Carbon Tax Center

Progressive Democrats Endorse Rep. Larson’s Carbon Tax Bill

02/1/2010 by James Handley

In his State of the Union address, last week, President Obama called for passage of “a comprehensive energy and climate bill with incentives that will finally make clean energy the profitable kind of energy in America.” The President did not mention cap-and-trade.

Several days ahead of Obama’s speech, Progressive Democrats of America, endorsed the straightforward, ramped-up carbon tax proposal introduced last March by Rep. John Larson of Connecticut, who heads the House Democratic Caucus. PDA recognized that as cap-and-trade legislation falters in the Senate, a long-term, grassroots effort to enact a stronger, simpler direct CO2 pricing approach will be needed.

Larson’s “America’s Energy Security Trust Fund Act” (AESTFA) would impose a steadily-increasing fee on carbon-based fuels upstream at the first point of sale and apply the revenue to reduce workers’ payroll taxes. Could there be a better time to encourage employment?

Larson’s 21-page bill is easy to understand. There are no offsets to monitor, report and verify; no carbon market for Wall Street to game; and over its life more than 95% of the revenue would go right to where it’s needed — into workers’ and retirees’ paychecks. Best of all, the carbon price would step up predictably by $10/T CO2 each year, with a bump-up in the rate to $15/ton if EPA monitoring indicates that the higher rate is needed to achieve the targeted emissions reductions. The Senate should substitute AESTFA, as endorsed by PDA, for the flawed and politically dead Kerry-Boxer cap-and-trade legislation.

Progressive Democrats of America was founded in 2004 when progressives, many with roots in the environmental, civil rights, labor, peace and social justice movements recognized the need for a strong progressive voice within the Democratic Party. PDA is urging supporters to contact senators and representatives to point out that AESTFA is the best answer to President Obama’s call for climate legislation to make clean energy profitable.

Rep. Larson’s bold proposal offers a win-win: it would put a clear, gradually-increasing price on CO2 pollution to reflect more of the real costs of dirty fossil fuels while simultaneously lifting taxation of workers that discourages employment and prolongs the recession.

Report from Copenhagen: Forget carbon targets, just set a price

12/19/2009 by James Handley

Copenhagen, 19 December 2009

While the mainstream press lamented the COP15 stalemate, and delegates struggled through the night to spin their impasse over “targets” and “verification” into some semblance of progress, the scene was harmonious, even jubilant at Klimaforum, the “people’s climate summit” near Copenhagen’s main train station Friday night.

Klimaforum negotiations coordinator Mathilde Kaalund-Jørgensen proclaimed to a standing room-only audience in the main auditorium that she had been admitted to the Bella Center (off limits to most non-governmental organizations since Wednesday), only to sit through hours of “very boring” speeches by heads of state, droning on about “urgency” and “binding targets.” The UN granted Mathilde just two minutes at its plenary session to introduce the Klimaforum Declaration. The consensus Declaration calls on industrialized nations to recognize and begin to pay their “climate debt” for the Earth’s accumulated greenhouse gas pollution that is already raining destruction and death disproportionately on developing nations. The Declaration rejects carbon trading, carbon markets and offsets as false solutions and perhaps most importantly, includes a clear call for a transparent carbon tax with revenue returned to the people.

After Mathilde’s remarks, Klimaforum closed with a rollicking, diverse celebration, including latin, kletzmer, waltz and folk music, dance and some good laughs. One musician played an impressive solo on an oboe he’d “up-cycled” from a plastic drinking straw. A speaker warned against cynicism and its evil twin, complacency; both block action and engagement. We are all products of an unbroken chain of millions of successful ancestors, he reminded us, who, at least for a moment, felt warmly about their mates. He pointed out that we each carry within us their accumulated success in adapting, cooperating and surviving. The Danish activists who had organized and obtained funding and space for the Klimaforum handed off the effort to a new team already planning an alternative summit at COP16 in Mexico City next year. “The people must lead” they said, “We will not wait for the so-called leaders.”

An apt ending to a week’s searing contrasts between pallid UN events and the lively and productive Klimaforum. Here’s how it went for me.

For the first week and a half of COP15, I divided my time between UN events at the Bella Center and the Klimaforum. While the plenary sessions were grinding along, the UN side events offered a wealth of information and occasional inspiration: British Columbia Premier Gordon Campbell was congratulated for enacting North America’s first revenue-neutral carbon tax which led in May to his comfortable re-election. The German government detailed ambitious plans for 95% reductions in GHG emissions by 2050, pointedly including a scenario in which carbon capture and sequestration turns out not viable. And at a session on monitoring, reporting and verification (MRV) of GHG emissions, I annoyed representatives of big accounting firms by pointing out that their Herculean (and lucrative) business plans to establish baselines and monitor GHG emissions would be unnecessary under a simple upstream carbon tax.

The dynamic shifted on Wednesday. I had planned to go to Bella Center for two side events in the morning and then head to Klimaforum for an afternoon presentation on carbon taxation. I had obtained the secondary credentials the UN was using to limit the number of attendees. On the Metro to Bella Center, delegates were ordered off at the Sundby station half a mile before the center. We marched through half-a-dozen police checkpoints between dozens of idling vehicles containing barking and snarling police dogs and lines of heavily armed police. From some points, we could see and hear throngs of protesters. They had planned a symbolic meet-up uniting supportive delegates inside Bella Center with those approaching from the outside. I saw a troupe of Latina women dressed as ears of corn nearly run down in mid-dance by a police van charging at full speed. Their corn husks crunched against the van as the women dodged, barely avoiding injury.

At the final checkpoint, in line to enter Bella Center, we were serenaded by Bob Marley tunes from a PA system powered by pedalling activists. I waited with two delegates from India. Their take: “Flopenhagen.” Inside Bella Center, guards scanned my credentials. The computer rejected me, and I was brusquely escorted by police armed with Glock 45’s out to the perimeter where the Marley tunes were still playing. Meanwhile, protestors were massing outside the gates; we could hear police yelling at them.

After taking a last look at the spectacle from Sundby station, I headed back to Klimaforum, where I met Friends of the Earth delegates who had also been locked out of Bella Center. FoE had elected not to participate in the demonstrations and try to work within the UN process instead, but it and many other NGOs were excluded anyway. They felt cheated, but also appeared glad to be on the “right side” of the new line between UN insiders and outsiders.

I arrived early to the Klimaforum presentation, Carbon Taxation – A forgotten climate policy tool, by Global Utmaning (Global Challenge), an independent Swedish think-tank. I was glad to meet presenter Carl von Essen who had contacted the Carbon Tax Center about our common pursuit of transparent, predictable carbon pricing. We chatted for a few minutes; he seemed very pleased to meet a rep from CTC. Their presentation was thorough, clear and well documented, covering the advantages of direct carbon pricing in reducing emissions and encouraging alternatives. Von Essen and his colleagues pointed out in countries where carbon revenue has been used to reduce other taxes, such tax shifting has produced economic benefits.

During the Q&A, I congratulated Global Utmaning on a terrific presentation and noted the excellent attendance (150 people packed the room). I mentioned our concerns with cap-and-trade: markets, traders, offsets, lack of clear price signals… and invited listeners to a discussion that I had arranged in the nearby “meshwork” area. Eight enthusiastic participants engaged for over an hour in a very substantive discussion about carbon pricing, including nitty-gritty details like border tax adjustments and ways to make the net effects of carbon taxes income-progressive. (Carl and his colleagues had headed for the Bella Center to try to make a similar presentation there.)

