Climate Policies in the United States: A Choice between the Market and Government?

Yuan Jian

Climate Policies in the United States: A Choice between the Market and Government?

Yuan Jian

The climate policies and policy instruments of the United States usually fall into two categories: “government-based” ones and“market-based” ones. The former are mainly comprised of the emissions regulations initiated and enforced by such government organs as the US Environmental Protection Agency (EPA) and government grants for low-carbon and clean-energy programs. The latter principally refers to a capand-trade system (hereinafter referred to as emissions trading system) and a carbon tax, a system whereby tax is levied on the emissions of carbon dioxide.

When the United States first attempted to introduce a nationwide system for emissions reduction, it resorted to a “market-based” emissions trading system. When this endeavor failed, it revealed that accomplishing this goal was far more complicated than simply making a choice between the government and the market. Rather, it placed great demand on the regulation-making ability on the part of the government: To establish a market-based emissions reduction system, not only does the government need to shore up support from the business world, it also needs to refrain from conceding too much to the demands of the corporate interest groups while securing such support, so that the emissions reduction targets desired by the new system will stay unharmed. In the United States, several political factors, such as the growing polarity between the Republicans and the Democrats, the undue influence of business over the country’s politics

and the diffused legislative powers of Congress, among others, limit the capabilities of legislators to strike a balance among different demands.

Emissions Trading System of Choice

The emissions trading system is formally known as “cap and trade” system, under which the government sets a cap on and a time limit for prescribed emissions in restricted economic sectors and issues or auctions tradable emissions credits to companies given limits on their emissions in line with the total emissions allowed for a year.1In 2007, legislative efforts by the US Congress to put in place an emissions trading system began to heat up, and in 2009 a breakthrough was achieved: on June 26 that year, the US House of Representatives passed the American Clean Energy and Security Act (otherwise known as the Waxman-Markey Bill) by a vote of 219 to 212. However, due to the great controversy surrounding the act, it failed to secure the 60 vote majority needed for it to be approved by the Senate, which in the end also failed to come up with an alternative. Efforts to pass this House-drafted act into law were put on hold in 2010 when the Republicans regained control of the House following their victory in the biennial congressional election.

That said, “market-based” climate policies were still widely held to be better than any other available option. And given the fact that the evaluation of climate policies in the United States is still influenced by the concept of dichotomy, “being based upon the government rather than the market” is one of the major reasons why the Obama administration’s climate policies are currently on the receiving end of both skepticism and criticism.

The existing US climate policies, for the most part, are constituted by the Clean Power Plan (CPP) which the EPA floated in June 2014 and finalized in August 2015. The Intended Nationally Determined Contributions (INDC) submitted by the United States for the UN Climate

Change Conference to be held in Paris at the end of 2015, confirmed that the CPP would remain a key vehicle for the United States to cut emissions till 2030.2Alison Cassady, “The Clean Power Plan: A Critical Step toward Decarbonizing America’s Energy System,” April 15, 2015, https://www.americanprogress.org/issues/green/news/2015/04/15/111188/theclean-power-plan-a critical-step-toward-decarbonzing-America’s-energy-system/.The CPP is by nature a “government-based” policy in that emission-control regulations thereof are initiated by the EPA and are primarily targeted at the emissions of carbon dioxide by the US electric power industry. As a directive, the CPP is also mandatory: Every US state must meet the targets the EPA has set for them by 2030. And by September 6, 2016, exactly a year after President Obama signed the plan into effect, all states must submit their respective CPP implementation plans based on the conditions of their own industries, technologies and resources. Should they fail to submit on time, a formal request for extension is required.3U.S. Environmental Protection Agency, “Clean Power Plan Technical Summary for States,” http://www. epa.gov/airquality/cpptoolbox/technical-summary-for-states.pdf.According to projections by the EPA, the implementation of the CPP will significantly bring down the carbon emissions of the US electric power industry, by 32 percent from 2015 to 2030.4U.S. Environmental Protection Agency, “Fact Sheet: Overview on the Clean Power Plan,” http://www2. epa.gov/cleanpowerplan/fact-sheet-overview-clean-power-plan.Considering the electric power industry is the biggest emitter of carbon dioxide in the United States, accounting for approximately 40 percent of the country’s total CO2 emissions, an effective implementation of the CPP is very likely to dramatically reduce the total carbon emissions of the United States.5“In Praise of Second Best,” The Economist, June 7, 2014, pp.10-11.

1 Alan Durning et al., “Cap and Trade 101: A Federal Climate Policy Primer,” Sightline Institute, 2009, http://www.sightline.org/research/energy/res_pubs/cap-and-trade-101/Cap-Trade, online.pdf.

However, the CPP has come under fire and been cast into doubt for not being “based upon the market.” Opponents, mainly the Republicans, argue that resorting to the CPP was tantamount to resorting to “big government”and a “centrally planned economy.” In 2004, Republican Congress leaders appointed after the party’s victory in the mid-term elections even claimed that they would seek to undermine the powers of the CPP, and “roll back”the regulations made by the EPA. James Inhofe, Chairman of the United

States Senate Committee on Environment and Public Works, noted that the EPA was in fact abusing the government’s power, and compared the EPA’s acts to those of “the Gestapo.”6“Dealing with Denial,” The Economist, November 15, 2014.

