As Simple as it Can Be
One of the major criticisms of cap and trade in general (and of some of the leading bills in Congress in particular) is that it’s too complicated. In fact, of the things one can do to reduce greenhouse gas emissions, cap and trade is not only the most effective and cost-effective, it is also relatively simple. Cap and trade simply means that the government sets an overall limit on greenhouse gas emissions, issues tradable allowances (permits to emit), and allows emitters the flexibility to decide how to reduce their emissions and whether to buy or sell these allowances. Since greenhouse gases are emitted from thousands of different activities throughout the economy, setting up specific command-and-control regulations for each emitter would be extremely complicated, if not impossible. As we learned from our experience with reducing acid rain, cap and trade programs are much easier to implement. Some people assert that a carbon tax would be simpler, but they obviously don’t fill out tax forms and haven’t been lucky enough to pore over the thousands of pages of the U.S. tax code.
Simplicity is certainly a worthwhile goal, and it is worth trying to find ways to simplify climate legislation. But simplicity is not our only goal, and some of these bills’ complexities are there to achieve specific and important objectives. If we can achieve those objectives in a simpler way, that would be good, but we don’t want to abandon worthy goals solely for the sake of simplicity.
Distributing allowances is one aspect of the legislation for which trying to achieve particular ends can require somewhat complicated means. For example, many in Congress want to protect electricity ratepayers from the near-term cost impacts of climate policy. Because the carbon intensity of electricity generation varies widely among states and utilities, the cost customers would face under the climate program will vary significantly. To ensure that the impact of cap and trade is fair across the country, one could distribute a significant portion of allowances to state-regulated electric utility companies, and require state public utility commissions to ensure that the utilities use those allowances to protect consumers. A simpler method of distributing allowances would be to auction off all the allowances and give a uniform rebate to everyone, but that would mean that the hardest hit consumers (generally in the midwest and southeast where many utilities are heavily reliant on traditional coal use) would not be adequately protected, and consumers who would see little cost impact (generally in the northeast and west coast) would receive a windfall. Now I’m as East Coast as they come, but I really don’t want or need a windfall from this program. I want assistance to go to those who need it the most to transition to a clean energy economy. Helping our industrial heartland through this economic transition helps us all. If we can find a simpler method that also achieves this objective, that would be great. But we shouldn’t abandon the objective for the sake of simplicity.
As another example, many Senators and Congressmen want to ensure that energy-intensive and trade-exposed (EITE) industries are not competitively disadvantaged in global markets. This is important both economically and environmentally: we don’t want to encourage industrial production and emissions to shift overseas. Providing allowances to EITE industries is one effective approach, but it can be somewhat complicated because it is challenging to properly identify the vulnerable industries and to provide an appropriate level of compensation. Again, if we can find a simpler way to achieve this objective, we should do so, but we shouldn’t abandon this important objective for the sake of simplicity.
Finally, there is a question as to how prescriptive climate legislation should be with respect to program implementation. Should it specify in detail, for example, who exactly is covered by the program and how allowances are to be distributed? There is a general trend in Congress toward providing much more specific direction in legislation and leaving less flexibility to the implementing agencies in the executive branch. Climate legislation could be vastly simplified by leaving more of the implementation decisions to the U.S. Environmental Protection Agency or other agencies. However, while this would make the legislation simpler, it would not make the program simpler, because important technical design issues would still need to be resolved. It also poses legal and political challenges. Lawsuits questioning the Agency’s use of its discretion could delay getting the program up and running. And businesses, consumers, and legislators may want to know specifically how the bill is likely to affect them before they feel comfortable supporting enactment. While I believe that EPA can be trusted to use its discretion wisely, Congress will need to decide how much it is willing to delegate to the executive branch for the sake of simplicity.
Judi Greenwald is Vice President for Innovative Solutions