Last week I also attended two Klimaforum sessions featuring prolific and influential Guardian columnist George Monbiot. He decried policies that increase supply of both fossil fuels and alternative energy without reducing demand for fossil fuel energy. He’s especially critical of Canada’s plans to unleash the dirtiest fossil fuel: tar sands. I treated him to tea and we had a few minutes to chat. I told him we agreed on the need to reduce energy demand and mentioned our recommended tool: carbon taxes with revenue recycling. “You’re pushing on an open door,” he said encouragingly. At his session later in the week entitled: “Are you getting the climate agreement you came for?,” Monbiot mentioned climatologist Jim Hansen’s trenchant critique of cap-and-trade and called on me during a comment period. I explained some of the flaws of carbon trading and suggested a direct carbon pricing system. Later, Monbiot picked up the point, explaining that a carbon tax is a way to reduce demand for fossil fuels and put alternatives on a stronger footing. Perhaps he’ll adopt revenue-neutral carbon taxing as a future talking point. (Click here for Monbiot’s bristling valedictory from COP15.)

What does it all mean? Like so many, I came to Copenhagen with a vague hope for a “fair and binding” agreement. I now question whether that was even a good framework to begin with. “Fair” now seems to point toward an endless struggle over allocating rights to emit carbon; and “binding” to incessant legal wrangling over monitoring and enforcement. In contrast, Klimaforum showed that leadership doesn’t have to come from the top, whether the UN or our so-called leaders. And sadly, the UN showed that it won’t.

What’s a better framework? How about one major trading bloc (e.g., the European Union or the U.S.) setting a steadily-increasing carbon tax? That would create pressure for others to follow, as the carbon-taxing countries collected (and kept) the laggards’ carbon taxes for them at the border. In effect, penalize the laggards while offering a bounty of tax revenue for those that join. The only international agreement needed — if at all —  would be that every country will enact a carbon fee, along with clarification of World Trade Organization rules on border tax adjustments. Nations don’t even need to agree on the same carbon tax rate, since individual countries’ rates can be harmonized at the border.

Forget targets, verification, offsets, trading… And don’t wait for the UN. Just lead: set a carbon price. The world will follow.

Photo: Flickr / Iklimicingenclik.

Bipartisan Senate Bill Could Breathe Fresh Air into Climate Debate

12/11/2009 by Charles Komanoff

Two Senators reached across party lines and today introduced a climate bill that would limit carbon trading, return 75% of permit revenues to households, and close the giant “offsets” loophole in both the Waxman-Markey bill passed by the House in June and the Kerry-Boxer bill now stalled in the Senate. With its fresh, “cap-and-dividend” architecture, the bill might stimulate Congress to consider alternatives to the embattled cap-and-trade approach.

While the Carbon Limits and Energy for America’s Renewal (CLEAR) Act was largely written in recent months by Sen. Maria Cantwell (D-Wash.), its co-sponsorship by Sen. Susan Collins (R-Maine) is noteworthy because bipartisan support will almost certainly be needed to win the 60 votes required for passage.

According to a press release and fact sheet from Sen. Cantwell’s office, the CLEAR Act will:

• require reductions from 2005 levels in emissions of greenhouse gases of 20% in 2020 and 83% in 2050;
• return 75% of carbon permit revenues to households in the form of tax-free monthly checks averaging $1,100 per year for a family of four; the remaining 25% would go toward clean-energy R&D;
• prevent “Wall Street traders or speculators” from “manipulat[ing] prices or supply for consumers” by limiting participation in the permit market to the few thousand upstream entities with a compliance obligation — fossil fuel producers and importers.

Energy producers would bid in monthly auctions for “carbon shares.” According to the Cantwell statement, the bill “provides businesses and investors with a simple, predictable mechanism that will open the way to clean energy expansion while achieving America’s goals of reducing carbon emission[s].”

As the Senator told E&E Daily last month,

People are moving more toward something that’s much more streamlined. The bottom line is you don’t want to have added volatility to the market when trying to solve [the emissions] problem. … What you want is a predictable price so that people can move forward and diversify. (no link, since subscription required)

The Cantwell-Collins bill differs from Kerry-Boxer and Waxman-Markey in important respects:

• No offsets, vs. offset allowances of up to a third of current U.S. emissions in K-B/W-M.
• Guaranteed return of 75% of permit revenues to households, vs. a lesser and “squishier” percentage return in K-B/W-M.
• An attempt to tighten limits on permit trading.
• More ambitious reduction targets than in Waxman-Markey.

Still to be determined, however is how the limits on permit trading will interact with large energy users’ interest in hedging against the inevitable seasonal and cyclical price swings. Also of concern is the low “price collar” in the bill: a range of $7 to $21 per ton of CO2 in the initial year, 2012, rising each year at approximately 6% above inflation. CTC’s Carbon Tax Impact Model (download spreadsheet via this link) suggests that the economic incentives from this price trajectory will only lead to a 7.5% drop in U.S. CO2 emissions from 2005 levels in 2020. (And 2020 emissions would actually be 1.5% greater than the likely depressed 2009 figure). Reportedly, Cantwell’s staff believe that the clean-energy investment provisions in the bill will make up the to for the 20% goal, suggesting that they view the permit mechanism more as a funding source than an inducement to cut carbon directly.

Nevertheless, the Cantwell-Collins CLEAR Act is a milestone: the first bipartisan legislation that seeks to guarantee return of most revenues to American families and to limit speculative permit trading. It demonstrates that cap-and-trade is not the only mechanism for putting a price on carbon emissions. Perhaps it will open the door to serious consideration of the “gold standard” of carbon pricing: a revenue-neutral carbon tax.

Photo: Flickr / Casino Connection International.

Copenhagen Klimaforum To Press UN Delegates for Carbon Tax

12/10/2009 by James Handley

P.S. Final Klimaforum 09 PEOPLE’S DECLARATION Open to Signatories. See below.

Greetings from Wonderful Copenhagen, site of the UN Climate Change Conference (“COP 15/CMP 5”) December 7 to 18.

I took my first air trip in years to represent the Carbon Tax Center, the Citizen’s Climate Lobby , the Climate Crisis Coalition and the Price Carbon Campaign, and carry the message of Progressive Democrats of America: we want a simple, direct carbon pricing system with most of the carbon revenues “recycled” to households, so we can build support for a rising carbon price long into the future.

My main focus here is the gargantuan UN conference, and I’ll be reporting on it. Because I’m also interested in movement-building and alternatives, I’ve been dropping in on Klimaforum09, the “People’s Summit,” organized by NGOs and the Danish government as an alternative and complement to COP15.

Klimaforum implores:

We can no longer wait for politicians to finish their never-ending negotiations … Klimaforum is developing a global climate declaration expressing the hopes, ideas, and visions of citizens groups and social movements from all corners of the planet … The declaration will be finalized during the first four days of Klimaforum09 thus giving the participants a possibility to influence the [COP-15] process. [The] finished … declaration will be handed over to the political leaders at the COP15 supplying them with inspiration as to how a fair and just climate deal can be put together. Above all the declaration will be another stepping stone in building of a planetary movement for climate justice.”

