Cap And Trade, RIP?

April 5, 2011, 2:13 PM UTC

The future of climate policy panel at Fortune Brainstorm Green. Credit: Russ Curtis

FORTUNE — The idea of setting a firm limit on carbon dioxide emissions but letting the market decide who should do the allowable amount of polluting is an environmental policy that seems to have a little something for everyone.  Lefties like the hard limits. Righties like the flexible markets, or at least they used to — and that change has thrown the future of cap-and-trade policies in doubt.

“Its going to be hard to resurrect cap-and-trade.  Even though it was invented by Republicans, it has been demonized by Republicans,” said Jim Rogers, chief executive of Duke Energy (DUK).  Rogers, unlike many of his fellow energy CEOs, has long taken an active role in pushing for tighter environmental rules. Speaking at a panel at Fortune’s Brainstorm Green conference, Rogers said doesn’t expect any strong climate change legislation out of the current U.S. Congress, or the next one, and probably even the one after that.

Panelist Michael Shellenberger, president of a think-tank called the Breakthrough Institute, argued that the cap-and-trade debate has distracted policy makers from the more important goal of cutting the costs of low-carbon technologies such as solar and wind power to make them competitive with natural gas. Relying on cap-and-trade, he said, “is doomed to failure. It’s not going to work.”

The view drew fire from Connie Hedegaard, the European Commissioner for Climate Action, who argued that despite the troubles in the U.S., the policy is working well in many places around the world. She counts 89 countries around the world that have set targets for greenhouse gas reductions. “It seems that whenever people are delivering on these domestic targets they are using cap-and-trade to do it,” Hedegaard said. “Is cap-and-trade too complicated?  It might be for the Americans but it is not for the Chinese.”

Part of the hostility towards cap-and-trade in the U.S. comes from an ideological wing of the Republican party that thinks working to limit carbon dioxide emissions is a waste of time, even if market forces are used to do it efficiently.  But there is also a growing disaffection on other parts of the right with the complexity of managing carbon markets compared to the simplicity of a straight tax on carbon emissions.

Greg Mankiw, a top economist in the George W. Bush administration who now teaches at Harvard, leads an ad hoc group that supports a straight carbon tax over a cap-and-trade policy. He argues that as matter of basic economics cap-and-trade is equivalent to a carbon tax, the only difference being that cap-and-trade is much easier for special interests to manipulate.  Mankiw has even derived his fundamental theorem of carbon taxation, which states that  Cap and Trade = Carbon Tax + Corporate Welfare.

Duke Energy’s Rogers says that the troubles with passing cap-and-trade should help environmentalists successfully push for smarter regulations in the future:  “I hope the fact that we failed doesn’t lead to us not working together in the future.”