It turns out that cap and trade might not be so bad after all.
New research shows that reducing carbon emissions through regulations like the administration's recent rules on power plants cuts less carbon at a higher price than the embattled climate policy Congress failed to pass in 2010. Cap and trade, or an equivalent carbon tax, would be economically easier on families, fairer to lower-income people and more flexible for emitters, according to a study by the Massachusetts Institute of Technology.
The study does not specifically examine U.S. EPA's newly proposed carbon rules, but it aims at the ballpark of all proposed rules. As such, it looks at regulatory options to cut carbon in the electricity sector, like a national renewable electricity standard and a clean energy standard, which permits nuclear power and natural gas. It also tested transportation regulations that already exist -- a fuel economy standard for new cars.
And it found that none of them works very well.
A renewable electricity standard and a transportation fuel economy standard would result in one-quarter of the emissions cuts attained by a cap-and-trade system. And all three would cost about the same, they said.
"Put differently, an equivalent level of emissions reduction could be achieved under a cap-and-trade system for less than 5% of the cost of either regulatory policy," said the researchers at the MIT Joint Program on the Science and Policy of Global Change.
If both regulatory plans were enacted -- one on electricity and the other on transportation -- their combined cost would be more expensive than a cap-and-trade system, the report says. But they would reduce just half the amount of emissions.
Take the transportation policy as an example. Increasing fuel efficiency only affects new cars, so carbon reductions can't be found in cheaper areas, like in agriculture or other industries, said Valerie Karplus, a research scientist with MIT and an author of the study.
"Any regulation that focuses on a subset of emissions reductions opportunities will therefore cost at least as much as an economy-wide cap-and-trade system, and often such targeted regulations actions can be much more costly," she said in an email.
Is cap and trade still an option?
Cap and trade has a tumultuous history in Congress. In the last decade it's been supported by Republicans and Democrats alike. When it narrowly passed the House in June 2009, it was described by Democrats as a game-changer on climate change and as an economic wrecking ball by Republicans. It died in the Senate the following year.
The threat of carbon regulations was one reason it gained traction five years ago -- as a less expensive alternative that could be tailored to the differing needs of states and companies.
Now that President Obama has introduced regulations on power plants, he has suggested there may be a better way forward -- a price on carbon, or cap and trade.
In an interview aired this week on Showtime's "Years of Living Dangerously," Obama said he still aspires to fulfill the campaign promise he made in 2008 to enact an economywide climate policy.
"So if there's one thing I would like to see, it'd be for us to be able to price the cost of carbon emissions," Obama said.
Republicans, meanwhile, are dusting off their criticism of the old policy, in part because U.S. EPA's proposed rules on power plants give the states a choice to use cap and trade.
Terri Lynn Land, a Republican who's running for Michigan's open Senate seat, has recently attacked her opponent, Rep. Gary Peters (D), for his support of cap and trade in 2009. Peters, for his part, isn't hiding from the policy that Republicans nicknamed "cap and tax."
"I certainly do not dismiss it and would take a good hard look at it," Peters said of cap and trade in a recent interview. "It may be part of what we need to be doing to move forward."
Still, there are reasons for the political volatility in the arc of cap and trade, which was initially put together during the George H.W. Bush administration in 1986 as a way to lure Republicans and utilities into supporting an alternative to EPA regulation. While it may be one of the most cost-effective policies out there, that doesn't mean it's free. It would raise the price of electricity more than smaller-bore regulations, because it reduces more emissions.
This is particularly true in regions of the nation, like the Southeast, where fewer steps have been taken to deploy cleaner electricity, according to the study.
"For the nation as a whole, electricity prices ... increase most under a cap-and-trade policy, as the emissions price is reflected in the cost of electricity generation," the report says.
They also note, however, that those price hikes can be softened by the same policy that created them. Cap and trade, unlike regulations, generates revenue, which the authors say can be used to offset the economic impact on families and businesses.