Even among most of its proponents, the CPP is also considered “the second choice.” Despite the Obama administration’s initial enthusiasm in pushing through Congress an emissions trading system, the administration, following its unsuccessful attempt, now can only advance its climate agenda by bypassing Congress and leveraging its executive powers and policy Instruments. The emissions reduction regulations the EPA initiated under the Clean Air Act (CAA) are in themselves directives, which in fact do not need to seek approval from Congress.7Daniel J. Weiss and Jackie Weidman, “Building on President Obama’s Clean Energy Successes,”Center for American Progress report, January 17, 2013, http://www.americanprogress.org/wp-content/ uploads/2013/01/17/weisssecondtermpriorities-2.pdf.

The market nature of the emissions trading system is manifested in two aspects. First, the cost of emissions reflected by the transaction price of the emission rights (also known as carbon credits) brings pressure to bear on companies to reduce carbon emissions. Second, the tradability of carbon credits can serve as incentives for companies to cut down the costs of reducing their emissions. If a company comes in below its cap, it will have extra credits to sell to the companies that have exceeded their caps. In order to increase the profit margins in selling carbon credits, companies will endeavor to adopt new technologies and minimize the costs of their emissions. With companies that enjoy cost advantage becoming the main force for emissions reduction, the costs for capping economy-wide emissions are bound to be pared down to the minimum.8Robert N. Stavis, “Experience with Market-Based Environmental Policy Instruments,” in Karl-Goran Maler and Jeffrey R. Vincent eds., Handbook of Environmental Economics, Vol.1, San Diego: Elsevier, 2003, pp.355-435.

In terms of the reduction effect, the emissions trading system is considered better than the carbon tax, another market-based policy whereby tax is levied on emissions of carbon dioxide. This is because the emissions

trading system puts a limit on a company’s total emissions, whereas a carbon tax merely adds to a company’s emissions costs rather than directly limiting its emissions. And since companies might simply pass on this cost to consumers by adjusting their prices, there exists some level of uncertainty in applying carbon taxes to enhance the emissions reduction pressure and effect.

What’s more, the emissions trading system, in the eyes of many, holds greater significance: it can limit the government’s role and reduce the room for and the possibility of the government intervening in the distribution of the interests and costs related to emissions reduction. These people are convinced that under the emissions trading system which is defined as “market-based,” the government only needs to establish a cap on total emissions, while emissions reduction is mainly driven by the incentives of trading emission credits. In this sense, the emissions trading system fits into the US practice of a free economy and its tradition of limiting the government’s role better than any other option.

However, judging by the above analysis of the reason why the United States’ efforts to enact an emissions trading system into law did not succeed, it is obvious that the relationship between a “market-based” emissions reduction system and the government is far more complicated than the concept of dichotomy might suggest.

Nature of Legislative Challenges

Concerning the reasons for the failure of legislation for an emissions trading system, resistance from the opposition is usually stressed. In practice, however, the division of opinions within the camp of supporters is also an important reason why the legislative process is at a stalemate. Despite the great number and complicated motives of interest groups that support and participate in the legislative process, they also have different demands, some of which are obviously far away from the emissions reduction goals pursued by the new law. Therefore, the coordination and balance of the legislators is facing great challenges.

Support from the business community

As restrictions on emissions of carbon dioxide will lead to increased production costs, companies, those in traditional energy industries and energy-intensive manufacturing industries in particular, are usually very alert to any reduction agenda. The emissions trading system is no exception. There are many strong opponents in the business community. Their representatives include the largest business organizations, such as the National Association of Manufacturers and the US Chamber of Commerce.

However, not all businesses are resisting emissions reduction. In fact, more and more enterprises are seeing the reality of climate change, and recognizing the inevitability and necessity to limit their carbon emissions. They have chosen to support and participate in the making of the climate agenda, take the initiative to affect its trend, including the choice of reduction approach and the design of the emissions reduction system.9Stephen Power, “Political Alliances Shift in Fight over Climate Bill,” Wall Street Journal, October 6, 2009; Daniel Gross, “The New Progressive CEOs,” Slate, October 10, 2009, http://www.slate.com/ id/2231925.

The following is also the background to these businesses’ support for Congress establishing an emissions trading system: In 2007, the US Supreme Court decided by a 5 to 4 vote,10Massachusetts v. EPA, 549 U.S. 497 (2007).that the EPA was empowered by the CAA to restrict greenhouse gas emissions harmful to public health. The EPA announced in April 2009 that it had confirmed six greenhouse gases that were “harmful to public health,” including carbon dioxide. And these belonged to pollutants that should be restricted. The EPA also said that it would proceed with the development of specific emissions standards and requirements.11John M. Groder, “EPA Moves to Curtail Greenhouse Gas Emission,” New York Times, October 1, 2009.For businesses, this meant that if they failed to establish a “market-based” emissions reduction system, they would have to follow the emissions standards set by the government. In this case, they chose to support legislation in Congress, which can be considered as a risk

management strategy, or a “preventative” strategy. That is, they took a step to reduce the possibility that the rules set by the government would dominate the emissions reduction agenda.12Jonas Meckling, Carbon Coalition: Business, Climate Politics and the Rise of Emission Trading, Cambridge, Massachusetts: The MIT Press, 2011, pp.174-175.

