Guest post by Michael Hoexter, Ph.D., LEED-AP
Michael blogs about climate and energy policy and marketing issues at www.greenthoughts.us. Through his work selling energy efficiency programs to businesses in California, he concluded that cap-and-trade’s carbon price volatility does not provide a strong price signal to CFOs and other financial decision-makers to invest in energy efficiency. A frequently asked question to CTC is how cap-and-trade became, and remains, mainstream environmental groups’ preferred approach for pricing carbon emissions — despite the financial sector’s unraveling. Michael has compiled a dozen factors that go a long way toward explaining cap-and-trade’s persistent hold over some advocates. — CTC
1) C&T already has its own bureaucracy. In the U.S., cap-and-trade systems are only beginning to be erected, but on a global scale thousands of people are now employed in administering various aspects of the Kyoto protocol programs, in particular the controversial CDM or “clean development mechanism” offset programs. Because of its complexity, cap-and-trade, notwithstanding its market-based label, is very bureaucracy-friendly, whether this bureaucracy is part of governments or part of non-governmental agencies.
2) No one really understands markets. Markets are complex social phenomena but the state of knowledge about them is riven with partisan contentions about their proper scope of applicability. Some think that almost everything should be a market while others think they should be controlled and circumscribed.
3) Markets became the object of uncritical veneration. From the late 1970s on, markets were viewed by many as panaceas for almost every social problem. Given our limited understanding of economies and markets, it was easy for a loose coalition of politicians and economists to ascribe all manner of positive attributes to markets. If we knew better what markets were we would be less likely to apply them to every social problem uncritically.
4) “Tax” became a dirty word. For the past several decades few people were willing to stand up for taxes as a means of paying for government services. The end-run around the “tax” word continues, though there are signs that President Obama may be willing to convey to Americans that taxes pay for valuable services. Anti-tax sentiment was stoked by the notion that the private market would deliver services that the government was either incapable of or did inefficiently.
5) Policy designers don’t generally have business backgrounds. While the microeconomics of investment decision-making aren’t particularly arcane knowledge, many in the climate community are not well versed or sympathetic to the concerns of business (even as they attempt to influence these businesses to save the planet).
6) Cap-and-trade has buy-in from several political and economic constituencies. Cap-and-trade includes ideological and concrete monetary elements that serve several constituencies. The “cap” appeals to many climate activists and politicians who are largely innocent of the policy’s faulty on-the-ground microeconomics. The “trading” and “market-based” components are supposed to placate political conservatives and remunerate those committed to trading as a means of making a living. The Clean Development Mechanism has developed into a funding source for projects in developing nations. CDM has hitched two laudable goals together, the fight against global warming and fighting poverty in less developed nations. Additionally, the use of these CDM projects as offsets takes pressure off industrialized countries to innovate in the area of low-carbon technologies. Thus, the development community, the climate action community, polluters in the first world, and the aid recipients feel themselves to be served. However, cap-and-trade does not support or serve well its “frontline soldiers”, the businesses and individuals who need to respond to the carbon price or “work” the permit market.
7) The “cap” is a reassuring metaphor. While the cap in cap-and-trade is entirely virtual, realized only through pricing or administrative actions like penalties, the concrete image of a placing a physical object like a cap over emissions reassures that there is a limit to emissions somewhere. Yet without both a price for emissions and some pretty daunting penalties, the cap hovers in the air without any foundation at all; it remains simply a well-meaning “climate pledge.”
8 ) It is difficult to connect high ethical ideals to self-interest. Acting on climate change corresponds to high ethical ideals (among people who accept its reality) that understandably can have lulling and analgesic effects on those involved in the movement. Economics deals with more venal matters. To make the policy work, as straight a line as possible needs to be drawn between the high ethical ideal and its real world realization: this requires sober thought and a commitment to neither venality nor the “high” associated with ethical purity. Cap-and-trade has surrounded itself in a fog of good intentions that obscures key lapses in its “mechanics.”
9) The prestige of the U.N. and Global NGO’s. There are many smart, well-meaning people from all over the world at the U.N. and associated NGO’s. To many Americans, many of these urbane folk seem unbelievably knowledgeable, especially about remote parts of the world about which there is little broadly disseminated public information in the U.S. So some assume: how could they be wrong?
10) Cap-and-trade kicks the monetary “can” down the road. People don’t like to confront large upfront costs; that’s why buying on credit is so seductive. Cap-and-trade does not name a price for climate mitigation upfront. (Thomas Friedman’s criticisms have touched on this aspect of cap-and-trade.) Furthermore, as in #8, above, pricing is considered to be venal, not part of a highly ethical enterprise.
