An Economic View of the Environment - Page 59 of 78 - One Economist's Perspective on Climate and Other Policy

The Credit Downgrade and the Congress: Why Polarized Politics Paralyze Public Policy

There’s room for debate about whether U.S. government deficits justify Standard & Poor’s downgrading last week of long-term U.S. debt, but the more important factor cited in S&P’s report is that “the effectiveness, stability, and predictability of American policymaking and political institutions have weakened…” The S&P team emphasizes that “the difficulties in bridging the gulf between the political parties … makes us pessimistic about the capacity of Congress and the Administration” to address the crucial problems the country faces.

Although these S&P judgments were intended to refer exclusively to fiscal policy, they really apply to a much broader set of issues, ranging from economic to health to environmental policies. The key reality is this: there is a widening gulf between the two political parties that is paralyzing sensible policy action.

Political Polarization

This increasing polarization between the political parties has shown up in a number of studies by political scientists employing a diverse set of measures that place roll-call votes by members of Congress on an ideological spectrum from extreme right to extreme left. This polarization – the disappearance of moderates – has been taking place for four decades. The rise of the Tea Party movement within the Republican Party is only the most recent vehicle that has continued a 40-year trend.

Why has this collapse of the middle taken place; why has party polarization increased so dramatically in the Congress over the past 40 years? In my view, three structural factors stand out.

Three Structural Factors

First, there has been the increasing importance of the primary system, a consequence of the “democratization” of the nomination process that took flight in the 1970s. A small share of the electorate vote in primaries, namely those with the strongest political preferences – the most conservative Republicans and the most liberal Democrats. This self-selection greatly favors candidates from the extremes.

Second, decades of redistricting – a state prerogative guaranteed by the Constitution – has produced more and more districts that are dominated by either Republican or Democratic voters. This increases the importance of primary elections, which is where the key choices among candidates are now made in many Congressional districts. Because of this, polarization has proceeded at a much more rapid pace in the House than in the Senate.

Third, the increasing cost of electoral campaigns greatly favors incumbents (with the ratio of average incumbent-to-challenger financing now exceeding 10-to-1). This tends to make districts relatively safe for the party that controls the seat, thereby increasing the importance of primaries.

These three factors operate mainly through the replacement of members of Congress (whether due to death, retirement, or challenges from within the party) – that is, the ideological shifts that cause increasing polarization largely occur when new members are elected (from either party, although a disproportionate share of polarization has been due to the rightward shift of new Republicans).

To a lesser degree, polarization has also taken place through the adaptation of sitting members of Congress as they behave more ideologically once in office. Such political conversions are due to the same pressures noted above: in order to discourage or survive primary challenges, Republican members shift rightward and Democratic members shift leftward.

A recent case in point is Senator John McCain, Republican of Arizona, who evolved from being a moderate at the time of his 2008 Presidential run to being a solid conservative in 2010, in response to a primary challenge from a Tea Party candidate.

Long-Term Implications

If the increasing polarization of the Congress is due to these factors, then it is difficult to be very optimistic about the prognosis in the near term for American politics. This is because it is unlikely that any of these factors will soon reverse course.

The two parties are not about to abandon the primary system to return to smoke‑filled back rooms. Likewise, no state legislature is willing to abandon its power to redistrict. And public financing of campaigns and other measures that would reduce the advantages of incumbency remain generally unpopular (among incumbents, who would – after all – need to vote for such reforms).

Other Factors?

True enough, in addition to these long-term structural factors that have driven political polarization, shorter-term economic and social fluctuations have also had pronounced effects. In particular, significant economic downturns – whether the Great Depression of the 1930s or the Great Recession of the past several years – increase political polarization.

The 1930s saw not only the rise of American socialists and communists, but also the rise of American right-wing extremism. It took World War II to bring an end both to the economic upheaval of the 1930s and the destructive political polarization that had accompanied it.

