Chances are good that legislation to “cap and auction” greenhouse gas (GHG) emissions will become law as early as 2009. While many environmentalists, utilities, and energy companies agree that cap and auction is the right framework, huge differences remain. Environmentalists want an 80% reduction of GHG emissions by 2050, or sooner. Energy companies want more modest reductions and for pollution allowances to be given away rather than auctioned. The energy lobby will likely favor, and environmentalists oppose, a “safety valve” to prevent the price of carbon dioxide (and thus the cost of energy) from rising too high.
Though the regulatory aspects of managing greenhouse gases are important, the biggest reductions in emissions won’t come from regulations but from technology innovations that lower the price of clean energy. The opportunity for agreement between industry and environmentalists lies in using revenues from auctioning emissions allowances to fund major investment in clean energy technology and infrastructure. But before describing what this win-win might look like, we need to understand the lessons of the Kyoto treaty.
The failure of Kyoto
Many environmentalists believe that Kyoto’s failure is due to Bush administration opposition to it. This story gives too much credit to the U.S. and too little responsibility to the wealthy nations that ratified Kyoto. The latter saw their GHG emissions go up, not down, by 4% from 2000 to 2004. In Britain and Germany, emissions fell not because of Kyoto but because Margaret Thatcher broke the coal miners’ union, moving Britain to cleaner-burning natural gas, and because the East German economy collapsed after the fall of communism, reducing a reunified Germany’s reliance on dirty coal plants. When you remove Germany and Britain from the calculation, European emissions rose 10% between 1990 and 2005. The reality is that Europe hasn’t reduced its emissions because its policymakers fear the backlash that will result from higher energy prices and slower economic growth.
U.S. lawmakers considering cap-and-auction legislation will soon face the same challenge as lawmakers in Europe: increase energy prices too much and face a public backlash; increase them too little and have no impact on emissions. This is the heart of the Kyoto problem. For regulations to work, the price of fossil fuels must increase enough that clean energy alternatives become cost-competitive.
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