Editor’s note: The federal version of Sightline Cap and Trade 101 is now available. Download Cap and Trade 101: A Federal Climate Policy Primer here.


Rep Henry WaxmanI’ve been poring over the 948 pages of Waxman-Markey, the cap-and-trade bill that now appears likely (fingers crossed) to pass the US House of Representatives this month or next.

My grade?

Overall, I give Representatives Henry Waxman of California (pictured) and Edward Markey of Massachusetts a solid “B,” but I’m grading on a curve—the curve of political reality. Straight A’s are hard to come by with oil, coal, and other industries spending almost $80 million lobbying on climate policy in just the past three months (pdf). Under withering fire, Waxman-Markey’s cap-and-trade superstructure is still intact. If it passes in its current form, we can all be pleased, but we’ll have to hold our breath, hoping that the offset provisions work as intended. If we can induce the House or Senate to fix a few flaws before passing it, we can be euphoric. Waxman-Markey could be the most important piece of energy or environmental legislation in a generation. It’s also much-needed economic policy: clean energy can be the path out of recession.

How do I love it? I’ll enumerate as soon as I document its flaws. First, though, a warning: to keep this post shorter than 948 pages, I used some wonk-speak. (An English-language exposition will be available soon, in our Cap and Trade 101 federal primer.)

6 things I hate about Waxman-Markey:

  • Our work is made possible by the generosity of people like you!

    Thanks to Suzanne Van Loon for supporting a sustainable Cascadia.

    1. I hate that Waxman-Markey allows 2 billion tons of offsets each year. That’s too many by an order of magnitude. Offsets are too slippery; you can never be sure if you’ve reduced emissions overall or just moved them around. W-M’s offsets provision could blow a hole in the cap—and the cap is the only guarantee we’ll meet crucial goals. This offsets number is, in my view, the bill’s biggest flaw. (Still, W-M is admirably complete in designing a set of administrative rules to sift real from fake offsets. Whether such regulatory standards will be enough is perhaps the key question about the bill, as Lisa argued yesterday.)
    2. I hate that Waxman-Markey’s goal for 2020 is a paltry 17 percent reduction below 2005 levels (19 percent, considering my love #3/strategic reserve). President Obama’s clean-energy stimulus and budget investments, the 2007 federal energy bill, new fuel-economy standards announced in May, and new programs in Waxman-Markey for efficientbuildings, vehicles, and appliances—these initiatives alone might take the United States to a 17 percent drop in emissions. Even without cap and trade.
    3. I hate that W-M only auctions 15 percent of permits at first. Carbon permits will be a public asset ultimately worth hundreds of billions of dollars. Distributing them for free, even distributing them for free with as much integrity and cleverness as W-M does, is at best sleight of hand. Sooner or later, voters will understand that permits are cash in another form. A more forthright policy would auction all permits first, then distribute the money in the light of day. If coal and oil companies really deserve tens of billions of public dollars (see hate #6), let them argue for it in the halls of Congress, with the news cameras rolling.
    4. I hate that W-M gives 15 percent of permits for free in its early years to energy-intensive companies in traded sectors. Transitional assistance for traded industries is a legitimate public objective, but handing out permits is too blunt a tool. Paying tribute to swing-state industries?
    5. I hate that Waxman-Markey, having just lavished 15 percent of permits on energy-intensive firms, dedicates a fraction of one percent of permits to programs that benefit workers. It gives 0.5 percent to transitional aid for displaced workers andgreen-collar job training programs. Combined.
    6. I hate that in its early years, Waxman-Markey gives 2 percent of permits to oil refiners and 5 percent to coal power plants. W-M also hands out permits to pay for carbon capture and storage (CCS) projects at coal plants. CCS is a promising technology worthy of research grants, but it’s too speculative to deserve 5 percent of permits every year, in perpetuity. Paying more tribute to swing-state industries?

    14 things I love about Waxman-Markey

    Enough bad news. There’s more to love than there is to hate:

    1. I love the 2050 goal: a reduction of emissions by more than 83 percent below 2005 levels. Beyond carbon in 40 years!
    2. I love Waxman-Markey’s scope. It is comprehensive, covering essentially all fossil fuels, along with most other greenhouse gases. The Congressional Budget Office estimates that W-M’s cap would cover 86 percent of emissions by 2020. For uncapped emissions, such as those from landfills and animal farms, it offers regulatory standards and other programs.
    3. I love W-M’s “strategic reserve”—a stockpile of permits that authorities will accumulate to help buffer prices. To establish the reserve, authorities will withhold a share of each year’s permits, typically 1- 3 percent. The reserve will have the effect of tightening the cap in normal years, but if permit prices spike upwards (rising by 60 percent above their three-year average), it will temper the market by releasing permits. Smart policy! This reserve is a clever, cap-protecting alternative to an off-ramp, which would generate cap-busting extra permits if prices spiked.
    4. I love that W-M operates (mostly) upstream in the energy economy. “Upstream” simplifies everything and makes the cap more comprehensive. It targets roughly 7,400 US companies, including oil and natural gas suppliers plus power companies that burn coal.
    5. I love that, by 2030, under W-M, federal authorities will auction 70 percent of permits and distribute the remainder to public agencies and institutions. Those entities will sell their permits as well, likely through the federal auction. It’s not 100 percent auctioned from day 1, as it ought to be, but it gets there eventually.
    6. I love that, from its inception, Waxman-Markey auctions 15 percent of permits for the benefit of low-income families. Working-class households have done the least to cause climate disruption; they stand to lose the most from it; and their pinched budgets are most exposed to the fossil-fuel rollercoaster. The Congressional Budget Office estimates such rebates might be worth $161 for a single adult in 2012 and grow over time.
    7. I love that, starting in 2026, federal authorities will auction all unallocated permits and distribute the proceeds in equal payments to all legal US residents. By 2030, that’s 55 percent of permits, worth tens of billions of dollars. It’s almost Cap and Dividend, and it will probably make climate policy a pocket-book winner for every families below the median income.
    8. I love that low-income families will get both their 15 percent climate credits and their per-capita dividends. W-M will compensate them for some of the cruel injustice of climate disruption itself.
    9. I love many of its technical features: W-M provides for unlimited “banking” but tightly limits “borrowing”; has few barriers to bidding at its permit auctions (low barriers to entry are among the best safeguards against market manipulation); uses quarterly, uniform-price, sealed-bid, single-round auctions (don’t ask); incorporates a battery of protections against market manipulation; allows linkage with European and other cap-and-trade systems, at the discretion of federal authorities; and allows any recipient of free permits to offer them on consignment at the main federal auction. (More on all this here.)
    10. I love that W-M sets an auction reserve price of $10 when the program begins in 2012. I love that the reserve price will rise each year by 5 percent plus inflation, as shown in this chart. By 2050, permits will never sell at auction for less than $63 (in 2009 dollars). This rising price floor will deliver us to the climate-pricing dream-world I sketched here. In effect, W-M incorporates a carbon tax shift in its cap-and-trade system. 

      Reserve Price Chart


    11. I love that W-M allocates 10 percent of permits (shrinking over time) to states, to fund renewables and efficiency programs, such as retrofits for all and upgrades to schools and other public buildings.
    12. I love that W-M dedicates 3 percent of permits to climate-change adaptation—both human and natural, both domestic and international—and raises this allocation to 12 percent in 2027.
    13. I love that W-M supports conversion to clean-energy abroad, devoting 1 percent of permits to this purpose initially and 4 percent after 2027.
    14. I love—or at least feel grudging admiration—that W-M finds ways to give free permits but still channel the dollar value of those permits to families. For example, I hate that W-M gives 30 percent of permits to electric utilities (not to power generators but electricity retailers), but I love that it requires them to rebate the value of those permits—after selling them on the market—to their customers in equal lump-sum payments. This mechanism is less transparent, universal, and fair than auctioning permits and sharing the revenue in equal parts. For one thing, rebates will vary widely, depending on utilities’ fuel mix. For another, utilities have no idea how many people share each meter, nor can they ensure that landlords pass rebates to their tenants. Still, it’s an ingenious compromise that may prevent most corporate windfalls, because electric utilities are closely regulated. It also ensures that the carbon price signal will still be felt throughout the electricity market.

    The “loves” outnumber the “hates” more than two to one. Among the “hates” only one could be fatal to cap and trade: the overprovision of offsets. Others are annoying, odious, even outrageous, but, considering the power of coal-dependent swing states, not too surprising. In fact, what’s a surprise to me about Waxman-Markey is how good it is as a piece of policy. Hence, I give it a respectable “B.”

    Waxman-Markey is the vehicle for a US cap-and-trade system, if the country is to have one in time to reach a new international climate agreement in Copenhagen in December. If the United States enacts W-M, I predict Canada will follow suit with a harmonized cap-and-trade law within two years. I suspect British Columbia will sign up even before Ottawa (see this story in yesterday’s Vancouver Sun).

    Waxman-Markey will, like any far-reaching and contested legislation, probably emerge from Congress imperfect: Still, as compromised as are some of its provisions (too little auctioning, too loose a cap initially, too much money to unproven CCS, too many offsets), it remains a giant leap toward a clean-energy economy.

    As Waxman-Markey moves through Congress, Northwest champions such as Representative Jay Inslee of Washington need all the support we can give them to correct its flaws and defend its strengths.