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Strong Impetus for Climate Action in U.S. – Take Note, Australia

February 11, 2010

If one is to read only the Australian print media, one would be led to believe that Copenhagen was a total dud, climate change is a left-wing conspiracy, China isn’t investing in low-emissions technology, and nothing on climate change will happen in the US. 

With this line of thinking, we can lead ourselves to believe that we can go on as before without worrying about implementing a meaningful climate policy.

I disagree with all the statements above – and strong arguments can be made to support my views on each.

However, for the purposes of this post I would like to focus briefly on the analysis and views of informed US-based observers and politicians, in order to gain a clearer understanding of the drivers, and politics, which may determine a pathway for domestic climate change policy in the United States.

There are those that have argued quite forcefully that emissions trading in the US is dead for the foreseeable future, particularly following the capitulation of the Democrats in the recent Senate election.  Instead, they foresee that the lobbying power of strong vested interests, combined with the desire of ‘progressive’ elements to do what they can to fund climate-pertinent initiatives, will lead to the bill being split into one element covering the range of energy pet projects and another that deals with emissions trading.

However, this may not be the case.  There are proponents of a comprehensive bill, including emissions pricing, from both the left and the right.  The driving-force?: Unleashing American innovation for leading clean-tech  industrial development (in the face of current Chinese State-directed leadership). 

This is a sentiment expressed by Thomas Friedman (the ‘Earth Race’) in the New York Times.  Elsewhere, he quotes Sen. Lindsay Graham (R), to support this view:

Every day that we delay trying to find a price for carbon is a day that China uses to dominate the green economy

Graham, a co-sponsor of efforts to reach a House bill (along with Lieberman and Kerry), is further quoted in the NYT:

If the approach is to try to pass some half-assed energy bill and say that’s moving the ball down the road, forget it with me

Friedman is quoted by Michael Tubman at the Pew Centre (‘We Need an Innovation War, not a Trade War’), which clearly holds a similar view related to the requirement to comprehensively address the energy innovation challenge, as identified (inter alia (!)) in its signature of a letter to US senior administration officials, within which the common cause is a vehement criticism (and fear) of the aggressive ‘indigenous innovation’ policy in China which targets sectors including green technology.  The letter is co-signed by entities not normally obvious aggressive climate policy advocates, including the US Chamber of Commerce, and the National Association of manufacturers.

Let us consider the analysis of Robert Stavins at the Belfer Centre at Harvard on the political economy of climate legislation in the United States.

Stavins is essentially optimistic about near-term carbon pricing in the US.  Stavins contends that the obvious track of the failure of Waxman-Markey Bill, thereby leading to ineffective and expensive direct subsidies tied with an element of EPA legislation, is unlikely to emerge.

Instead, the political attractiveness of a ‘cap-and-dividend’ program such as that proposed in the straight-forward Carbon Limits and Energy for America’s Renewal (CLEAR) Act (sponsored by Sens. Cantwell (D) and Collins (R) and introduced in December 2009), may yet garner substantial momentum.  The Bill proposes to cap and auction permits to upstream emitters, and redistribute revenue directly to consumers (the ‘dividend’).  It is conceptually simple, provides the incentive to abate emissions, and removes negative consumption impacts through the redistribution.

The bill  also has the benefit of being only 39 pages long – instead of the 1428 pages of Waxman-Markey.  In my book, that must make it easier to explain.  The Economist agrees.  However, the bill does currently contain measures that are economically inefficient.

Importantly, there is poll evidence to suggest that there is strong public support for policy action on both renewable energy promotion and greenhouse gas emissions reduction.  The January 2010 Yale/George Mason poll ‘Climate Change in the American Mind: Public Support for Climate and Energy Policies in January 2010’ shows a majority of respondents stating that the US should undertake medium- or large-scale efforts to tackle climate change, ‘irrespective of what other countries do’. 

Specifically, most respondents in the poll had still not heard anything about ‘cap and trade’ but, when explained, a majority support introduction of such a program – particularly when a direct consumer rebate or bonus is incorporated into design.  Sounds like cap-and-divend to me.

While, in the words of Stavins:

the textbook economics preference — full auction combined with cuts of distortionary taxes — appears to be a political, if not academic, orphan

…..if the Yale/Mason poll is representative of US public opinion (and if legislators are willing to listen) one cannot easily dismiss a carbon pricing and energy bill passing which is sold on the political merits of  industry-development benefits and absence of consumer pain.

But why write about this on what is predominately an Australia-focussed climate policy and markets blog?

First, given the similarities between cap-and-dividend, and some of the features of the Carbon Pollution Reduction Scheme (CPRS) in Australia, it is interesting to note the extent of difference in the clarity of the message to ‘sell’ the legislation – particularly now that it is evident the Rudd Government has done such a bad job of the communication.

Second, there are climate policy formulation implications of developments in the U.S.

Australian politicians and industry should be careful if they are to assume that carbon pricing has gone away.  There are a number of ramifications to consider for Australia should tradeable carbon pricing be introduced to the US economy.  These include compatibility, comparability, prospects for countervailing measures, and trade partnerships. 

Last, the seriousness with which the low-emissions economy is being taken should be a message that industry and Government in Australia should take home.

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