On Tuesday, I attended a Klimaforum session on climate justice where Oscar Reyes from Carbon Trade Watch strongly critiqued cap/trade but dismissed carbon taxes, saying they would always be too low to do much good. Instead, he supported regulation and direct government funding of energy alternatives. I countered by explaining that recycling carbon tax revenues to households via direct payments or lower taxes on work could cushion the rise in fuel prices and make a steadily rising carbon fee or tax income-progressive rather than regressive. I noted Dr. Hansen’s support for just such a carbon fee-and-dividend, and circulated copies of his Monday New York Times op-ed essay.

Reyes seemed interested, and I was peppered with requests for more info. One was from a German journalist who knew about U.S. cap-and-dividend proposals but not about carbon taxes. I let him know that Sen. Cantwell’s cap-and-dividend proposal may be about to gain a G.O.P. co-sponsor, but I expressed concern that Cantwell’s proposed price ramp-up is too slow to incentivize the needed emissions reductions.

My next conversation was with a Danish journalist writing about the Klimaforum declaration. I described my carbon tax mission, and he introduced me to Anesha, a Klimaforum organizer, who strongly encouraged me to come to Wednesday’s session and work on the carbon tax text. Apparently no one had felt well-versed enough to do that yet.

The declaration draft impressed me with its clarity and conviction, and I went to the plenary session today, ready to make a pitch and to offer suggestions. A solo guitarist opened the session with three inspirational songs, each in a different language. His first song, “We Need You,” had this lyric: “… activists who overcome the petty details that divide them… I can tell you that we need them…”

Anesha introduced me; I described our organizations’ objective of instituting carbon emissions pricing to put efficiency and alternatives on a strong footing while phasing down fossil fuels. I mentioned an ad I’d spotted on the Metro here by Vestas, the Danish windmill manufacturer that holds a large share of the world’s market in industrial wind turbines, and has erected a windmill outside the Bella Center, site of the UN conference. The ad reads, “The time is now for a price on CO2.”

I explained that without a price on carbon, “cheap” coal will continue to undercut and block financing of wind power and other alternatives. I asked my audience to put themselves in the position of someone seeking to build a wind farm. She would need to be able to show investors or a bank that sales of wind-generated power will generate the funds to pay off her wind farm. A predictably rising carbon price would be far more persuasive than a fluctuating price under cap-and-trade. I also mentioned the problem of offsets which seemed familiar to everyone, and our concerns about markets and traders. I then proposed adding italicized text to the end of the first paragraph of the summary:

Reductions of emissions must be strongly encouraged by a briskly-increasing, transparent carbon fee in addition to direct regulations to drive the phase-out of fossil fuels, while enabling safe, clean and renewable energy.

And adding to the text:

“Tax on CO2. Instead of the regime of tradeable quotas, we demand a tax on CO2, rising briskly enough to encourage the implementation of low-carbon energy with the phase-out of fossil fuels. Large portions of carbon tax revenue should be used to reduce taxes on work, in order to encourage and stimulate employment. A portion of revenues should finance a global fund to be reinvested in just and sustainable projects in the Global South.

I’m hoping that Klimaforum09 will send the UN delegates a message (or two) about the urgency of the climate situation and the need for effective policies that can be implemented quickly and widely; led by simple, straightforward carbon taxes with revenue recycled to workers and families.

Photo: flickr / Mikkel Inumineq Jorgensen

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POST SCRIPT: Final Klimaforum 09 PEOPLE’S DECLARATION Open to Signatories (Copenhagen, Dec. 11, 2009)

Kilmaforum issued the final People’s Declaration Thursday evening.  I’m pleased that we agreed to include a provision advocating aggressive carbon taxation, reached by consensus, which reads:

Equitable tax on carbon emissions: Instead of the regime of tradable emission quotas we demand an equitable tax on carbon emissions. Revenues from this carbon tax should be returned equitably to people, and a portion should be used to compensate and contribute to finance adaptation and mitigation. This is, however, not a substitute for repayment of already accumulated climate debt. This compensation and funding should be unconditional and free of market mechanisms and financial institutions. Reduction of emissions must be strongly encouraged by a briskly-increasing, transparent carbon tax, in addition to direct regulations to drive the phase-out of fossil fuels, while enabling safe, clean and renewable energy.”

I am especially pleased that we agreed to include:

- explicit rejection of tradable emission quotas (allowances),

- equitable return of carbon revenue to people,

- briskly-increasing, transparent carbon pricing to drive emissions reductions and promote low-carbon alternatives.

We are seeking sign-on, especially by NGOs.  Klimaforum intends to covey this Declaration to COP-15 next week.

Senate’s New Openness to Carbon Tax Demands New ‘Framing’

12/2/2009 by Charles Komanoff

With the ranking Republican on the Senate Energy & Natural Resources Committee now urging serious consideration of a revenue-neutral carbon tax, we carbon-tax advocates may want to re-examine our “framing,” even as we call upon cap-and-trade supporters to unite with us behind a carbon tax.

Let’s start with today’s news from GreenWire’s Darren Samuelsohn, which was picked up by The New York Times, that the ice jam blocking sound climate policy is finally beginning to break up:

The Senate climate debate detoured from cap-and-trade legislation today as the Energy and Natural Resources Committee weighed alternatives like a carbon tax or even sector-specific limits on power plants.

“We need to dispense with the blind loyalty to cap and trade, or at least begin to question if it is warranted,” said Sen. Lisa Murkowski (R-Alaska). “We should objectively review the strengths and weaknesses of our policy options and develop a measure that protects both our energy and the environment.”

Murkowski, the committee’s ranking member and a co-sponsor last year with Democrats of a cap-and-trade bill, said Americans now associate the cap-and-trade concept as a tax that will raise prices on a range of consumer goods. That, she added, should prompt Congress to consider other less-expensive legislative approaches that take aim at reducing greenhouse gas emissions.

“We need to be honest about those costs, and ensure that the revenues associated with them are returned to the people who will bear the burden of compliance,” Murkowski said.

Here are my takeaways from Murkowski’s statements:

1. The odds for passing the Waxman-Markey / Kerry-Boxer cap-and-trade bill are worsening steadily.
2. With Sen. Bob Corker (R-Tenn.) and Rep. Bob Inglis (R-So. Carolina) already in the fold, a semblance of a “GOP Caucus for a Revenue-Neutral Carbon Tax” may be starting to emerge — in contrast to monolithic Republican opposition to carbon cap-and-trade.
3. The political fallout from cap-and-trade has the potential to make winning public acceptance of a carbon tax even tougher.

The import of Takeaway #3 is obvious: Committing to revenue-neutrality may not be enough to push a carbon tax through the political fog and past the fossil-fuel lobby. And rhetorically tying the carbon tax to a tax-shift and/or dividend may not suffice, either. Radical re-framing may be in order.

One possible approach is to push the tax dividend before the tax itself. That’s precisely what the Canadian environmental campaigner and writer Silver Donald Cameron did in an essay last month, Tax Those Carbon Gluttons:

LEMME TELL YOU about a carbon tax you’re gonna love… The fun starts with the government giving you maybe $2,000 as a carbon dividend.

