moreover, verifying trades and offsets can be a daunting problem.  It is difficult to track small sources, such as the CO₂ from the 300 million automobiles in the United States,[87] meaning that mobile source usage intensity will not be a reliable offset.  Offsets in foreign countries present particular difficulties.  The Kyoto Protocol’s CDM program which allows the purchase of offsets in foreign countries,[88] has been roundly criticized for the questionable validity of the offsets purchased.[89] Creating an independent international agency to vet international offsets, perhaps in conjunction with the EU, may help ease international offset enforcement.  With respect to both international and domestic offsets, choosing limited, but heavily vetted offset possibilities, while having a mechanism to approve new offsets that “are in the public interest” is appropriate.  This legislative choice will drive lobbying and rent seeking for pet projects, but this may be the best alternative.

Seven of the current legislative proposals, Bingaman-Specter, Udall-Petri, Lieberman-McCain, Kerry-Snowe, Sanders-Boxer, Feinstein-Carper, and Alexander-Lieberman, specifically allow the use of offsets.[90]  The Waxman proposal does not specify the validity of particular offsets, but does state that the goals of a GHG reduction program should encompass “enhanced sequestration of carbon in the forest and agricultural sectors.”[91]  The Stark and Larson tax system proposals do not allow offsets per se but do propose tax credits (which can be seen as an “offset” in taxes) for certain sequestration or GHG destruction projects.[92]  Therefore all of the proposals trigger the issues of concern with offsets.

The Waxman proposal may have the virtue of simplicity, but simply encouraging “sequestration” in the “biological and agricultural sectors” pins the EPA, which would administer the program, into a system in which most of its research money would be spent in an area that is currently seen as less promising than originally thought, and which might thus be an inefficient way to reduce CO₂.[93]  The Kerry-Snowe proposal has the same problem, as it tracks much of the language of the Waxman proposal, including investment in forest and agricultural sequestration (though it adds some other offsetting goals as well).[94]  Focusing on a few offsets means that economic interests associated with those offsets may be benefited while we fail to receive efficiency gains from other offsets that are not favored in the statute.  For instance, the Udall-Petri proposal embraces “unlimited” geological sequestration offsets.  Though promising,[95] these offsets, which anticipate using spent oil and gas fields to store CO₂ underground, have not been fully tested, nor has the legality of title and usage (a traditionally state issue) been considered.  Lieberman-McCain addresses this issue by requiring that any credited sequestration be re-verified every five years, which is one way to put a check on the system, but that bill also focuses too much on sequestration to the exclusion of other offset possibilities.[96]

Since many potential offset sources have an economic interest in having their offset approved either by law or regulation, we should be particularly concerned with rent-seeking which is already part of the lobbying effort.  Sanders-Boxer leaves the determination of allowable offsets solely to regulatory decisionmakers.[97]  While this allows more flexibility with possible offsets and would also allow a system to recognize promising future offsets, simply putting the decision in regulatory hands does not always avoid undue pressure for approval of pet projects.  In fact, at the regulatory level, scrutiny of these choices might decrease.

Most of the proposals that address offsets anticipate that any U.S. trading system will allow trading internationally.  Apparently because of the difficulty of enforcement in this arena, several of the legislative proposals (Bingaman-Specter, Lieberman-McCain, Feinstein-Carper, and Alexander-Lieberman) cap the percentage of foreign offsets that any one producer can purchase.  Additionally, some (such as Lieberman-McCain and Bingaman-Specter) have some system for verification of foreign offsets as well.

D.  Other Issues (Safety Nets, Research Grants, CO₂ Equivalents, and Integration with Other Systems)

1.  Safety Nets—

Another important consideration is whether legislation would have a mechanism for avoiding large increases in cost for CO₂ allotments.  Bingaman-Specter and Udall-Petri currently propose a “safety net” to protect American businesses from economic dislocation associated with introduction of a cap-and-trade system.[98]  CO₂ safety nets usually set a maximum price for allocations in a cap-and-trade system.  David Montgomery, vice-president of CRA International and former Deputy Assistant Secretary for Policy at the Department of Energy, suggests such a maximum price will protect those who are hit particularly hard by the newly internalized cost of CO₂ production, and protect business from wild economic disruptions.[99]  Though controversial, safety nets have been proposed in some of the legislation, presumably to assist in legislative passage.[100]  However, there is also criticism of such safety nets as undercutting the effectiveness of any cap-and-trade system.[101]  In addition to undercutting the efficiency of a cap-and-trade system, such safety nets create another opportunity for certain industries to seek special favors in legislation.  Senator Boxer, chair of the Senate Environmental Committee, has indicated that she would not support any legislation that included such a safety net.  For their part, Bingaman and Specter have indicated a willingness to look at other options,[102] and Lieberman and Warner have said they will not agree to add a safety net to their legislative proposal.[103]  However, many legislators seem predisposed to favor business relief as the cost of passing climate change legislation.[104]

