The Audacity of the Grand Bargain

Seventeen years after George H. W. Bush signed the United Nations Framework Convention on Climate Change, committing the U.S. to seek greenhouse gas emissions limits, one chamber of Congress finally passed the first U.S. climate change bill in history. Coincidentally this fell on my birthday- I always thought I was the climate messiah. Too bad the 1300 page American Clean Energy and Security Act of 2009 is full of so many complicated, unnecessary and potentially dangerous provisions. The proposal commits the U.S. to reduce emissions 17% below 2005 levels by 2020 and 83% below by 2050, sets up a 20% renewable energy portfolio standard by 2020, and establishes a menagerie of committees, criterias, offsets, definitions and standards on how to measure and verify everything, all to be figured out later when these regulations are drafted.

This bill hands out all rights to emit carbon dioxide and five other gases to industries for free, in direct contrast to Obama’s campaign pledge. The results are windfall profits and the potential for an energy driven asset bubble. It provides no assurances that the price placed on carbon will actually be one that makes clean energy profitable, which was exactly the experience in Europe when they established the same system in 2005. Credits were handed out for free, and in order to get votes everyone got a big piece of the pie (resulting in more credits being handed out than there were emissions), and the price has hovered at near $0 per ton ever since, while Europe has lived with a huge regulatory bureaucracy and burden while actually increasing its greenhouse gas emissions. And if the price of carbon gets “too high”, well then more permits are handed out for free to lower the price. And if the price is still too high, well then the cap no longer applies, so everyone paid a lot of money for a big complicated system that didn’t reduce emissions. Not to mention that we are in the midst of the worst recession in three generations, largely precipitated by an asset bubble and excessive speculation in the housing market, a market that has been studied and regulated for hundreds of years. This bill sets up a multi-trillion dollar market for the next 50 years, one in which the U.S. has no experience. The same people who pushed this through so voraciously will be the same ones decrying the excesses of carbon credit default swaps and derivatives in 10 years after we have seen another huge unsustainable bubble pop.

Then there is the issue of offsets, new emissions credits that can be generated when firms offset their emissions with something that captures carbon. Except, what exactly that means and who measures it will be figured out later by the Department of Agriculture. This will take years and many lawsuits to resolve, and even then the standards may be overly broad and subject to some very clever abuse by Wall Street, who frankly I put my money on over USDA any day of the week when it comes to cleverness. Not to mention the agriculture community is in large part the regulated party, a slight conflict of interest. Then there are the trade sanction provisions. This will allow the U.S. to bring action in the WTO and UN against countries who “artificially subsidize” their products by not attaching the same carbon price as the U.S. India and China have already drawn a line in the sand and said they will reciprocate any climate change tariff or quota and challenge our actions via arbitration, which typically takes about a decade to resolve. Of course by the time this is resolved we’re already supposed to have reduced emissions nearly 20%, so we’ll either have to march on with significantly high energy costs while India and China walk, or wait until a nasty trade dispute is resolved. And of course the bill raises $650 billion in new tax revenues, not to be recycled back to the American people.

Much superior to this convoluted grand bargain, we should place a price on carbon so it is the cheapest alternative, rebate it back to the American people, and cut out 1000 pages of special interests pay-offs in the process. If we want a clean energy economy, we don’t need the government telling every business and consumer exactly how much carbon they can emit every year for the next 50 years. And we don’t need dozens of new programs and thousands of new bureaucrats trying to figure out how much we’re emitting in the first place. All we need is for clean, renewable energy to be cheaper than dirty finite energy. If clean energy is cheaper, consumers will buy it, there will be demand pull. If clean energy is cheaper, it will represent a larger profit margin and greater return on investment for producers, there will be supply push. The price is the market maker, not the government. This bill could very well result in the grotesque situation of firms producing unprofitable products for consumers who are forced to pay more for them. Many people on the Hill act as though once you acknowledge the reality of climate change, there can only be one way to address it. There is no discussion of the multiple potential approaches and associated tradeoffs. Just one bill, and a lot of gray-haired men ramming it down everyone’s throat. The consequences of such little context for debate could be some very unintended consequences.

The Obama Administration is pushing hard on so many mega issues- health care, financial regulatory reform, energy and climate change, the largest budget in the history of the world, and now it looks like immigration too. The implicit tradeoff with this ‘boil the ocean’ approach, in contrast for instance to a more incrementalist one, is it requires engagement with the entire universe of very powerful special interests. You either have to commit to hard slow negotiations with the lobbies, and take very public and potentially damaging defeats in the process, or give them broad sway in order to get votes and flattering headlines, but live with policies you may come to regret. Obama and chief whip Emmanuel have consciously chosen to attempt to complete their entire agenda in what would be a truly historical first term (and guarantee for a second) in exchange for being very willing to play ball with the interests they want to regulate. The stimulus was a prime example. The White House sent a list of broad goals and top line numbers up to the Hill, and like throwing meat to a pack of ravenous dogs said, “fill in the details.” Lobbyists get a bloated bill full of new government contracts, Congress gets the support of their local haymakers, and the White House gets a resounding legislative victory. We also get a lot debt, a still increasing unemployment rate, and a bill the American people are increasingly souring on. If all that bill produces is a few hundred thousand jobs, and nearly a trillion dollars in new debt, that could be just the opening the GOP needs. (*POSTSCRIPT: Excerpt from Fall 2010 Paper: "Mr. Obama is already faced with the reality that voters have, fairly or not, decided that his first big effort to revive the economy, the $800 billion package enacted right after he took office, was a qualified failure, and that anything tagged as further 'stimulus' will be cast by Republicans as throwing good money after bad.")

And if all this climate bill produces is mountains of new regulations, costs, and system gaming, with few emissions reductions (like Europe), then the White House just gave the GOP a gaping hole to meander through. Obama said at the time he was pushing the stimulus, "my job depends on this bill"- he knew the risk he was taking. If politics is the art of the possible, then this is some very fine art. Perhaps it’s impossible to achieve much better, but we won’t know unless we try. The bill that was passed Friday shows more about how many people want to be Rahm Emmanuel’s friend, and who don’t want to cross Henry Waxman, than about who wants to actually usher in a clean economy in the most efficient way.