In promoting legislation to establish an emissions trading system, some alliances of companies have played an important role. The most prominent of these is the United States Climate Action Partnership (USCAP).13Julie Kosterlitz, “Corporate-Environmental Alliance Breaks the Mold,” National Journal, May 30, 2009, http://www.nationaljournal.com/njmagazine/nj_20090530_9442.php.Formally established in January 2007, it is a climate policy alliance composed of 25 well-known large enterprises and five well-known environmental organizations. From the very beginning, USCAP has expressed its willingness to promote the establishment of an emissions trading system.14USCAP, “A Call for Action: Consensus Principles and Recommendations from the U.S. Climate Action Partnership, a Business and NGO Partnership,” January 2007, http://www.us-cap.org/USCAPCallForACtion. pdf.In early 2009, USCAP released A Blueprint for Legislation Action, which proposed many specific suggestions for the design of the system.15USCAP, “A Blueprint for Legislation Action: Consensus Recommendations for U.S. Climate Protection Legislation,” January 2009, http://www. us-cap.org/pdf/USCAP_Blueprint.pdf.

Large number of people care and participate

Legislation to establish an emissions trading system has attracted many followers and participants, mainly because the rule-making involves the distribution of huge economic interests.16Congressional Budget Office, “The Economic Effects of Legislation to Reduce Greenhouse-Gas Emissions,” September 2009, http://www.cb0gov/ftpdocs/105xx/doc10573/09-17-Greenhouse-Gas.pdf.First, the determination of emissions volume will directly affect the production costs of limited companies. This growth in costs and potential price increases are estimated at hundreds of millions of dollars.17Michael J. Graetz, End of Energy: The Unmaking of America’s Environmental, Security, and Independence, Cambridge, Massachusetts: The MIT Press, 2013, pp.228-229.Therefore, the rule-making is highly sensitive: what should be the ceiling for emissions, what should be the time limit to meet the standards, how should emissions reduction duties be

distributed, and which industries should be the major ones to be limited? Second, the annual trading volume of the emissions quota is expected to reach hundreds of millions of dollars. As part of the new emissions reduction system, the emissions offset mechanism will also promote a vast market of financial derivatives. The scale of the whole new financial market could reach trillions of dollars.18Ibid., p.239.The “distribution” of market opportunities depends primarily on the means of quota distribution: mainly through auction or for free. and allowing a free floating of price or limiting the range. In addition, as another component of the new emissions system, government subsidies and financing arrangements also involve the distribution of enormous interests. Government funding covers the creation of “green jobs,” the production and use of clean energy, and the research and development of various low-carbon and energy efficiency technologies, including providing direct subsidies, tax incentives, loan guarantees, etc. The total amount of money involved is expected to be at least billions of dollars.19Ibid., pp.228-228.

Therefore, there are a great number of stakeholders in the rulemaking of the emissions trading system. According to reports, during the deliberations on the Maxman-Markey proposal by the House of Representatives, there were over a thousand business interest groups, environmental organizations, trade unions, citizen action committees and other organizations lobbying Congress. In those days, the halls and corridors of Congress were packed with people coming to express their ideas and demands, lots of which were representatives of business interest groups.20Marianne Lavelle, “Tally of Interests on Climate Bill Tops a Thousand,” Center for Public Integrity, August 10, 2009, http://www.publicintegrity.org/articles/entry/1609.

Different goals and demands

Despite the large number and different demands of business interest groups following and participating in the legislation process, what is more important is that the goals of some participants are obviously different from

the purpose of establishing an emissions trading system, namely emissions reduction. The following examples reflect the complexity of the motivations and demands of businesses, as well as the challenge they pose to legislation.

1. The interest groups of the coal and power industries. Here the author mainly refers to coal-fired power plants, which are the main carbon emitters that need to be limited. Some coal and electricity giants, such as Duke Energy Corporation, Florida Power and Light, Exelon and other USCAP members, are important supporters of the emissions trading system. Their demands include: the new emissions reduction system will not give them excessive production costs, which means there should not be too tight limits on the volume of emissions, the distribution of quota should be large enough; they should be able to make profit from quota trading, for which reason they need as large a quota of free emissions as possible. From the operation of the Emission Trading System (ETS) established by the European Union, we can see that companies holding a large amount of quota for free emissions, which are also the major emitters whose emissions are to be capped, are likely to make huge economic profits from emissions trading. This is also an important reason why some European coal and electricity giants turned from opponents at the beginning into supporters of the EU ETS.21Melanie Warner, “Is America Ready to Quit Coal?” New York Times, February 15, 2009; John Carey,“Clash over Clean Power,” Business Week, October 12, 2009, http://www.businessweek.com/magazine/ content/09_41/b4150055757494.btm.

Previously, interest groups of the coal and electricity industries have demonstrated with their actions that they have fairly rigid demands for quota distribution. In October 2007, two senators drafted The Climate Security Act, or the Liberman-Warner proposal, aimed at establishing an emissions trading system. In many ways, the proposal integrated the claims of the business community and environmental organizations, so it received general support. At that time, USCAP sent a letter urging the Senate to expedite deliberation, so that the bill would be adopted before the Congress elections. According to the proposal, at the beginning, 75 percent of the

quota should be distributed for free, with the percentage reduced year by year, until all the quota is subject to auction.22Jonas Meckling, Carbon Coalition: Business, Climate Politics and the Rise of Emission Trading, p.159.The interest groups of the coal and electricity industries were dissatisfied with this arrangement, arguing that the percentage and schedule for auction was too tight, which did not fully consider the cost burden of reducing emissions. Jim Rogers, CEO of the coal and electricity giant Duke Energy Corporation, a key initiator of USCAP, took the lead in opposing the arrangement, claiming that this kind of distribution would mean a “huge economic loss” for his company.23Jim Rogers, “Climate Change Legislation Should Not Be Punitive,” The Energy Daily, February 29, 2008, http://Rogers-Energy-Daily-1-29-08.pdf; Clive Thompson, “A Green Coal Baron?” New York Times, June 22, 2008.In order to prevent the Senate from passing the proposal, coal and electricity companies extensively mobilized their clients to exert pressure on senators in their states. As a result, the proposal was not adopted.24Deborah Zabarenko, “Carbon-Capping Climate Bill Dies in Senate,” Reuters News, June 6, 2008, http://www.reuters.com/atticles/idUSWAT00961120080606.