U.S. participation in the war brought a degree of political unity at home, largely because U.S. action was precipitated by the attack on Pearl Harbor. Under conditions of less clear motivation for U.S. military action abroad – such as the war in Vietnam – the result has not been political unity, but divisiveness and polarization. The ultimate impacts on domestic politics of the wars in Afghanistan and Iraq may hinge on whether they are perceived to be patriotic responses to a foreign attack (9/11) or the latest manifestations of U.S. military adventurism.

The Future

So, it’s reasonable to anticipate – or at least to hope – that better economic times will reduce the pace of ongoing political polarization. However, in the face of the three long-term structural factors I’ve identified above – the increasing importance of primaries, continuing redistricting, and the increasing costs of electoral campaigns – it is difficult to be optimistic about the long-term prognosis for American politics.

No matter how one feels about the wisdom of Standard & Poor’s downgrading of long-term U.S. debt, the issue of greater concern should be their assessment of the state of the U.S. body politic.

A Golden Opportunity to Please Conservatives and Liberals Alike

The U.S. Environmental Protection Agency (EPA) has a golden opportunity to opt for a smart, low-cost approach to fulfilling its mandate under a Supreme Court decision to reduce carbon dioxide (CO₂) and other greenhouse gas (GHG) emissions linked with global climate change.

Such an approach would provide maximum compliance flexibility to private industry while meeting mandated emission reduction targets, would achieve these goals at the lowest possible cost, would work through the market rather than against it, would be consistent with the Obama Administration’s pragmatic approach to environmental regulation, and ought to receive broad political support, including from conservatives, who presumably want to minimize the cost burden of any policy on businesses and consumers.

Background and Context

By now, it is well known that the 2007 U.S. Supreme Court (5-4) decision in Massachusetts v. EPA found that EPA has the authority to regulate GHGs under the existing provisions of the Clean Air Act (CAA). This, combined with EPA’s “endangerment finding” in 2009 that GHGs threaten public health and the environment, led first in January, 2011, to new motor vehicle fuel efficiency standards, and soon will lead to regulations affecting new and modified stationary sources of emissions (under Section 111b of the CAA) via so-called New Source Performance Standards, and regulations for existing stationary sources (under Section 111d).

In quantitative terms, this last set of regulations – for existing stationary sources – will be key, and by far the most important affected sector will be electricity generation, which accounts for fully 40 percent of U.S. CO₂ emissions (and a third of national GHG emissions). Within this sector, coal-fired power plants will be the most drastically affected.

EPA could, in principle, promulgate a regulatory approach that incorporates compliance flexibility, such as through various types of credit, offset, or cap-and-trade mechanisms. It could do this, but may it do so under the legal authority of the Clean Air Act?

Call the Lawyers!

Over the past year, there has been a considerable amount of discussion and no small degree of hand-wringing over whether the relevant parts of the Clean Air Act authorize the use of such flexibility mechanisms. In the midst of this, a new report from Resources for the Future by Gregory Wannier (Columbia Law School) and others makes a compelling, but nuanced case in the affirmative. (See “Prevailing Academic View on Compliance Flexibility under §111 of the Clean Air Act”).

Their conclusion, in a nutshell: “EPA has the tools under §111 of the CAA to implement relatively flexible and efficient GHG regulation. The agency could use a range of compliance flexibility options itself, or facilitate state implementation plans that adopt such measures at the state or regional level.” Included are the market-based, economic-incentive instruments mentioned above.

We should take note, by the way, that Section 111d gives states considerable latitude when choosing their actions to follow EPA guidelines, an approach that is consistent with conservatives’ promotion of the primacy of state authorities in tailoring rules for individual state-by-state circumstances.

Now, for Some Economics

Even if the EPA has the legal authority to adopt a progressive, market-based approach to fulfilling this regulatory mandate, would it really make sense to do this? That is, what would be the consequences of adopting a flexible approach, compared with a conventional, inflexible regulatory scheme? Key issues include the implications for environmental performance, aggregate social cost, and consumer impacts via electricity prices.

