Prices, Taxes, and Amory Lovins
01/20/2007 by Charles Komanoff
Last week's New Yorker magazine carried a profile of energy-efficiency apostle (and, as it happens, my college classmate and longtime acquaintance) Amory Lovins by the magazine's global-warming reporter Elizabeth Kolbert. "Mr. Green -- Environmentalism's most optimistic guru" is a fair, digestible (at just 8 pages) portrait of the Rocky Mountain Institute CEO who reconceptualized the energy debate in the 1970s and is still tirelessly pitching his message of synergistic, human-scale energy solutions to the world's political, financial and industrial leaders.
Back in the day, I was a member of Amory's worldwide web of energy analysts who fed him our cutting-edge research (mine concerned cost escalation in the building and operating of U.S. nuclear reactors) and benefited in turn from his incisive editing and brilliant framing of our work. Along the way, however, I grew skeptical of his faith that human ingenuity and care would catalyze the dreamed-of wholesale shift to energy efficiency and renewables. Advances in efficiency, and there were many, seemed scattershot and outweighed by humankind's capacity to invent ever more uses of energy and our boundless appetites for using them.
The key difference in our outlook turned out to concern price. Amory, the physicist and optimist, considers high energy prices helpful but not necessary, whereas I, an economist and, dare I say, a realist, regard them as necessary though not sufficient. Thus, the Carbon Tax Center.
Toward the back of Kolbert's article is this useful passage:
... the example Lovins likes to point to -- the drop in oil use in the early nineteen-eighties -- is, at best, equivocal. As Lovins notes in his book, what made people "pay attention" to oil consumption was the 1973 Arab oil embargo and the second, even more severe 1979 oil shock. Part of the drop was due to structural shifts in the economy away from oil-intensive activities. Part of it was fuel substitution by both individual consumers and industry, as homeowners and factories switched from oil to, for example, natural gas. The largest part of it was increased fuel efficiency in both automobiles and buildings, led by the creation of federal auto efficiency standards in 1975. And, finally, part of it was a change in consumer behavior as Americans bought smaller cars and turned down their thermostats. Thus what Lovins offers as a demonstration that federal regulation and new taxes are unnecessary could just as plausibly be seen as evidence of exactly the opposite.
My point -- and CTC's point -- exactly.
And Thomas Friedman's point too, perhaps. In his first New York Times column after Kolbert's article appeared, Friedman wrote of the need to require "power utilities, factories and car owners ... to pay the real and full cost to society of the carbon they put into the atmosphere." In case the point wasn't clear, Friedman added: "... prices matter. They drive more and cleaner energy choices."
Although Friedman didn't mention Lovins by name -- he's a big admirer of Amory, as am I -- I'll bet he wrote with the New Yorker profile in mind.
I read Kolbert’s New Yorker piece on Lovins and was glad she made the point about the need for economic incentives. She quotes John Holdren, president of the American Assn for the Advancement of Science in support of that. Without price incentives we’re not going to move fast enough to outrun exponentially-increasing climate instability. When fuel is as heavily subsidized as it is, a few people may conserve or build alternatives on moral grounds, but they just make room for more waste by the others. Right now it feels futile to conserve energy or to invest in alternatives. You just help keep the price down so your neighbors can buy SUVs or fly to Hawaii. No one can solve this problem unless we all do. And that’s what market signals i.e., price do best. We need a gradually-increasing carbon tax to shift price expectations. What’s the political strategy? - James Handley (Washington, DC)
Comment by James Handley — January 28, 2007 @ 5:05 pm
James —
Thanks for writing. Building and growing a network of people who feel as you do is CTC’s raison d’etre. I differ from you in just one detail: I don’t feel it’s futile for individuals to conserve or invest in alternatives. I doubt that the inducement to others to consume more due to our having brought the price down through conservation, is enough to offset our conservation itself. (I say this as one who subscribes to the idea of price-elasticity!) Anyway, from your note, I suspect you conserve too, for the existential reasons that motivate me.
(BTW, your image of conserving so the neighbors can buy SUVs is hauntingly similar to an image I used in a recent magazine article on wind power. There’s a link to the article in "Myth #7" of our Myths page.)
You’re right, of course, that collective action is required. What’s our political strategy? We’re working on it. (We’ve only been in business a week!) A possible start is to rally environmentalists to support carbon taxing over cap-and-trade.
Let us know what you think. Please spread the word about CTC. Thank you.
Comment by Charles — January 28, 2007 @ 6:45 pm
Thanks Charles,
Cap and trade systems are complex and the record of success isn’t encouraging. Taxes are much more transparent and don’t require monitoring and reporting as cap and trade does.
I wrote about the accelerating phenomenon of climate chaos and the need for carbon taxes recently in a piece for the Washington Spark, a local activist paper. It’s at http://heartspring.net/global_warming_greenhouse.html.
Noticed while working at EPA enforcement that regulatory efforts seldom move as fast as the problems they are ostensibly addressing. Markets can move whole sectors simultaneously.
Legislation, regulation and enforcement move relatively narrow groups of actors and usually do so incrementally, giving those with vested interests time and opportunity to undermine and delay the process– negotiating for exceptions and special treatment.
Cap and trade seems like something of a hybrid– it offers the interest groups more chances to meddle and involves many of the bureaucratic problems of regulation and enforcement but is incentive-based. (Industry, btw loves to complain about "bureaucracy" but they benefit from it, because there are so many pressure points.) Markets are more like gravity– everyone feels their pull more or less in proportion to their weight or in this case, carbon footprint.
- James Handley (Washington DC)
Comment by James Handley — January 28, 2007 @ 7:30 pm
On political strategy: the framing of the issue should not be carbon tax vs. cap and trade. It’s to make sure that any market system auctions carbon permits–in effect a carbon tax under a more neutral name, based on sound economics. Here in California, industry and the Governor are promoting cap and trade, including the grandfathering (i.e. giving away) permits to emit carbon. This raises all kinds of questions of rewarding polluters, how to account for actions already taken, and why the European market collapsed (according to the Economist, in part because polluters didn’t pay).
So we’re pressuring the California process (via legislative Dems, among others) to air the strategic issue: if you want a market, does auctioning or grandfathering make the market work better? The conclusion is inescapable, and the result will hopefully be an auction which raises a ton of money for climate change mitigation and progress, and changes relative prices. In my strategic view, the auction in a cap and trade system is the historic compromise between the enviro/public interest community (anti-market, pro-carbon tax) and industry (pro-market, anti-tax).
The good news is that both Eliot Spitzer and Deval Patrick have taken the auction route in NY and Mass, at least for electricity. We at least have a chance in California, including transportation fuels. And the approach has to be injected into the national debate, which so far has been cap and trade without an auction. I think that’s a viable strategy. Keep up the great work!
Comment by Lenny Goldberg — January 30, 2007 @ 1:17 pm
James - Thanks for your thoughtful note and for the link to your excellent article in the Washington Spark. Your experience at EPA enforcement confirms our concerns about cap-and-trade.
Lenny - A cap-and-trade program with an auction would certainly be preferable to what you accurately refer to as "giving away" permits. While I hope that NY and Massachusetts end up with an auction, I’m not optimistic that a national cap-and-trade program would include one based upon past U.S. experience with NOx and SO2 cap-and-trade programs. Moreover, we have other concerns about cap-and-trade that are set forth in our issue paper on carbon tax v. cap-and-trade. By the way, your The ghost of Al Gore: regulating carbon emissions makes a compelling case for a carbon tax. I’m taking the liberty of providing a link. Great article!
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