President Obama surprised many with the attention (158 words!) that he gave to climate change in his inaugural address. “We will respond to the threat of climate change, knowing that the failure to do so would betray our children and future generations,” he promised. Encouraging, yes. But how we respond matters as much as if we respond – and in this respect the president left us guessing.
When the President delivers his State of the Union address tomorrow evening, will he again call for incremental steps to reduce greenhouse gas emissions (perhaps acknowledging, as he did last year, that the partisan divide is “too deep right now to pass a comprehensive plan”) – or will he seize the opportunity to build on his January address and change the debate fundamentally?
If the President wants real change, he won’t talk about loan guaranties for renewable energy projects, efficiency standards for appliances, or tax credits for windfarms. Instead, he will remind Americans of the high costs of inaction on climate change: the increasing fury of droughts and storms brought on by a warming planet; the greater risks of famine and instability worldwide; and the accelerating loss of our natural environment. Then the President will deftly outflank the Republican opposition by moving sharply to the political right and explaining how we can use market forces to conquer this challenge.
The President can achieve this goal by calling for a broad-based, revenue-neutral, market-driven cap-and-dividend program – let’s call it a Pure Cap-and-Dividend program to distinguish it from other, more limited, past proposals. A Pure Cap-and-Dividend program will not increase taxes; instead it will bring savings that can be used for other priorities or deficit reduction. It will reduce government regulation and bureaucracy. It will strengthen America’s global competitiveness.
Consider where we stand today. To the extent that the United States has a climate policy, it is a hodge-podge of subsidies and regulations that suggest a national identity crisis. Politicians, the President included, say they want Americans to conserve…and then promote an “all of the above” energy policy that keeps energy prices down and promotes consumption. Federal lands are opened to allow for increased oil and gas drilling and then, to make renewable energy cost-competitive, the federal government provides grants, tax incentives, and loan guaranties to prop up wind and solar power.
Many states have renewable portfolio standards requiring that utilities generate or purchase a certain quantity of electricity from renewable sources. It turns out that these state standards provide incentives that are more powerful than the physics of solar radiation. As of late 2012, New Jersey ranked second only to California for installed solar electric capacity. And Massachusetts may soon overtake Florida. New Jersey is beautiful. But the Sunshine State it is not.
Please don’t get me wrong: these existing policies are better than nothing. But with Pure Cap-and-Dividend, we can reduce greenhouse gas emissions better, cheaper, and faster. Even if we didn’t already have a sluggish economy and a national debt exceeding 70% of our gross domestic product (over 100% counting intergovernmental debt), why would we choose to do things the hard way?
At its core, Pure Cap-and-Dividend is simple: instead of subsidizing renewable energy and hoping that greenhouse gas emissions drop, we start by limiting greenhouse gas emissions and allow the market to do the rest. To create such a system, Congress would set an annual cap on greenhouse gas emissions, with the cap dropping each year. Each year, the government would auction off permits allowing greenhouse gas emission in a quantity equal to the annual cap for that year. Businesses would have an incentive to minimize their emissions in order to minimize their costs. All proceeds from the auctions would be distributed on a pro rata basis to every American. You can read more details about how a Pure Cap-and-Dividend program would work here.
As a Pure Cap-and-Dividend program takes hold, many of the subsidies and regulations now in place can be repealed, and bureaucracy reduced because the market will do the work. Fossil fuel plants will need to purchase emissions permits while renewable energy projects will not. The net result is that the renewable energy producers will have a price advantage – without the need for a government subsidy or renewable portfolio standard.
Similarly, many government established efficiency standards will be moot. Consumers will need to know the fuel efficiency that a vehicle offers or how much electricity an appliance uses, but it will be consumer demand, not government dictate, that drives manufacturers to innovate and provide energy efficient products. (And if you think about it, they will even have greater incentive to produce those products with lower greenhouse gas emissions.)
Best of all, instead of creating subsidies and regulations and hoping for the best, under a Pure Cap-and-Dividend program, emissions are actually capped. Not only is the system more efficient, the result is more assured.
Finally, yes, we need global cooperation to tackle the climate crisis. Under a Pure Cap-and-Dividend program the United States could opt for more modest emissions reductions until we have a satisfactory international agreement. Other nations can reduce greenhouse gas emissions using their own methods, of course. They will be free to have their government invest in industry or to make choices for consumers. But we would be well advised to do it the American way, using a Pure Cap-and-Dividend approach that will give us a competitive advantage over nations that want to use government dictates and subsidy models. Tomorrow would be a good day for President Obama to start talking about it.