President Obama, the Gang of Ten, and Getting to Yes in Copenhagen

President Obama clearly wants to break with his predecessor on energy and climate policy. But the American political divide has not disappeared, and it still threatens to derail the Copenhagen climate negotiations next December. Three developments during the past week highlight both the promise and the peril: Secretary of State Hillary Clinton's appointment of Todd Stern to be U.S. special envoy for climate negotiations; President Obama's reversal of the Bush administration's refusal to let California and other states set tighter standards for greenhouse gas emissions from motor vehicles; and the re-emergence of the "Gang of Ten" -- Democratic Senators who represent coal-dependent states in the U.S. heartland and fear that cap-and-trade regulation of carbon emissions will harm their constituents.First some good news: Todd Stern's appointment. The implications are clearly spelled out in his recent Center for American Progress paper, co-authored with Kit Batten and John Podesta, co-chair of the Obama transition team:

… we can provide the global leadership that is desperately needed to manage the impact of climate change in the developing world …. The United States is a large part of the problem … At the same time, most of the growth in emissions going forward will be generated by developing countries. …. It is thus clear that rapidly industrializing countries -- China chief among them -- will have a big role to play in containing climate change. The United States will simply have no credibility with other nations unless we have vigorously addressed the problem at home. As we are putting our own mandatory system in place, we will need to re-engage vigorously in the diplomatic arena.

This paper echoes themes in recent CGD research, my chapter in CGD's publication, The White House and The World: A Global Development Agenda for the Next U.S. President, and a CGD post on transition climate policy right after the election.As Stern, Podesta and Batten note, the sequence is critical here: Developing countries will only move toward meaningful emissions limits if the United States moves first. The initial signs are certainly positive: President Obama has just empowered a coalition of Pacific and Northeastern states to enact their own (tighter) limits on vehicular greenhouse gas emissions. These "green" states are willing to move first, because they are much less dependent on fossil fuels than their "brown" counterparts in the country"s interior. The White House has also posted President Obama's intent to enact a national cap-and-trade program. And key Democratic leaders in Congress are poised to go along. Yesterday's New York Times cites Representative Henry A. Waxman, Chair of the House Energy and Commerce Committee, as expecting to move a climate bill out of his committee by Memorial Day, and Senator Barbara Boxer, Chair of the Senate Environment and Public Works Committee, has stated that that "the writing is on the wall that legislation to combat global warming is coming soon."Now here's the rub: The U.S. political divide on energy and climate policy has not disappeared -- in fact it has re-emerged within the Democratic Party itself, in the Gang of Ten who represent brown states. It's worth listening carefully to two leaders:

• Senator Sherrod Brown of Ohio:"If we pass a climate bill the wrong way, it will hurt American jobs and the American economy, as more and more production jobs go to places like China, where it’s cheaper."
• Senator Debbie Stabenow of Michigan:"My message over all is that for us to support what needs to be done in addressing global warming we need to demonstrate that, in fact, jobs are created. It’s not a theoretical argument. We have to come up with a policy that is manageable on the cost end … and that treats states equitably and addresses regional differences.”

Their sentiments have been echoed by other Senators from Virginia, West Virginia, Indiana, Michigan, Arkansas, Missouri, Nebraska, South Dakota, North Dakota, Colorado and New Mexico.This divide is not new. During the latter days of the Bush administration, it looked so stark that I posted a speculation about two American delegations at Copenhagen -- a rump delegation representing green states, and an official delegation with a dominant constituency in the brown states. Now the political shoe is on the other foot, and the national administration is in a de facto alliance with the green states. But the path to Copenhagen passes squarely through the brown states, and a gate controlled by the Gang of Ten. They are not likely to open it unless the President addresses two key concerns:

1. The cost of cap-and-trade: As I have argued in a recent post and public CGD dialogue with David Gergen, the President needs to confront the conventional cost argument head-on because it is simply wrong: A recession is exactly the right time to introduce cap-and-trade, because it will be cheap. Rather than waiting for good times to return, we should immediately adopt a cap-and-trade system with two key features: 100% auction of permits and the initial cap set at the pre-recession emissions level. This will bring all major carbon emitters into a uniform national system while ensuring both economic efficiency and a very low auction price during the worst of the recession, because the cap will exceed emissions until the recession eases. Once that occurs, the reviving economy will intersect with a shrinking emissions cap to produce a steady increase in the auction price. As carbon emissions get more expensive, market forces will inexorably reduce them.
2. Fairness: The President must acknowledge that the Gang of Ten are right: Working families could be severely impacted by post-recession energy price hikes under cap-and-trade, particularly in the brown states. In a recent paper, I have shown that their concerns played a major role in undermining the Warner-Lieberman cap-and-trade bill in the last Congress. Fortunately, the solution is both clear and politically feasible: Set aside a major share of permit auction revenues and divide the money equally among all Americans. This will ensure that poor working families are fully compensated for energy prices hikes associated with cap-and-trade (see Why Warner-Lieberman Failed and How to Get America's Working Families behind the Next Cap-and-Trade Bill.

Thanks to President Obama's new initiatives, we now have a clear path toward Copenhagen and real hope for a successful outcome. But before Todd Stern and other new appointees arrive in Copenhagen, they will have to get past the Congressional gatekeepers: the Gang of Ten and their potential allies among brown state Republicans. And this will require a cap-and-trade system that is:

• Economically efficient, which means 100% auction of emissions permits right from the start, as candidate Obama advocated;
• Low-cost at the outset, which means starting now and setting the first cap at the pre-recession emissions level, thus ensuring low permit prices while US industry adjusts to the system;
• Fair to working families, which means rebating enough permit auction revenues to fully compensate them for energy price hikes from cap-and-trade.

President Obama can do this -- it's not even hard by comparison with looming problems like health care, social security and the deficit. And the need is urgent, because we won't get to Yes in Copenhagen without it.