Introduction

The Bush administration finally admitted in late May that the combustion of fossil fuels is damaging the earth's climate. Unfortunately, the administration doesn't plan to do much about it.

The admission, contained in a report sent recently by the United States to the United Nations, comes after more than a year of steady denials of the mounting evidence, including a report by the National Academy of Sciences that the president himself requested.

During this period of denial, the president repudiated his own campaign pledge to "cap" electric utility emissions of carbon dioxide, one of the main "greenhouse gases," and also unilaterally torpedoed the Kyoto Protocol on Global Climate Change, the product of many years of U.S. efforts to create an international framework for dealing with the problem.

The recent White House admission not only accepts the reality of climate change, and the role of "greenhouse gases" in creating it, but also acknowledges some very serious immediate consequences for Americans and their natural environment. The disruption of water supplies, new and more severe heat waves, radical reductions in coastal marshes, and the permanent disappearance of Rocky Mountain meadows are just a few of the serious consequences that the recent U.S. report to the United Nations identifies.

Rather than seek swift, mandatory responses to these looming threats, the report's best solution is simply to live with the problem and do nothing.

This "do-nothing" policy response appears to be consistent with a purely voluntary initiative on climate change released by the White House in February. The plan seeks to slow the rate at which we release emissions while allowing the total amount of greenhouse gases we spew into the atmosphere to continue unabated. But the White House plan amounts to little more than business-as-usual.

Even more troubling is the inability of any voluntary proposal to give businesses the certainty they badly need to convince financial markets to invest in technologies to reduce greenhouse gas emissions.

America can no longer afford to dither and delay on slowing climate change. We must impose mandatory caps on carbon dioxide and other greenhouse gases now, both to avert the potentially catastrophic impacts to humans associated with global warming and to restore our global standing as a leader in the cause of a clean and healthy environment.

The president's voluntary proposal seeks only to reduce emissions' intensity, that is, the amount of greenhouse gases adjusted for economic activity. But that ratio has been improving on its own in the United States over the last two decades. In this regard, the president's proposal marks nothing more than a continuation of the status quo.

The best way to control carbon dioxide -- and other greenhouse gases implicated in climate change -- is not with voluntary measures but with a "cap-and-trade" system that harnesses the power of markets to spur energy-saving and pollution-reducing technologies.

Unlike command-and-control regulations, cap-and-trade systems set a single limit, or "cap," on emissions from all polluters. Those who can control emissions cheaply can sell emissions trading allowances to those who find reducing emissions more costly. This combined approach is far less expensive than "first generation" laws that regulate emissions separately from each source. The key question in designing such a system is: Who should be capped? Fuel producers or fossil fuel users? The answer carries enormous economic and environmental consequences.

The amount of greenhouse gases a trading system can curb, how much those cuts will cost, and who benefits most from regulatory controls will vary, depending in part on whether Congress places a cap on energy producers upstream or greenhouse gas emitters downstream.

To better assess these questions, this paper weighs the merits of upstream and downstream approaches relative to four criteria: program cost, emissions coverage, technological innovation, and political feasibility. Most economists favor an upstream system for its administrative simplicity and ability to reach most of the greenhouse gases. This approach, however, has a major political drawback: Because it would raise energy prices, it bears an uncomfortable resemblance to an energy tax.

In contrast, a system pointed downstream doesn't rely primarily on higher energy prices to control greenhouse gas emissions. It concentrates incentives for polluters to find cleaner ways to operate or else spend more money to buy allowances. Mindful of a downstream system's potential to spur innovation as well as its greater political feasibility, the Progressive Policy Institute (PPI) proposed such a program to cap carbon dioxide in 1999.

The upstream/downstream debate is about to resurface as Sens. Joseph Lieberman (D-Conn.) and John McCain (R-Ariz.) prepare to unveil a mandatory system to reduce emissions of carbon dioxide and greenhouse gases economy-wide. As the debate gets underway, PPI urges Congress to avoid an "either-or" debate on means and keep its sights squarely on the end: reducing greenhouse gases with a mandatory emissions trading system. This paper offers a substantive and political case for a hybrid system that combines the best features of both the upstream and downstream approaches. A hybrid system is superior to an approach pointed solely upstream or downstream: It captures far more greenhouse gases, involves fewer sources than a solely downstream approach, and is potentially simpler to administer.

To understand in greater detail why Congress should pursue a hybrid system, it is helpful to first understand the fundamental mechanisms of cap-and-trade.

Blueprint Keywords: Extra CO2

Jan Mazurek directs the Center for Innovation & Environment at the Progressive Policy Institute.