You like it so far? Thought so. And the government gets the money by imposing a tax on everything that emits carbon dioxide into the air. The total amount raised by the carbon tax is the same amount that’s being distributed as a dividend. So it’s a wash. The government is no better off at the end of the day.

But you’re better off — if you’ve been frugal with energy, living in a snug house with solar hot water and wood heat, travelling on public transport, eating local food. You lose a bit of your dividend in taxes on gasoline and electricity and what-not — but you get to keep a good chunk of your carbon dividend. Let’s say you pay $400 more in taxes. That money just reduces your windfall dividend. The carbon tax still leaves you $1,600 ahead. How does that sound, sonny?

Fred Foulwater doesn’t.

Fred’s a carbon glutton, so he’s definitely worse off. Sure, he also gets his $2,000 dividend — but he lives in a huge house in the outer suburbs, he doesn’t turn down his thermostat and he commutes 60 kilometres to work in a monstrous SUV. He has a penchant for exotic tropical fruit in midwinter and he flies a lot, so in the end he pays a lot of tax — which doesn’t exactly feel like a tax, but feels like higher prices. Let’s say Fred’s profligacy adds $3,600 to his overall tax bill. So the new taxes have eaten up all of his $2,000 dividend — and another $1,600 besides. That’s the $1,600 that ended up in your pocket, buddy.

Pollute if you want. Buy junk if you like. Emit as you choose. But it’s going to cost you — and the money captured from you goes directly to your clever neighbours. As time goes by and the whole society becomes more serious about slashing emissions, the taxes and the dividend go up. Stupidity becomes more and more expensive.

(Emphases added.  Cameron’s piece is no longer available at its original Nov. 22 posting at the Nova Scotian / Chronicle Herald, but by clicking here you can download it as an MS-Word doc.)

I happen to like Cameron’s messaging. A lot. I like that he puts the “dividend” up front. (By the way, the dividend could be a tax cut  as well as a check, though the check seems cleaner and clearer.) I like the libertarian, “Pollute if you want … But it’s going to cost you.” And I like the simplicity.

A carbon tax, even revenue-neutral, has always been a tough sell. The fact that cap-and-trade has been partly branded as a carbon tax might make the sell tougher still. But we may be breaking through the “That’s politically impossible” screen. With the right messaging, we could get there — into and through Congress — even faster.

Photo: Flickr /Anna.Andres

Memo to Sen. Kerry: Climate Science Includes Economics

11/12/2009 by James Handley

U.S. climate activists are gleeful at Sen. John Kerry’s demolition of a sometime climate skeptic at a Senate Finance Committee hearing on Tuesday, and justly so. Ken Green, a resident scholar for the corporate-financed American Enterprise Institute, won the respect of carbon tax advocates two years ago, when he co-authored an AEI report that powerfully made the case for a revenue-neutral carbon tax over a cap-and-trade system. But as an invited witness on Climate Change Legislation: Considerations for Future Jobs, Green attempted to argue that Earth’s ecosystems and human civilization could safely accommodate a global temperature rise of 2 degrees Celsius, though he admitted that any larger temperature rises would be dangerous. Kerry skillfully “outed” Green as an amateur in climatology who had published no peer-reviewed studies and could point to none to support his climate blandishments.

The interchange, summarized in a 6½-minute video assembled by Joe Romm at Climate Progress, showcases Sen. Kerry’s skill as a cross-examiner and reveals just how flimsy and muddled the case questioning the climate crisis really is. Lost in the euphoria, however, is evidence of the Senator’s own confusion — not on the need to act to avert climate catastrophe, but on the workings of competing means of pricing carbon emissions.

In an earlier part of this week’s hearing, Sen. Kerry repeated a point he made in an August 4 Finance Committee hearing on Climate Change Legislation: Allowance and Revenue Distribution: a carbon tax wouldn’t reduce emissions, Kerry claimed, because polluters would “just pay the tax,” whereas a cap would force them into making the desired reductions.

Of course, as anyone versed in climate economics knows, and as the economist-witnesses explained in August, a carbon price of, say, $20/ton would produce the same emissions reductions whether the price was set by traders in a carbon market or directly via a fee on fossil fuel producers. Under a cap with a $20/ton permit price, emitters would have no greater (and no less) incentive to reduce emissions than they would under a $20/ton tax. Reductions that can be made for up to $20 per ton will be made in either system because they will yield the same savings — as permits that wouldn’t need to be purchased under a cap, or as taxes that wouldn’t have to be paid under a tax. Similarly, reductions costing more than the set price won’t be made because it will be cheaper to “just buy the permits” (to adapt Sen. Kerry’s phrase), or “just pay the tax.”

Under either system, then, emitters retain the flexibility to make reductions when those reductions are cheaper than the carbon price and to pay the allowance cost or tax if that turns out to be cheaper. That flexibility about where, when and how to make reductions is why either a carbon cap or tax is more efficient than source-specific regulations which would force emissions reductions at times and places where they’re more expensive and would miss some reductions that were cheaper.

In the August hearing, Sen. Kerry questioned whether American businesses and households would actually respond to higher fuel and energy prices. In doing so, Sen. Kerry overlooked the vast body of evidence quantifying price-elasticity in virtually every sector of the U.S. economy. He also had evidently forgotten what happened during the summer of 2008 when gasoline hit $4/gallon: traffic congestion eased, carpools, buses and trains filled up, and SUV sales tumbled. And that was only the short-term effect of a price spike; a long-term, predictable carbon emissions price increase would allow sound business planning and create incentives for long-term investment in energy efficiency and low-carbon alternatives.

And that points to a key reason that cap-and-trade is an inferior way to set a price on carbon: the price signal under a cap would be “noisy” due to both volatility and the fact that the price must be “revealed” through the market workings of the cap rather than being stated, explicitly, in the tax code. That noise means that with cap-and-trade it takes a higher price for the economy to “hear it” and respond, even if the general trend is upward.

Sen. Kerry is on solid ground relying on peer-reviewed climate science. But his ongoing misunderstanding of the workings of carbon pricing is almost as shocking as the AEI witness’s misrepresentation this week of climate science. It’s past time for both sides to get it right: The consequences of unmitigated climate change will be grave, whereas clear, simple, predictable carbon pricing is essential to catalyzing the solutions.

Photo: Flickr / The Minnesota Independent

Carbon Tax is on the (Round) Table at the Cosmos Club

11/7/2009 by James Handley

How do you get inside Washington D.C.’s exclusive Cosmos Club? With an invitation to present on behalf of the Carbon Tax Center in a “roundtable” discussion, “Transatlantic Perspectives on Market Mechanisms for Curbing Carbon Emissions,” hosted by the European Institute. Here’s my report of the panel this past Wednesday.

Peter Zapfel, Assistant Deputy Director General of Environment at the European Commission kicked off the session by conceding that the EU’s Emissions Trading Scheme (ETS) had experienced serious difficulties, but he contended that they are being remedied. The EU and the UN are improving oversight of offsets, he said, and the ETS is moving toward full auctioning of allowances and away from free allocation that gave windfalls to emitters. Zapfel also asserted that the ETS has tightened up its initial over-allocation of allowances. The overriding imperative for the U.S., Zapfel stressed, is to price carbon.