2. Interest groups from the agricultural sector. Though they are not major emitters to be capped, interest groups consisting of farm owners, farm product companies and food processing giants have high expectations of the new emissions reduction system: the exemption of the duty of emissions reduction for the agricultural sector; providing high subsidies for biofuels development, including the controversial corn-ethanol program; and allowing the planting sector to be the primary beneficiary of the emissions offset mechanism in the emissions trading system, which would allow enterprises to pay land owners for planting vegetation (such as trees) to help enterprises fulfill their emission reduction obligations.25“Farmers v Greens,” The Economist, November, 12, 2009, p.44.

3. Interest groups from the financial sector. What legislation participants from Wall Street care most about is: how to make the rules on quota price management. The financial market and related derivatives market promoted by quota trading has provided great business opportunities for the banking industry. Profits from providing financial services depend largely on the

openness of quota prices, or the freedom of speculation. Therefore, the demand of the interest groups of the financial sector is very clear: Quota prices should be determined by the market, and the government should try its best not to interfere in the floating of the price.26Michael J. Graetz, End of Energy: The Unmaking of America’s Environmental, Security, and Independence, p.239.This demand is in conflict with the claims of other business groups, especially potential major holders of quota. The latter believe that the excessive fluctuations of quota prices will affect normal transactions. More importantly, big fluctuations and unpredictability would make it difficult for enterprises to estimate the costs of reducing emissions, and for investors to evaluate the risk of investing in new energy and other low-carbon projects. Their demand is to establish an effective management system for quota prices, which can set a range for the fluctuation of the prices. Environmental groups also request regulating the fluctuations of prices, but the problem they are most concerned about is the quota prices being too low, which will weaken the emissions trading system’s role in promoting emissions reduction and stimulating investment in new energy.27Jad Mouawad, “Industries Allied to Cap Carbon Differ on the Details,” New York Times, June 2, 2008.

From the aforementioned different demands, we can see the huge difference in the opinions and claims of the supporters and participants of emissions trading legislation about what kind of system should be built. For lawmakers, it is already difficult to coordinate and balance the different demands of different interest groups. It is even more difficult to avoid too much compromise that will limit the effectiveness of an emissions reduction law.

Limited experience for reference

In terms of emissions trading, the United States has some practical experience, which is one reason why the emissions trading system is recognized. In the mid-1970s, not long after CAA was adopted by Congress, people in the United States started to discuss how to use “market-based”

policy instruments to reduce the emissions of air pollutants.28Hugh S. Gorman and Barry D. Solomon, “The Origins and Practice of Emissions Trading,” Journal of Political History 2002 14(3), pp.293-320; Marc. J. Roberts and Michael Spence, “Effluent Charges and Licenses under Uncertainty,” Journal of Public Economics, No.5, 1976, pp.193-208.In 1974, the EPA granted emissions reduction credits to enterprises which lowered their emissions of pollutants under the CAA standards, allowing them to use the credits later. In 1977, in the program to reduce lead in gasoline, EPA allowed companies to sell their credits. In 1990, the CAA amendment adopted by Congress confirmed the tradability of an enterprise’s emissions quota.29Tom Tietenberg, “The Tradable-Permits Approach to Protecting the Commons: Lessons for Climate Change,” Oxford Review of Economic Policy 19, No.3 (2003), pp.400-419.In 1996, in order to control acid rain pollution, Congress distributed tradable sulfur dioxide and nitrogen oxide emissions quota to 110 coal-fired power plants in the northeast. Public access to trading rights meant that social groups and individuals that supported solving the acid rain problem could reduce the circulation of quota and increase the pressure on power plants by purchasing quota.30Richard Conniff, “The Political History of Cap & Trade,” Smithsonian, August 2009, http://www. smithsonianmag.com/science-nature/Resence-of-Mind-Blue-Sky-Thinking.html.The project is generally considered to have been successful: it achieved the emissions reduction goals ahead of time and lowered costs.31Robert N. Stavis, “Experience with Market-Based Environmental Policy Instruments,” pp.401-403.

However, as has been pointed out in some comments, compared with an emissions trading system which is aimed at controlling the volume of carbon dioxide emissions throughout the United States, the acid rain project was no more than a “small potato:” it involved much simpler economic interests, and the demands of supporters and participants were far less complicated and easier to coordinate than the situation in the legislation for emissions trading.32Michael J. Graetz, End of Energy: The Unmaking of America’s Environmental, Security, and Independence, p.206.

Legislation Capability is Restricted

Some changes relating to politics and political institutions have weakened

the ability of Congress to deal with complex challenges concerning legislation. For example, the relaxed limits on campaign contributions and lobbying activities have led to growing corporate influence in the outcome of the legislative process. And, with the intensified party conflict and decentralization of Congress’ legislative power, it is more difficult to reach the consensus within Congress necessary for legislation. Since in the mid-1970s, these trends have to a changed the conditions for introducing legislation. In terms of legislative activities in the field of environment and energy, as the economic interests and the economic relations involved are very complex, they are particularly affected.

