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**RSC Policy Brief:**

**Cap-and-Trade Proposals for Greenhouse Gas Emissions**

*October 2007*

**In light of increasing social pressures for lawmakers to legislate on
global warming, the following information on the leading Democrat
proposals might be useful.**

**[Background]{.underline}**: According to the Competitive Enterprise
Institute (CEI), there is no true scientific consensus that global
warming now will cause catastrophic events in the future, and there is
no scientific consensus that man is solely or even mostly responsible
for the warming. However, there is such consensus that some sort of
warming is occurring. CEI reports that "global average temperature is
about 0.6° Celsius---or just over 1° Fahrenheit---higher than it was a
century ago; atmospheric levels of carbon dioxide (CO2) have risen by
about 30 percent over past 200 years; and carbon dioxide, like water
vapor, is a greenhouse gas whose increase is likely to warm the Earth's
atmosphere."

But CEI also notes that, "Scientists do not agree on whether: (1) we
know enough to ascribe past temperature changes to carbon dioxide
levels; (2) we have enough data to confidently predict future
temperature levels; and (3) at what level temperature change might be
more damaging than beneficial to life on Earth."

Both James Hansen of NASA (who CEI calls "the father of greenhouse
theory") and Richard

Lindzen of MIT (who CEI calls "the most renowned climatologist in the
world") agree that, even if nothing is done to restrict greenhouse
gases, the world will only see a global

temperature increase of about 1°C in the next 50-100
years---considerably less than the predictions of the United Nations'
Intergovernmental Panel on Climate Change (IPCC), which has predicted an
increase as high as 6°C.

In regards to former Vice President Al Gore's predictions of massive
sea-level increases, the IPCC (widely seen as one of the most liberal
entities on global warming) foresees sea-level rise of between 0.1
meters and 0.9 meters by the year 2100. As Nils-Axel Mörner of Stockholm
University Points out, the Earth experienced a sea-level rise of 0.2
meters over the past century with no noticeable ill effects. There seems
to be no scientific consensus as to the extent of sea-level increase
that would result from the current rate of ice-sheet loss. For instance,
one researcher (Zwally) argues that it could take thousands of years for
the sea to rise just one meter at the current ice-sheet loss rate.

In May 2007, NASA Administrator Michael Griffin told ABC News:

> I have no doubt that a trend of global warming exists.  I am not sure
> that it is fair to say that it is a problem we must wrestle with. To
> assume that it is a problem is to assume that the state of Earth's
> climate today is the optimal climate, the best climate that we could
> have or ever have had and that we need to take steps to make sure that
> it doesn\'t change.  I guess I would ask which human beings---where
> and when--- are to be accorded the privilege of deciding that this
> particular climate that we have right here today, right now is the
> best climate for all other human beings.  I think that\'s a rather
> arrogant position for people to take.

Despite this lack of consensus on the cause and seriousness of global
warming, one of the primary Democrat reactions to a perceived global
warming crisis caused by man-made emissions has been proposing
government-run "cap-and-trade" systems, as detailed below.
"Cap-and-trade" refers to capping annual carbon (or carbon-equivalent
greenhouse gas) emissions from commercial operations and allowing the
trading of credits (or "allowances") for such emissions among
businesses.

Although the Democrat cap-and-trade systems would be run by the federal
government, some private-sector cap-and-trade programs have begun to
emerge nationwide. For example, the Chicago Climate Exchange (CCX) was
created by grants from private foundations to bring companies and other
entities (like universities) together to cap and trade greenhouse gas
emissions. As CCX's website notes:

> Through their CCX membership, the \[member\] organizations were first
> in the world to make legally binding commitments to reduce all six
> greenhouse gases, in the world's first multinational multi-sector
> market for reducing and trading greenhouse gases. CCX is a U.S.
> corporation, and today remains the only emissions reduction and
> trading system for all six greenhouse gases and the only operational
> emissions reduction and trading system in North America. CCX has
> nearly 300 Members from all sectors...worldwide.

To learn more about CCX, visit this website:
<http://www.chicagoclimatex.com/content.jsf?id=1>

**[Democrat Proposals]{.underline}**: Two cap-and-trade bills have been
introduced in the House in the 110^th^ Congress thus far: the [Climate
Stewardship
Act](http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.00620:) (H.R. 620,
introduced by Rep. Olver of Massachusetts, 129 co-sponsors) and the
[Safe Climate
Act](http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.01590:) (H.R.
1590, introduced by Rep. Waxman of California, 140 co-sponsors). Neither
bill has been acted on by any House committee. The Climate Stewardship
Act has a Senate companion bill ([S.
280](http://thomas.loc.gov/cgi-bin/bdquery/z?d110:SN00280:), introduced
by Senator Lieberman).

