From Lord Stern to Obama on Crafting Carbon Cap and Trade: Don’t Give In to Pressures

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ABU DHABI — Here the advice to Barack Obama and Congress from Nicholas Stern, a former World Bank chief economist, about what not to do in crafting a carbon emissions cap-and-trade program:

“Don’t be pushed too hard by domestic pressure and move as quickly a possible the auctioning of permits. Do allow international trading and buying of credits.”

Stern, or Lord Stern to those who are mindful of his knighthood and membership to the House of Lords in the British parliament, made his comments during a press event on Monday at the big renewable energy confab in Abu Dhabi called the World Future Energy Summit. Obama will take office Tuesday, and what he can and will do to resuscitate a poor economy and curb greenhouse gas emission is a hot topic at the conference, which is attracting business executives, government delegations and royalties.

Having advised the United Kingdom on the economics of climate change and currently a professor at the London School of Economics, Stern has watched the birth of the European Union’s carbon cap-and-trade program and struggles to fix the program’s shortcomings.

The European program, started running in 2005, sets emissions-emitting limits for certain industries and issue emissions permits to companies. Companies that can’t emit below the limits will have to buy permits from those who are able to or have gotten credits from developing green energy projects.

When carbon credit prices crashed at one point, for example, the EU realized it had issued too many emissions allowances. The EU also has been giving away the permits largely free of charge, something that it’s looking to change.

American business and environmental groups also want to avoid the same mistakes, though they are offering different solutions. One of those groups, the U.S. Climate Action Partnership, drew lots of criticism when it presented its proposal to a Congressional committee last week. The group wants the government to give away a big portion of the allowances for free. Obama, on the other hand, wants to auction them off to raise money for a variety of initiatives, including greentech research and development.

Stern is siding with Obama because he believes polluters should have to pay dearly for their transgression. He warned against giving in to business or political pressures to weaken any climate change legislation.

“We should tax things that are bad. We are not paying the price of destruction,” Stern said. “There are $250 billion worth of energy subsidies [worldwide], mostly in hydrocarbon, and we should get rid of all of them.”

Asked whether the United States should choose a carbon tax instead of a carbon cap-and-trade program, Stern said both. He noted that European countries levy heavy gasoline gases, and the EU is trying to tighten its cap-and-trade program and broaden the program’s coverage to include more industries. The current cap-and-trade program covers about 40 percent of EU’s emissions.

Stern said a cap-and-trade program such as the EU’s generates incentives for developing countries to embrace renewable energy generation and other greentech ideas. As part of EU’s program, companies that need to buy emissions permits can buy from those who have built solar or wind energy projects in the developing world and garnered credits that can be sold to make a profit.

“I think it’s horses for courses,” Stern said about which approach would be a better fit for the United States. “I wouldn’t turn it into a simple arm wrestle with one over the other.”