11) Complexity can disguise weaknesses. Cap-and-trade’s complexity can hide its weaknesses compared to measures that come with an explicit price tag. Concern about climate is of varying importance in countries throughout the world but hardly anywhere is it number one. More effective measures of simpler design may have to bring the issue to a head before popular support can be organized.
12) Big mistakes are easier to hide in plain sight than little ones. People tend to accord others a basic level of competency they may not deserve, especially if they are using arcane terminology. Unfairly for some people who are basically “right” on a particular issue, small mistakes may stand out like a sore thumb in a basically sound context. Cap-and-traders have followed the dictum, popular in some circles: “make only big mistakes.”
Image: Flickr / hodgsonteacher
anon says
Enforcement is the exact same under either a carbon tax or a cap-and-trade system. Think about it: either way the emitter is simplying buying a piece of paper from the government that gives them the legal right to emit greenhouse gases–but neither system works unless you enforce it.
This does not change the fundamental difference between a carbon tax and cap-and-trade.
Under a carbon tax governments set the price of emitting GHGs and allow the quantity to be determined by the market–i.e. at a price of $20/ton people will emit Y quantity of GHG, at $40/ton the amount will be less.
Under a cap-and-trade system governments set the total quantity of GHGs that can be emitted and allow the price to be determined by the market–we issue 700 Mt of permits and that results in a price of P dollars per permit.
Since we want to lower emissions to a certain total level–rather than impose a certain predetermined price–it makes far more sense to adopt a cap-and-trade policy.
Supporters of the carbon tax generally support it because its name somehow sounds tougher. Well, its name is also less popular, so let’s just get on with the less easily opposed and smarter solution.
Michael Hoexter says
“anon”
I’m scratching my head at this radically simplified picture of cap and trade you are presenting and your utter caricature of carbon tax advocates. It’s like you’re reading a brochure for cap and trade.
Cap and trade is far more complex. It involves setting up an auction system for permits and a fairly complex set of rules about trading. Also, if offsets are allowed, there are HUGE enforcement and oversight issues that require monitoring features like “additionality” of CDM projects. A carbon derivative is being created at point in time in history in which the usefulness of derivatives has come under fire from Main Street and a boatload of financial analysts and economists. It’s as though “market based cap” advocates have not read any one of the many accounts of our current financial crisis that they could find in their local newspaper.
And the complexity only grows when you go from the macro to the micro level. Your very misleading and simplified picture is only looking at these systems from an idealized macro vantage point. At the micro level, cap and trade introduces a lot of chaos as the value of permits varies a great deal. Only large corporations will be able to deal with the complexity of making assessments of the value of permits and the need to purchase permits. This is why some of the biggest emitters are in favor of cap and trade because it strengthens their own competitive advantages.
A carbon tax system is going to provide a great deal more price certainty at the micro-level which is much more important from the point of view of cutting carbon emissions. Carbon emissions are cut via carbon pricing systems not by policy makers pledging to cut carbon a certain amount and issuing or auctioning permits but by market actors assessing the value of carbon to them and making investments in emissions-reducing technologies. Regulators are not going to be able to shut down a utility if they go over their permit allocation, thereby causing black outs and cuts in essential services.
Cap and trade creates an artificial permit market that interferes with the real market for emissions-reducing solutions by inserting permit price volatility and market game-playing as an overlay over the carbon price.
You are not thinking through how cap and trade will actually work and instead are looking at the policy on the “brochure level”. If you want to drive the market for lower carbon technologies, an ascending carbon tax will work much better. The certainty of quantities of emissions that cap and trade offers politicians on the “brochure” level can only work if cap and trade works as a virtual carbon tax with a very narrow permit price range and penalties that are prohibitive and, in some cases, politically unacceptable. Simply adjusting the carbon tax rate up will be a more flexible and effective way to reach emissions targets.
However, it is my belief that directive clean energy and energy efficiency incentives plus disincentives will get us there much faster than either just a tax and definitely faster than cap and trade. An ascending tax alone or an ascending tax plus incentives is less “punitive” to industry than cap and trade, which is now turning into, and will become still more of, a mess.
Greg says
Any type of U.S. carbon tax will encourage carbon producing products to be made in more carbon-friendly economies like communist China where they have little or no carbon standards. This will also shift, the already low paying jobs, to even lower paying jobs in a foreign country. This type of thinking leads to the expansion of poverty throughout the globe, adding more risk to our security as a nation.
I’m all for protecting the environment, but it’s a problem that the U.S. cannot solve alone, all nations MUST participate in order for it to work! If you keep shipping jobs over seas, you don’t gain control over the environment, you lose it!
Let’s escalate this to the UN and Nato for a start. America cannot go at it alone! In the meantime, let’s stop giving away our leverage by shipping the polution (and jobs) elsewhere!
Greg Spence
gspence11@aol.com