The influence of the business community has increased

This is directly related to the reduced limits on campaign contributions and lobbying. In 1976, the Supreme Court of the United States Supreme Court ruled that limits on individual campaign contributions and campaign spending would be regarded as “unconstitutional.”33Buckley v. Valeo, 424 U.S.1(1976).As for restrictions on corporate campaign contributions, although the Supreme Court did not bestow the same recognition, it expressed its support for the decision of the Federal Election Commission: A Political Action Committee (PAC) is a kind of agency for campaign contributions established by enterprises, and by removing the limits on their numbers it actually broadened the channels for companies to contribute to campaigns. In 1972, only 89 companies had a PAC; in 1980, this figure had soared to 1,204. With the rapid growth in the number of PAC, funds from the business community started to flow into campaign activities on an unprecedented scale. Within a few years, campaign funding from the business community has increased from $ 2.7 million in 1972 to nearly $ 20 million at the end of the 1970s.34David Vogel, Fluctuating Fortunes: The Political Power of Business in America, New York: Basic Books, 1989, p.207.With their absolute leading role as campaign contributors, large enterprises

and enterprise groups became the main forces influencing the agenda of the Congress. In the 1980s, with the weakening of trade unions, the business community easily maintained its No.1 position in terms of influence.35Ibid., pp.115-118.Among these enterprises, energy companies were very prominent. The energy interest group, consisting of traditional energy industries such as oil, gas and coal, and the power and automotive industries, as well as energy-intensive industries such as iron and steel and chemicals were called “an almost irresistible political force.”36Michael J. Graetz, End of Energy: The Unmaking of America’s Environmental, Security, and Independence, p.230.

In addition to campaigns, business interest groups also rely heavily on lobbying to influence the legislation of Congress. Some commentators have pointed out that since the mid-1970s, Washington’s “lobby of interest groups has exploded.” In 1971, the number of full-time lobbyists registered in Washington was 175, it increased to nearly 2,500 in 1981, and to more than 13,700 in 2009.37Francis Fukuyama, “The Decay of American Political System,” The National Interest, January/ February, 2014.Due to their outstanding resources, the ability of business groups to influence Congress through lobbying channels has been much greater than other social forces: In addition to direct lobbying, they also hire a large number of professional lobbyists.

The Lobbying Disclosure Act contains requirements for the disclosure of lobbying expenditures, mainly focused on lobbying expenditures associated with rebates. As the Internal Revenue Service (IRS) had no right to disclose this information, the public knew little about the lobbying investment of interest groups. However, successive political scandals related to lobbying put pressure on the government to strengthen its management over lobbying increased. In 2007, Congress passed The Honest Leadership and Open Government Act, which clarified some requirements for the qualification of full-time lobbyists and lobbying agencies. Since then, there has been a reduction in the number of registered professional lobbying

companies. However, many companies just changed their names, and continued to engage in lobbying activities in the names of “strategic advisor,”“issues management organization” or other similar identities, and their customers were still dominated by business interests. According to reports, big businesses lobbying in Washington usually hire over 10 specialist lobbying organizations or individuals, and another 20 something among over 2,000 lobbying companies based in the K Street with a broader scope. What deserves more attention is that corporate lobbying is not only expanding in scale, its purposes are also significantly changing. In the past, the purposes for companies’ lobbying Congress were mainly defensive: to prevent the government from adopting new tax policies and regulations that might damage their interests. But the latest development is business groups lobby to influence the formulation of new laws so the new laws bring them economic benefits: whether new business or rent-seeking opportunities.38“The Washington Wishing-Well,” The Economist, June 13, 2015, p.62.

This trend is well reflected in the lobbying activities around legislation on emissions reduction. According to the data of the NGO the Center for Public Integrity, in 2009, just before the House of Representatives voted on the Maxman-Markey proposal, at least 1,150 companies and organizations lobbied in Congress, including about 200 from energy and manufacturing industries, and 130 from the power generation and supply industry.39Marianne Lavelle, “Tally of Interests on Climate Bill Tops a Thousand.”Although there is no way of knowing how much money they invested in total, maybe some data can give us some hints. It was reported that Exxon Mobil’s spending on lobbying in the first three quarters of 2009 was $20.7 million.40Roll Call, November 9, 2009, http://www.rollcall.com/issues/55_54/lobbying/40376-1.html.

To influence the decision of members of Congress, in addition to direct lobbying, business groups also invested heavily in the mobilization of public opinion and the creation of public pressure, including financing the media and think tanks to promote their ideas, organizing themed “public

gatherings,” guiding voters to send massive emails to lawmakers, and so on.41“Another Astroturf Campaign,” New York Times, September 3, 2009, http://www.nytimes. com/2009/09/04/opinion/04fri2.html.

The difficulty in reaching a consensus necessary for legislation has increased

This is firstly associated with the opposition of the two major political parties. The polarization of political opinion and ideology has reduced the possibility for the two parties to cooperate and reach a necessary consensus for legislation. In the 1980s, the new political coalition between the two parties came to an end. And the situation where the Democratic Party had long controlled both houses of Congress no longer existed. Since then, the two parties have basically taken turns to control both houses, and the influence of partisanship on legislation has become more and more obvious. In the early 1970s, in legislative votes, about one-third of the votes were those where the two parties were acting against each other. By the mid-1990s, this proportion had increased to two-thirds, and it has only increased since.42Michael J. Graetz, End of Energy: The Unmaking of America’s Environmental, Security, and Independence, p.218.

