Offsets Key to McCain’s Climate Plan (Grist)
Guest Post by James Handley
When brand-new Clean Skies TV invited me to advocate a carbon tax at its Webcast roundtable, I worried that I might be cast as a fringe type. Instead, the taping (on-line soon, use link above) went off like a grad school seminar, yet livelier.
My co-panelists were heavy hitters: economists Robert Shapiro (Commerce Undersecretary under Pres. Clinton) and Eric Toder (formerly of IRS and Treasury), and Barack Obama’s energy and environment advisor, Bob Sussman (former Deputy EPA Administrator).
Moderator Susan McGinnis set the stage with a clip from Al Gore’s latest slide show:
Here’s the solution. We need a CO2 tax, revenue-neutral, to replace taxation on employment, which was invented by Bismarck — and some things have changed since the 19th Century.
I explained that a gradually-increasing carbon fee imposed upstream on fossil fuel energy sources would create price expectations to encourage energy conservation and renewables. A carbon fee would also disproportionately tax those who fly more, drive bigger vehicles longer distances and choose oversized, sprawled-out houses, thus embodying the "polluter pays" principal.
Moreover, a carbon tax wouldn’t divert funds for government spending so long as it was revenue-neutral. The Carbon Tax Center suggests recycling carbon fee revenue through the economy via equal distributions or “dividends” to every household. Each household’s "carbon dividend" would increase annually as the carbon tax rises. Gore suggests using carbon tax
revenue to replace regressive payroll taxes. Either revenue-neutral approach would reward low-carbon-users without penalizing the poor or increasing the total tax burden.
Shapiro was trenchant:
The only reason anyone is talking about cap-and-trade now is because the U.S. (at Gore’s urging) insisted on cap-and-trade in Kyoto. Gore has since abandoned cap-and-trade and is now calling for a carbon tax to replace other taxes. Caps just aren’t working.
CO2 reductions under the EU’s cap have been "negligible and very costly," Shapiro said. Exemptions (e.g., for coal power plants in Germany) "overwhelm the cap."
Shapiro also noted out that China and India have rejected cap-and-trade. In contrast, he argued, a U.S. carbon tax would encourage our trading partners to tax carbon to avoid forfeiting revenues on their exports to us.
Shapiro further noted that controlling quantity, as a cap does, adds volatility to energy prices, leading to disruptive price spikes, harming the economy and undermining support for the system.
McGinnis noted that Southern California’s cap-and-trade system for smog emissions was crashed by price spikes during their electricity crisis.
Toder contended that either a carbon tax or cap-and-trade could work, depending on the specifics. He conceded that a under a cap, a "safety valve" (setting a maximum permit price) is needed to prevent destabilizing price spikes, a problem that doesn’t arise under a tax.
The panelists were unanimous that economy-wide incentives are essential to spur carbon-cutting technology. Either a cap or a carbon tax would drive innovation and alternatives, favoring wind power over coal, for example, But only Sussman advocated mandatory cap-and-trade, citing greater certainty of meeting climate goals. Noting that "there’s never a perfect time to start a climate policy" and that excuses like economic recessions or high gas prices will always be available, Sussman insisted that we can’t afford to wait any longer.
McGinnis asked why candidates avoid carbon taxes. Shapiro replied that candidates use the term "cap-and-trade” as a "placeholder” to indicate that they’re serious about climate policy, not that they’ve embraced that particular system. He’s hopeful that a detailed discussion of more effective options including revenue-neutral carbon taxes can begin after the election.
Sussman countered that the public supports cap-and-trade and expressed hope that the Lieberman-Warner bill would be enacted without further climate-damaging delay.
McGinnis asked: What would success in ten years look like? Toder expressed our consensus: If greenhouse gas emissions are dropping, we’ll have turned a crucial corner.
Gore is calling on Americans to "fix our democracy" so we can set policies to avert climate disaster. By hosting a thoughtful discussion of carbon pricing, Cleanskies.TV has taken a solid step toward informed public prticipation in our democracy.
This post reprints in its entirety a column today by veteran Washington reporter Darren Samuelsohn of ClimateWire, a new on-line news service published by E&E News. Samuelsohn’s column focuses on the controversial “safety valve” mechanism that would release additional CO2 permits whenever the price of carbon emissions overshot some set limit. The column, while lengthy, is essential reading for anyone seeking to understand the “devilish details” in carbon cap-and-trade proposals. Note that links to documents in the article are available only to ClimateWire subscribers. — CTC
Behind ‘safety valve’ debate resides 30+ years of history
Tuesday, March 11, 2008
By Darren Samuelsohn, ClimateWire senior reporter
Congress’ effort to pass passing global warming legislation faces many sticking points, but few are as sticky — or as wonky — as the battle over whether a cap-and-trade system for greenhouse gas emissions should include what is called a “safety valve.”