Bingaman-Specter and Udall-Petri also include provisions to offset “unfair” competition from countries, particularly developing countries, that do not limit CO₂ production.  There has been less attention paid to these provisions, and it is possible that they could be seen as encouraging foreign governments to implement binding cuts.  Whether this is appropriate from a “goals” point of view must be discussed in that context; as an effective mechanism for encouraging all countries to take their fair share of binding cuts, it may or may not be effective.  Though trade sanctions have been part of worldwide environmental treaties before, unilateral imposition raises questions of WTO violations.[105]

2.  Research and Development (R&D)—

Grants for increasing technological solutions to climate change are prominent in the proposed legislation.  Many environmentalists and think tanks suggest that federal climate change legislation must include funds for alternative energy research, claiming that it is a necessary investment in order to make CO₂ reduction less expensive, and there has already been significant research into technologies that might be particularly beneficial.[106]  As with any government grant, there is a significant risk that research funds will be spent improperly.  As an example of the dangers of government research grants, ethanol incentives have been lambasted for being wasteful, inefficient, harmful to the poor, and a farm-state giveaway.[107]

Five proposals, Bingaman-Specter, Udall-Petri, Lieberman-McCain, Feinstein-Carper and Larson, provide for direct R&D grants.  In the cap and trade systems, these grants are to be funded from the money received from the auctioned portion of CO₂ allocations.[108]  In the Larson tax proposal, six billion dollars of carbon tax receipts would go towards research and development.[109]  The most striking aspect of these proposals is that, despite the abundance of free money on the table, there are few articulated standards for determining who should get this money, beyond the fact that it should contribute to a low carbon economy and be promising.  The Bingaman-Specter proposal has the greatest level of specification. It identifies specific categories, including coal-fired plant efficiency, zero emission electricity production, coal sequestration, cellulosic biomass, and lower vehicle emission technology, that may receive grants, and even specifies a rudimentary formula for the awards.[110] Specificity about allowable R&D in legislation can be both good and bad.  With large amounts of money at stake, the pre-identification of eligible technologies increases the probability of lobbying for financial gain at the expense of funding for the most scientifically promising technologies.[111]  However, if no specifications are set out for administratively awarding such grants, the award of the grants becomes a goal in itself, rather than necessarily being an efficient way to encourage innovation.

There are political and economic arguments about whether direct grants really do good or whether these issues should be left to the marketplace.  The popularity of R&D among most factions supporting climate change legislation, however, seems to indicate that it will be part of a comprehensive scheme.  R&D which benefits certain areas of the country may also be the necessary political “pork” to grease the wheels of Congressional voting.[112]

3.  CO₂ Equivalents—

Another issue that has not yet been thoroughly explored in the current crop of proposals is the eligibility and handling of other greenhouse gases as carbon dioxide equivalents.  Overall, CO₂ produces about 70% of global warming potential worldwide, but other gases, such as refrigerants and methane, are far more potent contributors.  The Kyoto Protocol and other major climate change policies have recognized this linkage, and the legislative provisions for the most part define a “Carbon Dioxide equivalent” uniformly:  “For each greenhouse gas (other than carbon dioxide), the quantity of carbon dioxide that would have an effect on global warming equal to the effect of a unit of the greenhouse gas, as determined by the President, taking into consideration global warming potentials.”[113]

While this seems direct enough, the details could get more complicated.  Two issues in particular should be addressed: 1) should the greenhouse gas equivalents be limited, and 2) how should equivalency to CO₂ be determined.  The Bingaman-Specter and Lieberman-McCain proposals define “greenhouse gases” as only including carbon dioxide, methane, nitrous oxide, hydrochlorofluorocarbons, perfluorocarbons, and sulfur hexafluoride.[114]  Waxman, Kerry-Snowe, and Boxer-Sanders, on the other hand, add another provision to the definition of “greenhouse gas” which allows the administrator to designate additional greenhouse gases.  Though the Bingaman-Specter and Lieberman-McCain limitations of gases reflect allowable gas equivalents in the Kyoto Protocol, having the possibility of recognizing other gases maintains flexibility to identify other, more efficient reduction possibilities.