Another important factor that has increased the difficulty of legislation is the decentralization of the legislative power of Congress.43Thomas E. Mann and Norman J. Ornstein, The Broken Branch: How Congress Is Failing American and How to Get It Back on Track, New York: Oxford University Press, 2006, pp.51-63.The CAA enacted by Congress in 1970 is still the most important environmental law in the United States. At that time, those who controlled the legislative process in Congress were mainly chairmen of related committees. In terms of the CAA, the two Democratic Congressional leaders played the key role: Henry M. Jackson, who was in charge of energy legislation in the Senate, and Edmund Muskie, who was in charge of environmental legislation in the Senate. Promoted by the two senior committee chairmen, the CAA was adopted with a 73-0 victory in the Senate. So it could be voted in the House of Representatives only after the deliberation of one Committee of the House

of Representatives.44Michael J. Graetz, End of Energy: The Unmaking of America’s Environmental, Security, and Independence, pp.219-220.

By the middle of the 1970s, the model of a few senior chairmen controlling the legislative process was broken. Newly established committees and subcommittees appeared in large numbers, many of which were headed by junior members of Congress. This means that more and more Congressional agencies and members with different backgrounds have been able to influence the legislative process and results. At that time, a Congressional lobbyist described the change like this: In the House and Senate, there were less than 10 chairmen who had great influence. Today, there are 70 people in the Senate and 100 in the House who can affect the results of legislation.45David Vogel, Fluctuating Fortunes: The Political Power of Business in America, p.206.

The following figures also reflect the decentralization of legislative power in Congress: before the CAA was adopted in 1970, a committee composed of members of the House and Senate carried out final approval for its details. At that time, there were only five representatives from the House. By 1990, in the meeting committee responsible for the final approval of the amendments of the CAA, the number of representatives from the House had increased to 130, representing seven different committees in the House.46Michael J. Graetz, End of Energy: The Unmaking of America’s Environmental, Security, and Independence, pp.220-221.

In addition to the large number, the newly involved committees and subcommittees also lacked a clear division of work and the hierarchy. The overlapping functions of these agencies has resulted in the phenomenon that committees and subcommittees in the same field often checked each other.47Francis Fukuyama, “America in Decay: the Sources of Political Dysfunction,” Foreign Affairs, September/October, 2014, pp.5-26.

The impact of these problems on the legislative ability of Congress is very obvious. As the number of agencies involved in deliberations increases, more and more individuals have been able to disagree with, block or deny collective decision-making, so the legislative process becomes more complex, and the progress becomes slower. It has been more difficult to avoid the

legislative efforts getting stuck or failing as there are more potential points where proposals may be vetoed in the process of rule-making. In addition, even if the legislation can be completed, the “effectiveness” of the new law will also be affected. In order to be adopted in a number of committees and subcommittees, including the deliberations of their potential “rejecters” in them, legal proposals have to be modified from time to time to incorporate different ideas and suggestions.48In terms of the concepts of “veto points” and “veto player,” see George Tsebelis, Veto Players: How Political Institutions Work, Princeton: Princeton University Press, 2002.In this process, the content of the proposals becomes more and more complex, allowing more “exceptions”and “immunities.” So it is hard to avoid conflicts and inconsistency between rules and terms. Moreover, the decentralization of legislative power has given interest groups more chances to exert their influence, and at the same time weakened the ability of Congress to coordinate efforts to respond to external pressure and balance different demands. The difficulties and failures of emissions trading reflect the existence of these problems to a large extent.

Failure to Balance

The emissions reduction bill passed by the House of Representatives aroused controversy and discontent even among supporters, which has weakened the foundation of support for successful legislation. This is one important reason for the legislation ultimately being unsuccessful. The discontent has been about the “imbalance” with regard two aspects: The bill has compromised too much to meet the demands of some interest groups, which has undermined the emissions reduction effects of the law; and interests have been over-allocated to some interest groups, which has ignored to the demands of other participants.

Excessive attention to the demands of some interest groups

Coal and electric power industries are generally considered to be the

main beneficiaries of the bill of the House of Representatives. According to the regulations of the bill, 80 percent of the emissions quota will be distributed for free, mainly to companies in these industries. And the the large quota is considered to be more than what the companies need to pay for reducing emissions. Although the bill proposes that steps will be taken to gradually reduce the distribution of quota, and increase the proportion of auctioned quota among the ways of distribution, no strict timetable has been put in place. Therefore, there is limited pressure on large emitters, and there is big room for them to sell quota for profits. There is a prediction that in the decades to come, these companies will be able to reap most of the economic benefits of emissions trading. In addition, the coal and power industries will also be the primary beneficiaries of government subsidies: The federal government plans to provide billions of dollars in technology subsidies to create green jobs, and the carbon capture and storage technology (CCS) closely associated with the coal and power industries is listed as a key beneficiary of the subsidy.

As for the reasons, one is that interest groups of these industries have great influence, and they have lots of speakers in Congress, especially among conservative members of the Democratic Party; another is that as the representatives and lobbyists of related companies closely participated in the deliberations on the bill, and were “always sitting at the table.”49Richard Schelesinger, “Fortunes in Cap and Trade,” Energy Central, November 25, 2009, http:// www.energyconferences.net/articles/energybizinsider/ebi_detail.cfm?id=776; Larry Parker and Brent D. Yacobucci, Congressional Research Service, “Climate Change: Costs and Benefits of the Cap-and-Trade Provisions of H.R.2454, R40809,” September 14, 2009.