What started as an obscure, almost monastic dispute among economists three decades ago has now emerged as a potential make-or-break point for the proposed legislation. Tracking its tangled history may now be essential to outsiders who want to understand this issue — and the huge economic stakes involved — as champions on both sides of the political arena saddle up to do battle over it.
In recent years, New Mexico Democratic Sen. Jeff Bingaman has become the lawmaker most linked to this cause. His version of the safety valve emerged in 2005 in a legislative proposal that created a price cap on carbon. It would guarantee that American companies pay no more than $12 for every ton of carbon dioxide they release into the atmosphere. This rate would go up five percent annually beyond inflation.
Rallying against him are environmental groups and commodity traders who are concerned his plan would stifle investment in new low- and zero- carbon energy technologies. Meanwhile industry and labor unions are forming up their ranks behind Bingaman.
Finding a compromise to settle this feud won’t be easy. It has been brewing since 1974 when Martin Weitzman, then an economist at Massachusetts Institute of Technology, lit the fuse for the first salvo. An expert on how socialist governments distributed goods, Weitzman published “Prices vs. Quantities.” In it, he examined the best way to set a government policy where there is considerable uncertainty over a potential regulation’s costs and benefits.
Weitzman’s work didn’t have global warming specifically in mind. In fact, it touched only tangentially on environmental issues. But as many other academics have since noted, his findings helped to trigger the debate over how to minimize costs while reducing heat-trapping emissions.
Essentially, Weitzman found that government is best positioned to regulate by stepping in to manipulate prices when there is uncertainty about the net environmental benefits of taking action. But when the chances for an environmental catastrophe are high, Weitzman said, it’s better to tackle a problem with a quantity-based target.
“It’s without a doubt one of the most heavily cited papers in environmental economics,” said Joseph Aldy, a former White House economist now working as a fellow at the Washington-based Resources for the Future think tank. “And one of the most widely cited in economics.”
Engaging President Clinton
Building off Weitzman’s work, Mark Roberts and Michael Spence, who would go on to win a Nobel prize in 2001 for his work on information flows and market development, came up in 1976 with a “hybrid” system for reducing pollution. The Harvard economists premised their paper on the concept that a government could set up a cap-and-trade program to control pollution in the most cost-effective manner.
But because of uncertainty over those costs, Roberts and Spence suggested regulators could withhold some of the credits in this system and only release them if compliance prices exceeded a fixed trigger point.
Several more economists followed with their own complex formulas, but it wasn’t until the 1990s that the safety valve idea blossomed in government policy circles. In this case, it was the Clinton administration preparing for the 1997 United Nations climate negotiations in Kyoto, Japan.
Australian economist Warwick McKibbin and Peter Wilcoxen, then based at the University of Texas-Austin, published a paper in 1997 suggesting a ceiling price on carbon dioxide emissions permits.
Their work was followed by Billy Pizer, Raymond Kopp and Richard Morgenstern of RFF. The trio argued a few months later that climate change can’t be regulated with any specificity to prevent damage to the environment. Building off Weitzman’s work, they suggested a “safety valve” that provides a price guarantee for industry.
Among some members of the Clinton administration, the RFF paper sounded like a perfect fit. Clinton was still bruised from Congress’ rejection of his proposed energy tax on the carbon content of fossil fuels. Officials from the Treasury Department and Clinton’s own Council on Economic Advisers pushed for the cost containment measure. They said it was the best method for dealing with climate change absent an outright tax on carbon emissions.
Others in the administration urged Clinton not to meddle with future carbon prices. They insisted there would be an “announcement effect”: once the government revealed its climate plans, companies would undertake new technological innovations.
This debate entered the public arena two months before the Kyoto negotiations, when Vice President Al Gore asked about the price ceilings during a daylong forum that Clinton hosted at Georgetown University.
Alarmed by Gore’s question, environmental groups quickly pounced. Seventeen nonprofit groups, led by Environmental Defense Fund and the Sierra Club, sent Clinton a letter warning him against using what they dubbed a “relief mechanism.”
“This proposal would weaken, if not eliminate, any incentive for private sector innovation and investment in clean technologies that … is the key to successfully addressing the global warming problem,” they wrote.
