States see pushback against carbon trading
— John Kemp is a Reuters market analyst. The views expressed are his own —
Efforts to implement cap-and-trade programs at state level are faltering, just as policymakers in Washington are struggling to generate enough support to put in place a comprehensive national system.
Recent setbacks in California and Arizona point to growing headwinds against the policy. As cap-and-trade loses momentum and becomes embroiled in bigger political disputes about the size and role of government, opponents are becoming emboldened to try to block the policy completely.
Carbon market supporters have repeatedly expressed the hope that state and regional initiatives can provide at least a temporary substitute as hopes for a national program have dimmed in the wake of last year’s failed summit in Copenhagen and a string of election defeats that have thrown the progressive wing of the Democratic Party onto the defensive.
But the same factors that undermined support for a nationwide program, especially concern about the near-term costs and adverse impact on employment when the economy is only just starting to recover from deep recession, are dimming enthusiasm at state level as well.
In trade policy, policymakers and analysts talk about “bicycling theory”: you have to keep pressing forward with new liberalizing measures or risk forfeiting the gains already made as the process loses momentum and support falls away.
Proponents of carbon markets are about to learn the same lesson.
ARIZONA AND CALIFORNIA
In February, Arizona Governor Janice Brewer (R) signed an executive order (2010-06) pulling the state out of the proposed cap-and-trade program announced by the Western Climate Initiative (WCI), due to start in January 2012.
Arizona was a founder member of the WCI, which groups seven states in the western United States and four Canadian provinces, together with a number of other observers, to develop collaborative climate-change solutions. While the state will remain a member of WCI, and support other aspects of the program, it will no longer participate in cap-and-trade.
In California, Meg Whitman, the Republican Party’s likely candidate for governor in this year’s election has indicated she would delay implementation of the state’s own trading scheme for at least a year to study its likely economic impact. Whitman currently has a narrow poll lead over likely Democratic rival Jerry Brown.
Now the New York Times reports independent oil refiners Valero Energy Corp and Tesoro Corp are backing a petition drive organized by the California Jobs Initiative (CJI), which is trying to collect enough signatures to put an initiative on the ballot in November suspending the state’s climate change law.
CJI’s initiative would suspend operation and implementation of California’s landmark Global Warming Solutions Act (AB 32) until the state unemployment rate has fallen to 5.5 percent or less for four consecutive quarters. The rate is currently over 12 percent.
CJI’s initiative goes much further than proposed Whitman moratorium. It would defer all actions under AB 32 (not just cap-and-trade) pending a strong economic recovery and improvement in the job market.
EMBROILED WITH THE TEA PARTY
CJI is an offshoot of the Harvard Jarvis Taxpayers Association, which helped sponsor California’s famous Proposition 13 limiting property taxes in 1978, the seminal moment in the anti-tax, small government insurgency.
CJI is courting support from the free-market, small government and anti-tax Tea Party movement.
Herein lies the danger for cap-and-trade supporters. The issue is rapidly becoming caught up in partisan warfare in ways that could make it very hard to make progress at either national or state level.
It is intersecting with the anti-incumbency mood in the country at large and pressure from conservatives for a roll-back of government. It risks being swept away in a backlash against ballooning deficits, increased government intervention in healthcare, and a perception the Obama administration is bent on imposing a big government agenda.
The Tea Party movement is already threatening to target South Carolina Republican Senator Lindsey Graham, angry at his willingness to work across the aisle with Democrat John Kerry of Massachusetts and the administration on a compromise climate law.
In reality the senator is in no danger; he is not on the ballot again until 2014. Other Republicans seeking re-election this year are more vulnerable. Arizona Senator John McCain is locked in a tough primary re-election fight with face a Republican opponent drawing significant support from the Tea Party insurgency.
Cap-and-trade was originally framed as market-based and business-friendly. The contrast with traditional command-and-control approaches was its main attraction. But it is rapidly being reframed by opponents as another example of big government intrusion into the economy.
The more it becomes embroiled in a wider debate over big government and regulation the more difficult it will be to achieve action at any level in the United States — especially in the current climate, where anti-incumbent sentiment is running high and the Democratic Party looks likely to lose ground in both chambers of Congress as well as in state houses across the country in the forthcoming election cycle.
GREEN JOBS QUERY
But the main problem for cap-and-trade is persuading voters and policymakers to support proposals that will impose significant costs upfront, at a time when most households already face rising tax bills to cut the deficit, slow growth in wages and increased job uncertainty.
The non-partisan Congressional Budget Office (CBO) has pointed out winners and losers from cap-and-trade will (mostly) net out at economy-wide level. Much of the debate centres round how to allocate the emissions permits, whether to charge for them, and what to do with the revenues.
But CBO made no attempt to measure transitional costs (in terms of obsolete factories, resource re-deployment and layoffs), which could be substantial.
The respected, non-partisan California Legislative Analyst’s Office (LAO) last month published its own review of the jobs market estimates used by the California Air Resources Board (CARB) and other state agencies to support their proposed cap-and-trade scheme.
LAO admits the jobs impact is hard to predict. There would be “gains in some occupations and industries (including so-called “green” jobs) and losses in others (primarily involving fossil-fuel related energy production).” On balance, however, LAO concluded AB 32 would have a negative impact on the jobs market in the near term.
The longer-term impact is even cloudier. CARB estimates that AB 32 would lead to an extra 120,000 people being employed in 2020. But LAO points out this is tiny compared with the state’s estimated employment of 18.4 million people by the end of the decade — a trivial increase of just 0.7 percent, that will be swamped by normal cyclical variations.
Moreover, LAO highlights a number of serious limitations in the impact assessments. While CARB thinks market failures create a strong case for cap-and-trade, it also thinks markets will operate smoothly to reallocate resources that become unemployed in the transition, which seems inconsistent intellectually.
While acknowledging this type of projection is difficult, LAO concluded “CARB’s current modelling tools and their method of application are not able to provide reliable estimates of the jobs impacts” in 2020.
Cap-and-trade supporters have tried to reframe the debate by pointing up how many jobs China is creating in new technologies such as solar cells and windpower. But they have a long way to go. In a recession it will be hard to generate enthusiasm for policies that will increase the burden on ordinary households in the coming decade.
The cap-and-refund scheme being proposed by Senators Maria Cantwell (D, Washington) and Susan Collins (R, Maine) might allay some of these fears by recycling revenues directly back to households. But it will still be a tough sell during a downturn when households are struggling with more immediate concerns.
Image shows smoke billowing from chimneys at a chemical factory in Tianjin Municipality December 23, 2008. REUTERS/Stringer