There are also some other powerful interest groups that have become big beneficiaries of the bill with their influence and participation. For example, interest groups of automotive companies have won the promise of the bill that emission issues related to this industry will be “discussed later,”as they are not the concern of this bill. Agricultural interest groups have been another major beneficiary. The bill has satisfied their major demands: The agricultural sector is exempted from emissions reduction duties; farm

owners engaged in low-carbon agriculture will enjoy billions of dollars in tax breaks and subsidies; and the planting sector is identified as one of the main suppliers of emissions credits. It is expected that transactions associated with emissions offset credits will bring great benefits to farm owners. The lobbying efforts made by the agricultural groups have also been impressive: Before the adoption of the bill by the House of Representatives, more than 80 agriculture-related enterprises and organizations lobbied in Congress.50“Farmers v Greens,” The Economist, p.44.

The distribution of benefits has been unfair

Critics point out that providing lots of free quota to large emitters means the major economic benefits from emissions trading will be grabbed by a few companies. If most of the quota is auctioned, then the government will be able to use its income to subsidize the energy consumption of medium and low-income families by such ways as return of electric charge. Although this kind of subsidy is also mentioned in the bill, the practice to distribute the majority of the quota for free will weaken the government’s ability to pay in order to fulfill this commitment.51Alan D. Viard, testimony, “Climate Change Legislation: Allowance and Revenue distribution: Hearing before the Committee on Finance,” U.S. Senate, 111the Cong., 1st sess., August 4, 2009, http://wwwfinance. senate.gov/hearings/?id=1f3ebe07-009e-744b-93a4-67168d05fc4b.

The emissions reduction effects of the new law will be weakened

This dissatisfaction comes mainly from some environmental groups. In their view, the bill of the House of Representatives has provided major emitters too much free quota, which is contrary to the purpose of establishing the carbon market system - to produce enough pressure to cut emissions, and promote the transition to a low-carbon energy structure. A research report expects that during the period 2011 to 2019, the value of distributed quota could be worth up to $700 billion, far more than the cost

of meeting the emissions reduction standards.52Larry Parker and Brent D. Yacobucci, Congressional Research Service, “Climate Change: Costs and Benefits of the Cap-and-Trade Provisions of H.R.2454, R40809.”Greenpeace, an international NGO, even expects that the “generous gift” for coal and power enterprises in terms of quota distribution is likely to stimulate the construction of new coal-fired power plants.53Green Peace, “Green Peace: Waxman-Markey Climate Change Bill Not Strong Enough to Stop Global Warming,” http://www.greenpeace.org/usa/en/news/greenpeace-wasman-markey-clim.

In addition to environmental groups, companies investing in clean energy and other low-carbon industries are also dissatisfied with the “loose” rules for emissions reduction in the bill, including the massive distribution of free quota. In their view, if the quota distribution mainly takes the form of an auction, then part of the income can be used to increase funding for research and development of new energy and energy-saving technologies. Most importantly, a quota auction can help to control the liquidity of emissions, stabilize the price of the quota, ensure that the new system has the potential to generate enough pressure to cut emissions, stimulate investment in new energy, and accelerate the transition of the economic structure to a low-carbon one.

The demands of other participants have been ignored.

The benefits the bill has given to the coal industry on the issue of quota distribution have aroused the dissatisfaction of other interest groups. In February 2010, before the bill of the House of Representatives was delivered to the Senate for voting, some important members of USCAP, including the oil and gas giants BP America and Conoco Philips, and the manufacturing giant Caterpillar, announced their withdrawal from USCAP, to express their disapproval of the bill. They pointed out that, “The important thing is not a bill is passed, but what kind of bill is passed.”54Stephen Power and Ben Casselman, “BP Deals Blow to Obama Fight on Climate,” Financial Times, February 17, 2010.The separation of USCAP has reflected the fragility of the legislative union. Enterprises and enterprise groups that support carbon trading legislation established various unions

as they participated in the legislation process. But due to the complexity of relations between different interests, their demands were satisfied at different degrees, so it has been hard for the unions to maintain stability. The separation and reorganization have increased the uncertainty of the legislation prospects.

In fact, in order to stabilize supporters, and try to reflect the demands of many participants, the bill has made great efforts. Initially, the bill only had several hundred pages, but when it was handed in to the Senate, the number has increased to over 1,400. However, some demands conflict with one another, so it was hard to achieve a satisfactory balance in the rulemaking process. For example, in terms of quota price management, the bill has limited speculation in the carbon trading market, which is far different from the Wall Street’s demand to open quota trading, and let the supply and demand of the market decide the price of quota. However, it has not completely satisfied the demand of the other side either, which is to set a clear range for the fluctuations in the quota price.

In the face of the controversy aroused by the bill of the House of Representatives, the bill of the Senate has tried respond. Among many others, the draft of The American Power Act proposed by Senator John Kerry and Joe Lieberman in May 2010 was very eye-attracting. This proposal was thousands of pages in length. It relatively tightened emissions reduction requirements, proposing that quota distribution, which is currently mainly for free, should become mainly auction four years later. From 2016, the manufacturing sector will also be limited in emissions. Besides, the bill proposes to treat the duties on coal and oil and gas industries differently, which has facilitated domestic oil and gas development in the United States, and offered more benefits for the development of nuclear power.55The Pew Center for Global Climate Change, http://www.pewclimate.org/federalanalysis/congress/111/ comparison-wasman-markey-and-kerry-lieberman.But as it turned out, this “adjustment” was not enough to quell the controversy and pull the legislative process out of the stalemate.

