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10 Ways to Trade Up

How Obama can fix the climate, raise billions for clean tech, and send you a fat check.

6. Technology innovation is key. One reason the acid rain cap-and-trade program worked so well is that it didn't require inventing any new technology. That's decidedly not the case for carbon. Here, cap and trade needs to fairly quickly generate prices high enough to not just prompt us to drive less, insulate our houses better, and install more solar panels. To get to the 80 percent reduction we need, we also need major technology breakthroughs—what economist William Nordhaus calls "radical innovation." That's going to happen only if the price is so high that people can make a lot more money by eliminating carbon than by emitting it.

7. Cap and trade is politically feasible. As Kreindler says, "Mention the word 'tax' in Washington and everyone runs behind a tree." Even 15 years after the fact, Democrats still talk nervously about being "Btu-ed," a reference to the Clinton administration's proposed energy tax in 1993, which some House Democrats blamed for losing their seats in the 1994 Republican landslide. Cap and trade's market-friendly trading mechanism, combined with the fact that the acid rain program was so successful, makes it far more likely than a tax to survive on Capitol Hill.

8. The cap needs to keep coming down over time. Kreindler advises that the most important part of an effective cap-and-trade plan is setting a short-term target that prompts substantive action right away. A good place to start, he says, would be to plan on a 2012 launch with the cap targeted to provide a 20 percent reduction in carbon emissions by 2020. But that's only the beginning. "It's important to keep compliance costs low at first in order to maintain political support," Kreindler says. But if we want to eventually reduce emissions by 80 percent, the cap has to keep coming down year after year—and it should do so at a predictable rate. If businesses know what the cap level will be in future years, they can estimate carbon costs more reliably and make green investments more rationally.

9. You have to get the details right. There are plenty of bells and whistles you can build into a cap-and-trade program. A safety valve, for example, sets a maximum price on permits, providing some predictability. A circuit breaker does much the same thing by freezing the cap level if the price of permits gets too high. Banking, a feature of the acid rain program, allows carbon emitters to hold on to permits in years when they don't need them and then use (or sell) them later. Finally, and most controversially, there are offsets. A power plant in Georgia might fund tree-planting programs in the Amazon to earn permits, for example, which seems like a good idea at first glance. But who's going to check that those trees really get planted and really stay put? Offsets can be useful, but tight regulation is critical.

10. It's not a panacea. "Cap and trade is just a tool," says the nrdc's Bryk. It might be the backbone of any effective long-term carbon reduction policy, but it's not the only tool we need. Or even necessarily the best. If you want to improve vehicle mileage, for example, raising federal fuel-efficiency standards is "much cheaper for consumers than raising the price of gas," she says. Michael O'Hare, a public-policy professor at UC-Berkeley, emphasizes the need for the government to take a more active role than just setting carbon prices. Sure, higher energy prices might motivate people to change their behavior. "But," he points out, "even if I want to take the tram, I can't do it if there's no tram."

In other words, command and control will remain absolutely necessary. As will taxes. Even with a well-designed cap-and-trade plan in place, we'll need tougher efficiency standards, higher fuel taxes, more sensible land-use policies, green research programs, and plenty more. But in the same way that cutting calories is the core of any weight loss no matter which fad diet you follow, raising the price of carbon is the core of any climate plan. With luck, this could be the year we finally figure that out.

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