Another new study, this one by Dallas Burtraw, Anthony Paul, and Matt Woerman (all at RFF), provides the analysis that is needed, using RFF’s well-regarded Haiku model of the U.S. electricity market, to examine the effect of alternative CAA policies on investment and operation of the nation’s electricity system over a 25-year time horizon in 21 interlinked regions. (See: “Retail Electricity Price Savings from Compliance Flexibility in GHG Standards for Stationary Sources”)

Four scenarios which would achieve the same environmental benefits are examined:

(1) a conventional approach in which the operating efficiency of individual coal-fired power plants would be regulated (labeled an “inflexible performance standard”).

(2) a “flexible performance standard,” under which plants that exceeded the standard could transfer a credit (in exchange for payment) to plants that found it more difficult to achieve the standard. The researchers call these “generation efficiency credit offsets.”

(3) cap-and-trade with auctioned CO₂ emission allowances, where the revenue generated for government simply displaces the need for other revenue sources on a one-for-one basis (that is, there is no assumption of a double-dividend through increased efficiency of the tax code).

(4) cap-and-trade with free allocation of allowances to Local Distribution Companies (LDCs), which are regulated and hence assumed to pass the benefits of the free allocation on to consumers.

The results are striking. In terms of aggregate social costs, the inflexible standard would bring with it total costs of about $5 billion per year, whereas – at the other extreme – cap-and-trade with free allocation would involve total costs of only $500 million annually, a 90 percent cost savings!

If – despite its legal authority – EPA believes it is politically unable to adopt a cap-and-trade approach (because of last year’s successful tarnishing of that phrase by Congressional conservatives), then it could opt for a second-best approach, the “flexible-performance standard,” above, which would involve total annual costs of about $1.4 billion, still a 70 percent cost savings compared with the conventional, inflexible standard.

Of course, political consideration of such policy alternatives is more frequently driven by estimates of consumer impacts than by overall social costs (which include consumer costs, industry costs, and costs to government). Here, the analysis is also striking. Consumer costs – due to higher electricity prices – under the inflexible standard would increase by 7 percent, while consumer costs under the flexible performance standard would increase by less than 2 percent. With the cap-and-trade regime with free allowances, consumer costs would actually fall by nearly 1 percent, due to lower electricity prices. [For complete numerical results with all of the scenarios, see the RFF discussion paper.]

The Bottom Line

Clearly, much is to be gained – and virtually nothing lost – by adopting a more flexible approach to meeting a court-ordered mandate that, one way or another, will have a regulation promulgated and eventually finalized. It would be foolish to turn away from a potential 90 percent cost savings for the country’s economy, particularly when the same approach yields lower electricity prices for consumers. All this, while meeting national obligations to reduce greenhouse gas emissions.

It’s too soon to forget that a year ago the Senate abandoned its attempt to pass climate legislation that would limit CO₂ emissions. In the process, conservative Republicans dubbed cap-and-trade “cap-and-tax.’’ But, as I’ve said before, regardless of what they think about climate change, conservatives should resist demonizing market-based approaches to environmental protection and reverting to pre-1980s thinking that saddled business and consumers with needless costs.

Market-based approaches to environmental protection should be lauded, not condemned, by political leaders, no matter what their party affiliation. Otherwise, there will be severe and perverse long-term consequences for the economy, for business, and for consumers.

Canada’s Step Away From the Kyoto Protocol Can Be a Constructive Step Forward

Canada confirmed this week that it will not take on a target under an extension of the Kyoto Protocol following the completion of the first commitment period, 2008-2012. Given that Canada is likely to miss by a wide margin its current target under the first commitment period, this decision may not be surprising, but it is nevertheless important. More striking, it may actually turn out to be a positive and constructive step forward in the drive to address global climate change through meaningful international cooperation. Why do I say that?

The Current Situation

The Kyoto Protocol, which essentially expires at the end of 2012, divides the world into two competing economic camps. Emission reductions are required for only the small set of “Annex I countries” (essentially those nations that used to be thought of as comprising the industrialized world). Such reductions will not reduce global emissions, and whatever is achieved would be at excessive cost, because of having left so many countries and so many low-cost emissions-reduction opportunities off the table. Furthermore, that dichotomous distinction is by no means fair: more than 50 non-Annex I countries now have higher per capita incomes than the poorest of the Annex I countries. (I have written about this and other issues surrounding the Kyoto Protocol in the past: Defining Success for Climate Negotiations in Cancun; Defining Success for Climate Negotiations in Copenhagen; Three Pillars of a New Climate Pact).