With respect to the second issue regarding equivalents, while Bingaman-Specter says the CO₂ equivalency will be “determined by the President, taking into consideration global warming potential,” Lieberman-McCain (and other bills) simply allow determination by the administrator.  While this may seem a distinction without a difference, the additional requirement of taking into consideration global warming potential disallows consideration of other important factors.  Some reduction in greenhouse gas equivalents may have collateral dangers, while other may have benefits.

For instance, by funneling money to offset more potent greenhouse gases that impact other environmental effects, the Kyoto Protocol’s CDM may be creating a market to allow more harmful gases to be sold for credit.[115]  But in developed countries, reductions of volatile organic compounds may also have collateral benefits in the reduction of ozone pollution and toxic air pollution.  This effect may be very large, and the related programs in the Clean Air Act should be examined in the formation of any climate change legislation to ensure that these benefits (and possible costs) are taken into account, or that the administrator can take them into account in determining various benefits of relative reductions in different greenhouse gases.

4.  Relationship to other CO₂ trading systems—

Finally, the relationship between any comprehensive cap-and-trade law and existing greenhouse gas control systems must be analyzed.  Any trading or tax systems should be able to integrate with other verified CO₂ (or CO₂ equivalent) trading systems.  If the systems do not create an even playing field a conversion process can be established.  The same system can be implemented if usage in different sectors is not equivalent.

Boxer-Sanders explicitly notes that verifiable state and local early reductions shall be recognized, meaning that any reductions taken pursuant to the northeast greenhouse gas initiative will be valid.[116]  Lieberman-McCain takes a similar approach.[117]  Lieberman-McCain goes on to allow verified international trading allowances to satisfy 30% of allowable offsets, while the Bingaman-Specter bill allows the use of comparable foreign emissions credits to satisfy up to 10% of valid offsets.[118] Kerry-Snowe and Waxman do not discuss state or international equivalent systems.  Our legislation need not slavishly follow another model and adopt its decisions on trading price or offsets, but we must consider how these programs will interact because this interaction will affect the success and efficiency of the programs.

Other issues may be important in comprehensive climate change as well.  If energy legislation is considered, there could be many legislative provisions to encourage energy conservation.  With the costs of insurance rising due to climate change, the government may need to address the availability of insurance or re-insurance.  But the issues outlined above provide a fairly comprehensive model of concerns for climate change legislation.

CONCLUSION

None of the current legislative proposals encompass all of the best options for each of these policy considerations, but the major bills, such as Bingaman-Specter and Lieberman-McCain, could be altered to do so.  Big changes would require including an auction system (Stark proposes a 100% auction), resetting the target reductions in accord with international agreement, and establishing a binding target that is sufficient for harm avoidance (most studies suggest that at least a 50% reduction in annual CO₂ production from 1990 levels by mid-century is necessary to avoid the worst impacts, but 80% may better approach our responsibility).

Climate change legislation is complex; we cannot get by on vague calls for CO₂ reduction.  The devil is in the details and the intent behind those details.  While the current legislative proposals address some of the issues associated with climate change legislation, none do so completely; and without examining all of the issues together, incorrect choices will be made.  Armed with a checklist of issues, we can weigh the benefits and harms of current proposals and better tailor them to avoid climate change harms in a fair and efficient manner.  We may not all agree on necessary reduction levels, acceptable harms, or what is fair or efficient, but a focus on the issues in this essay will make such discussions and decisions more transparent.

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*.  A.L. O’Quinn Chair in Environmental Law, and director of the Environment, Energy, and Natural Resources Center, the University of Houston Law Center.  The author would like to thank Marcilynn Burke, Charles Irvine, and Carol Rose for comments on earlier iterations of this document.  Thanks to Environment & Energy Daily and Michael Witt for their permission to hyperlink to several Environment & Energy Daily articles.  Additionally, an article such as this dealing with a fast-moving target could not exist without the commitment of the Northwestern University Law Review to putting forth scholarly dialogue in the new Northwestern University Law Review Colloquy.  Special thanks to the dedicated fast and thorough work of the students associated with the Colloquy, especially Isaac Peterson and Melissa Whitehead.  Finally, a special thank you to John O’Quinn Foundation for endowing the A. L. O’Quinn Chair in Environmental Law, which make this scholarship possible.

