Goodbye US Climate Bill, Hello Carbon Tax?...

Barack Obama and the Democrats were sent a hefty blow the other day when, in a surprising turn of events, a Republican nominee was able to win the Massachusetts Senate seat left vacated by the late Edward Kennedy. Having a Democrat win the seat was initially seen as an inevitability, but it was not to be so.

The big talk these days is that this win for the Republicans could sink the huge health care bill currently being put together by congress because this Republican win puts 41 Republicans in the Senate, enough to filibuster any bill.

But the next big ticket item on Obama's agenda is a climate bill in the Senate, which's main component is a cap-and-trade system. Considering how long it has taken the health bills to get this far, most aren't expecting the climate bill -- one barely got through the House of Representatives -- to get too far in the next year. That year-long time frame is very important. In November, the Americans go to the polls for the Midterm elections, where several Senate and House seats are up for grabs. Considering how much popularity Obama (and by association, the Democrats) has lost over his first year, many are expecting the Republicans to gather up most of those seats.

The US climate bill is almost by definition guaranteed to be disliked by Republicans -- to be fair, some are very willing to do something about climate change -- but many Democrats (especially those from the coal-producing states) are opposed to the climate bill. Such contention makes passing the bill especially difficult, and even more so to pass something that will be in any way moderately effective. Indeed, the most optimistic of realists are expecting something very watered down, with multiple exemptions for certain emitters and low emissions reduction targets.

To many, the climate bill might as well be off the table, at least until after the midterm elections. Stephen Hill, a professor at Trent, thinks it could possibly return in a year or so without a cap-and-trade system, but rather a carbon tax. Americans are even less encouraged by new taxes than Canadians, and we all saw how the carbon tax went over here in the last federal election. But interestingly, some of the most environmentally-unfriendly companies in the US, like Exxon-Mobil, are in support of a carbon tax.

To the naked eye, this seems highly unlikely. But these companies see the writing on the wall and some kind of climate-related legislation is bound to come into play relatively soon -- if anything, the EPA will use its power to regulate greenhouse gases. Under a cap-and-trade system the price of carbon fluctuates and businesses can never be too sure how hard it will hit their balance sheets each year. For companies that are huge and have less than impressive carbon emission histories, such fluctuation could be in the hundreds of millions of dollars. A carbon tax, however, is predictable, which is highly valuable to businesses. Moreover, the cost of the tax is borne both by industry and consumers, so businesses don't take as much of the hit. And for the more cynically-minded, it is much easier to influence the price of the tax when the government controls it (see coal, gas & oil lobby) than when the market has control.

But Obama likes the cap-and-trade, and so do the Democrats (for the most part). For now it looks like very little will come about, but who knows about the future? We can only hope the EPA starts to wield its axe or Congress puts something together. I'm not feeling too optimistic about the latter...