Obama has endorsed a cap-and-trade system for controlling greenhouse gas emissions (Obama commits to a strong cap-and-trade system).
In a cap-and-trade system, the government sets an cap on overall greenhouse gas emissions and allocates the available rights to emit the gases to firms in various industries. The firms can trade these rights among themselves. That makes it possible for the rights to be used by the parties that place the greatest value on them, and to minimize the aggregate cost of reaching the emissions target. As time passes, the government can squeeze down the volume of greenhouse gases emitted by reducing the overall cap.
The U.S. Environmental Protection Agency (EPA) has a useful report on the theory and mechanics of cap-and-trade systems in general: Tools of the Trade. A Guide to Designing and Operating a Cap and Trade Program for Pollution Control.
Robert Stavins, an environmental economist from Harvard's Kennedy School of Government, discusses the issues involved in a U.S. greenhouse gas cap-and-trade program in this working paper: Addressing Climate Change with a Comprehensive U.S. Cap-and-Trade System. The Resources for the Future (RFF) web page on Assessing U.S. climate Change Options is a good resource.
But it may be hard for Obama to move forward on an expensive program like this until the current economic crisis is brought under control (Bad economy threatens Obama's climate fix).
If the U.S. raises the costs of domestic industries by requiring them to acquire greenhouse gas credits, there will be demands to impose conditions on imports from other countries that don't impose similar costs on their own industries. The RFF legislation page links to two working papers on this topic. Richard Morgenstern and four others discuss Competitiveness Impacts of Carbon Dioxide Pricing Policies on Manufacturing, and then Morgenstern goes on Addressing Competitiveness Concerns in the Context of a Mandatory Policy for Reducing U.S. Greenhouse Gas Emissions. Here are Brookings Institution conference proceedings on the issue: Climate Change, Trade and Competitiveness: Is a Collision Inevitable? The Peterson Institute and the World Resources Institute published a short book, Leveling the Carbon Playing Field: International Competition and US Climate Policy Design, last spring.
It's not clear that cap-and-trade program import conditions would be compatible with U.S. trade commitments. Steve Charnovitz examines the general linkages between trade and the environment in WTO jurisprudence (this paper is not specifically about cap-and-trade measures): Trade and the Environment in the WTO. Jeffrey Frankel thinks it might be possible to design WTO compatible rules (Global Environmental Policy and Global Trade Policy) and offers guidelines for program design. Last winter Public Citizen distributed a paper by Todd Tucker and Mary Bottari laying out possible conflicts between climate change legislation and WTO requirements: Presidential Candidates’ Key Proposals on Health Care and Climate Will Require WTO Modifications (there is a page or so in the main text, and an appendix). The attorneys at the Sidley-Austin law firm evaluated the WTO compatibilty of certain cap-and-trade border measures on behalf of the International Brotherhood of Boilermakers, and thought that measures could be designed that would not violate WTO rules. Here's the Austin-Sidley memo, attached to testimony by a representative of the Boilermakers: WTO Analysis of International Provisions of U.S. Climate Change Legislation. Gary Hufbauer of the Peterson Institute is not at all sure what might pass WTO muster and what might not (Climate Change: Competitiveness Concerns and Prospects):
Application of basic World Trade Organization (WTO) rules to foreseeable GHG emissions controls is far from cut and dried. Only a brave or foolish lawyer would give this Committee strong assurance that such-and-such a system of GHG controls is immune from challenge in the WTO.... almost all trade restrictive measures stand a fair chance of being challenged in the WTO.
Some are excited by the possibility that the U.S. might adopt environmental measures that would be rejected by the WTO dispute settlement system (The Nasty Truth: Free Trade Agreements May Scuttle Green Jobs Plans):
Recently, AlterNet asked Van Jones, founder of Green For All and author of The Green Collar Economy, about this issue, and he responded with defiance. "I want the WTO to tell us we can't do this," he said, "because then we won't have a WTO.
A greenhouse gas cap-and-trade program may be more effective if it can be tied to similar programs in other countries, so that credits can move across borders. Judson Jaffe and Robert Stavins look at the issues this raises in this working paper: Linkage of Tradable Permit Systems in Inernational Climate Change Policy Architecture.
Hat tip to Todd Tucker for the link to "The Nasty Truth...": "I want the WTO to tell us we can't do this...because then we won't have a WTO."
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