Warning: The following is just one man's long-winded opinion on goings-on, and while I have been spending a bit of time engaging on these topics lately, I'm far from being an insider, so read accordingly
My guess is that we won't see any major climate change legislation signed into law this year. There's a decent chance, but less than 50%.
I come to that conclusion after observing a lot of "strategy discussions" among proponents, and listening to a lot of political rhetoric over the past few months. And it's becoming clear to me that the way climate change legislation is being tackled is likely doomed to failure.
And that would be a big shame. Because we need to address climate change and energy independence as quickly as possible. And if we can't get something useful done that's market-based by design, then we will see yet another big prolonged battle between those espousing "do nothing" and those espousing "command-and-control" approaches. Paul Krugman touched on the cost-effectiveness of market-based solutions like cap-and-trade in an op-ed over the weekend.
But let's go back to 2006, when California's Prop 87 was on the ballot. This would have imposed a tax on California oil producers, with the explicit goal of significantly reducing the state's oil consumption, and with the revenues being directed in part into a program of subsidies for alternative energy research. It would have represented a pretty moderate tax of 1.5-6% per barrel on oil producers.
Prop 87 had some major endorsers (Al Gore, Bill Clinton, and Vinod Khosla, to name a few) and, it being an off-year for elections, it got a lot of attention and positive donations. A major ad push was undertaken. If any state would pass such a measure by popular vote, you would think it would be California, a state that prides itself as being at the forefront of green living and green energy. The prop started out with a lot of positive public momentum.
And it was defeated.
At the time, I was living in California, and I vividly remember the massive ad campaign -- almost entirely and overtly funded by oil producers -- against Prop 87. Opponents pulled out the stops. The proposal was attacked as tax and spend. The use of the tax to fund subsidies for green power technology was assailed as imposing a new massive bureaucracy on a public already tired of big government. A firefighter in full fire-fighting regalia was put on camera to argue that the tax would lead to higher gas prices, hurting firefighter budgets, and therefore making it harder for firefighters to fight fires.
The lessons that should have been learned are that a) when voters perceive something as being a "tax", they don't really care about (or in many cases, understand) the relative burden of that tax, they just react negatively no matter what price it is; and b) if that tax money is taken and spent by the government on new programs, no matter how popular those programs might be, it's easy to attack the whole thing as "tax and spend bureaucracy".
So what's going on in DC right now? The very same thing. And this time in the middle of a recession.
At a high level, the approach being touted for passing cap-and-trade suffers from the very same flaws as Prop 87. It may not be called a "tax", but as most will admit, cap-and-trade is simply an alternative way to price carbon emissions. It's already being labeled as a "tax" by opponents. After a few months of massive negative ad campaigns (we're already all starting to see them on TV), I would bet that most voters will believe that "cap-and-trade" is a synonym for "tax".
That by itself is not a bad thing, if the message was better controlled. If was "a tax on big polluters," for example, people might be more sympathetic. But more on that below.
The other strategic mistake being made is that the proceeds of any auction are already being tapped for budgetary purposes. Green energy proponents and producers are already arguing over who's going to get what slice of the revenues for subsidizing their businesses.
I'm not at all against subsidizing alternative energy technology development, commercialization, and adoption. But that's a very separate concept from pricing carbon appropriately. If you price carbon appropriately, then in theory consumers will make their own personal decisions about the trade-offs between green energy, efficiency and traditional energy sources. In theory. In reality there are market adoption reasons (not to mention the important goals of technology leadership and energy independence) for separately and additionally subsidizing alternative energy technologies. But that should be left out of the climate change legislation, it should be part of a separate Energy Bill conversation. Let's address the price for carbon. Then let's have a different conversation about supporting one technology over another. Conflating the two is confusing for voters, and also makes it tougher for them to support the overall proposal.
Because, I believe, in order to get voters (and their representatives in DC) to support even a moderate "tax on big polluters", it has to be revenue-neutral. In other words, every single dollar of proceeds has to be kept out of the budgetary process. And it has to be returned to each household in the form of a per capita rebate check.