Clinton decided to leave the safety valve out of the U.S. position going into Kyoto.
“The ED letter had a big effect,” recalled Rafe Pomerance, a top State Department official at the time. “It was basically dropped.”
Joseph Romm, a safety valve opponent who ran the Energy Department’s renewable lab office during the Clinton administration, said Aldy, then working for the White House, handed him a note after one high-level meeting following Clinton’s decision. It read: “Economists 0, Romm 1.”
But neither side could claim victory. John “Skip” Laitner, a top U.S. EPA economist from 1996-2006, explained: “They didn’t take the safety valve, but we didn’t win either. Because to win meant we had to come in with some really good domestic policies that would allow the market to be given a clear signal about the slow transition needed and to give the market greater capacity to respond.” Laitner is now director of economic analysis at the American Council for an Energy-Efficient Economy.
Courting Bush, McCain, Bingaman
Proponents of the safety valve pushed on. As President Bush arrived in Washington, Pizer shifted to the White House Council of Economic Advisers, where he served as a fellow under Chairman Glenn Hubbard. “He had a significant insider role,” said Pomerance.
There, Pizer recommended Bush use a safety valve as he advanced a campaign pledge to regulate carbon dioxide emissions from power plants. Bush, however, soon backed away from his pledge.
Attention turned next to Sens. John McCain (R-Ariz.) and Joe Lieberman (I-Conn.), who emerged in the fall of 2001 as lead authors of an economy-wide bill to cap U.S. greenhouse gas emissions.
After he left the Bush administration for a job on the Columbia University faculty, Hubbard sent McCain a letter urging him to consider the safety valve in his climate legislation. He was joined by fellow Columbia colleague Joseph Stiglitz, a top Clinton administration economist who had also won the Nobel Prize with Spence.
“Our support for the safety valve stems from the underlying science and economics surrounding the problem of global climate change, and is something that virtually all economists — even two with as politically diverse views as ourselves — can agree upon,” they wrote in their 2003 letter. “The climate change problem is a marathon, not a sprint, and there is little environmental justification for heroic efforts to meet a short-term target.”
McCain, no fan of Hubbard, threw the brief in his waste basket.
But ideas are hard to kill. The safety valve idea emerged again in a widely publicized 2004 report from the bipartisan National Commission on Energy Policy. The commission, a collection of industry officials, politicians and environmentalists, was asked to offer solutions that could help end the stalemate over U.S. energy and environmental policy. Their study recommended Congress pass legislation with a cap-and-trade system and a safety valve that didn’t allow CO2 prices in the first year to go beyond $7 per ton.
Such a price “reflects a judgment about the political feasibility of establishing a federal framework for reducing greenhouse gas emissions in the near term,” the NCEP report said.
A year later, Bingaman, then the ranking member of the Senate Energy and Natural Resources Committee, floated draft legislation with the safety valve as a centerpiece. Last summer, Bingaman introduced a formal version of his bill with a trio of high-profile Republican cosponsors: Pennsylvania Sen. Arlen Specter and Alaska Sens. Ted Stevens and Lisa Murkowski.
The legislation captured attention because he had won over three GOP senators who previously had not supported mandatory limits on greenhouse gas emissions. Major labor groups and the chairmen and CEOs of PNM Resources, Exelon, American Electric Power and Duke Energy Corp. also appeared at Bingaman’s press conference when he introduced the bill.
‘The worst case is X’
Safety valve advocates base their argument on one of Weitzman’s principal theories: that a price mechanism is best when there’s uncertainty over environmental benefits. Global warming is a byproduct of greenhouse gas concentrations built up over decades and centuries, and any one year’s emissions won’t push the climate over the tipping point.
Also, they claim a price limit will guarantee the new U.S. climate program won’t lead to a volatile market in the short-term. They also like being able to tell cost-conscious senators and congressmen exactly what the bottom line is.
“Ph.D.s, all of them, can make very reasoned-sounding presentations that reach shockingly different conclusions,” said Jason Grumet, executive director of the National Commission on Energy Policy. “Legislators don’t have the ability to differentiate among those.”
If he’s asked the worst-case scenario for energy or coal prices, Grumet said he can turn to the safety valve for a simple answer. “We didn’t have to start our response with, ‘Well, we think’ or ‘Our models project.’ We could simply say, ‘The worst case is X.'”
Labor groups, including the AFL-CIO, see the safety valve as a must have, though they’ve recently signalled a willingness to negotiate. So too do many industries.