52.  Carol M. Rose, Rethinking Environmental Controls: Management Strategies for Common Resources, 1991 Duke L.J. 1, 9 (1991).

53.  For example, Professor Driesen has been quite successful in noting that “feasibility” is a policy implementation mechanism separate from others.  See David M. Driesen, Distributing the Costs of Environmental, Health, and Safety Protection: The Feasibility Principle, Cost-Benefit Analysis, and Regulatory Reform, 32 B.C. Envtl. Aff. L. Rev. 1 (2005).

54.  See Rose, supra note 53.

55.  See 42 U.S.C.§§ 7651c–7651m (2006).

56.  See Craig N. Johnston, William F. Funk & Victor B. Flatt, Legal Protection of the Environment 390 (2d ed. 2007); Victor B. Flatt, The Enron Story and Environmental Policy, 33 Envtl. L. Rep. 10485, 10493 (2003) [hereinafter Enron].

57.  Though collateral pollutants, such as mercury from coal-fired plants, will be affected by any change in demand and concentration of coal-fired power, and thus cap-and-trade systems could have collateral localized effects.

58.  See Enron, supra note 57, at 10,494.

59.  Id.

60.  Split actor problems refer to those situations in which a cost structure is set up so that the person who makes the buying decision is not penalized by the cost, e.g. the landlord who purchases the cheapest stove, even if its energy use is high and costs tenants more.

61.  See Helena Spongenberg, EU Could Ban Incandescent Bulbs, BusinessWeek, June 22, 2007 (link).

62.  See Peter Aldhous, Exclusive Global Warming Poll: The Buck Stops Here, New Scientist, June 23, 2007, at 16–19 (link). There is also a preferance for a tax system to a cap-and-trade system. Id.

63.  See Summary of Bills, supra note 2.

64.  See David Cay Johnston, A New Push to Regulate Power Costs, N.Y. Times, Sept. 4, 2007, at C1.

65.  See Darren Samuelsohn, Sanders Shifts Warming Debate With Power Plant-Only Bills, Env’t & Energy Daily, April 25, 2007 (explaining that Senatory Carper notes that some accomplisment in one sector is better than a stalled bill covering all sectors).

66.  David Leonhart, Auto’s Friend Shifts Tune on Climate, N.Y. Times, Sept. 5, 2007, at C1.

67.  Id.

68.  The Congressional Budget Office estimates that the value of carbon allocations in a US cap and trade system could approach hundreds of billions of dollars.  See Cong. Budget Office, Trade-Offs in Allocating Allowances for CO₂ Emissions 1 (2007), available at http://www.cbo.gov/ftpdocs/80xx/doc8027/04-25-Cap_Trade.pdf (link).

69.  See John O. McGinnis & Michael B. Rappaport, Majority and Supermajority Rules: Three Views of the Capitol, 85 Tex. L. Rev. 1115, 1124 (2007) (link).

70.  Clean Air Watch, Should Big Polluters Own the Sky? The Distribution of Emissions Permits Under a Federal Greenhouse Gas Cap-and-Trade Program (2007) (link).

71.  See Examining Global Warming Issues in the Power Plant Sector: Before the S. Comm. on Environment & Public Works, 110th Cong. 2–4 (2007) (testimony of Lewis Hay III, Chairman, CEO, FPL Group), available at http://epw.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore
_id=ac3ec28a-a579-4ef1-b840-faba432d7c11 (link).

72.  See Examining Global Warming Issues in the Power Plant Sector: Before the S. Comm. on Environment & Public Works, 110th Cong. 8 (2007) (testimony of James E. Rogers, Chairman, President, and CEO Duke Energy Corporation), available at http://epw.senate.gov/public/
index.cfm?FuseAction=Files.View&FileStore_id=96b0a903-32fc-47f8-9a36-b4ddd9805e2b (link).

73.  Id. at 9.

74.  See July 2007 Climate Change Bills, supra note 2.

75.  See S. 1766, 110th Cong. § 201(a)(1) (2007), available at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:s1766is.txt.pdf (link) [hereinafter Bingaman-Specter Bill].

