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The American Prospect

Getting Real on Climate Change

We'll never succeed in making dirty energy too expensive. Let's make clean energy cheap.

Ted Nordhaus and Michael Schellenberger

The wave of optimism that American environmentalists rode into 2008 reached its zenith sometime around April 22 -- Earth Day. Green was everywhere, from the pages of Sports Illustrated to NBC's Green Week to a new cable channel, Planet Green. Armed with an Oscar and a Nobel Prize, Al Gore announced a $300 million global-warming advertising campaign. In the Democratic presidential primary, Barack Obama and Hillary Clinton competed over who had the strongest climate and energy record, and John McCain marked his "maverick" status by his intermittent support for legislation to cap carbon emissions.

Since then, the environmental movement has experienced a reversal as unexpected as it has been swift. In May, when Sen. Barbara Boxer brought climate legislation to the Senate floor, Sen. Joe Lieberman, a co-sponsor, announced that he could get the 60 votes to overcome a filibuster. Green groups proclaimed that the coming Senate debate would be a show of force -- a "dress rehearsal" for 2009, when a friendlier president might sign even stronger legislation.

What happened next was indeed a dress rehearsal, just not the one the environmental movement had expected. During the debate, Senate Democrats spoke of the urgent threat to civilization and displayed pictures of melting ice. Republicans presented graphs of rising gasoline prices. Democrats held up economic models showing that cap-and-trade would cause only modest increases to gas and electricity prices. Republicans warned of the effect higher energy prices would have on an increasingly fragile economy. It was as though the entire Senate had not moved an inch since 1997, when it voted 95 - 0 to reject the Kyoto treaty.

A closer look at this episode reveals that the cap-and-trade model of climate legislation, which many in Washington believed had achieved bipartisan consensus, remains out of reach. And all the assumptions behind cap-and-trade -- that markets are efficient, that the federal budget deficit limits any new investment, that emission caps will be firm and free from political manipulation -- have either been put to the test and failed or rendered obsolete by the economic crisis. But this lesson and the economic crisis also open a new and more promising path to halt climate change.

The debate over cap-and-trade legislation in June began to turn against Democrats almost as soon as it began. As Republicans prepared to introduce amendments that would have suspended the cap if it raised gasoline prices -- which no one doubted it would -- panic set in. Democrats started to flee the legislation, and senior Democratic staffers in the Senate were quoted anonymously in Roll Call: "This is what happens when the committee staff and the chairman get so deep into the weeds of the bill that they can no longer see the political realities," said one. "Boxer is walking us off a cliff," said another.

Senate Majority Leader Harry Reid quickly orchestrated a vote for cloture to end debate so Democrats could avoid voting on the legislation. "In the end, we got a stronger vote [for cloture] on a stronger bill than we had three years ago," says Fred Krupp, president of the Environmental Defense Fund (EDF). But support for cap-and-trade has steadily eroded, not increased. In 2003, cap-and-trade received 43 votes. In 2005, it received 38 votes. Had the 2008 bill actually been voted on, green lobbyists and Senate staffers said, it would have received no more than 35 votes.

Emboldened by their victory, Republicans doubled down, and before long, the Republican presidential nominee who bragged of his support for cap-and-trade denied that he had ever supported the "cap" part and joined in the "drill here, drill now" mantra. Public opinion shifted toward lifting the ban, and by August, Obama, Reid, and House Speaker Nancy Pelosi had all reversed their opposition.

Then the global financial crisis hit. The first casualty was Stepháne Dion, Canada's Liberal Party candidate for prime minister, who had made taxing carbon pollution a central focus of his campaign. With the global economy tipping into recession, it should have been a good year for the opposition. But instead, voters gave Conservatives 19 more seats in Parliament. Around the same time, European governments began quietly scaling back their climate commitments. A new report revealed that Europe would only meet its Kyoto targets by purchasing highly dubious carbon offsets.

Ironically, the economic crisis that appears likely to seal the fate of cap-and-trade legislation in the next Congress ensured the election of Barack Obama and the largest Democratic congressional majority in a generation. But the circumstances in which the new president and Congress take power are radically different than those that greens optimistically envisioned when they planned their dress rehearsal last spring.

