Caps, Trades and Offsets: Can Climate Plan Work?

By David A. Fahrenthold
Washington Post Staff Writer
Tuesday, May 26, 2009

It sounds like alchemy, an act of bureaucratic magic. Under the climate-change bill just approved by a House committee, the U.S. government would literally make a commodity -- as tradable as a Pontiac or a pork belly -- out of thin air.

The bill would require polluters to obtain "allowances" -- permits allowing them to emit a given amount of a greenhouse gas such as carbon dioxide or methane. Today, these gases are invisible, free and floating all around us. This bill would put a price on them.

That would accomplish an economist's version of a triple back flip. It would divide a problem of the global commons into pieces and make those who use gas or electricity pay for their share of the emissions that result.

But a closer look through the bill's 940-plus pages shows that selling chunks of air still might not be its most radical idea. The proposal would also create official carbon "offsets" -- in some cases, a government-certified hypothetical calculation of an amount of gases that would have been emitted but were not. Those, too, could be bought by polluters.

As the legislation moves toward the House floor, Democrats are calling it a "jobs bill" -- because of new business activity they say the system would stimulate -- and Republicans are labeling it a "light-switch tax," because energy costs would go up. But neither characterization does justice to its ambitions, or its unknowns. The proposal is far more complex than anything tried before in this country, and a close parallel in Europe turned out to be seriously flawed.

"I've been through lots of meetings where Americans say, 'Well, we're going to do it right.' Well, no, you're not," said Mark Smith, an economics professor at Colorado College who has studied the European example. "You're creating an entirely new market, by the government, and there's a tremendous amount of political pressure being expressed in the design of this market."

But Smith, like many environmental groups, said these worries are not a reason to kill the plan. "Does that mean we should do nothing? I say no."

The bill has now passed two important Washington mileposts, one official and one symbolic.

The House Energy and Commerce Committee endorsed it Thursday night. And members of Congress showed that they now think climate change is important enough to horse-trade over.

To satisfy Democrats from states with coal mines or heavy industry that would be hit hard, committee leaders dropped their target for emissions reductions by 2020, from 20 percent to 17 percent. And they agreed that, instead of all credits being sold to the highest bidder, 85 percent would be given away.

This had the effect of simultaneously outraging both Greenpeace -- "If you give all the pollution credits away, it doesn't actually serve the market principle of making carbon have a cost," spokesman Michael Crocker said -- and House Republicans. The bill's complexity led one Republican to cite the adage that a camel is a horse designed by a congressional committee.

It may prove to be an elephant before long: The rest of the House and the Senate are waiting for their crack at it.

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