I'll never understand why some politician hasn't stood up and declared:
"I want to propose an income tax reduction! We're going to put money in the hands of average American households who need it so badly right now! And the way we're going to pay for it is by charging a fee on big polluters. We'll set up a separate account that the politicians aren't allowed to touch, and every dollar paid for by the big oil and coal producers will be sent back to the American public. You'll get your share of the proceeds as a rebate check every year!"
Alas, those writing the current legislative proposals are following the Prop 87 script pretty closely instead.
Polling done with Americans suggest that they are very sympathetic to the goals of fighting climate change, growing "green energy jobs", and moving toward energy independence. They claim to be willing to make sacrifices. But once again, when asked about even the most minor of cost increases on their electricity bill or at the pump, they balk. They're willing to make sacrifices like changing lightbulbs and driving smaller cars, but they're not willing to pay any higher prices during a recession. And they simply don't trust the promised "payback" in terms of the benefits of green collar jobs growth, avoided climate change damage, etc. Unless it's a protected rebate check delivered right to their door, they will never believe the benefits are net positive.
But from what I can see, the inside-the-Beltway horsetrading seems to be focused on two things: Arguing over what the price of carbon should be (via the proxy argument of how much of the available pool of emissions should be auctioned vs. granted to utilities, etc.); and trying to pile additional spending proposals into the major bills or auxilliary bills being proposed over the next few weeks.
When I talk with proponents of climate change legislation, many of them appear to recognize that this is likely a flawed strategy, at least in terms of getting something done this year. Symptomatic of this kind of active denial is the emphasis being put on the Waxman-Markey bill in the House. But everyone agrees that the Senate (with its 16 or so skeptical Democrat senators) will be the really tough place to pass anything. So why fight so hard about the specifics of Waxman-Markey? Because that's the way to get something meaningful passed in the House. And then, hopefully, that will lead to some momentum going into the Senate.
The other hope I've heard expressed is a "backup plan" of pushing for a National Renewable Energy Standard. This would require all states to make sure that a certain proportion of their energy supply comes from renewable resources by 2025 or so. The hope is that, even if a cap-and-trade scheme is defeated, much of the same objectives could be achieved by mandating this kind of supply mix. But now I hear of strong objections to this kind of scheme as well, from those states (such as the Southeast) who don't believe they have good access to renewable resources. And besides, it gets us away from the most efficacious solution: Pricing carbon. It's closer to command-and-control than it is to market-based solutions, and thus probably costlier in the end for power suppliers.
Those groups hoping to forestall any real carbon pricing or renewable energy standard are probably pretty happy with their position right now. The dollar advantage they enjoy is pretty significant, and that will start to play out in the ad and lobbying campaigns. And even before that really kicks into full swing, the schisms and strategic choices of the proponents of climate change legislation are making it difficult to see a clear path to getting something meaningful passed in this economic situation.
On the other hand, let's not forget what the ultimate alternative for action is: Forced technology adoption, the ultimate command-and-control approach. So called "Best Available Control Technology" has long been a fact of life for power generators in terms of other pollutants besides carbon. Now we're seeing, in the UK, proposals for what are essentiall "Future BACT": A requirement that any new power generation facility must promised to adopt carbon capture and sequestration technology as soon as it is commercially available.
That could end up being a lot more costly for utilities than any cap-and-trade or carbon tax. And the threat of that kind of thing may be exactly why some utilities like Duke Energy have been publicly supportive of climate change regulation... if it isn't too punitive on them in the near term.
So there's still a chance that something gets passed that would have a meaningful "Phase 2" in its implementation. A cap-and-trade scheme where Duke Energy, et al, can see enough other benefits (from CCS research and commercialization subsidies, and the inclusion of energy efficiency as a source of near-term offsets, for example) where they can support it.
I've long said that if you want to pass climate change legislation, it has to be something that Duke Energy's Jim Rogers would be able to endorse. And it might not be perfect, but it would be better than nothing.
Stay tuned. The next few months will be fun to watch. Often frustrating for all sides, I'm sure. But fun to watch.
*PS: Yes, I spelled it right. Apologies for a dorky pun.