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The Politics of Carbon

The 2008 elections portend federal regulation of greenhouse gases by 2010.

Fortnightly Magazine - June 2008

legislation. These scenarios correspond to whether the Democrats or Republicans win the White House and whether the Democrats and independents in the Senate obtain a bare majority (less than or equal to 52 votes), a strong majority (53-54 votes), or an effective filibuster-proof majority (55+ votes, assuming moderate Republicans will join Democrats and independents to support GHG legislation) in the November elections. The current political analysis assumes the Democrats will at least maintain their majority in the Senate and will continue to have a majority in the House. It also assumes Democratic senators will support a carbon penalty while Republicans (with a handful of exceptions) will oppose one. This assumption is justified by the strong support of Democratic voters for a carbon penalty and the near party-line vote in the Senate Environment and Public Works Committee on the Lieberman-Warner bill. Reluctant Democrats and moderate Republicans may be persuaded to support GHG legislation with agreements to grandfather permits for certain industries or with promises of additional federal spending using revenues from the sale of pollution permits.

In addition, the remaining Democratic presidential candidates presumably will continue supporting comprehensive GHG legislation. There are few differences between the proposed GHG policies of Sen. Hillary Clinton and Sen. Barack Obama, according to public statements and platforms. Both propose emissions should be 80 percent below their 1990 levels by 2050, and would auction 100 percent of the permits. On the Republican side, Sen. John McCain also supports federal GHG legislation, but his support is more cautious. He argues the U.S. must act to limit GHGs through a cap-and-trade system, but he favors an allocation method that considers end-use cost consequences.

The prospects for GHG legislation, as well as the specific characteristics of the legislation, will depend on which scenario becomes reality (see Table 2) . A cap-and-trade system seems far more likely than a carbon tax, but there are three important dimensions along which GHG legislation could vary. The first is the size of the targeted reductions. The second is whether the legislation contains a safety valve, and how low the price ceiling will be set. 8 The third is the extent of grandfathering of pollution permits.

The strongest form of GHG legislation would involve high targeted reductions, with a high price ceiling or no ceiling at all, and no grandfathering. The weakest form of GHG legislation would involve low targeted reductions, a low price ceiling, and extensive grandfathering. A moderate form of legislation would involve some grandfathering and either high targeted reductions and a low price ceiling or a high price ceiling and low targeted reductions.

Obviously, for power companies and other carbon producers, strong legislation would be the most costly and weak legislation the least costly. From the standpoint of controlling GHG emissions, strong legislation would have the most effect and weak legislation the least effect, although the grandfathering of permits affects only the distribution of the costs of pollution control.

With a filibuster-proof Democratic majority, supporters of strict limits on GHG emissions will be in a position to pass either a moderate or strong