Cap and trade in America: US climate policy at a crossroads

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“The EU has been the sole leader in climate protection so far, but the US should soon join in,” says Klaus Deutsch in a July paper for Deutsche Bank Research, pointing out that the Senate has begun preparations for a wide-ranging climate bill.

Deutsch claims that the US Senate initiated an unprecedented debate on a “radical” climate protection policy, explaining how it has been working on a Climate Security Act, which would represent a significant US contribution to fighting global warming.

On 6 June, the proposal attracted majority support during a Senate debate, but the bill was momentarily postponed due to divisions ahead of the presidential elections, Deutsch notes. But the debate will pick up in Congress after the elections and “groundbreaking laws” will be adopted as the country seeks to “redress its shortcomings,” he claims.

The act will introduce an American emissions trading system for greenhouse gases (GHGs), covering almost 90% of all the country’s GHG emissions. These will be capped and eventually reduced to 72% below the current level by mid-century, the paper explains. 

Significant revenues should accrue from emissions auctions, Deutsch notes. He expects this to further contribute to fighting climate change as a quarter of the revenue will be allocated to measures to help climate change adaptation and prevent global warming both home and abroad. Half will be returned to citizens and electricity consumers, while the remaining quarter will be used to help companies to make the transition.

The bill offers great economic incentives for industry, particularly the energy sector, to invest in greener technologies, according to Deutsch. He points out that coal-fired power plants will come under particular threat of closure and will have to develop capture and sequestration technologies, while renewable energies and potentially even nuclear energy will receive a boost.

The paper highlights the difference between the US bill and the EU emissions trading scheme, namely that all transport fuel needs will be subject to the cap-and-trade system, offering further incentives to develop new technologies. But it also claims that the protectionist obligation for importers to buy emission credits is problematic.

Deutsch concludes that the “upcoming political turnaround is an enormous opportunity to create a large market for emissions trading in North America, the EU and other large greenhouse-gas-emitting countries later on,” but cautions that the new US government will have to hurry if it is to have its “major policy shift” ready before the UN climate protection conference in December 2009.

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