Continued Dependency on Policy Interventions

One view is popular: In order to get broad support from the business community, and increase the likelihood of legislative success, the initial emissions rules can be loose. And after the emissions trading system is built up, the rules can be gradually tightened, for example, by reducing the supply of quota, and increasing the percentage of auction in the quota allocation. However, looking from the operation of the emissions trading system established by the European Union, it remains uncertain whether this “loosefirst-tight-later” approach is feasible.

The EU ETS was completed in 2005. It mainly limits the emissions of the energy, power and energy-intensive manufacturing industries. Initially, in order to weaken the strong opposition of the coal and power giants in countries such as Germany and France, the EU ETS offered them lots of free emissions quota. These companies gained great economic benefits by selling their remaining quota.56James Kanter, “Fraud Besets U.S. Carbon Trade System,” New York Times, February 8, 2010, http:// www.nytime.com/2010/02/08/business/energy-environment/08green.html.According to the evaluation of the Environmental Audit Committee of the House of Commons of the UK, the distribution of quota exceeded the real emissions of related companies at that time, leading to the fact that the carbon emissions of the EU increased rather than decreased from 2005 to 2007.57Environmental Audit Committee, House of Commons, “The Role of Carbon Markets in Preventing Dangerous Climate Change: Fourth Report of Session 2009-10,” HC290, http://www.publications. parliament.uk/pa/cm200910/cmselect/cmenvaud/290/290.pdf.

After the outbreak of the financial crisis in 2008, production cutbacks led to weaker demand for emissions trading, which resulted in a steep price drop. In 2008, the quota was 25 euros per ton. By the end of 2009, the price had fallen by over two-thirds. By 2012, the price was only 7 euros per ton. By the spring of 2013, it fell further to 5 euros per ton. At that time some forecasted that if there was no policy intervention, the prices could drop

to 1 euro per ton.58“E.U. to Consider Tougher Carbon Credits,” International Herald Tribune, April 16, 2013.Faced with this situation, the European Commission decided to vote on whether to carry out price intervention in April 2013. At that time, available intervention methods included: postponing to 2019 to 2020 the auction of the 900 million tons of quota scheduled for 2013 to 2015, so as to reduce the quota supply for 2013 to 1015 by 25 percent; limit the scope and categories of “exemptions;” or increase the proportion of auction. However, due to pressure from the business community, the European Commission failed to adopt price intervention. Instead, in order to reduce the impact of economic recession and increase the energy costs of the enterprises, the Committee promised to provide free quota to enterprises in more fields.59“Europe’s Energy Woes,” The Economist, January 25, 2014; “Worse than Useless,” The Economist, January 25, 2014.Due to the too low price of quota, the EU ETS is considered unable to substantially drive the growth of green investment.60Environmental Audit Committee, “EU Carbon Market Failing to Deliver Vital Green Investment—MP’s Warn,” News Release, February 8, 2010, http://www.carliament.UK/parliamentary-committees/ environmantal_audit_committee/eacpn08210.cfm.The performance of the EU ETS may not prove that the “loose first, tight later”approach is not feasible, but is shows that even if an emissions trading system is established and operated, its reliance on government and policy intervention will continue to exist.

Some economists argue that another market-based approach – a carbon tax may rely less on the role of the government than the emissions trading system. Different from the emissions trading system, a carbon tax does not involve huge economic costs and interests distribution. And the work of government is only to set tax rates, and let businesses readjust their emissions according to the pressure of cost.61Gilbert E. Metcalf, “A Proposal for a U.S. Carbon Tax Swap: An Equitable Tax Reform to Address Global Climate Change,” Brookings Institution Discussion Paper 2007-12, October 2007, http://www. brookings.edu/media/files/rc/papers/2007/10_carbontax_metcalf.pdf.However, the reality may not be so simple. Whether the carbon tax can work mainly depends on the structure and rate of taxation, as well as the scope of exemption. A carbon tax also needs support – taking into account the demands of business interest groups,

including different tax rates for different industries. At the beginning, the tax rate may be set too low, and the message it conveys about emissions cost is not able to drive a significant decrease in emissions. This means that after the system starts operating, the rules need to be adjusted based on the effects of emissions reduction and changes in objective conditions, including raising the tax rate and shrinking exemptions. These are all highly sensitive and extremely difficult policy choices. Such rule-making is no easier than the establishment and operation of an emissions trading system in terms of its requirement for the intervention level of the government and its ability to stand the influence of political factors.

Conclusion

The experience of trying to establish an emissions trading system in the United States has to a large extent supported the paradox concerning the emissions market: While trying to control the power of market, people just create greater demand for high-level government intervention.62Jonas Meckling, Carbon Coalition: Business, Climate Politics and the Rise of Emission Trading, p.202.The establishment of an emissions trading system seems to be a choice between the market and government: limiting the role of government, and reducing the space for political factors to interfere economic activities. But in fact, the possibility of establishing such a system and making it work is still dependent on the rule-making capability of the government to a large extent. And this capability is very sensitive to the political environment and institutional conditions. Understanding more about where the difficulties lie will help us to have a more comprehensive understanding of the necessary conditions for the development and implementation of successful climate policies, including the complicated relations between government and market in dealing with climate change issues.

Yuan Jian is Senior Research Fellow at China Institute of International Studies.