“Now, the experience of a cap-and-trade system thus far is that if you’re giving away carbon permits for free, then basically you’re not really pricing the thing and it doesn’t work, or people can game the system in so many ways that it’s not creating the incentive structures that we’re looking for,” Obama said.
“The way that the allowances are distributed matters hugely for the success of the program,” Burtraw said. “But for the most part, it does not matter directly for the kinds of emission reductions you’re going to see. The primary influence is the existence of an emissions cap.”
President Obama’s comments yesterday in support of climate change legislation included two errors on the fundamental design and history of the cap-and-trade approach that his new administration intends as the centerpiece of its global warming policy, according to several experts tracking the Capitol Hill debate.
Appearing before CEOs at the Business Roundtable in Washington, Obama fielded a question about his campaign pledge to distribute allowances for emissions of greenhouse gases via a 100 percent auction.
The president replied with a warning against giving away too many free allowances to industry for compliance with a cap-and-trade system.
“Now, the experience of a cap-and-trade system thus far is that if you’re giving away carbon permits for free, then basically you’re not really pricing the thing and it doesn’t work, or people can game the system in so many ways that it’s not creating the incentive structures that we’re looking for,” Obama said.
A pair of leading climate economists say the president’s comments glossed over a key point in the cap-and-trade debate.
So long as the government caps emissions, companies will see a price signal and be forced to act, Harvard University’s Robert Stavins said.
“If you give permits away for free or sell them, either way, allowances will be priced and the system will work,” Stavins said in an interview. “There may be sound arguments that the administration wishes to make for auctioning allowances, but the functioning of the price mechanism and the environmental performance of the system is not one of them.”
Dallas Burtraw, a senior fellow at the nonpartisan Resources for the Future think tank, agreed with Stavins’ assessment.
“The way that the allowances are distributed matters hugely for the success of the program,” Burtraw said. “But for the most part, it does not matter directly for the kinds of emission reductions you’re going to see. The primary influence is the existence of an emissions cap.”
Obama also erred in overstating the role of emissions auctions during the implementation of the sulfur dioxide trading program created through the 1990 Clean Air Act Amendments.
“We put in an auction system and a trading mechanism and, lo and behold, American ingenuity and American entrepreneurship and inventiveness created options that ended up being much cheaper than anybody had imagined — much cheaper than anybody had imagined,” the president said.
But the 1990 law signed by President George H.W. Bush required U.S. EPA to auction about 3 percent of the cap-and-trade credits. Electric utilities got the rest for free based on their historical emission levels.
“I’m not sure that’s the example one wants to give,” Stavins said, citing instead the Northeastern states’ Regional Greenhouse Gas Initiative, which so far has required electric utilities to purchase credits via auction.
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