Obama faces the deepest recession the United States has seen in decades, a failing health system, and a crumbling infrastructure. His top priority will be to get the U.S. economy back on its feet. Yet there is little evidence that greens have come to terms with this reality. Like conservatives who see tax cuts as the solution to all problems, greens are now offering carbon auctions and energy taxes as the answer to the economic crisis. "Capping global warming pollution and auctioning off the pollution rights will inject $150 billion into the economy each year," Krupp of EDF told his members in an Oct. 24 e-mail.

But auctioning carbon permits does not, in fact, inject any new money into the U.S. economy. Requiring industry to purchase pollution permits functions the same as a tax. Anyone old enough to remember the beginning of the Clinton presidency will recall that greens and Democrats have tried to raise money through environmental taxes before. During the formulation of Clinton's first budget, Gore and green groups convinced the president to propose a British thermal unit (a measurement of heat, also known as a BTU) tax on all nonrenewable energy sources. Environmental groups had pushed similar proposals for years, seeing them as a way to encourage conservation, efficiency, and use of renewable energy sources (such as sunlight, wind, and geothermal heat). "The BTU tax creates an incentive to switch from coal to natural gas," the Natural Resources Defense Council's Dan Lashof told The New York Times in June of 1993. "If you compare the environmental benefits per dollar, a gasoline tax is just half as effective as a BTU tax."

Clinton had decided that balancing the budget would be his top economic priority rather than stimulating the economy through increasing government spending, as he had promised during the campaign. The BTU tax promised to allow him to follow through on campaign promises without further increasing the deficit, all while enacting a policy that promised significant environmental benefits. But industries required to pay more for energy will simply pass along the cost increase to consumers. The BTU tax would have, on average, raised electricity prices for consumers by 30 percent -- far more in coal-dependent states like Ohio. The fossil fuel, manufacturing, and transportation industries circulated petitions and ran ads against the proposal, and the BTU tax died in the Senate. Unfortunately, Clinton had already prevailed upon House Democrats to vote for the legislation, and many of those who lost their seats in the 1994 midterm election blamed their vote for the BTU tax. Getting "BTU'd" became Beltway slang for being hung out to dry on a difficult vote.


Green leaders are now offering President Obama the same advice they offered President Clinton: Raise energy prices. But Obama is taking power during a very different economic moment than Clinton did in 1993. Back then, as the U.S. was slowly emerging from recession, a reasonable case could be made for reducing the budget deficit. High interest rates were constraining growth, and reducing the deficit would lower interest rates. By contrast, Obama is inheriting an economy that is entering, not exiting a recession.


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The longstanding conservative arguments against large deficits and government intervention in the economy have given way to a bipartisan pragmatism. Even before the recent crisis and subsequent financial-industry bailout, deficit hawks Robert Rubin and Lawrence Summers, who served as Clinton's treasury secretaries, publicly said that because the deficit is a smaller percentage of gross domestic product today than it was in 1992, some deficit is justified. Now Washington is under intense pressure to take a much more active role in the economy. And with a high demand for safe U.S. Treasury bonds, the cost of borrowing is low.

Deficit spending and direct government investment in the economy are in. Balanced budgets and obeisance to markets are out. Faced with a global liquidity crisis and a deep and potentially prolonged recession, government has become the investor of last resort. Congress may close tax loopholes and allow the Bush tax credits to expire, but the prospects for any kind of broad-based energy or carbon tax, or serious auctioning of pollution rights, are extremely poor. Given the recent chaos in the financial markets, Congress is unlikely to turn over the nation's energy and transportation economies to the same Wall Street firms that brought us credit-default swaps and financial derivatives.

Greens have, by and large, missed this shift in assumptions. While we should not be surprised if environmental leaders continue to argue for cap-and-trade, it will be surprising if Obama, Pelosi, and Reid choose to follow them "off a cliff" once again.


So what should greens, progressives, and Democrats do in this difficult political and economic climate? While carbon pricing and pollution trading may be dead, the prospects for serious public investment in our energy economy and infrastructure are better than they have been in a generation.

