What's all this about cap-and-trade?

This past week the House Energy and Commerce Committee passed the American Clean Energy and Security Act of 2009, commonly known as the Waxman-Markey bill. At the core of this legislation is a cap-and-trade program, designed to reduce carbon dioxide emissions 83 percent below 2005 levels by the year 2050.

Proponents claim that the legislation will create millions of clean-energy jobs, at the same time reducing our dependence on fossil fuels and decreasing greenhouse gas emissions which cause global warming. However, opponents say that it will drastically increase the cost of energy and actually cause the loss of millions of jobs in this country. As one opponent reportedly summed it up, “This bill is the biggest energy tax in the history of the United States.”

If you don’t understand the intricacies of this 900+ page bill, count yourself in good company. According to Rasmussen Reports, only 24 percent of Americans understand that the cap-and-trade proposal currently winding its way through Congress has to do with environmental issues. Others incorrectly guessed that it had to do either with regulating Wall Street or reforming our health care system.

So, what is cap-and-trade?

The Environmental Defense Fund explains that a “well-designed” cap-and-trade program consists of the following elements:

(1) The government must place a mandatory emissions cap—in this case a limit on carbon dioxide emissions—on the total tons of emissions that may be emitted by all polluting entities in a given compliance period.
(2) The government must allocate—either by giving away or at auction—a fixed number of allowances for each polluting entity. Each allowance gives the holder the right to emit one ton of pollution.
(3) Companies that emit less than they are allowed may either bank their unused allowances for future use or trade them to those companies which are emitting more than they are allowed.
(4) At the end of the compliance period, each company must meet clear performance criteria and prove that their tons of emissions have not exceeded their allowances.
(5) Throughout this process, companies have the flexibility to choose when and how they will reduce their emissions. They do not have to reduce emissions right away; they can do it on their own timeline. If it is more cost-effective for them to buy allowances from another company than to install the technologies necessary to reduce their own emissions, they may do so. As long as their emissions do not exceed their allowances, whether those allowances were allocated by the government or bought from another polluting source, they will not be penalized.

Proponents say the cap-and-trade system was a huge success in this country during the 1990’s when it was used to reduce the sulfur dioxide emissions which caused acid rain. According to the Environmental Defense Fund, “the U.S. acid rain cap and trade program achieved 100 percent compliance in reducing sulfur dioxide emissions.”

However, opponents such as the American Legislative Exchange Council say carbon dioxide is far more ubiquitous than sulfur dioxide. In addition, while the technologies necessary to reduce sulfur dioxide emissions were widely available in the 1990’s, the technologies for reducing carbon dioxide emissions are currently still in the research and development stage, with no clear timeline for when they will become commercially viable.

There are, of course, a number of other details that have become sticking points for both sides in this legislation and a number of larger issues being considered; and doubtless there will be hours of heated debate about those in the coming months. But even if a cap-and-trade bill does finally pass through Congress, it will do little to eliminate the link between our productivity and our carbon emissions. And, ultimately, if we are to succeed, we must innovate clean technologies that will do just that.