Would Cap and Trade Have Increased U.S. Emissions?

When the Waxman-Markey cap-and-trade bill collapsed a few year back, advocates of aggressive action on climate change despaired. But a fascinating and provocative new analysis from Dallas Butraw and Matt Woerman at Resources for the Future suggests that people might want to revisit that judgment: by 2020, they write, domestic emissions will “probably [be] less than would have occurred if the Waxman-Markey cap-and-trade proposal had become law”. Whether you believe that depends on some important details.

The underlying logic is relatively simple. Butraw and Woerman identify three main sources of emissions reductions over the next decade: changes in the economy (notably cheap natural gas), state and regional policies, and regulation of carbon dioxide under the Clean Air Act (CAA). They project that those will collectively lead to a 16.3 percent reduction in carbon dioxide emissions below 2005 levels by 2020, with standards under the CAA contributing more than ten percentage points of that. That is close to the target the United States announced at Copenhagen.

Then they make an important observation: Waxman-Markey would have preempted regulation of carbon dioxide under the CAA. The carbon price in the bill would have pushed emissions down, but the lack of new CAA regulations would have pushed it up, with the net impact, in principle, ambiguous. In addition, the impact of state level policies and changes in the economy would have been blunted under Waxman-Markey: by reducing emissions, they would have lowered the price of emissions permits, prompting some offsetting emissions increases elsewhere.

Butraw and Woerman ultimately estimate that emissions would only have declined 13.6 percent by 2020 under Waxman-Markey – more than 2 percentage points less than without it. (This does not include controversial emissions cuts through offsets.) Worse, they observe, Waxman-Markey would have seen participants “bank” emissions permits equivalent to 5.7 percent of annual emissions, in turn allowing them to increase their emissions by that much in later years. If you factor out this sort of emissions-shifting, they observe, Waxman-Markey would only have resulted in a 7.9 percent cut, a full ten percentage points less than without it.

This analysis is intriguing. It is particularly interesting because of what it says about the possibility that the United States could come very close to meeting the 2020 emissions target that it has pledged in international negotiations. But – in the spirit of the fact that the Butraw and Woerman analysis is a “Discussion Paper” – I want to explain why I’m somewhat skeptical of the bottom line.

Start with the issue of banked permits. I think that Butraw and Woerman are incorrect to count these against emissions reductions. Yes, under Waxman-Markey, banked permits would have allowed higher emissions in later years. But those would have been higher emissions than the already reduced emissions mandated post-2020 by Waxman-Markey. Since Butraw and Woerman don’t give any credit to post-2020 emissions reductions in the first place, it’s wrong to penalize anything for undermining them.

My next issue is with the fuel economy regulations implemented by the Obama administration. Butraw and Woerman assume that they would have been preempted by Waxman-Markey. But the cost-benefit analysis in the regulations makes clear that they could have been justified without any reliance on climate benefits. Indeed the Waxman-Markey bill itself called on the administration to strengthen fuel economy standards. Butraw and Woerman show that if you assume that Waxman-Markey wouldn’t have preempted CAFE regulations, then you get a 15.9 percent projected decline in emissions, not a 13.6 percent one, and barely distinguishable from what Butraw and Woerman project without Waxman-Markey.

That leaves one big question: What will happen with CAA regulation of stationary sources? Butraw and Woerman are quite generous, assuming that emissions cuts in this area will add up to the equivalent of a bit more than 7 percent of 2005 emissions. These, they note, are all emissions cuts that would have been preempted under Waxman-Markey. Whether the U.S. government will actually put in place such measures, though, remains to be determined, since most of the CAA regulations that Butraw and Woerman have in their model don’t exist yet. Whether a second Obama administration will pursue those standards (which are admittedly relatively modest) remains to be seen. It’s fairly certain that a Romney administration wouldn’t.

This says to me that whether you think emissions would have been higher or lower under Waxman-Markey depends fundamentally on what you think the prospects for regulation of stationary sources (particularly existing ones) under the CAA are. This is almost entirely a matter of political, rather than economic, projection.

One last observation: Focusing on 2020 can be misleading. It is possible to make substantial short-term emissions cuts without really setting the stage for much deeper ones later. The U.S. emissions goals for 2020 were long believed to be rather weak – even the U.S. negotiating team in Copenhagen often emphasized the 2030 and 2050 goals when defending the U.S. approach.  (I made a similar case in Slate during the talks.) In the end, I believe Butraw and Woerman when they say that the United States might well end up doing better domestically by 2020 than it would have with cap-and-trade. But I worry that if we don’t put long-term signals to the market in place soon, that victory will be ephemeral, as our longer-term climate goals slip further from remaining realistic.