If your friends and family perceive you as the local environmental expert, you’ve probably been in social situations when you had to answer this question: How does cap and trade work? Drawing upon your best environmental economics plus a dash of conversational flair, you stumble through the subject and leave your listeners thinking they sort of understand it. Too bad the President of the United States isn’t nearby to bolster your case. This is how President Obama explained cap and trade during his Earth Day speech at a wind tower factory in Iowa last week:
> And here’s how a market-based cap would work: We’d set a cap, a ceiling, on all the carbon dioxide and other greenhouse gases that our economy is allowed to produce in total, combining the emissions from cars and trucks, coal-fired power plants, energy-intensive industries, all sources.
> And by setting an overall cap, carbon pollution becomes like a commodity. It places a value on a limited resource, and that is the ability to pollute. And to determine that value, just like any other traded commodity, we’d create a market where companies could buy and sell the right to produce a certain amount of carbon pollution. And in this way, every company can determine for itself whether it makes sense to spend the money to become cleaner or more efficient, or to spend the money on a certain amount of allowable pollution.
> “Over time, as the cap on greenhouse gases is lowered, the commodity becomes scarcer — and the price goes up. And year by year, companies and consumers would have greater incentive to invest in clean energy and energy efficiency as the price of the status quo became more expensive.
> What this does is it makes wind power more economical, makes solar power more economical. Clean energy all becomes more economical. And by closing the carbon loophole through this kind of market-based cap, we can address in a systematic way all the facets of the energy crisis: We lower our dependence on foreign oil, we reduce our use of fossil fuels, we promote new industries right here in America. We set up the right incentives so that everybody is moving in the same direction towards energy independence.
President Obama’s talent for explaining complicated things will be very much needed in the coming weeks as Congress debates climate policy legislation. The discussion draft prepared by Reps. Henry Waxman (D-CA) and Edward Markey (D-MA) moves into the mark-up phase next week. Lobbyists representing every affected interest are crawling over Capitol Hill in their efforts to influence the bill. Members of Congress will be reluctant to vote for legislation they don’t understand. That’s why President Obama has to apply his gifts of clarity and persuasion to push a comprehensive climate bill through Congress.