Is the U.S. Moving Closer to a Carbon Constrained Economy?

Despite an old American foreign policy tradition of telling other countries how to run their own affairs and the necessity of different sides of an issue acting in a civil manner, politics in America is not exactly a "no contact" sport. In fact, one battle now raging in Washington, D.C., is how greenhouse gas emissions will be reduced in the U.S. And there is going to be plenty of contact as Washington considers the various available alternatives.

In some ways, it is rather fitting that the U.S. now faces the issue of what to do and how to do it. For years, the Europeans, who have in place the world's only major emissions trading reduction program, have practically begged the U.S. to do something. Even China is making noises about doing something (although it is worth noting that China does a lot of "noise making" in Beijing, but often the actual implementation gets lost out in the provinces). But, alas, nothing has been forthcoming from America, although the U.S. may now be on the precipice of doing something. The question now is will that "something" be through regulation or through legislation? No one is quite sure today. But the method of reducing emissions makes a big different to the various affected constituencies.

On one hand, the U.S. Congress is considering legislation that would reduce carbon emissions through a cap-and-trade system (as well as several other concepts such as instituting a national renewable energy standard). The U.S. House, as reported in this blog in June, has passed a cap-and-trade bill, albeit one punched full of holes for all sorts of special interests. A similar measure is awaiting action in the U.S. Senate, although the powerful "status quo" lobbies (e.g., many big unions, the fossil fuel interests, etc.) are assisting their friends in the Senate (generally those who reap huge political support from these groups) "understand" their side of the matter. Among the friends of the status quo are such luminaries as the two Democratic Senators from West Virginia, the two Republicans from Wyoming, and a vast array of other senators and representatives.

Businesses and policy wonks are watching closely what sort of legislative (if any) measure comes out because of the likely inclusion of a cap-and-trade scheme where regulated businesses can sell and buy emissions allowances on an as-needed basis. (This approach is called a market-based approach, which is contrasted to a regulatory-based command and control approach.)

On the other hand, the Obama Administration's EPA Administrator Lisa Jackson has recently defined greenhouse gas emissions as dangerous to public health, thus setting the stage for the EPA to regulate these emissions. In this context, the federal Clean Air Act will provide the statutory basis for reducing emissions. With no small amount of boasting in her voice, Ms. Jackson announced that this decision "cements 2009's place in history as the year when the U.S. government began seriously addressing the challenges of greenhouse gas pollution and seizing the opportunity of clean energy reform." However, if the U.S. follows this approach (rather than the legislative one), cap-and-trade will not be part of the program.

Where do various interests and observers line up?

Many U.S. electric utility executives would prefer a legislative approach that includes cap-and-trade. For example, David Ratcliffe, chief executive of the large electricity generator Southern Company, said last week, "A carbon bill [legislation] would give more clarity to what you need to do and when." ("EPA's Carbon Proposal Riles Industries," The Wall Street Journal, Dec. 8, 2009). Frank Prager, vice president for environmental policy at Xcel Energy, has also voiced support for a cap and trade solution, particularly with respect to Xcel's renewable energy initiatives. "From our perspective, a flexible market-based program would do a much better job in allowing us to bring renewable energy on-line," Mr. Prager told National Public Radio recently ("Companies Weigh Climate Laws Over EPA Rules," Morning Edition, Dec. 17, 2009).

Across the Atlantic, the EU appears to be situated somewhere between relief that the U.S. will do something and disappointment that it is not enough. For instance, the Financial Times' editorial page, which is often a proxy for European views, wrote recently, "The prospect of EPA action will focus minds in Congress and make passage of cap-and-trade more likely" ("A Changed Climate for Copenhagen," Dec. 8, 2009). However, the FT editorial also made this sage observation: "The EPA's new posture is...a mixed blessing. As the administration knows, an old-fashioned regulatory approach to carbon mitigation is certain to be far more costly than cap-and-trade...since it lacks a market-based mechanism to apportion the curbs efficiently."

If the FT editorial page can be seen as a proxy for European interests, the Wall Street Journal editorial and op-ed pages can nearly always to be counted on to boost their perception of U.S. interests. Recently Kimberly Strassel, who writes the "Potomac Watch" op-ed column for the Journal, panned the EPA's move towards regulating greenhouse gas emissions. Ms. Strassel wrote, "From the start, the Obama team has wielded the EPA action as a club, warning Congress that if it did not come up with cap-and-trade legislation the EPA would act on its own -- and in a far more blunt fashion than Congress preferred" ("The EPA's Carbon Bomb Fizzles," Dec. 11, 2009). Then Ms. Strassel went on to offer an interesting -- and perhaps prescient -- observation: "Bottom line: At least some congressional Democrats view [the EPA's announcement] as breathing room, a further reason to not tackle a killer issue in the run-up to next year's election...[Mr. Obama's] real problem is getting Congress to act, and his EPA move may have just made that job harder."

And to make things even more curisor, in a nod to Lewis Carroll's "Alice in Wonderland" (or "Alice in Washington" as the case may be), Alaska Republican U.S. Senator Lisa Murkowski has announced her intention to introduce a resolution aimed at overturning the EPA's finding that greenhouse gas emissions endanger public health. According to Sen. Murkowski, "I remain committed to reducing emissions through a policy that will protect our environment and strengthen our economy, but EPA's backdoor climate regulations achieve neither of those goals. EPA regulation must be taken off the table so that we can focus on more responsible approaches to dealing with global climate change." What are the Senator's ideas for "more responsible approaches?" It is not entirely clear. But she went on to say, "Upon introduction, a disapproval resolution is referred to the committee of jurisdiction, which in this case will be the Senate Committee on Environment and Public Works. If the committee does not favorably report the resolution within 20 calendar days, it may be discharged upon petition by 30 Senators. Once a disapproval resolution is placed on the Senate calendar, it is then subject to expedited consideration on the Senate floor, and not subject to filibuster."

The debate can and will go on and on. For now all we know for sure is that the U.S. will do something. If the Congress does not act, then the administration -- through its EPA administrator -- will regulate greenhouse gas emissions. The stage is now set.