76.  Id. at § 202(a)(1) & 202(a)(2).

77.  See S. 1168, 110th Cong. § 705(c) (2007), available at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:s1168is.txt.pdf (link) [hereinafter Alexander-Lieberman Bill].

78.  See S. 317, 110th Cong. § 716(b)(2) (2007), available at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:s317is.txt.pdf (link) [hereinafter Feinstein-Carper Bill].

79.  See S. 280, 110th Cong. § 103(c)(2) (2007), available at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:s280is.txt.pdf (link) [hereinafter Lieberman-McCain Bill]; S. 309, 110th Cong. § 704(f)(2)(B)(ii) (2007), available at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:s309is.txt.pdf (link) [hereinafter Boxer-Sanders Bill]; Bingaman-Specter Bill, supra note 75, at § 206(c)(2).

80.  See S. 485, 110th Cong. § 702(a)(2)(f) (2007) available at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:s485is.txt.pdf (link) [hereinafter Kerry-Snowe Bill].

81.  See Press Release, Environmental Defense, Bingaman Proposal Reflects Growing Support for Mandatory Climate Change Policy (July 10, 2007), available at http://www.environmentaldefense.org/pressrelease.cfm?ContentID=6606 (link).

82.  See Question Marks Over EU CO₂ Trading Scheme, EurActive.com, June 29, 2007 , http://www.euractiv.com/en/sustainability/question-marks-eu-CO₂-trading-scheme/article-155349 (link).

83.  See Critics Attack Offsetting Plan Near Galapagos Islands, Greenwire, Aug. 17, 2007, (link).

84.  See S.G. Gibbard, K. Caldeira, G. Bala, T.J. Phillips, & M. Wicket, Climate Effects of Global Land Cover Change, in Geophysical Res. Letters (Lawrence Livermore Nat’l Lab. 2005), available at http://www.llnl.gov/tid/lof/documents/pdf/324200.pdf (link); see also Gustavo A. B. da Fonseca, Carlos Manuel Rodriguez, Guy Midgley, Jonah Busch, Lee Hannah & Russell A. Mittermeier, No Forest Left Behind, 5 Pub. Libr. of Sci. Biology 1645 (2007), available at http://biology.plosjournals.org/archive/1545-7885/5/8/pdf/10.1371_journal.pbio.0050216-L.pdf (link).

85.  See Upset About an Offset, http://blogs.wsj.com/energy/2007/08/16/upset-about-an-offset/ (Aug. 16, 2007, 16:37 EST).

86.  London Profits, While Africa Awaits Kyoto Benefits, Reuters, August 13, 2007, available at http://www.reuters.com/article/environmentNews/idUSL137011320070813 (link).

87.  Trading Foes Hail EPA Region IX Report Criticizing RECLAIM Program, Inside EPA, Nov. 22, 2002, at 7.

88.  United Nations Framework Convention on Climate Change, Clean Development Mechanism, http://unfccc.int/kyoto_protocol/mechanisms/clean_development_mechanism/items/2718.php (link) (last visited Nov. 20, 2007).

89.  Press Release, Dag Hammarskjold Foundation, New Book Exposes Scandal of Carbon Trading, available at http://www.dhf.uu.se/documents/Press_release_carbon_trading.pdf (link).

90.  See Summary of Bills, supra note 2.

91.  Safe Climate Act of 2007, H.R. 1590, 110th Cong. § 704(e)(5), available at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:h1590ih.txt (link).

92.  See Summary of Bills, supra note 2.

93.  Press Release, Lawrence Livermore National Laboratory, Plant a Tree and Save the Earth? (Dec. 11, 2006), available at https://publicaffairs.llnl.gov/news/news_releases/2006/NR-06-12-02.html (link).

94.  Global Warming Reduction Act of 2007, S. 485, 110th Cong. § 702(a)(2)(E) (2007), available at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:s485is.txt (link).

95.  Darren Samuelsohn, DOE Finds Sequestration Capacity for 900 Years of CO₂ Emissions, Greenwire, Mar. 28, 2007, (link).

96.  Climate Stewardship and Innovation Act of 2007, S. 280, 110th Cong. § 144(c)(5) (2007), avaiable at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid
=f:s280is.txt (link).