Anne Lammila, from Finland’s Mission to the U.S., said her country had exceeded its Kyoto reductions quotas but had found offset verification under the UN Clean Development Mechanism (CDM) “laborious” and “expertise-demanding.” Lammila enthusiastically endorsed Finland’s carbon tax which she said has reduced emissions by 5% below the previous trend and stimulated renewable energy investment and development. Energy taxes are now a major source of government revenue, she said, and are curbing growth in energy use and promoting efficiency while Finland’s economy expands. Lammilla said nearly everyone in Finland is “convinced of the need to act now” on global warming. She also stressed that climate policy had created jobs in her country, including more jobs for women.

Sylvain Garnaud, North American president of LaFarge Cement, the world’s largest cement manufacturer, acknowledged that cement manufacturing is a large CO2 emitter but not, in his estimation, vis-à-vis other building materials on a lifecycle basis. According to Garnaud, cement production generates 5% of CO2 emissions worldwide, the great bulk from China. Garnaud called cement manufacture a trade-exposed industry, with 10% of U.S. demand now met by imports despite 15% additional costs for shipping. On “cap vs. tax,” Garnaud said that the important point is CO2 “price visibility and a level playing field.” He hoped the U.S. would soon set a climate policy rather than “continuing discussions for another 30 years.” Garnaud opined that the “poor market functioning” of the EU ETS is “not endemic to cap-and-trade.” He suggested that a carbon tax could complement a cap, particularly to cover uncapped sources. Garnaud said LaFarge joined and is achieving the World Wildlife Federation’s program to cut its 1990 emissions 20% by 2010.

Moderator Mark Hopkins (of the United Nations Foundation) asked why the U.S. has such a high level of skepticism about global warming. He noted that no U.S. president has ever devoted even a substantial part of a speech to climate. He also asked panelists about the problem of carbon market volatility which “doesn’t necessarily give clear planning horizons” to businesses and investors.

Zapfel responded that “in the U.S., volatility seems to be a bad word,” but he thinks the adjustable prices in EU’s ETS have benefits. Falling prices during a recession provide a “countercyclical stimulus,” he said, while also touting the possible advantage of a falling allowance price in the event of a technological breakthrough. Zapfel also claimed that ETS trading prices are becoming more stable.

Boyden Gray, White House counsel in the Bush père administration and a principal architect of the U.S. SO2 emissions trading system, suggested that there is little “systemic risk” to the U.S. economy from cap-and-trade. But he was concerned about the prospect that volatility would enrich traders, pointing to the recent op-ed by Sen. Gillibrand touting carbon trading as a salvation for Wall St. He criticized even the limited inclusion of auctioning in the Waxman-Markey and Kerry-Boxer cap-and-trade bills, claiming that distributing 100% of permits to emitters would do away with volatility.

The EU’s Zapfel pointed out that the windfalls reaped by utilities in the EU ETS had “seriously damaged their reputations. ” He advised against free allocation of allowances, noting that the EU is moving as quickly as possible toward full auctioning.

Gray disputed the notion that utilities would reap windfalls from free allowances, since they would bear the compliance cost.

Washington Post reporter Dan Morgan asked how agricultural interests had been addressed in the EU’s climate system. Zapfel replied that EU agricultural interests played only a minor role in setting their climate policy because of the EU’s long-standing common agricultural policy which creates stability. He noted that agricultural interests had not sought offsets.

William Ferretti of the Chicago Climate Exchange led off the second session, on the “practicalities of carbon trading.” CCE manages a voluntary exchange which he said members join “in order to get ready for a federal system,” to “provide accountability to shareholders about carbon footprint” and to “monetize their reductions.” CCE also manages permit trading on RGGI, the Northeast states’ Regional Greenhouse Gas Initiative. He touted the “price discovery” process of markets and supported the proposals in climate bills to increase the auctioning of permits over time.

Kevin James of Climate Change Capital criticized the UN CDM (offset) verification process as slow and “very poorly operated” and unlikely to provide enough verifiable offsets to satisfy the huge demand created by climate legislation. He also said participants in the offset market had misunderstandings. For example offsets produced in Brazil and sold into the market cannot be counted toward Brazil’s reductions.

I opened my presentation suggesting that the most practical carbon market is no market at all. Then I read a snippet from Al Gore’s “Earth in the Balance” (1992) advocating a “C02 tax completely offset by reductions in other taxes…” I showed the graph of historical price volatility in the EU ETS: volatility that enriches traders but can bankrupt or prevent the establishment of alternative energy firms. I described Stanford Law Prof. Michael Wara’s finding that offsets in Waxman-Markey could delay U.S. emissions reductions for two decades, and I discussed the Carbon Tax Center’s findings that Rep. Larson’s proposed carbon tax with payroll tax reductions would produce roughly 2-4 times the domestic emissions reductions of Waxman-Markey or Kerry-Boxer.

William Nitze (chairman of the Climate Institute and EPA Assistant Administrator For International Affairs (1994-2001)) observed that Congress has a regional problem: the southeastern U.S. is powered by “very cheap grandfathered coal fired power … their rates are in the around 5 cents per kWh while most of the rest of the country pays 8 cents or more.” Nitze said that while “there’s no getting around the need to raise fossil fuel prices,” politicians will do their all to shield their constituents from price increases for as long as they can.

The Post’s Morgan asked how Congress can gain support from agricultural states for climate policy without offsets or other benefits to agriculture. Zapfel said the EU hasn’t faced this problem because agricultural interests have long been more protected in the EU. He suggested that some revenues could support forestry management and no-till farming in much the same way that the related practices of soil and water conservation are supported.

“I may be the one of the few [people] who actually enjoyed reading EPA’s [proposed] greenhouse gas rule,” Gray quipped. He noted that EPA is invoking the doctrine of “absurd results” in order to exempt millions of small sources of CO2. Since it would be “absurd,” the agency reasons, to regulate so many sources, EPA’s proposed rule would raise the threshold for regulation to 25,000 T/CO2 and thus restrict regulations to fewer than 1,000 sources. Gray cited the Washington Post editorial that the Clean Air Act is “breathtakingly unsuited” for regulation of greenhouse gases. The Post’s conclusion, Gray observed, implies that the Supreme Court’s decision affirming EPA authority to regulate greenhouse gas emissions is “breathtakingly wrong,” a result he is confident the courts would reject. Thus, Gray expects the EPA rule to (eventually) survive legal challenges.

Photo: Cosmos Club, Erik Hess (flickr)

Progressive Democrats Say: “Cut Out Wall Street — Price Carbon Directly and Recycle Revenue to Households.”

10/20/2009 by James Handley

The growing movement for transparent carbon pricing to combat global warming reached a major milestone this week: Progressive Democrats of America, the nationwide grassroots voice for progressive values founded in 2004, has strongly endorsed direct carbon pricing to create incentives for a transition to renewable, low-carbon energy. PDA also advocates “recycling” substantial carbon revenues to households to counteract the potentially regressive effects of carbon pricing and to build long-term public support for carbon pricing

PDA played a key role in the Democratic Party’s surge in the 2006 mid-term elections, as well as in the Democrats’ 2008 victories. Its board includes prominent members of the Progressive Caucus as well as peace, labor and civil rights advocates. PDA says that it seeks to reclaim the Democratic Party as a voice for the people by educating, organizing, and lobbying within as well as outside the Party. Its statement follows:

Global Warming Policy Statement, adopted Oct. 19, 2009. (Footnotes omitted.)

