- The Washington Times - Tuesday, July 7, 2009

OPINION/ANALYSIS:

The White House and the sponsors of the Waxman-Markey legislation recently passed by the House have prominently asserted that their proposals are based on the hugely successful acid rain cap-and-trade program established in the Clean Air Act Amendments (CAAA) of 1990. But this is a clear bait and switch. The acid rain success and other successes based on it did not utilize the impossibly complicated $1 trillion auction/tax/allowance reallocation scheme that resulted from the political logrolling behind the close 219-212 House vote.

To the contrary, all previous cap-and-trade programs have been based on an annual reduction of allowances initially allocated on the basis of an average of previous emissions that were well-documented - a simple formula that has been totally abandoned by Waxman-Markey. If you think derivatives wrecked the debt markets, wait until you see what allowance derivatives do to the manufacturing sector.

Moreover, no one ever accused the acid rain program (or any of the others) of giving away “free” allowances. There was in fact nothing “free” about any of it, because utilities had to start reducing their acid rain emissions from Day One, ultimately having to spend billions ($5 billion in the case of Duke Energy alone) to meet the requirements. But, without a huge float of auctioned allowances, there were no financial machinations, and, with no revenues collected, no political fights over revenue distribution that have so poisoned the current climate debate.

The acid rain program was itself based in part on a similarly successful - and auction-free - trading system established in 1982 to accelerate the phase-out of lead in gasoline. The next proposal after the 1990 CAAA was RECLAIM, which was established in 1994 by California and which successfully initiated nitrogen oxide and sulfur oxide trading within the state - again without an auction.

Subsequently, EPA established successful trading programs for nitrogen oxide in the eastern U.S. and, later, during the George W. Bush administration, for sulfur oxide in the Clean Air Interstate Rule to achieve a further 70 percent reduction beyond the original 50 percent cut in the 1990 CAAA. There were no auctions for these successful programs, as EPA has no authority to require them. The U.S. Court of Appeals for the District of Columbia Circuit has recently thrown in doubt the legality of the CAIR trading system, causing such massive dislocations that no one should be suggesting that EPA can begin to manage a carbon dioxide reduction without emissions trading - but not the complicated mess now being legislated.

Supporters of the carbon dioxide auction have frequently cited the European Climate Change emission-trading scheme (known as the ETS) as the real reason auctions are necessary. The first phase of the ETS did not use an auction and overallocated the allowances, producing utility windfalls and carbon dioxide prices so low as to be meaningless. But the proximate reason for the problem was that there was no reliable baseline emissions data, as we have had for decades in the case of utilities here in the U.S.

As a result, the European Commission gave out too many allowances. The commission has corrected this mistake for the second (and successful) phase that is now in effect - but without an auction, it must be quickly noted. There are proposals to launch a 60 percent auction for the third phase, but that auction would probably be discretionary with the member states, which probably would not impose them.

To be sure, the Waxman-Markey legislation tries to avoid the trillion-dollar tax implications of a 100 percent auction by temporarily seeking to provide “free” allowances to coal and natural-gas customers. But these allowances will have to be auctioned to the emitters anyway, and there is no guarantee that the proceeds will actually get into the hands of those who have to pay the tax.

Over time, in any event, the system would revert to a 100 percent auction to provide trillions of dollars in revenues for unrelated budget proposals (and triggering protectionist import tariffs to curb trade with nations that have not imposed the same tax). One can understand the desire for deficit-reduction revenues. But they should not come out of a climate change program, which will be costly even without auctions and the success of which depends on the cap reduction level, not on the revenues collected. (Indeed, the group that has pushed for an auction, U.S. Climate Action Partnership, stresses that emission reductions under cap and trade are the same whether an auction is used or not.)

Some recent Waxman-Markey supporters have said that the actual design of the acid rain program is not applicable to the much more complex task of controlling greenhouse gases. But the sponsors have themselves artificially created the very complexity they complain about. Treating the transportation sector separately under Corporate Average Fuel Economy and not the cap in fact removes the only factor that might complicate this legislation more than acid rain. (Transportation produces roughly 30 percent of U.S. greenhouse gases and is the second-largest and fastest-growing sector.)

No one ever called the acid rain program or any that copied it either a “giveaway” or “tax” and none of them required complex trading controls that are completely untested. Climate change and energy security should not have to carry the political or economic baggage that has unfortunately been imposed in the name of the successful Clear Air Act.

• C. Boyden Gray is a former U.S. ambassador to the European Union.

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