Professor's View of Climate Bill

American Clean Energy & Security Act, Flaws Included, is a Big Step Forward

By Charles D. Kolstad

July 1, 2009


On June 26, 2009, the U.S. House of Representatives narrowly passed the most ambitious environmental legislation in two decades. The American Clean Energy and Security Act of 2009 – better known as the Waxman-Markey bill – is an enormous (1427 pages) piece of legislation of great breadth. It is not an elegant bill to behold, with last-minute clauses added to bring recalcitrant lawmakers on board, but it is nevertheless a landmark piece of legislation.

The centerpiecof the bill is a program to regulate the emissions of greenhouse gases (GHGs), mostly carbon dioxide from the combustion of fossil fuels – electricity generation from fossil fuels, home heating, and gasoline used in transportation being a few major source categories. GHG emissions are very gradually brought under control by the legislation, with a target of 3% below 2005 levels by 2012 (a modest goal), 17% below 2005 levels by 2020 (a more ambitious goal), and 80% below 2005 levels by 2050 (a very ambitious goal).

Emissions will be reined in through what is known as a cap-and-trade system. The idea is quite simple. A cap, equal to the national emissions goal, is stipulated every year. Permits to emit pollution up to that cap are issued to various parties in the economy, with each permit allowing emissions of one ton of CO2. At the end of each year, all polluters need to surrender permits corresponding to their actual carbon emissions during the year.

The second aspect of cap and trade is trading: these permits can then be traded among polluters. Because there are not quite enough permits to go around, the permits will have value. So polluters are faced with the choice of spending money to reduce emissions or spending money to acquire permits. This is the beauty of cap and trade: the amount of emissions is clear and unambiguous (the size of the cap), and polluters who find it cheapest to cut back emissions do so, selling permits to those who have a harder time reducing emissions.

Although there are a number of concerns with the legislation, criticism has focused on three primary issues: (1) that permit costs will drive up the cost of everything in our economy and hit the average citizen hard in the pocketbook; (2) that certain industries will be put at an unfair competitive advantage, causing jobs to migrate to China; and (3) that the carbon cap is too lax and too many permits are given away.

Although it is true that permit costs will be passed on to consumers, the respected nonpartisan Congressional Budget Office estimates the costs per household to be $165 per year – hardly a heavy burden. Furthermore, the costs are fairly evenly spread among various income classes.

In terms of industries that will be hard hit, it is true that some industries that emit a lot of carbon or use a lot of fossil-fuel-based electricity may see their costs rise. Most industries will see costs rise less than 1%. A few industries will see larger increases, but most of these are bulk-material industries (such as cement), the production of which is highly local and not likely to move overseas. Nevertheless, the bill does set aside a large number of permits to be freely allocated to these industries, which should neutralize this issue. Furthermore, as a way of partially protecting such firms, the bill contains clauses that allow (and in the latest version, require) the president to place an import tariff on carbon-intensive products imported from countries that lack carbon regulation. The bigger picture, however, is that there may well be job losses in some sectors but gains in others, as cleaner energy technologies grow.

Another criticism is that the bill has very weak targets for reducing greenhouse gases. It is true that for the next five to ten years the cap is quite loose – in fact it increases every year through 2016. And as a result, during this period, the price of allowances is expected to be very low. But eventually, and this is the important part, the cap does tighten. In twenty years, the goal is to have greenhouse gas emissions 42% below 2005 levels. That would be a remarkable achievement that would overshadow any slow beginning or temporary giveaways that might be in the bill.

Probably the biggest shortcomings in the bill are not the cap-and-trade portion but all the other sections, particularly those dealing with agriculture and biofuels. Biofuels, for instance, are exempted from the cap even though they can be a major source of GHGs. Agriculture is generously granted offsets that can be used in lieu of permits, and the offset program is overseen by the U.S. Department of Agriculture.

Although the bill has its shortcomings, at its core it is an impressive piece of legislation. If the senate trims some of the glaring defects, then the U.S. will become the world leader in taking global warming and climate change seriously.


Charles Kolstad is a Bren professor of Environmental Economics and served as a lead chapter author for the 2007 report titled “Climate Change 2007: Mitigation," which helped to earn the 2007 Nobel Prize for the Intergovernmental Panel on Climate Change, which produced the report. Professor Kolstad can be reached at: 805.893.2108.