James Pethokoukis

I have been saying for some time that I do not think Congress is going to pass cap-and-trade in 2010, or probably ever. (I think the threat of EPA action is empty given the flurry of litigation that would surely follow.) My Reuters news pals seem to agree somewhat and paint an alternate scenario:

1) But the Copenhagen Accord did not include emissions targets. This will make it difficult for lawmakers to argue that the United States should have a cap while China, the world’s top emitter of greenhouse gases, and other big polluters are not legally required to act on climate. “We were previously of the view that cap and trade was becoming an increasingly hard sell in the U.S.,” said Paul McConnell, an energy markets analyst at Wood Mackenzie. “But I think the events in Copenhagen have probably made that even more difficult.”

2) Alternatives to cap and trade will emerge, such as mandates and incentives for increasing levels of energy from low-carbon sources like solar, wind and nuclear.

3) The healthcare debate has delayed U.S. Senate action on climate, and financial industry reform legislation will likely push back the cap-and-trade debate into early next year, analysts said. The longer the delay, the harder it will be to convince undecided Democratic senators to vote for a cap-and-trade plan. “For a lot of moderate Democrats who are up for reelection, they don’t want to be seen as closely attached to this because of the concerns about job losses and higher energy prices,” said Divya Reddy, an analyst at the Eurasia Group in Washington.

4) Kerry said in Copenhagen last week that the Senate bill may not contain cap and trade, and other options are being discussed. So-called “Plan B” alternatives to cap and trade could include carbon taxes and national mandates for power generators to produce higher levelof cleaner energy sources, Reddy said. A new climate strategy could also include elements of a “cap and dividend” plan recently introduced by two senators. That aims to cut Wall Street’s role in emissions markets by auctioning permits to polluters and delivering most of the proceeds to the general public. But Kevin Book, an analyst at Clearview Energy Partners, LLC, said many senators and many companies, like oil major ConocoPhillips and power generator Duke Energy Corp, are already sold on cap and trade. Some power companies that have invested in low-carbon electricity generation feel they could compete better against companies that burn mostly coal under a cap-and-trade regime.

Here is what the POTUS told COP15:

I believe we can act boldly, and decisively, in the face of a common threat. That’s why I come here today — not to talk, but to act.

But back in America, it’s the Senate that’s acting — and not in a way that Obama likes. First, Maria Cantwell and Susan Collins have come up with a cap-and-dividend alternative that could steal support away from the cap-and-trade efforts of the White House and Kerry-Boxer-Lieberman-Graham. And now there is also an effort in the Senate to negate the Environmental Protection Agency’s finding that greenhouse gas emissions endanger health and the environment. It’s the EPA ruling that is supposed to be the catalyst for action on climate since most everyone agrees that EPA regulation would be even more ham-handed and onerous that congressional action.

Here’s the theory about the new U.S. position on greenhouse gases. The official finding by the U.S. Environmental Protection Agency that the emissions endanger human health sets the stage for permit requirements on power plants, factories and automobiles. It also supplies President Barack Obama with more evidence at the Copenhagen summit of a “new normal” in America when it comes to climate policy. And back home, it supposedly gives a nudge to the Senate where cap-and-trade legislation is stuck on the back burner.

But in practice, the only thing certain about the EPA ruling is more regulatory uncertainty leading to less economic growth and fewer jobs. Bad news, to be sure, for American businesses already flummoxed by the mercurial state of healthcare, financial and tax reform. Call it Obama’s Uncertainty Tax.

While a cap-and-trade bill has already passed the House of Representatives, few Capitol Hill observers expected the Senate to approve one, even by the end of 2010 thanks to the anemic economy and political risks for incumbent Democrats facing midterm elections. What’s more, expectations of a more Republican-leaning congress after 2010 made it seem like economy-wide carbon caps were sliding off the Obama agenda for the foreseeable future.

But now it’s conceivable carbon restrictions would be implemented as early as next year – even though the EPA itself admits its efforts would be more disruptive and less efficient than congressional action. Such an optimistic timetable assumes no legal challenges. But there will be plenty of those. Already, business groups are preparing to file suit against the EPA. It could fall to U.S. courts to determine the future of the nation’s approach to climate policy. This is a nightmare scenario for the private sector when it comes to planning for new expansion or hiring. Note that the big problem with the job market at the moment is not so much job losses and zippo new jobs being created. It will take a year of 4 percent growth adding 250,000 jobs a month to lower the unemployment rate to 9 percent.

Of course, about the only thing worse than regulatory uncertainty would be for the EPA to follow through with its top-down, command-and-control approach to dealing with perceived climate change.

One solution would be for Congress itself to act. GOP strategists would love to disrupt reeling Democrats with another controversial proposal – which is precisely why it won’t happen. Dems in the Senate are well aware of the shellacking their House colleagues have taken on their cap-and-trade vote.

Another option would be for the White House to devise a plan that would generate some bipartisan support. One idea might be a carbon tax whose revenue could be distributed back to citizens as a dividend, or used to offset payroll taxes. Such a refund could be progressive and popular.

But the most likely scenario is no cap-and-trade and no carbon tax, just more government “investment” in clean energy. But for now, workers and business are left to keep paying the Uncertainty Tax.