“The way [Bingaman’s] come at it is the only way you can do this,” said Fred Palmer, senior vice president for governmental affairs at Peabody Coal. “There’s a big group in Congress who thinks we’re paying enough for energy now.”
“If you think that cap-and-trade is the best way to go, then the safety valve is your insurance policy,” said Aldy. “The reason you buy insurance is because the future is uncertain. We want to protect against the things we can’t currently imagine. This is a way to do it.”
Weitzman, who moved to Harvard in 1990, said he would prefer Congress impose a carbon tax of $50 per ton on the fossil-fuel content of energy sources.
But he also acknowledged that the political reality suggests lawmakers will go with cap-and-trade legislation. He’s open to that too, but said it must include a safety valve. “A very strong safety valve is equal to a tax,” he said. “If you don’t allow the price to vary very much, it’s the equivalent to taxing it.”
Opponents say a safety valve would undermine the very nature of a cap-and-trade program. “Those who have taken global warming seriously have never supported something like a safety valve,” said Romm, now a senior fellow at the liberal Center for American Progress.
Indeed, the safety valve’s critics have lined up a number of political players to reject the idea, including Clinton, Gore, 2004 Democratic presidential nominee Sen. John Kerry and Sen. Barbara Boxer (D-Calif.), the chairwoman of the Senate Environment and Public Works Committee.
“There are a number of no-gos and poison pills, and safety valve would be among those,” explains Brent Blackwelder, president of Friends of the Earth. He added that any effort to add a safety valve would lead sponsors of the Lieberman-Warner bill to pull it off the floor.
Jonathan Pershing, director of the Climate, Energy and Pollution Program at the World Resources Institute, cautioned that none of the major U.S. environmental trading programs — for nitrogen oxides and sulfur dioxide — include a safety valve. The European system for greenhouse gases also avoided it.
Pershing said the safety valve doesn’t fit with the growing scientific warnings associated with global warming that call for near-term actions.
Europeans are weighing in too. “You can also pretty much forget about a global carbon market,” said Damien Meadows, a top climate official from the European Commission. “If Europe linked to America, and the price cap was reached, and we were just sending money across to the U.S. Treasury, that would be a major issue just as if American companies were paying Europe to do nothing because you reached our price cap.”
Meadows added, “Nobody has actually explained to me how that is overcome. And when people tend to think about, they tend to go ‘Oh yeah, I see.'”
Several proponents of the safety valve envision Europe adopting a cost ceiling to match up with the United States. “A cap sends the message that you really are prepared to wimp out of this,” counters Romm. “It sends the message to all the businesses that if they just whine enough that you can stop whatever it is you’re doing.”
A ‘Fed’ compromise?
A bill from Lieberman and Sen. John Warner headed for the Senate floor doesn’t include Bingaman’s safety valve. But it has several provisions designed to dampen the costs to the economy. One piece supported by environmental groups would allow companies to bank away extra emission credits they haven’t used. Another lets them borrow against future years, with interest.
Duke University’s Nicholas School for Environmental Policy Solutions also came up with a program added to the Lieberman-Warner bill that establishes a Carbon Market Efficiency Board. It would monitor the new U.S. climate market and release carbon credits when the cost gets too high, much as the Federal Reserve uses its powers to influence interest rates.
Under the Lieberman-Warner bill, the president appoints the board’s seven members to 14-year terms. Tim Profeta, a former Lieberman aide and the Duke school’s director, acknowledged that the concept falls distinctly on one end of Weitzman’s equation. “I think the Fed itself is a middle ground,” he said.
Harvard economist Robert Stavins disputes any correlation between this plan and the Federal Reserve, which, he notes, carries “a tradition of political independence,” a research board staffed by 200 Ph.D.s in Washington and reserve banks across the country.
Sponsors of the Lieberman-Warner bill are now on the hunt for additional compromises — and House members are only beginning to grasp this slippery subject. To find a middle ground will require movement from all sides. Grumet thinks that’s not impossible. “I’ve never seen a number in Congress that’s non-negotiable,” he said.
Photo: Monceau / Flickr.
Rex Nutting’s Market Watch commentary (see "Quote of the Week") properly criticizes the presidential candidates for coming up with Rube Goldberg energy plans instead of having the guts to show leadership by proposing to increase the price of fossil fuels. It’s a fair critique, but it’s the rare candidate who has Senator Dodd’s courage to propose a tax while running for office.