The United States did not ratify the Kyoto Protocol, and has made it clear that it will not take on a target under a second commitment period. The U.S. position continues to be that a considerably broader agreement is necessary – one that includes commitments not only from the Annex I (industrialized) countries, but also from the key emerging economies, such as China, India, Brazil, Korea, Mexico, and South Africa.

For much the same reason, Russia and Japan announced last year that they would not take on post-2012 commitments under the Kyoto Protocol. Further, it is unlikely that Australia will take on such a commitment under Kyoto, essentially leaving the European Union on its own.

On the other hand, the Kyoto Protocol is enthusiastically embraced by the non-Annex I countries (sometimes inaccurately characterized as the “developing countries”), because it holds out the promise of emissions reductions by the wealthiest nations without any responsibilities (costs) borne by others, including the emerging economies.

The Path from Copenhagen to Cancun to Durban

Year after year, the Conference of the Parties to the United Nations Framework Convention on Climate Change has failed to reach agreement on a second commitment period for the Kyoto Protocol. Most recently, in December, 2010, the issue was punted from the annual conference held in Cancun, Mexico, to the next conference, scheduled for December, 2011, in Durban, South Africa.

Because Durban provides the last opportunity to set up post-2012 targets (with time remaining for national ratification actions), it has been anticipated that the negotiations in Durban will re-ignite the divisiveness and recriminations that highlighted the Copenhagen negotiations in 2009 – with verbal hostilities between Annex I countries and non-Annex I countries dominating the discussions at the expense of any other considerations or meaningful actions.

A Positive and Constructive Step Forward

The decision just announced at meetings in Bonn, Germany, by the Canadian delegation that Canada will not take on a target in a second commitment period of the Kyoto Protocol can be a very constructive step forward. This is because it greatly reduces the risk that this year’s annual meeting of the Conference of the Parties in Durban will be dominated by acrimonious debates about a second commitment period for the Kyoto Protocol.

On the contrary, this announcement should encourage the non-Annex I (“developing”) countries, which have been insisting on a second commitment period, to begin to accept the reality that with the United States, Japan, Russia, and now Canada on record as not endorsing a second commitment period for the Kyoto Protocol, it is infeasible for the European Union to go it alone. (Indeed, one might suspect that Australia and most European nations are privately pleased by Canada’s announcement.)

The reality is that the world will be better off by focusing on sensible alternatives under the Long-Term Cooperative Action track of the UN negotiations and by “getting real” about post-Kyoto international climate policy architecture for the long term, such as by putting some additional meat on the Cancun Agreements and by considering any supplemental and sensible architectures the various parties wish to discuss. (For previous posts on the Cancun Agreements, see: Why Cancun Trumped Copenhagen; What Happened (and Why): An Assessment of the Cancun Agreements; Defining Success for Climate Negotiations in Cancun. For descriptions of a wide range of potential global climate policy architectures — ranging from top-down to bottom-up — see the diverse publications of the Harvard Project on Climate Agreements.)

Next Steps

At Cancun, it was encouraging to hear fewer people holding out for a commitment to another phase of the Kyoto Protocol, but it was politically impossible to spike the idea of extending the Kyoto agreement entirely. Instead, it was punted to the next gathering in Durban. Otherwise, the Cancun meeting could have collapsed amid acrimony and recriminations reminiscent of Copenhagen.

Usefully, the Cancun Agreements recognize directly and explicitly two key principles: (1) all countries must recognize their historic emissions (read, the industrialized world); and (2) all countries are responsible for their future emissions (think of those with fast-growing emerging economies). In important ways, this helps move beyond the old Kyoto divide.

The acceptance of the Cancun Agreements last December suggested that the international community may have begun to recognize that incremental steps in the right direction are better than acrimonious debates over unachievable targets. Canada’s announcement should help advance that recognition, and can thereby lead to vastly more productive talks this year in Durban.