Legislating Carbon Caps: Five Unresolved Issues for the New Administration

• Date: 01 January 2009

1-2009 NEWS & A NALYSIS 39 ELR 100511-2009 NEWS & A NALYSIS 39 ELR 10051

Legislating Carbon

Caps: Five

Unresolved Issues

for the New

Administration

by Gregory C. Staple

Gregory C. Staple, a partner in the Washington, D.C., off‌ice of

Vinson & Elkins, specializes in climate change matters. The

opinions expressed here are solely those of the author and do not

necessarily ref‌lect the views of Vinson & Elkins or its clients.

Editors’ Summary:

Federal cap-and-trade legislation is essential if the

United States is to reduce greenhouse gas emissions. Five

stumbling blocks that the incoming administration and

Congress must address in order to get legislation are: the

economic rationale for reducing greenhouse gas emissions

as part of a clean energy-led economic recovery program;

why reductions are best achieved by issuing a capped

number of tradable emission permits; how permits will be

allocated by the government and any associated revenues

disbursed; which government agencies will administer

the program; and how America’s new plan will move the

country toward the promised environmental goals.

[T]he nature of the challenges that we’re going to face are

immense and on e of the things that we kn ow about the presi-

dency is that it’s never the challenges that you expect.1

— Barack Obama

It has been clear for some time that adopting a compre-

hensive federal program to curb America’s greenhouse

gas (GHG) emissions would present President George W.

Bush’s successor with a key test on Capitol Hill. In the last few

months, however, it has become apparent that President-elect

Barack Obama plans to simultaneously propose new measures

to remedy two market failures of unprecedented scope, one

environmental and the other f‌inancial. Together, these chal-

lenges offer the president a once-in-a-generation chance to

transform the country’s energy sector.

This two-part Article starts by discussing the importance

of squaring America’s carbon accounts as part of the new

Administration’s program to rebalance the country’s economic

priorities after the 2008 f‌inancial crisis. The second part sug-

gests that the president’s ability to do so via an economywide

cap-and-trade program may depend largely on the resolution

of f‌ive open issues raised by legislation that was stalemated in

the 2007-2008 congressional session.

I. Carbon Regulation and the Financial

Crisis

While some may see scant similarity between the f‌inancial

crisis that swept across the world in 2008 and the unchecked

build up of GHGs in the atmosphere, each stem in large mea-

sure from the failure of the market properly to account for the

systemic risk arising from millions of seemingly rational indi-

vidual decisions. In the f‌inancial sector, so long as the risk

of borrowing and insurance, no matter how reckless or thinly

secured, could be prof‌itably traded to someone else, some-

where in the global market—then, a seemingly unbounded

universe of banks, private equity groups, and hedge funds—it

was business as usual. Until it wasn’t. Then the whole unreg-

ulated house of cards came tumbling down, burdening the

world’s economies with trillions of dollars in deferred costs

that will take years to amortize with innumerable hardships

along the way—many still unknown.

So too with global warming. Because no charge generally

has been made for venting GHGs into the atmosphere, despite

the rising costs this imposes on the public, for the most part,

it is business as usual. But the bill also will come due. As

Nicholas Stern, perhaps the leading authority on the econom-

ics of climate change, has bluntly told us, global warming is

1. Statement from Nashville Presidential Debate (Oct. 8, 2008).