After the election, when there is less concern about cheap shots distorting policy discussions just before voting, it will be far easier to consider the best approach to reducing greenhouse gas emissions. After the election it will be possible to explain that a revenue-neutral carbon tax is a tax-shift, not a tax increase, and that will be good for both the environment and the economy. After the election it will be easier to get past the rhetoric and to recognize that both carbon taxes and cap-and-trade increase prices. After the election, when there is an opportunity for a relatively objective analysis, citizens and elected officials will be able to compare a revenue- neutral carbon tax (which raises prices gradually with an upwards trajectory that gives families and businesses time to adjust by using energy more efficiently and substituting renewable energy for coal and other fossil fuels) to cap-and-trade (which produces volatile energy prices and, under most proposed legislation, huge windfalls for polluters).
For now, we can wait until after the election. Or, take a look at the headlines to the right of this page to learn about the more serious discussions taking place in Canada and Europe.
"A significant portion of the business community would prefer a carbon tax" to a carbon cap-and-trade system, an official of a leading pro-business lobby group declared today.
In an interview on E&E TV, Margo Thorning, senior vice president and chief economist at the American Council for Capital Formation, honed in on one of the key advantages of carbon taxes over the competing cap-and-trade approach — price certainty:
An advantage of a carbon tax … is that an investor knows, given the projected … set of increases in carbon prices from one year to the next, he knows what the carbon price will be and he can factor that in to what kind of capital equipment he buys, what sort of transport fleet he puts in place, and it provides more certainty.
ACCF’s board has been called "a who’s-who in big business," with past or present directors from the American Petroleum Institute, American Forest & Paper Association, Edison Electric Institute and other pro-industry trade associations, thus lending corporate gravitas to Thorning’s remarks, excerpted (and slightly edited) here (Note: subscription probably required):
E&E TV: One of the bill’s ideas is to set
up a financial board of sorts that would oversee the new greenhouse gas market. What’s your take on setting up a board of regulators?
Margo Thorning: I think the idea of expecting regulators to know what the price of carbon should be is probably not very well grounded. It does serve as a backstop in that if prices got so high that producers and households were experiencing severe economic pain they could say, well, just go ahead and emit. But it creates uncertainty, because for someone trying to invest in new equipment, if they don’t know what the price of carbon will be, that adds to the risk of the investment. That’s the problem with a cap-and-trade system and that’s what’s happening in Europe. Investors don’t know what the price of carbon will be from one month to the next or one year to the next and it’s been very volatile. So that makes the
cost of capital higher, investment more uncertain, and produces less investment. An advantage of a carbon tax, if you want to impose some sort of penalty on carbon use, is that an investor knows, given the projected set of increases in carbon prices from one year to the next, he knows what the carbon price will be and he can factor that in to what kind of capital equipment he buys, what sort of transport fleet he puts in place, and it provides more certainty. And a carbon tax provides a stream of revenue for the government to spend on new technology or to pay for offsetting the burden on low income
individuals of higher energy prices.
E&E TV: So, if you were given the opportunity to write your own proposal of how the U.S. should
reduce emissions and not hurt itself economically, you’d go with the carbon tax?
Margo Thorning: I would go with the carbon tax and more incentives for new technology development.
E&E TV: So, if a cap and trade is not the way to go as you’re saying, why has the business community come out in support of a cap and trade?
Margo Thorning: Well, a significant portion of the business community would prefer a carbon tax and there’s beginning to be more discussion about that. I think one reason some in the business community have supported a cap and trade is they expect to make money on it. They’ve maybe made emission reductions or expect to be able to make emission reductions. They expect to be winners. On the other hand, new companies or companies that are expanding that need more credits will be losers. So the winners under a cap-and-trade system, for example in Europe, the big electric utilities have been winners because they’ve been able to pass forward to consumers the price of the carbon credit even though they were given those credits by the government. So people who expect to make money on it naturally are supportive.
* * *
ACCF’s clear acknowledgment of the price-certainty advantage of a carbon tax, coupled with its outspoken criticism of carbon cap-and-trade, follows the contours of the American Enterprise Institute’s June report contrasting the two approaches. The myth that business unanimously favors carbon cap-and-trade over carbon taxes (or monolithically opposes carbon pricing in the first place) is crumbling.
Photo: le_rez / Flickr.
Friends of the Earth released an important analysis today revealing who would be the real winners from the type of carbon cap-and-trade program being promoted by large corporate polluters. Senators Joe Lieberman (I-Conn.) and John Warner (R-Va.) are expected to introduce cap-and-trade legislation tomorrow that would reward polluters by giving them a substantial number of emission allowances for free. The Friends of the Earth analysis is based upon the allocation in an August draft and will be updated to reflect precise numbers in the pending legislation, but the message is clear — polluters would receive a windfall.