No issue is more of a threat to civilization than the accelerating menace of catastrophic climate destabilization.  To avert this disaster, we must make a collective, long-term investment in a new energy infrastructure in order to protect the welfare of future generations.

Focus group research shows that the “…public has come to view clean energy as an immediate and long lasting economic driver,…something that is vitally important to the health of our economy.”  Scientists call for urgent action: “Continued growth of greenhouse gas emissions, for just another decade, practically eliminates the possibility of near-term return of atmospheric composition beneath the tipping level for catastrophic effects.”

PDA calls on the President and Congress to lead boldly in reducing our country’s oil dependence and use of fossil fuels by investing in walkable, bikeable communities, efficient public transportation, energy conservation technologies and alternative energy development, which all create good-paying and dependable jobs.

PDA supported 2008’s “climate principles letter” circulated in the House of Representatives.  To repeat and expand upon its goals, we agree that climate/energy legislation should meet these criteria:

1. Reduce greenhouse gas emissions on a long-term trajectory that will avoid the worst effects of global warming;

2. Transition the United States to an efficient, clean energy economy by putting a price on carbon that will guide investment and personal decisions on every level and lead the world with both incentives and example;

3. Recognize and minimize any adverse economic impacts from global warming legislation and build political support for a price on carbon pollution by “recycling” carbon pricing revenues directly to households; and

4. Aid communities and ecosystems vulnerable to harm from global warming.

To help achieve these goals, PDA supports revenue-neutral direct carbon pricing over carbon trading.

Direct carbon pricing:

1. Can push America toward an efficient, clean energy economy, and reduce greenhouse gas emissions on a long-term trajectory, by providing a gradually-increasing price on carbon pollution;
2. Can minimize adverse economic impacts of legislation by “recycling” a substantial portion of carbon revenue to households through a direct “carbon dividend” or a payroll tax reduction;
3. Can provide revenue to aid communities and ecosystems vulnerable to harm from global warming;
4. Reduces the need for complex and difficult-to-verify regulations and cannot be gamed in a multi-trillion dollar unregulated secondary energy trading market;
5. Eliminates offsets, which are difficult to measure and substantiate;
6. With WTO-sanctioned border tax adjustments would create immediate incentives for international implementation, as all countries have a taxing mechanism in place but few (if any) can manage a complex carbon trading system;
7. Can be set at levels to form the basis for international cooperation and treaties to reduce greenhouse gases to levels consistent with the findings of the IPCC; and
8. Would maintain the EPA’s authority to regulate carbon emissions.

The Carbon Tax Center welcomes PDA to the movement for a clear, simple, effective and fair carbon-pricing system as a key component of climate policy.

The Three Newest Flaws in Cap-and-Trade

09/29/2009 by Charles Komanoff

Democratic Senators Barbara Boxer (CA) and John Kerry (MA) are expected to introduce their long-awaited climate-change bill tomorrow. As the Houston Chronicle reported last weekend, the bill was delayed for months “by negotiations aimed at appeasing moderate Democrats worried that new emissions caps could impose hefty economic costs on the energy industry, struggling manufacturers and coal mining.”

The Boxer-Kerry bill is expected to be modeled after the Waxman-Markey bill that squeaked through the House in June. This means it will employ the cap-and-trade architecture that underpinned the 1997 Kyoto Accords and has been the cornerstone of the U.S. Big Green lobby’s legislative offensive on climate ever since.

[Addendum: The 821-page Boxer-Kerry "Clean Energy Jobs and American Power Act" was introduced Sept. 30. Go here for text, or here for section-by-section summary. -- C.K., Oct. 1.]

Cap-and-trade has been attacked on many grounds: lack of a clear price signal, inherent complexity, and necessary reliance on trading mechanisms that would unleash a pandora’s box of financial machinations that could destabilize global finance. Of late, three new objections have surfaced against cap-and-trade as an “architecture” for reducing greenhouse gases. Each is worth considering as the Senate begins tackling climate legislation in earnest.

The first concerns what has heretofore been billed as cap-and-trade’s greatest virtue: its foundation on a quantified emission target, i.e., a “cap.” Alas, the nature of a cap is to be fixed, and therefore not adaptable to changing circumstances — including, now, the sudden drop in U.S. emissions.

As everyone knows, the Great Recession has shrunk economic activity in the United States. And fossil fuel burning and CO2 emissions have been shrinking particularly fast. Consider just one sector, albeit a key one: coal-fired electric power generation.

Until very recently, coal-fired power plants were responsible for almost a third of all U.S. emissions of carbon dioxide. This year, however, the bottom has fallen out.

First-half 2009 figures released last week by the Energy Information Administration show an almost 13% drop in electricity generation from coal and an attendant 11% drop in the physical tonnage of coal burned to make power vis-à-vis the first half of 2008, as coal has absorbed the entire unprecedented 5% drop in overall electricity production. By my calculations, this six-month drop in coal burning alone has already translated to 106 million fewer metric tons of carbon dioxide, singlehandedly reducing total annual U.S. emissions by almost 2%. If continued through December, the 2009 decline in coal burning would cut U.S. emissions by 3% from 2005 levels, thereby achieving, in one sector, almost a fifth of the Waxman-Markey target of reducing 2020 emissions by 17%,

Yes, emissions will eventually “rebound” as economic recovery takes hold. But not all of the lost output will be made up. Moreover, some observers, The Earth Policy Institute’s Lester Brown among them, believe that much of the sudden drop in coal-fired and other emissions is due to emerging structural factors such as fuel-efficiency standards, the liftoff in renewable energy, and more widespread awareness of the perils of oil dependence. These developments too are cutting the Waxman-Markey 17% target down to size. While in theory this “stature gap” could be restored by writing a tougher target into the Senate bill, in practice it’s unlikely the bar will be raised this fall, or ever. If so, the vaunted “emissions certainty” in cap-and-trade will lock in a hollow achievement.

The second new flaw, variously referred to as the “voluntary reductions conundrum” or the “virtue dilemma,” concerns the prospect that under a cap-and-trade regime, any “extra” steps to reduce CO2 emissions stand to be canceled out by corresponding increases in emissions that the cap enables somewhere else. In effect, any action to, say, ride a bike instead of driving (or, on a larger scale, to create a bicycling infrastructure that can replace thousands of car trips), or to permit a wind-turbine farm whose output allows the grid to cut back on fossil-fuel generation, ends up creating “room” under the cap that lets other parties increase driving or coal-burning and emit the “saved” emissions.

The mechanism for this perverse consequence of a carbon cap would be a decrement in the auction price of allowances due to the increment in bicycling or wind output, encouraging a corresponding increment in driving or fossil-fuel power generation elsewhere within the capped entity. In effect, the celebrated cap in cap-and-trade dictates an emissions equilibrium that, in turn, vitiates any given decarbonizing measure which, absent the cap, would have reduced emissions.

The implication is troubling, to say the least. No more could one promote a proposed renewable-energy or energy-efficiency project as a climate-saver, if its fossil-fuel-saving virtue will be offset by an equal helping of fossil-fuel vice somewhere else. At the same time, a dirty-energy project (or failure to implement a clean one) could be justified on the grounds that the resulting propping up of allowance prices will enable other low-carbon investments or behaviors to come into being and pick up the slack. The idea that “the cap will provide” turns out, it seems, to be a two-edged sword.

