Massachusetts election kills cap-and-trade

January 20, 2010

- John Kemp is a Reuters columnist. The views expressed are his own -

The Republican Party’s stunning special election victory in deep-blue Massachusetts has killed any lingering prospect of passing cap-and-trade legislation in 2010, and with it international negotiations to produce a binding climate accord before the end of the year.

With no chance of U.S. action in the short term, emerging markets such as China and India are under no pressure to accept mandatory emissions reduction targets. If climate legislation is eventually revived in the United States, in 2011 or beyond, it may come back in the form of a carbon tax rather than a permit trading program.

TO RETREAT OR REINFORCE?
Perhaps the most important decision any general has to make is when to stand and fight, and when to beat a retreat in order to fight another day. The Massachusetts special election to fill the Senate seat left open by the death of Edward Kennedy confronts President Barack Obama with a similar strategic choice.

The administration can stick to its existing agenda and hope economic recovery comes in time to save the Democratic Party from heavy defeat at the mid-term elections in November. But with the loss of the crucial sixtieth vote in the Senate, much of that agenda now appears destined to sink into the upper chamber’s legislation swamp.

Or it can trim the agenda to de-emphasize the least popular measures, such as the climate legislation, and re-focus on the economy and popular themes, such as stiffening financial regulation. In practice this may now be the only course open to the president.

REBELLIONS WILL ONLY ESCALATE
Balky congressional Democrats can read the election returns as well as the White House. Rebellions have already cut the administration’s notional majority of almost 80 to single digits in the House of Representatives, and left it struggling to find a reliable 60-vote super-majority in the Senate.

House Democrats could muster a majority of only five for healthcare (Roll Call 887) and seven for the climate change bill (Roll Call 477), as many Democrats from the 49 districts that voted for Senator John McCain rather than Obama in the 2008 presidential election rebelled against their party colleagues.

Both measures will need to be voted on again before they can become law. When the bills return to the House floor even more vulnerable Democrats are likely to rebel, eliminating the majority altogether. From now on, congressional Democrats must focus on self-preservation. Those from Republican-leaning districts and states are even more likely to reject controversial measures.

In the Senate, the administration only just managed to scrape together 60 votes to pass a watered-down version of healthcare, and it is far from putting together the 60 votes needed to proceed with climate legislation.

Cap-and-trade has exposed deep fissures within the caucus — pitting senators from liberal, coastal states against those representing heavy industrial and coal-mining states, and Democratic outposts in the heartland.

Unable to attract firm support from many Republican senators, the administration was nowhere close to putting together a super-majority for cap-and-trade, even before yesterday’s political earthquake.

THE END OF CAP-AND-TRADE
From a purely numerical perspective, the Massachusetts election makes only a marginal difference. With the real division running through the centre of the Democratic Party, rather than between the parties, cap-and-trade was never going to pass on a 60-40 party-line vote. It was always going to need at least some Republican votes. So the loss of one Democrat makes only a small difference.

In practice, the Massachusetts defeat, coming after a string of retirements, defections and defeats in November’s gubernatorial elections, will harden opposition to cap-and-trade from Democrats representing industrial and coal states as well as those from red states such as Arkansas and Louisiana.

If Democrats cannot hold even safe seats such as Massachusetts (which has not elected a Republican to the Senate since 1972), why should more vulnerable senators from states that would be hit hard by emissions controls, some of which are already starting to lean Republican, risk voting for yet another unpopular bill?

Meanwhile, Republican senators have no incentive to help the president pass unpopular bills when his party is at real risk of suffering heavy defeats later in the year. So cap-and-trade in its current form is dead for the rest of 2010.

CARBON TAX RESURRECTED?
The White House and Congress are unlikely to risk breaking with the environmental lobbyists who have proved an important of their coalition by abandoning the bill formally. But Senate Majority Leader Harry Reid (himself facing a tough re-election battle in Nevada) will not bring it up for a vote and the bill is destined to die a quiet death in the Senate cloakroom.

In the medium term, the administration has three major alternatives:
(1) It could strip cap-and-trade proposals out of the bill and pass a non-contentious measure containing a few subsidies for green technology, while promising to return to emissions control after the election. But if legislators try to revisit cap-and-trade in the next Congress, there is no reason to expect it will be any more successful.

(2) The administration could “go nuclear” and try to impose something similar to cap-and-trade using the Environmental Protection Agency (EPA)’s existing regulatory authority under the Clean Air Act (CAA).

EPA has already published a finding that greenhouse gas emissions “cause or contribute” to air pollution under Title II of the CAA, allowing it to regulate emissions from new motor vehicles sold in the United States. It could set up a control system for vehicles, and trigger a separate rule-making process under Title I to establish similar controls for stationary sources such as power plants.

While the administration has been using the threat of unilateral EPA regulation to push Congress into passing cap-and-trade by legislation instead, and reassure its international partners that America is serious about cutting emissions, the bluff is probably an empty one.

Circumventing Congress would carry enormous political risks. For a popular and powerful administration it would be hard. For an unpopular and weakened one, it is probably impossible.

Legislators will excoriate EPA if it tries to impose rules putting their seats at risk. Congress can prohibit EPA from taking any action by ordinary legislation; there might even be enough votes from fearful Democrats and those mindful of congressional prerogatives to over-ride a threatened presidential veto. At the same time, the courts are likely to become more skeptical about attempts to introduce bold, economy-wide regulations by an agency when Congress lacks a majority to enact laws itself.

(3) The administration could dump the complicated emissions trading system in favor of a simpler and more transparent carbon tax once the elections are out of the way. There is no guarantee a tax would pass either. But the excessive complexity of the climate change bill (over 1,000 pages of complex and often deliberately opaque drafting) has made it almost impossible to understand or defend.

With its myriad of special permit allocations to affected industries, it is the quintessential special-interest bill. And the idea of having Wall Street investment banks help set the carbon price through a market-based trading system is a very hard sell when memories of recent commodity price spikes and investment banking excess are so fresh.

Recent polls have shown voters prefer a tax as more transparent, easier to understand, and avoiding speculation. There have always been good theoretical reasons to think a carbon tax would be the better option. It was abandoned because the environmental NGOs thought a tax would be too controversial and cap-and-trade would be easier to get through Congress. But now that is no longer the case, it might be time to dust off the idea.

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