While economists stand by carbon pricing as the most efficient way to reduce emissions, many have considered it politically difficult to pass. Yet, a decade ago the United States nearly passed an economy-wide cap-and-trade program: the American Clean Energy Security Act of 2009, or Waxman-Markey. What happened to make it fail? New research finds lobbying by the companies who stood to be impacted by the bill reduced its probability of passing by 13 percent—representing $60 billion in expected climate damages that could have been avoided.

“The failure of Waxman-Markey continues to shape the climate policy debate today as policymakers hesitate to get behind a carbon price,” says study co-author Ashwin Rode, director of scientific research at the Energy Policy Institute at the University of Chicago (EPIC). “Our research suggests that their lack of action may be due to political influence.”

Lobbying efforts around Waxman-Markey were significant. Referred to by the media as “the sum of all lobbies,” companies spent more than $700 million to lobby the bill, totaling about 14 percent of all lobbying expenditures between 2009 and 2010. Rode and his co-author, Kyle Meng, an assistant professor of economics at the University of California-Santa Barbara, measured the effect the bill’s passage would have had on the stock prices of the companies that lobbied it.

The researchers discovered that the expected impact of the bill’s passage on stock prices correlated directly with the amount firms spent lobbying against Waxman-Markey. The more firms anticipated to gain or lose, the more they spent. And, although the expected “winners” outspent the “losers,” the firms that stood to lose were more effective at influencing the odds of passage than those that would have gained. In the end, Waxman-Markey had a 55 percent chance of passing had it not been for the lobbying efforts. With the lobbying efforts, its chances dropped to 42 percent.

What impact did Waxman-Markey’s failure have on how much society will end up paying for climate change? Using a conservative estimate for the social cost of carbon, a metric that aggregates the future costs of climate change to society, the researchers found that lobbying’s impact in reducing the likelihood of Waxman-Markey passing translated to an expected societal cost of $60 billion in climate damages that could have been avoided.

Importantly, the study also provides a glimmer of hope by laying out a path for more politically robust climate policies. The researchers show how subtle design changes to market-based climate policies can alleviate political opposition and increase chances of adoption. Namely, to the free allowances given to regulated entities to soften the blow during the initial stages of a new carbon market.

Because the intensity of lobbying activity – and thus the odds of policy enactment – moved with the expected gains or losses from the bill’s passage, the researchers explored several scenarios that allocated additional free allowances beyond what Waxman-Markey required. Targeting firms incrementally based on their level of loss scored the best odds, outperforming when additional permits were distributed evenly to losing firms and when permits were distributed evenly to all firms. The researchers acknowledged, however, that this could also dampen support because explicitly “picking winners and losers” could prove politically unpopular.

“Subtle changes to a carbon market’s design can make a big impact on its political acceptance,” Rode says. “Policymakers would be wise to factor that in as they devise market-based solutions moving forward.”

Areas of Focus: Climate Law & Policy
Climate Law & Policy
As countries around the world implement policies to confront climate change, EPIC research is calculating which policies will have the most impact for the least cost.