[Climate Stewardship Act]{.underline}. The Climate Stewardship Act (H.R.
620) would direct the Administrator of the Environmental Protection
Agency (EPA) to establish a National Greenhouse Gas Database consisting
of:

-   an inventory of greenhouse gas (GHG) emissions by specified entities
    that own or control a source of GHG emissions in the electric power,
    transportation, industrial, or commercial sectors of the U.S.
    economy that emit more than 10,000 metric tons of GHGs per year; and

-   a registry of GHG emission reductions and increased sequestration
    (capture of emissions before they are released into the atmosphere),
    applicable to both covered and noncovered entities.

H.R. 620 would also establish a program of tradable emissions allowances
(the right to emit a certain unit of emissions), which would be capped
in a declining fashion over time (as detailed in the bill---there would
have to be a net 75.5% reduction in tradable allowances between 2012 and
2050).

\[More specifically, tradable allowances permit companies to shuffle
among themselves what they are allowed to emit in a year, without
exceeding the overall cap. For example, if there is a 20-allowance cap
for a town, divided evenly between the two companies in that town, the
first company could buy two extra allowances from the second company in
a year when the first company needs to emit more and the second company
will emit less. In this example, the first company would be permitted to
emit 12 units of GHGs, while the second company would be permitted to
emit 8 units of GHGs. But the overall 20-allowance cap would not be
breached, and total emissions would not be reduced. But, as the overall
cap is reduced over time---for example, if the 20-allowance cap in the
hypothetical town were reduced to 18 in the subsequent year---total
emissions from that town would, theoretically, be reduced.\]

Covered entities (which would include governmental entities), beginning
in 2012, would have to submit to the Administrator one tradable
allowance for every metric ton of GHGs emitted (subject to civil
penalties for noncompliance). Allowances could be sold, exchanged,
purchased, retired, borrowed, offset by credits from other countries, or
otherwise used as authorized by this legislation, but would not be a
property right. A newly established Climate Change Credit Corporation
(CCCC) would receive, manage, buy, and sell the GHG allowances. Specific
appropriations are not authorized.

H.R. 620 would instruct the Administrator to make allocations of
allowances to covered entities and commercial [sectors]{.underline}, as
well as to the CCCC, providing initial allocations for early action and
accelerated participation.

The CCCC would have to establish a program to distribute (unspecified)
funds for:

-   technology to facilitate compliance with this legislation;

-   incentives for GHG emission reductions or net increases in
    sequestration on agricultural lands; and

-   helping fish and wildlife adapt to climate change.

The Secretary of Commerce would have to report to Congress on the
oceanic and coastal impacts of climate change and assist certain coastal
states in adapting to climate change. Additionally, the Secretary of
Commerce would have to submit a climate change adaptation plan to
Congress and research the impact of climate change on low-income
populations worldwide.

The Director of the Office of Science and Technology Policy would have
to establish a program on adaptation technologies (as part of the
Climate Technology Challenge Program) and perform regional
infrastructure cost assessments of the impacts of climate change.
Specific appropriations are not authorized.

Lastly, H.R. 620 would provide (unspecified) funding for states to
develop and implement climate change impact mitigation plans.

[Safe Climate Act]{.underline}: The Safe Climate Act (H.R. 1590) would
direct the EPA to promulgate:

-   targets for a 2% reduction in GHG emissions each year from
    2010-2020;

-   targets for a 5% reduction in GHG emissions each year from
    2021-2050; and

-   regulations requiring reductions to meet such targets, including by
    setting caps on the emissions of entities and sectors with the
    largest emissions, by issuing and authorizing trading of emission
    allowances, and by imposing penalties for excess emissions.

The bill would require affected federal agencies to each finalize a rule
to carry out the National Academy of Sciences' and the National Research
Council's recommendations for regulatory action needed to reduce
atmospheric GHG concentrations or to explain reasons for declining to
act.

The President would be directed to submit to Congress a plan for the
distribution of emission allowances (including through auctions) and the
use of proceeds (to be deposited in a Climate Reinvestment Fund) for
specified goals, including mitigating the effects of energy cost
increases and climate change. The EPA would have to ensure that
emissions and allowances are accurately tracked, reported, and verified.

The emission reduction regulations could include additional requirements
for any entity or sector, as well as performance standards, best
management practices, and technology-based requirements for compliance.
Standards for the reduction of GHG emissions from motor vehicles would
have to follow a reduction schedule that is at least as fast as the
standards adopted by the California Air Resources Board at its September
2004 hearing. The EPA would have to revise such standards in 2014 and
every five years thereafter to further reduce emissions.

H.R. 1590 would direct the Secretary of Energy to:

-   require, beginning in 2010, an annual increase in the percentage of
    electric energy generated from renewable sources that is sold at the
    retail level in the United States and to require such percentage to
    be at least 20% of the total electricity sold by 2020; and

-   set end-user savings targets for retail electric-energy and natural
    gas suppliers.

The Secretary of Energy would be allowed to increase the required
percentage of end-user savings for years after 2020 and allow suppliers
to achieve the targets through a trading system.

Reports indicate that a cap-and-trade bill could be considered on the
House floor before the end of this year.