The Lieberman-Warner bill has exposed an important split in the environmental community, with Environmental Defense, the Natural Resources Defense Council and National Wildlife Federation supporting the legislation while Friends of the Earth, U.S. PIRG and Clean Air Watch oppose it, according to a story in E&E News (subscription required). According to the E&E News story, Senators Lautenberg (D-NJ) and Sanders (I-Vermont) today issued a joint statement in which they:
outlined their demands today for legislation whose targets are "bold, aggressive, and comprehensive enough to prevent the devastating effects of catastrophic climate change." They called for pollution credits to be distributed by an auction rather than being given for free to electric utilities and other U.S. sources of greenhouse gas emissions.
An auction isn’t ideal, but it is far closer to the "gold standard" of a carbon tax than a cap-and-trade program that gives away allowances. Friends of the Earth’s press release is reprinted verbatim below:
Lieberman climate bill could have record corporate giveaways
Oct. 17, 2007
For Immediate Release
For more information contact:
Nick Berning, 202-222-0748
Legislation’s allocation of permits to polluters could be worth trillions, says analysis from Friends of the Earth, and the coal industry stands to be the biggest winner
WASHINGTON — Global warming legislation expected to be introduced tomorrow could provide giveaways worth hundreds of billions or even trillions of dollars to polluting industries, according to an analysis of a draft of the legislation conducted by Friends of the Earth.
The cap-and-trade legislation, sponsored by Senators Joe Lieberman (I-Conn.) and John Warner (R-Va.), would attempt to limit U.S. greenhouse gas emissions by setting annual emissions limits for each industry. Under this legislation, a set amount of greenhouse gas pollution would continue to be allowed — and the way in which these transferable allowances, or permits, would be allocated could richly reward the country’s largest global warming polluters, as each permit could be sold or traded for cash just like a stock or a bond.
"What we’re looking at is the potential for corporate giveaways that are orders of magnitude larger than anything environmentalists have ever faced — potentially the biggest corporate giveaways in American history," said Erich Pica, one of the authors of the Friends of the Earth analysis of the August draft of the legislation. "Polluters should have to pay for their pollution, not be rewarded for it."
The Friends of the Earth analysis found that the coal industry in particular stands to benefit from this legislation, precisely because it is currently the industry most responsible for global warming pollution. Depending on market conditions, the coal industry could receive permits worth up to $231 billion in the first year alone, 48 percent of the total permit allocation. It could then sell or "trade" its permits to others for their cash value, or it could emit at no cost carbon that less fortunate industries would have to pay to emit.
"If Congress is going to implement a cap-and-trade system, it should auction off 100 percent of permits so that taxpayers reap the financial rewards. We could use that money to help Americans adjust to higher energy costs, and to subsidize clean, alternative forms of energy," Pica said. "Instead, Senators Lieberman and Warner have proposed auctioning off only 24 percent of permits at the outset of this legislation, setting up a rigged market in which most permits are handed out to polluting industries for free. If you see a lot of polluters lining up in support of this legislation, that’s why."
While the specific language of the legislation being introduced tomorrow could differ somewhat from the draft circulated in August, permit allocations will reportedly continue to be a problem. Friends of the Earth will update its analysis after the legislation is introduced to reflect the final numbers in the bill.
Friends of the Earth’s analysis of the Lieberman-Warner draft can be found here.
FoE’s August statement responding to the initial release of the Lieberman-Warner draft can be found here.
The Daily Report, a Georgia-based "timely and indispensable guide to everything happening in the legal world," ran a provocative story today.
A U.S. Carbon-Trading Market Could Be Lucrative—or Perilous touches on just how complicated it will be to set up a cap-and-trade market. But the focus is on who will benefit most. The environment? There’s not much discussion of how effectively a cap-and-trade scheme will reduce emissions, but there are telling observations on who will get rich.
For those whose interest in climate change is secondary, the good news about carbon cap-and-trade is that:
It won’t just create work for environmental, energy trading and regulatory attorneys. It also will generate hours for those whose practices encompass business transactions and litigation, capital markets, project finance and even white-collar crime. Already, it’s lining the pockets of lobbyists in the nation’s Capitol and the 17 states that are moving even faster than the federal government toward considering regulation and trading of greenhouse gases, implicated as a cause of global warming.
