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The Politics of Carbon

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

Fortnightly Magazine - June 2008

U.S. Senate Environment and Public Works Committee. Majority Leader Harry Reid (D-Nev.) recently promised the bill would be considered in the full Senate this summer.

Any federal legislation regulating GHG emissions likely will resemble the 2007 version of Lieberman-Warner or one of the close variants under consideration in the U.S. Senate (see Table 1) . Sponsored by Senators Joseph Lieberman (I-CT) and John Warner (R-VA), the bill would cover electric power, transportation, and manufacturing carbon sources, which account for about 75 percent of GHG emissions in the United States. The cap would decline over time and require emissions to be four percent below their 2005 levels in 2012, 20 percent below 2005 levels in 2020, and 71 percent below 2005 levels in 2050. Permits sold at auction would rise gradually from 26 percent in 2012 to 70 percent after 2030. The remaining permits would be allocated between states and sectors of the economy according to a formula in the bill. To avoid price uncertainty and variability, the Lieberman-Warner bill would allow firms to increase their emissions in the short run by borrowing against future allocations of permits. The bill also would allow firms to purchase a limited number of carbon offsets in lieu of purchasing permits or reducing their emissions.

The other Senate bills have similar provisions, with modest differences in cap levels, the percentage of permits to be sold at auction, use of offsets, and cost controls. For instance, the Low Carbon Economy Act of 2007 (LCEA), sponsored by Senators Jeff Bingaman (D-NM) and Arlen Specter (R-PA), would institute a cap-and-trade system but require smaller reductions in GHGs than Lieberman-Warner. It also would establish a price ceiling for emissions. The price ceiling would be set at $12 per metric ton of CO 2e in 2012 and rise steadily thereafter at 5 percent per year in real terms.

GHG-Regulation Scenarios

The probability of passage of federal legislation regulating GHG emissions before the end of 2008 is virtually zero. The Democrats and independents supporting such legislation have a bare majority in the Senate, not enough to overcome a certain Republican filibuster. Also, any legislation passing Congress surely would almost be vetoed by President Bush, and supporters would not have enough votes in the Senate or House to override such a veto. The only possibility of Republican and White House support would be if GHG legislation was viewed as inevitable, and Republicans sought to preempt ambitious reductions in GHGs by supporting a weak and watered-down bill—which Democrats likely would reject.

The probability of a carbon penalty will increase significantly after 2008, however. The enactment of a cap-and-trade system will depend principally on the outcomes of the upcoming presidential and Congressional elections. The most critical variable will be the size of the Democratic and independent majority in the U.S. Senate. If the Democrats and independent can get close to 60 votes (with some support from Republican moderates), legislation imposing a carbon penalty through a cap-and-trade system is very likely.

Six possible scenarios in Washington, D.C., in January 2009 will determine the path of climate-change