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Business Warms to Climate Change

Cap-and-Trade Programs Are Key

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When energy industry executives, private equity financiers, labor union leaders and environmentalists all suddenly come together to tackle global warming, something must be in the air. That something includes the realization that Americans are demanding action on climate change, but it also has a lot to do with money.

Three major energy trade associations announced this week that they will join the AFL-CIO in backing modest mandatory federal curbs on carbon dioxide and other emissions that cause climate change. They did so because the energy groups are worried that more stringent green regulations may be imposed on them by Congress. The AFL-CIO is worried that more jobs might migrate abroad.

This unlikely agreement follows in the wake of the largest proposed leverage buyout in history, the $45 billion purchase of energy giant TXU Corp. by a collection of private equity investors led by Texas Pacific Group and Kohlberg Kravis Roberts—in a deal that includes support from two key environmental groups because of the buyers’ commitment to reduce the number of coal-fired power stations built, increase energy efficiency, and decrease emissions overall.

The money angle here is that TXU is very profitable and has a strong position in an important energy market, Texas, ensuring steady cash flow to service the debt the private equity firms will use to pay for the purchase. The buyers are concerned about the future financial risk of carbon dioxide emissions and can afford to be “green,” which in turn allows environmentalists to offer their stamp of approval on a deal that will indeed cut carbon emissions.

The challenge is, consumers in both cases could end up paying more for each kilowatt as these green solutions are introduced, both by newly-owned TXU and by Congress if they act on the recommendations of three energy associations and the AFL-CIO. The answer to this dilemma is a capitalists’ dream—the marketplace. The Center for American Progress has released several reports in the past year calling for the reduction of carbon emissions with a national cap-and trade program similar to those currently under consideration in the Senate.

Cap-and-trade is an approach that businesses, labor, and environmentalists can agree on. Cap-and-trade, an approach already used to combat acid rain here at home and by nations that are part of the Kyoto Protocol, provides economic incentives for reducing emissions that over the long term can help reduce the cost of energy to consumers as the nation shifts to cleaner sources of energy.

Under a cap-and-trade system, the government sets a cap on the amount of pollutants that companies or other groups can emit, and gives corporations credits for that amount. Companies whose emissions exceed their allotment must buy—or “trade”—credits form other companies in order to cover their pollution. Raised pollution standards will initially raise production costs, which will subsequently raise costs for consumers.

Yet cap-and-trade programs will allow companies to more efficiently “go green” via a vibrant and liquid marketplace for carbon credits. More efficient businesses can sell their credits to offset costs. Less efficient businesses can trade for those credits. As the market in these credits becomes more and more vibrant the market becomes more and more efficient at pricing these credits. More efficient markets mean less costs will be shifted to consumers and a more competitive U.S. market. As former Federal Reserve Board Chairman Paul Volcker recently warned, “you can be sure that the economy will go down the drain in the next 30 years” if the United States does not control greenhouse gas emissions.

The AFL-CIO and the energy trade associations are right to be concerned about the cost of new emissions standards on consumers and workers. By advocating for more moderate change they think that they can keep consumer costs low and more jobs at home. That’s what Sens. Bingaman (D-NM) and Specter (R-PA) have also proposed—a moderate bill that would only raise initial consumer costs by about 3.5 percent.

But now is not the time for modest change. Sens. McCain (R-AZ) and Lieberman (I-CT) have proposed a more aggressive bill that could initially raise electricity costs by an estimated 35 percent to fight global warming much more aggressively. And Sens. Kerry (D-MA) and Snowe (R-ME) and Sen. Sanders (D-VT) have introduced two other pieces of legislation that call for even deeper cuts in carbon dioxide emissions. And with good reason. The Earth’s temperature has already increased 1.5°F degrees over the last century, leading to rising sea levels, a decrease in snow coverage, the retreat of glaciers and sea ice, and an increase of droughts.

Scientists also predict that without intervention, Earth will near a two degree Fahrenheit global temperature increase within the next 25 years, leading to decreased crop yields, water shortages, and diminished economic growth in developing countries. Acting quickly on a number of policymaking fronts is critical to the safety of our planet.

The swift implementation of an aggressive cap-and-trade program is critical to this effort. Reversing the effects of global warming can be implemented in a way that will minimize long-term consumer costs by employing tried-and-true market mechanisms. We must all work together to keep the earth’s temperature from rising more than 3.6°F. Why not include Wall Street?

For more information on CAP’s policy solutions for reducing the effects of global warming, see:

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