Sunday, November 26, 2006

Emission caps in America: will Bush embrace Kyoto?
In many of my recent posts, I have suggested mainstream America is becoming more comfortable with the idea of caps, or limits, on emissions from fossil fuel use by heavy industry. So far, this shift has manifested itself in policy and action at the state level, with carbon-capping regimes in the northeast (the RGGI) and in California; see my posts of August 13 and August 20.

Federal efforts, like the McCain-Lieberman draft Senate proposal on carbon caps, have not met with the same success.

Up to now.

After the November 7 mid-terms, the scene is changed. Democratic takeover of the leadership of the great standing congressional committees gives initiatives like McCain-Lieberman a much better chance. Many industry leaders are already advocating an overall federal policy on emissions, for fear of a patchwork of state-level policies that could become impossibly complex, especially in inter-jurisdictional electricity markets. And many, like NRG Energy’s David Crane, accept that emission caps in some form are inevitable.

The question is, will these be hard or soft caps? I.e., how hard will the federal government push emitters?

My prediction: a carbon market will come to America. The two biggest bellwether states, California and Massachusetts, support such measures (though Massachusetts pulled out of the RGGI last year, incoming governor Deval Patrick supports the RGGI, and has indicated he wants back in).

America’s carbon market will contain the general features of the European Union’s emission trading scheme (ETS). The ETS’s failure so far to reduce emissions—due, as I suggested on November 12, to tacit and systemic collusion between individual emitters, their national governments, and the ETS’s administrators in the European Commission—will make the idea of cap-and-trade palatable to coal-based power generators, and their lobbies, in the U.S.

Canada should also take this route: a hard cap on emissions, in the form of a tax, is simply a non-starter.

A national cap-and-trade system in the U.S. could come by way of a rejuvenated McCain-Lieberman proposal. For this to work, the president must be involved. Bush has resisted carbon caps up to now (for exactly the same economic reason that forced the Ontario Liberals to back away from their coal phase-out).

But now the landscape is different, and industry opposition in some quarters is beginning to evaporate, as in the case of NRG Energy. Bush still has major clout, and if he reads the writing on the wall—his former energy secretary, Spencer Abraham, predicts a carbon framework in the U.S. within five years—he might decide to spend his final two years leading the effort, instead of opposing it.

Should Canada lead this, or follow? We’re well-placed to lead, as I’ll explain in my next post. Stay tuned.


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