The third and last cap-and-trade flaw attracting notice concerns transnational fungibility. Shorn of its recondite name, it denotes the difficulty if not impossibility of establishing a normative quantity-reduction target for greenhouse gases. In a nutshell, if the U.S. were to establish an emissions reduction goal of 17%, or any other number, for 2020 or any other future year, by what criterion should that target be deemed appropriate for any other country? After all, the United States emits twice as much CO2 per capita as comparably wealthy countries in Europe, and, of course, 5 to 20 times as much per person as China, India, Brazil, et al. (And this comparison doesn’t reflect the even greater disparities in historical or aggregate emissions.)

Needless to say, this problem of fungibility, or its lack, doesn’t apply to a carbon tax. A U.S. carbon tax of so many dollars per ton of CO2 might or might not be the “optimal” level, but it would at least translate fairly and equally across borders, disadvantaging manufacturers in every nation more or less equally. Moreover, as Elaine Kamarck has pointed out, many countries lack the administrative capacity to manage a cap-and-trade system, whereas most governments can at least collect taxes.

Nor would a carbon tax be beset by flaws #1 or #2. The impacts of a carbon tax on U.S. investment decisions, infrastructure provisions and personal behaviors will be relatively unaffected by aggregate contractions in emissions. Moreover, unlike cap-and-trade, a carbon tax won’t undercut virtue but will reinforce it, since each and every elimination of emissions will be rewarded by a corresponding reduction in the tax.

At this point, cap-and-trade seems to have little going for it other than institutional inertia. Let us hope that all of its drawbacks are closely and fairly scrutinized in the Senate debate now set to begin.

Photo: David Pine, rising tide north america

Senate Warned: Cap & trade Volatile, Offsets Ineffective

09/16/2009 by James Handley

CTC Washington rep James Handley shares his notes from yesterday’s Senate Energy & Natural Resources Committee hearing on price volatility and cost containment for cap & trade:

I was encouraged. Many Committee members seem interested in working to make cap & trade more like a price mechanism via a “price collar.” “Revenue recycling” also came up. “Carbon tax” was discussed more than I’ve heard since the House Ways & Means hearings last spring. There was considerable candor and minimal posturing. My summary is a bit long, but the entire hearing was compelling and perhaps significant. I’ve bolded some of the highlights.

(Chairman) Sen. Bingaman: Price volatility as well as total cost, important concerns…

Sen. Murkowski: Climate is serious problem. Alaska witnesses. One reason Lieberman-Warner failed is that it didn’t control costs adequately.

Opening Statements:

Brent Yacobucci, Congressional Research Service: Price collar (floor & ceiling) most comprehensive way to control volatility and overall costs. Ceiling / safety valve is cash payment in lieu of buying allowances. RES passed by ENR does include “safety valve.” Lower limit, — reserve price. ACESA strategic reserve– not certain effective.

Eileen Claussen, Pew Center on Global Climate Change: Cap provides way for gov’t to set limit, business to meet limit with flexibility. Price of offsets and low carbon technology determine allowance price. EIA says if int’l offsets barred, would increase allowance price 65%. Low carbon tech– CCS and nukes would reduce climpliance costs. Multi-year banking provides “when” flexibility for redxns in cap/trade. Advantage of cap — slow economy carbon price drops– automatic adjustment. C-tax would require gov’t to intervene. Strategic reserve pool similar to price cap– w/o detracting from envt’l integrity.

Michael Wara, Stanford University (Law): Researched emissions trading, offsets under (UN, EU) CDM. Two conclusions: 1) offsets cannot provide cost control and environmental integrity. 2) price collar can provide both. Need durable program, thru 2050. CDM experience suggests that env’tl integrity [of offsets] difficult to measure. Establishing envt’l baseline — difficult. Hardest in heavily regulated sectors. E.g., China, energy sector already regulated, includes subsidies, regulations that already favor renewables and nat’l gas. Can’t determine if benefits are additional. Difficult to produce large enough quantity of credits/ offsets (to manage allowance price). ACESA 20 – 50 times larger than CDM and need higher envt’l integrity. ACESA dependent on offsets. Most redxns — offsets, rather than covered entities. Quantity certainty in doubt. (Price) collar = superior price control. Use $ from price collar to fund GHG reduction projects. Recommends collar instead of offsets.

Joseph Mason, Louisiana State University: Two approaches: quantity (cap/trade), price (carbon tax). Cap/trade assumes banking and borrowing can be optimized. But central banks’ experience with monetary policy shows that controlling money supply (or allowance supply) is very problematic. Bagehot’s rule: liquidity crisis addressed by “lending freely at a penalty rate.” Fed’s “discount window” for lending to banks not used much now. Similarly reserve requirements not used to control monetary policy. Tools for monetary control not well understood and can be gamed by speculators — might try to run up prices to game the bank. banking leads to hoarding, attempts to corner markets. Expiration dates on permits call to mind Zimbabwe’s currency which has expiration dates. Convoluted market design is un-necessary, carbon tax accomplishes directly. Borrowing institutional structures from one realm (monetary system) and applying to another (carbon trading system) rarely works. Tax achieves goal of price certainty.

Jason Grumet – Bipartisan Policy Center: Support price collar, strategic reserve and aggressive oversight of market. Tremendous uncertainty — offsets. 1 billion very unlikely to be available.

Q/A:

Sen. Bingaman: Int’l forestry projects — need to fund. Offsets?

Wara: Need 1) objective baselines, quantify offsets, 2) solidify property rights in develping countries. W/o certainty of prop ownership, more uncertainty about land use. Major developing co’s — delicate issue = land titles.

Grumet: largest source of int’l offsets = forestry. but not avail next 12 – 36 mos.

Claussen: Real possibility, US engage in int’l forestry regime.

Bingaman: EU not recognizing foresty offsets b/c no baseline. Domestic offsets?

Wara: Ag offsets very difficult to do well. Already have programs for tillage. Can monitor smokestack. Field isn’t smokestack. Soil varies, history varies, water, weather… many quantification problems.

Sen. Murkowski: House bill relies so heavily on offsets. People at home scratching heads. How does it work? Rob’t Shapiro (former Clinton Admin) says “trillion dollar mkt securitized by Wall St.” How avoid? Carbon Tax?

Mason: to stabilize prices, (carbon) tax avoids problems. Offset verification, similar problems to mortgage verification. reckless to go into new market. Prop rts critical. must be stable to sell meaningful offset. Developing co’s have political instability. Big investment in offsets could lead to another bailout. Parties (buyer and seller) have incentive to overstate value, game system.

Grumet: Bipartisan carbon tax proposal would gain steam if someone would propose. short of that, collar = elegant solution. reduces potential for malfeasance.

Sen. Cantwell: Mason’s testimony is “music to my ears”. Specificity in EU. Enron needed “the tape” of “get grandma” to trigger investigation. Now see problem in EU. System inherently favors special interests. Predictability = different way.

Mason: Insulate mkts from those w/ overt interests. In Britain, speculators intervened to push strategic reserves. Tax doesn’t need to be set to internalize all costs. Even nominal “user fee” encourages some behavior change. Might get 80% of benefit with moderate price. Can do today.