Climate change deniers won’t be thrilled, but there’s good news for others:
For climate-change skeptics and deniers, it’s no doubt a frustrating time to be watching the 110th Congress. But for businesspeople and lawyers — regardless of their views on whether the Earth is warming and why — it’s nothing short of the opportunity of the century.
“The saying in Washington is anytime there’s a new program, the lawyers are the ones who get rich first,” says Charles A. Patrizia, a Paul, Hastings, Janofsky & Walker attorney who’s spent three decades inside the Beltway.
The good news, again for lawyers, is that there will be work to spread throughout the law firm:
If and when the U.S. government imposes carbon emissions restrictions, says Jones Day’s Holden, the amount of legal work generated by those regulations will be significant.
“The transactional side is going to be huge; the regulatory side, the litigation side is quite big; there’s patent, intellectual property; the international law side,” he says. “It’s hard to find an area of law that isn’t going to be impacted by a regulatory program that not only affects every manufacturing facility, but … [affects] all the products that go into what is manufactured.”
Will the focus of the interest groups that stand to gain from cap-and-trade be on the most efficient ways to reduce greenhouse gas emissions? Will the lawyers, traders, coal companies and others put aside their self-interest because a revenue-neutral carbon tax would provide more greenhouse gas emission reductions sooner, more efficiently and less expensively? Don’t hold your breath!
Photo: Krispy*Kreme / Flickr
This Q&A is from an interview with Grist magazine, published July 30. While Obama’s positive words about a carbon tax are encouraging, shouldn’t his next step be to ditch the substitute and go for the real thing?
Q. Do you believe that we need a carbon tax in addition to a cap-and-trade program?
A. I believe that, depending on how it is designed, a carbon tax accomplishes much of the same thing that a cap-and-trade program accomplishes. The danger in a cap-and-trade system is that the permits to emit greenhouse gases are given away for free as opposed to priced at auction. One of the mistakes the Europeans made in setting up a cap-and-trade system was to give too many of those permits away. So as I roll out my proposals for a cap-and-trade system, I will price permits so that it has much of the same effect as a carbon tax. [Emphasis added]
The American Enterprise Institute issued a concise report (June 2007) comparing carbon caps with carbon taxes for combating climate change. AEI’s clear verdict: “carbon-centered tax reform — not GHG [greenhouse gases] emission trading — is the superior policy option.”
On SO2 Trading as a Model for CO2 Cap-and-Trade
There has been significant volatility in [SO2] emission permit prices, ranging from a low of $66 per ton in 1997 to $860 per ton in 2006… Over the last three years, SO2 permit prices have risen 80 percent a year, despite the EPA’s authority to auction additional permits as a
“safety valve” to smooth out this severe price volatility.
Several other aspects of the SO2-trading program are of doubtful applicability to GHGs. First, SO2 trading was only applied to a single sector: … coal-fired power plants … a comprehensive GHG emissions-trading program will have to apply across many sectors beyond electric utilities, vastly complicating a trading system.
Second … reducing SO2 emissions did not require any constraint on end-use energy production or consumption. Coal-fired power plants had many low-cost options to reduce SO2 emissions without reducing electricity production. CO2 is different: it is the product of complete fuel combustion. There is no “low-CO2 coal,” and the equivalent of SO2 scrubbers does not yet exist in economical form. [A]ny serious reduction in CO2 emissions will require a suppression of fuel combustion. This is going to mean lower energy consumption and higher prices, at least in the intermediate term.
Even though confined to a segment of a single sector of energy use, the SO2 emissions-trading regime was far from simple. There were complicated allocation formulas to distribute the initial emissions permits. [Even so,] establishing allowances and accounting systems for GHG emissions across industries is going to be vastly more difficult and highly politicized.
The favored solution to these problems is to over-allocate the number of initial permits both to ease the cost and to encourage the rapid start-up of a market for trades. This was the course the European Union took with its Emissions Trading System (ETS), and it has very nearly led to the collapse of the system. Because emissions permits were over-allocated, the price of emissions permits plummeted, and little — if any — emissions reductions have taken place because of the ETS. The over-allocation of initial permits merely postpones both emissions cuts and the economic pain involved. Economist Robert J. Shapiro notes:
As a result of all of these factors and deficiencies, the ETS is failing to reduce European CO2 emissions. [T]he European
Environmental Agency has projected that the EU is likely to achieve no more than one-quarter of its Kyoto-targeted reductions by 2012, and much of those “reductions” will simply reflect credits purchased from Russia or non-Annex-I countries [developing countries], with no net environmental benefits.
