It began in April 2007 with a U.S. Supreme Court case, Massachusetts v. Environmental Protection Agency, in which 12 states and several cities brought a lawsuit against the EPA to force the federal agency to regulate carbon dioxide and other greenhouse gases as pollutants. In a 5-4 ruling, the court ruled that the EPA violated the Clean Air Act by improperly declining to regulate new-vehicle emissions standards to control the CO² that scientists say contributes to global warming, setting the stage for a national debate about the best method for addressing reductions in those emissions.
With that, it became a matter of how – not a matter of if – CO² emissions will be reduced.
In 2007, the city of Boulder became the first to adopt a voter-approved carbon tax to address climate change. Also in 2007, the Regional Greenhouse Gas Initiative kicked off the nation’s first mandatory market-based program to reduce greenhouse gas emissions. RGGI is a cap-and-trade program, a cooperative effort among nine Northeast states to reduce CO² emissions from the power sector. In 2013, California followed with its version of cap-and-trade regulations.
After the U.S. Congress failed to pass a national climate bill in 2010, and in light of the 2007 Supreme Court ruling requiring the regulation of carbon dioxide emissions, in August 2015, the EPA released its Clean Power Plan. Its rules set state-specific CO² emission-reduction targets that would reduce such emissions nationally by 32 percent by 2032. The plan provides a “model rule” for states to adopt that would meet the state’s CO² emissions target. This model rule is a cap-and-trade program that would effectively create a 50-state CO² trading system that would over time establish a national price for carbon dioxide.
Also in 2007, an organization came into the national spotlight called the Citizens Climate Lobby. It advocates a carbon tax (as it is called on the group’s website) within a Fee and Dividend program. CCL has since become a populist movement to address climate change.
The basic idea is to tax fossil fuels at their entry point into the U.S. economy and redistribute the proceeds as dividends to consumers. Today, citizens and legislators in Washington, Massachusetts, Vermont, New York, Rhode Island and Oregon are at various stages of introducing proposals similar to the CCL’s within their state legislatures.
So why did California, the nine RGGI states and the 50-state CPP adopt cap and trade as the method to reduce CO² emissions? How do we know cap and trade works and is an effective means of addressing CO² emission reductions?
In the 1980s, the EPA and electric power sector partnered to design and implement a voluntary trading program to reduce sulfur dioxide and nitric oxide emissions that effectively eliminated the acid rain problem that was killing our lakes and causing significant human health problems. Since then, it has been widely accepted by scientists and economists that market-based emissions trading schemes effectively address emission reductions, while providing incredible human health benefits (a 40-to-1 benefit to cost ratio). This was our nation’s first cap-and-trade success story.
Carbon cap-and-trade schemes are effective at reducing carbon dioxide emissions because they have five criteria in common:
A CO² emission reduction target is established as well as the year it will be attained;The target’s attainment can be measured;The emission-reduction program establishes a carbon price;When energy prices change, national energy policy changes or personal incomes change, the attainment of the CO² emission reduction target is not affected;And the CO² emission-reduction program is politically acceptable.So far, carbon tax proposals have accomplished none of these at a state or national scale.
As proposed by the CCL, a carbon tax will raise prices on consumer purchases as the carbon tax is passed down to consumers. This may sound simple and appealing to some; it assumes consumers will change their purchasing behavior to buy products that cost less as prices increase because of the carbon tax. For example, to understand what this might mean to consumers, the CCL proposes an annual tax increase in fossil fuels at their point of entry into the economy that translates into an annual 10-cent-per-gallon increase at the pump for gasoline.
These assumptions are reasonable to make, but they simply cannot be measured. And if they cannot be measured, we will never know if they work. This is especially true in light of significant macroeconomic events such as the drop in crude oil prices from over $100 per barrel in August 2014 to less than $30 per barrel in March 2016, or the United State’s lifting a 40-year export ban on crude oil in December 2015.
To find the best solutions, economists and policymakers must address the effectiveness, efficiency and equity of their policy proposals. Tradeoffs must be made. For good reasons, these tradeoffs favor using cap-and-trade schemes to reduce state or national CO² emissions.
Steve Ruddell is president and owner of CarbonVerde, a bio-carbon and policy advisory firm with headquarters in Durango. Reach him at steve@carbonverde.com.bt.