Sen. Cantwell: Benefit of floor?

Grumet: Wall St / spec interests. but also want to stimulate innovators. floor reduces price uncertainty– now investors must assume zero carbon price. $10 could do a lot.

Wara: Floor means (green energy) investors can go to bank and borrow. EU — downside risk actually greater than hi prices.

Sen. Corker: Rube Goldberg notion – vehicle. price volatility. Why don’t climate chg advocates level and say we need higher C price? floor would reward investors. Why not tax? (I restrained my impulse to applaud.)

Claussen: Would support carbon price / tax if high enough to get redxns. Offsets are low cost reductions.

Sen. Corker: Isn’t a tax a better approach? Aren’t int’l offsets just wealth transfer abroad? Why not recycle revenue into our economy?

Wara: “Vast majority” of reductions would be offsets (under ACESA).

Sen. Corker: Safety valve + price floor, in essence carbon tax. Wish public could hear all this.

Sen. Shaheen: Not sure public should hear. Public would be concerned. how set prices? Market? How do cap and limit prices w/o interfering in market?

Grumet: “Interference” with volatility is salutory. Set floor at $13 – 15 and ceiling at 2x, eg $28 would get redxns. $20 price makes electric convert. $25- 30 sustained.

Claussen: support price floor (but not ceiling). Hard cap, too high. strategic reserve better than price ceiling.

Sen. Shaheen: how set floor?

Grument: price needs to support technol investors. clarity that there will be a price would help a lot. eg $10 floor rising 5 – 10% would be very meaningful. if too low, lose potential to encourage innovation. rate (eg $8 vs 15) is political decision, but certainty is very imp’t.

Mason: Price is zero now. dithering– waste time, investment. Objects to cap/trade because of well identified externality problem. do not know what right amount of carbon is. (unlike acid rain.) could start with modest carbon tax, and later change to quantity-based system.

Sen. Stabenow: quantify Ag offsets. Sec’y of Ag doing great job. Price collar– agree floor and ceiling. also support offsets. Wara — critical of offsets. “Smart design choices” eg re deforestation. Would you eliminate offsets? CBO found that w/ offsets, allowance price in 2030 ~ $40/T. w/o offsets, $138/T. Share Corker’s observation — int’l offsets– want reductions where “ton of carbon = ton of carbon.” Offsets vs Collar?

Wara: Both design, better than offsets alone. mulitple parties favor cheap offsets. Buyer and seller. regulators have wide discretion. pressure to create credits. favor creation over integrity. Price collar improves integrity of offsets– greater incentives to regulate effectively.

Grumet: Need both. But concern re offsets as (sole) containment. Pressure, low qual offsets. undermined if collar, not unlimited offsets.

Sen. Barrasso (R-Wyo): concern Wall St gaming. cap/ tax green collar crime. abuse, UK suspended energy auditor (Guardian article). SGS suspended 2d company suspended. Another Enron situation?

Wara: SGS suspension = positive step. previously auditors impunity. need incentives for auditors. adequate, no. but improvement, yes.

Mason: pattern familiar financial crisis. 1400 pages (ACESA) lots of places for influence and holes. too little environmental effect for too much cost. Chicago climate exchange hired lobbyists – want lax rules for trading, offsets, early action credits, don’t want limits on who can trade. banks supply credits for allowances.

Sen. Dorgan: day trading oil very volatile. collar discussion. lack of confidence in mkt. not support $1 trillion new mkt. diminishing product year by year. “rolling seas of cap & trade” set price. estimate size of market and range of volatility?

Mason: $1 trillion is under-estimate. volatility — hard to see mkt w/o volatility. if we don’t like volatility, we shouldn’t choose market to set price. will bail out when price goes up (?) energy cos can trade, arbitrage opp’ys.

Sen. Dorgan: derivatives / swaps have already in EU. new products. hang US growth on this? prefer “carbon fee”?

Grumet: since BTU tax, don’t say “tax”. if serious about problem, then support carbon tax. if not, have to fix market.

Sen. Dorgan: regulation of markets, pathetic.

Grumet: collar is training wheels for mkt. balance mkt.

Sen. Dorgan: need to talk about all alternatives– regulation and carbon tax as well as cap/trade.

Sen. Bennett: conclusion of Mason (p 20) “hinging econ growth on complex contract and market design both of which have yet to be tested in the real world”. Any cost / benefit on cap/trade, or carbon tax or command/control?

Wara: NYU law school did cost/benefit analysis of cap/trade and found very positive.

Clausssen: lost of analysis re costs but few on benefits. but believe benefits far exceed costs.

Yacobucci: range of benefit is very wide.

Sen. Bennett: Temp redxns– wide “delta” –  impact on Temp de minimis.

Grumet: Must assume US is leading world. same as any big problem, hunger, poverty, war… price collarwould avoid underminining econ strength. then support taking 2d and 3d steps.

Sen. Bennett: problem– US leads but no one follows, then stuck with program.

Claussen: w/o US action, no world action. if we do act, then (others actions) depend….

Sen. Bennett: Visited EU. $20/T trading. advice they gave– “go slow, start small.”

Sen. Bingaman: “Well we’re certainly following that advice.” (laughter)

Sen. Murkowski: cost concern. mechanism to recognize recession?

Grumet: econ has changed discsn. if pass law now, effective maybe 2014. recession will be past. uncertainty in carbon mkts is deterring investment now.

Wara: Health care analogy apt. existing system — EPA will regulate under CAA. not as if nothing there. do nothing is not an alternative. EPA proceeding.

Sen. Cantwell: transition– EPA estimates $1.4 trillion int’l offsets under ACESA. What could we buy here with that?

Wara: EPA unrealistic. low cost offsets. presumes $1 billion T/yr. Thinks will be much smaller.

Mason: property laws. change rules. no property tax, owners sit on land and don’t use. immediate benefits from carbon price. US shipping pelletized wood to EU for offsets. Where does that make sense?

Sen. Corker: not enough offsets? assuredly “enough hucksters” to sell trillion $ figure. way to benefit taxpayers– rev-n carbon tax, no $$ leaving economy.

Grumet: right goal exactly. challenge– how to give back equitably. (ACESA) efforts to divert allowances to utilities, state regs on utilities — rev’s to ratepayers. cap / dividend?

Mason: Markets — no boundaries. Taxes do (have boundaries).

Wara: distn of revenue. complicated. firms have some (legit) claims. households also. taxes theoretically better. but not necessarily simple. want single rate. hard to do in real world. EU– not simple. $ for adaptation. tax scheme will want exemptions. should explore tax but won’t be simple.

Sen. Corker: Ancillary goal of cap/trade. takle in $ then spend $6 trillion in last year.

Sen. Bennett: “Trust fund” / ear mark defeats appropriations discretion. EU covers utilities not automobiles. why? they only have accurate data on utilities. Saw big pickup truck with sticker “this truck is offset by… ” XYZ website. Real? Accurate data?

Claussen: EU over-allocated. system failed. now have data.

Wara: US EPA doing inventory— reporting GHG emissions. EU mobile sources already taxed. Germany equivalent to $220/T. states regulate at refinery. RAC [Refiner Acquisition Cost & volume of crude oil, reported to EIA] = good data. at pickup truck — not good data.