**[Conservative Concerns and Questions to Pose]{.underline}**:
Conservative concerns about government-run cap-and-trade are numerous
and significant. Some such concerns include, but are not limited to, the
following:

-   [Government Planning Scheme]{.underline}. Government-run
    cap-and-trade is, by definition, a central economic planning scheme
    in which the government decides which industries and companies
    deserve more or fewer credits and what business factors and economic
    outputs are "necessary." Lowering greenhouse gas emissions,
    especially in the short terms, means government-directed decreases
    in economic activity.

-   [Stifles Private-Sector Innovation]{.underline}. Government-run
    cap-and-trade stifles innovation since companies are artificially
    constrained in their economic activities, thereby dampening the
    incentives to create new products and services. As Jim Manzi wrote
    in *National Review* on June 25, 2007, "The loss of economic and
    technological development that would be required to eliminate
    literally all theorized climate-change risk would cripple our
    ability to deal with virtually every other foreseeable and
    unforeseeable risk, not to mention our ability to lead productive
    and interesting lives in the meantime." Additionally, government-run
    cap-and-trade, like government-run anything, would dampen the
    incentives for developing private-sector cap-and-trade initiatives,
    which would be market-driven and thus more efficient.

-   [Higher Consumer Energy Prices]{.underline}. Because a scarcity of a
    high-demand product yields higher prices, government caps on energy
    production and usage would lead to higher energy prices. As CBO
    notes, "Regardless of how the allowances were distributed, most of
    the cost of meeting a cap on CO2 emissions would be borne by
    consumers who would face persistently higher prices for products
    such as electricity and gasoline." Such price increases would be
    felt most harshly in poorer households, who spend a larger
    percentage of their incomes on energy.

-   [Job Losses, Lower Wages, and Stock Devaluation]{.underline}. As CBO
    noted as a corollary from the previous bullet-point, "As some parts
    of the energy sector and various energy-intensive industries
    adjusted to a decline in demand for their goods, current workers and
    investors in those industries would experience costs in the form of
    lower wages, job losses, and reduced stock values." 

-   [Potential for Corruption]{.underline}. Government-run cap-and-trade
    has serious potential for corruption, since for example, local
    officials would have political (and perhaps monetary) incentives to
    help their local businesses get more credits. And businesses in the
    aggregate may have powerful economic incentives to get more credits
    than their designated allotment in a given year.

-   [Windfall for Traders]{.underline}. Government-run cap-and-trade
    naturally yields substantial sums for traders. This may be
    profitable for them, but this is money that could have been put into
    innovation and investment.

-   [Not Likely to Actually Reduce Emissions]{.underline}.
    Government-run cap-and-trade has never been shown to actually reduce
    greenhouse gas emissions, yet isn\'t that the stated goal of
    cap-and-trade proponents? Just because the government requires a
    certain decrease in emissions within a certain timeframe does not
    mean such decreases can occur in the real world. As the Competitive
    Enterprise Institute notes, the European Union has a government-run
    cap-and-trade regime right now, and its greenhouse gas emissions are
    increasing *much* faster than those in the United States.

-   [No Guarantee that Reducing U.S. Emissions Stops Global
    Warming]{.underline}. Scientists agree that global warming is caused
    by a multitude of factors, some natural and perhaps some man-made.
    U.S. emissions are a small fraction of carbon dioxide in the
    atmosphere, and China's and other developing countries' emissions
    are increasing dramatically faster than are those of the United
    States.

As this last bullet point implies, conservative concerns about
cap-and-trade are also a function of larger concerns about the global
warming issue. Many questions central to global warming exist and remain
unanswered by any meaningful scientific consensus. Some such questions
include, but are not limited to, the following:

-   Is significant global warming actually happening?

-   Why? What's causing it?

-   On what scale? Is global warming an imminent crisis or a manageable
    risk?

-   How is this warming different from previous warming periods in
    Earth's history?

-   Are climate changes inherently bad?

-   Is this latest warming causing harm to the health and welfare of the
    U.S., of the world?

-   Do the benefits of warming (such as longer growing seasons) outweigh
    the costs of warming (such as receding beaches)?

-   Why do some people think that humans and the swift pace of modern
    technology won't be able to adapt to climate change?

-   Why do we think that the Earth's own adaptations won't stop
    runaway-warming? *(For example, more carbon dioxide in the
    atmosphere means faster and more robust plant growth, which means
    more carbon dioxide being pulled out of the atmosphere by plants.)*

-   Can human behavior changes stop the warming, if we even want to?

-   What is the ideal climate? What is the ideal average temperature of
    the Earth?

-   Why do we expect the Earth to have no variations in average
    temperature when we know it has experienced some in the past and we
    know that such temperature variations exist on other planets and on
    the sun itself?

-   Why do we think we can predict the planetary climate decades in
    advance when we cannot even accurately predict local rainstorms a
    week in advance?

-   Similarly, why do we think we can change the climate of the whole
    planet when we cannot even change local weather?

**[RSC Staff Contact]{.underline}**: Paul S. Teller,
<paul.teller@mail.house.gov>, (202) 226-9718