Cap-and-Trade or a Carbon Tax for Greenhouse Reductions?

By Kennedy Maize

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What’s a “License to Pollute”?

Conventional environmentalists viewed emissions trading in 1990 as “a license to pollute,” and lobbied vigorously and unsuccessfully against the SO₂-trading program in favor of a traditional “command-and-control” regulatory regime. Their opposition was misguided, as some (but not all) economists and environmentalists would acknowledge today.

The SO₂ market was probably the most effective environmental regulatory program in U.S. experience, according to many environmental policy analysts. In an interview in late May, A. Denny Ellerman, an economist at the MIT Sloan School of Management who has followed the SO₂ market closely since it’s inception in the early 1990s, told MANAGING POWER, “The SO₂ market has worked very well. Far beyond the predictions of both advocates and critics at the time.”

Ellerman was an advocate at the inception of the SO₂-trading concept, as chief economist for the former National Coal Association (now part of the National Mining Association). “We had no idea it would work so remarkably well,” reducing SO₂ pollution by half in the U.S. in just a few years, Ellerman said.

Command-and-Control and Litigation Hell

In 1989 and 1990, the electricity industry, supporting President George H.W. Bush, lobbied strongly for the SO₂-trading regime in the Clean Air Act rewrite. The industry’s fear was command-and-control, characterized by the Clean Air Act of 1970, which tied industry into regulatory and litigation hell in courts throughout the decades to follow.

Under the command-and-control approach, the EPA called the shots and commanded environmental controls on power plants. Generators had to fight multiple battles in multiple legal venues, with multi-millions of dollars in legal costs, to make their case.

While the SO₂ market thrived in the 1990s, the struggle over command-and-control regulation of NO_x and ozone pollution continued at the EPA in the courts. The issues involved topics such as “new source review” and the meaning of whether plant maintenance constituted new construction. It was, for both the generators and the regulators, a regulatory and legal nightmare. The only beneficiaries were environmental lawyers for both the generators and the environmental groups.

Today, many environmentalists are pushing the CO₂-trading regime as the best approach to reducing emissions. Some key electric utility generation companies, such as Chicago-based Exelon Corp., buy into that regulatory paradigm.

At the same time, many in the electricity industry argue for a carbon tax instead of a cap-trade regime, as demonstrated at the ELECTRIC POWER CEO Roundtable in Chicago in May. The industry is throwing up many of the arguments against the cap-and-trade plan that the greens suggested would accompany a SO₂ market at the end of the 20th century. Rather than cap-and-trade, some in the electric generating industry now argue that a CO₂ or Btu tax would be simpler, easier to implement, and more effective in reducing global warming gases.