Governors’ Global Climate Summit makes case for baskets

Day one of the Governors’ Global Climate Summit was staged like an awards ceremony for the end of global warming–complete with crescendoing musical entry queues and an acceptance speech from leading actor, Gov. Schwarzenegger, in which he likened his wife to an “environmental Gestapo” and warmly celebrated the incoming Obama administration, despite having campaigned against the man just two weeks ago–and concluded with a panel discussion on the “sectoral approach” to reducing greenhouse gas emissions. For anyone watching this made-for-TV special at home without the appropriate decoder ring, the term “sectoral approach” might not mean much. Similarly innocuous-sounding were remarks from Diane Wittenberg, executive director of The Climate Registry, about how the United States won’t be able to reach a goal of 80 percent reduction in greenhouse gas emissions below 1990 levels without a “basket.” The reason these terms are important is that they indicate a significant–if not wholly unexpected–change of direction for domestic climate change policy, away from market-based mechanisms and toward heavily bureaucratic, prescriptive regulation, targeting the transportation sector in particular. Compared to the science behind anthropogenic climate change, whether to bail out auto companies, or any number of other political debates, the support for a cap-and-trade approach to greenhouse gas abatement has been broad and nonpartisan. (Yes, economists favor tax-and-credit systems that accomplish essentially the same goals but with greater price stability, but politicians evidently find these unpalatable–policy advisers in the European Union sought a carbon tax for five years until giving into the political preference for cap and trade communicated at the Kyoto climate change conference.) Cap and trade for greenhouse gas emissions is also one of the most widely embraced emerging market-based mechanisms in environmental policy outside of climate and energy issues. The agenda for today’s panel on “sectoral approaches” read:

This panel will discuss the importance of both targeted actions to reduce emissions and partnership opportunities for partnership between developed and developing state and provincial governments. Such targeted actions can take the form of technology transfer, best practices sharing, and market-based approaches to reducing emissions or other actions that provide mutually beneficial outcomes. These actions are not intended to displace the existing successful efforts to create a highly credible offset market, establish economy-wide caps on emissions, or any other actions by our respective states and provinces or federal governments.

There’s nothing wrong with sharing and mutually beneficial outcomes, but the real agenda of targeted sectoral approaches is potentially much more heavy-handed than this description implies. These approaches might not entirely displace carbon markets under an economy-wide emission cap, but they certainly could undermine the effectiveness of such markets. Displacement of markets by direct regulations is inherent to California’s greenhouse gas abatement program, for instance. California’s Global Warming Solutions Act (AB 32) allows for the state to adopt market-based compliance mechanisms, which it defines as:

(1) A system of market-based declining annual aggregate emissions limitations for sources or categories of sources that emit greenhouse gases. (2) Greenhouse gas emissions exchanges, banking, credits, and other transactions, governed by rules and protocols established by the state board, that result in the same greenhouse gas emission reduction, over the same time period, as direct compliance with a greenhouse gas emission limit or emission reduction measure adopted by the state board pursuant to this division.

–Plus AB 32 contains a proviso that any market-based compliance mechanism achieve reductions that are “in addition to any greenhouse gas emission reduction otherwise required by law or regulation, and any other greenhouse gas emission reduction that otherwise would occur.” Drew Kodjak, executive director of The International Council on Clean Transportation, explained in today’s panel that his organization supports the “sectoral approach” because cap and trade would “leave transportation virtually untouched.” In other words, cap-and-trade programs only engineer one outcome: the total amount of emissions, irrespective of the sector, industry, or firm they come from. (The sectors used in accounting for emissions are somewhat artificial anyway, and the line between the electricity and transportation sectors will dim as transportation becomes increasingly electrified.) Many analysts expect that the price of carbon permits would have to be fairly high before it spurred significant reductions in the transportation sector–instead, reductions would come from other, cheaper sectors. That’s fine if the goal is simply to reduce greenhouse gas emissions to a specified level, but if the goal is to eliminate the gasoline vehicle at any cost, that’s where the basket comes in. “Basket” and “sectoral approach” in this case both mean adding layers of direct regulations such as technological prescriptions, performance standards, and land use controls, and additional penalties in the form of carbon fees and taxes on top of any cap-and-trade program. (“Basket” has another meaning in greenhouse gas regulatory parlance, generally in reference to the weighted sum of the six major greenhouse gases, which is more closely related to the meaning of the financial use of the term.) California’s climate change policy is shaping up like a basket, and despite the nice talk about not displacing carbon markets, heading in this direction means that there will soon be little left outside the basket for a viable cap-and-trade scheme.