Over the last eight years the Bush administration mortgaged our future by cutting taxes and running up huge deficits. But while deficit spending during a period of robust economic growth is a waste, it is absolutely vital during a serious recession. Rather than sending checks to every household, the spending should take the productive form of major investments in our economic future. Those investments should be financed by their future returns to the Treasury, rather than through new green taxes, which would imperil not only the economic recovery but also the new Democratic majority. America has arrived at a Keynesian moment, and greens should embrace it rather than propose pollution taxes in the guise of economic stimulus.

The opportunity today is to make large and sustained federal investments to radically drive down the costs of clean-energy technologies, along with investing in the enabling technologies necessary to broadly deploy them. The government should invest $50 billion a year in building the new infrastructure and promote alternatives -- including carbon capture and storage, and solar, wind, nuclear, geothermal, and tidal energy -- in a competitive environment where the success of these projects can be judged rationally.

Many greens and progressives worry that this investment approach would result in more public money going to technologies they don't like, namely nuclear, corn ethanol, and "clean coal." But nuclear and corn ethanol already get very large subsidies, a situation that cap-and-trade wouldn't change, whereas an investment-centered approach would deliver far greater funding for renewables, the poor stepchildren of energy policy. While there is no such thing as "clean coal," given its impact on mountains and rivers, most energy experts believe that, as the world triples its energy consumption between now and 2050, coal will remain a large component of our energy supply. Few countries will be in a hurry to dismantle coal plants, but they might retrofit them with cheap technology to capture and store carbon emissions. And that technology may help us to build inexpensive stand-alone "air capture" machines to vacuum emissions from the ambient air -- prototypes of which are already up and running.

Obama has long advocated a $150 billion clean-energy investment program, which he has proposed to pay for through carbon auctions. But on the stump and in the debates, he spent most of his time talking about his proposed investments and almost none talking about carbon auctions. Given the severity of the recession, the funds for Obama's clean-energy plan are more likely to come from deficit spending. This will strike many greens as a flawed approach to reducing carbon emissions, because, they argue, without a carbon cap or tax, there is no certainty that investments in clean-energy technologies will actually reduce emissions.

But carbon caps and taxes hardly guarantee a decline in emissions. Despite ratifying the Kyoto Accord, which included binding caps, few nations have actually reduced their emissions at all, and global emissions growth has substantially increased. That's because virtually every nation that has established carbon caps has also included measures, either overtly or covertly, to reduce the cost of compliance, which renders the caps largely symbolic. Carbon caps have failed to reduce emissions all over the world because fossil-fuel alternatives are still much more expensive than current polluting energy sources, and voters and policy-makers are not willing to make fossil fuels so expensive that clean-energy alternatives are economically viable. If we succeed in developing the right new technologies, it might pave the way for a future cap or carbon-pricing approach that would cause less hardship and thus actually work.

Since the early 1990s, environmentalists have argued the opposite -- that once the government established caps or a price for carbon, polluting industries would quickly find an inexpensive way to comply, as they did in the case of acid rain and chlorofluorocarbons (CFCs). But in fact, efforts to negotiate a phase-out of CFCs failed repeatedly until the chemical company DuPont developed a low-cost alternative. Only then was an agreement achieved. And the cap-and-trade program to reduce sulfur-dioxide emissions was able to do so at costs significantly below early estimates because low-sulfur coal became widely available in the years just prior to the passage of the relevant Clean Air Act amendments in 1990.

Fortunately, some green leaders are starting to question this view. Brent Blackwelder, president of Friends of the Earth, recently called for "re-evaluating proposals that place a price on carbon such as carbon caps or taxes. For instance, a cap-and-trade program relies on the same markets that created the mortgage meltdown. In the aftermath of one of the largest market failures in history, do we really want to trust markets to do all the work that's needed?"

For 20 years the green climate agenda has embraced two insidious orthodoxies that are rooted in market fundamen-talism: Deficit spending is always bad for the economy, and we should "let the market decide" our energy future. The result has been serial political failure, skyrocketing emissions, and stagnation of energy technology. Now is the time to let go of the pollution-pricing paradigm, along with a zero-sum deficit mentality, and embrace an agenda squarely focused on public investment, building the enabling infrastructure, and making clean energy cheap.

Michael Shellenberger is, with Michael Nordhaus, the author of the book Break Through: From the Death of Environmentalism to the Politics of Possibility and the essay "The Death of Environmentalism." They are managing directors at American Environics and the founders of the Breakthrough Institute.

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