97.  Global Warming Pollution Reduction Act, S. 309, 110th Cong. § 704(b)(1) (2007), available at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:s309is.txt (link).

98.  See Summary of Bills, supra note 2.

99.  CRA’s David Montgomery Talks Economics of Calif. Policy, Says Safety Valve Positive Tool, Env’t & Energy Daily News PM, June 19, 2007 (link).

100.  Katherine Ling, Bingaman Calls His CO₂ Allocation a First Attempt, Env’t & Energy Daily, July 17, 2007 (link); Darren Samuelsohn, Lieberman, Warner Eye New Cost Proposal, Shy Away from “Safety Valve,” Env’t & Energy Daily, July 25, 2007 (link) (explaining the tension surrounding the “safety valve” possibility).

101.  Darren Samuelsohn, Boxer Raises concern Over ‘Safety Valve’ Provision in New Bill, Env’t & Energy Daily, July 13, 2007 (link).

102.  See Ling, supra note 100.

103.  See Samuelsohn, supra note100.

104.  See Darren Samuelsohn, Senate Moderates to Propose “Cost Control” Bill as Addendum to Cap-and-Trade, Env’t & Energy Daily, July 24, 2007 (link).

105.  Steve Charnowitz, Environmental Trade Sanctions and the GATT: An Analysis of the Pelly Amendment on Foreign Environmental Practices, 9 Am. U. J. Int’l Law & Pol’y. 751, 777–78 (1994) (discussing how some trade sanctions for environmental treaty violations would violate the precursor to the WTO).

106.  See, e.g., JA Edmonds et al., Global Energy Technology Strategy: Addressing Climate Change (Executive Summary) 21 (2007) (link).

107.  Jack Lyne, Ethanol Incentives: Fueling a Boon or a Boondoggle?, Site Selection, Aug. 2007, http://www.siteselection.com/ssinsider/incentive/ti0708.htm (link).  For a more detailed discussion of the problems associated with ethanol incentives (including marketplace distortion, environmental harms, energy inefficiency, and food security) see L. Leon Geyer, Phillip Chong, & Bill Hxue, Ethanol, Biomass, Biofuels and Energy: a Profile and Overview, 12 Drake J. Agric. L. 61, 72, 74–76 (2007).

108.  See Summary of Bills, supra note 2.

109.  Id.

110.  Low Carbon Economy Act of 2007, S. 1766, 110th Cong. § 401 (2007), available at http://energy.senate.gov/public/_files/END07842_xml1.pdf (link).

111.  For example, the much touted hydrogen car in President Bush’s 2003 State of the Union address, which has received large amounts of federal funding, is no closer to reality than it was in 2003.  Brett Clanton, So, When Do We Get Hydrogen Vehicles, Houston Chronicle, Sept. 5, 2007, at A1.

112.  Alaska has already received funding for an International Arctic Climate Change Research Center for the University of Alaska Fairbanks, see Internatinonal Artic Research Center Homepage, http://www.iarc.uaf.edu/index.php (link) (last visited Nov. 20, 2007).

113.  Low Carbon Economy Act of 2007, S. 1766, 110th Cong. § 3(2)(B) (2007) available at http://energy.senate.gov/public/_files/END07842_xml1.pdf (link).

114.  Id. at § 3; see also Climate Stewardship and Innovation Act of 2007, S. 280, 110th Cong. § 3 (2007), avaiable at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:s280is.txt (link).

115.  Kyoto Projects Harm Ozone Layer: Ozone Official, Reuters, Aug. 13, 2007, available at http://www.reuters.com/article/environmentNews/idUSL137011320070813 (link).

116.  Global Warming Pollution Reduction Act, S. 309, 110th Cong. § 704(f)(2)(B) (2007), available at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:s309is.txt (link).

117.  Climate Stewardship and Innovation Act of 2007, S. 280, 110th Cong. § 3 (2007), avaiable at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:s280is.txt (link).

118.  Id. at § 144(a); Low Carbon Economy Act of 2007, S. 1766, 110th Cong. § 501(f)(2) (2007), available at http://energy.senate.gov/public/_files/END07842_xml1.pdf (link).

————      

Copyright 2007 Northwestern University      

Cite as: 102 Nw. U. L. Rev. Colloquy 123 (2007).

Persistent URL: http://www.law.northwestern.edu/lawreview/Colloquy/2007/32

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