As economist William Nordhaus observes:
We have preliminary indications that European trading prices for CO2 are highly volatile, fluctuating in a band and [changing] +/- 50 percent over the last year. More extensive evidence comes from the history of the U.S. sulfur-emissions trading program. SO2 trading prices have varied from a low of $70 per ton in 1996 to $1500 per ton in late 2005. SO2 allowances have a monthly volatility of 10 percent and an annual volatility of 43 percent over the last decade.
Nordhaus points out the ramifications of such volatility, observing that “[s]uch rapid fluctuations would be extremely undesirable, particularly for an input (carbon) whose aggregate costs might be as great as petroleum in the coming decades,” and that “experience suggests that a regime of strict quantity limits might become extremely unpopular with market participants and economic policymakers if carbon price variability caused significant changes in inflation rates, energy prices, and import and export values.”
Nordhaus is not alone in this concern about price volatility. Shapiro similarly observes:
Under a cap-and-trade program strict enough to affect climate change, this increased volatility in all energy prices will affect
business investment and consumption, especially in major CO2 producing economies such as the United States, Germany, Britain, China and other major developing countries.
Cap Reform Unlikely
It is possible that the defects of previous emissions-trading programs could be overcome with more careful design
and extended to an international level, though this would require an extraordinary feat of diplomacy and substantial refinements of
international law. Even if such improvement could be accomplished, it would not provide assurance against the prospect that the cost of such a system might erode the competitiveness of the U.S. economy against developing nations that do not join the system.
Advantages of a Carbon Tax
Most economists believe a carbon tax (a tax
on the quantity of CO2 emitted when using energy) would be a superior policy alternative to an emissions-trading regime. In fact, the irony is that there is a broad consensus in favor of a carbon tax everywhere except on Capitol Hill, where the “T word” is anathema. Former vice president Al Gore supports the concept, as does James Connaughton, head of the White House Council on Environmental Quality during the George W. Bush administration. Lester Brown of the Earth Policy Institute
supports such an initiative, but so does Paul Anderson, the CEO of Duke Energy. Crossing the two disciplines most relevant to the discussion of climate policy–science and economics–both NASA scientist James Hansen and Harvard University economist N. Gregory Mankiw give the thumbs up to a carbon tax swap. [Note: pro-tax statements by all six individuals are collected here.]
There are many reasons for preferring a revenue-neutral carbon tax regime (in which taxes are placed on the carbon emissions of fuel use, with revenues used to reduce other taxes) to emissions trading.
[The AEI report goes on to catalog the advantages of carbon taxing, under these nine headings:]
- Effectiveness and Efficiency
- Incentive Creation
- Less Corruption
- Elimination of Superfluous Regulations
- Adjustability and Certainty
- Preexisting Collection Mechanisms
- Keeping Revenue In-Country
- Mitigation of General Economic Damages
[The AEI report, which was authored by Kenneth P. Green, Steven F. Hayward, and Kevin A. Hassett, ends as follows:]
A cap-and-trade approach to controlling GHG emissions would be highly problematic. A lack of international binding authority would render enforcement nearly impossible, while the incentives for cheating would be extremely high. The upfront costs of creating institutions to administer trading are significant and likely to produce entrenched bureaucracies that clamor for ever-tighter controls on carbon emissions. Permit holders will see value in further
tightening of caps, but will resist efforts outside the cap-and-trade system that might devalue their new carbon currency. Higher energy costs resulting from trading would lead to economic slowdown, but as revenues would flow into for-profit coffers (domestically or internationally), revenues would be unavailable for offsetting either the economic slowdown or the impacts of higher energy prices on low-income earners.
A program of carbon-centered tax reform, by contrast, lacks most of the negative attributes of cap-and-trade, and could convey significant benefits unrelated to GHG reductions or avoidance of potential climate harms, making this a no-regrets policy. A tax swap would create economy-wide incentives for energy efficiency and lower-carbon energy, and by raising the price of energy would also reduce energy use. At the same time, revenues generated would allow the mitigation of the economic impact of higher energy prices, both on the general economy and on the lower-income earners who might be disproportionately affected by such a change. Carbon taxes would be more difficult to avoid, and existing institutions quite adept at tax collection could step up immediately. Revenues would remain in-country, removing international incentives for cheating or insincere participation in
carbon-reduction programs. Most of these effects would remain beneficial even if science should determine that reducing GHG emissions has only a negligible effect on mitigating global warming.
A modest carbon tax of $15 per ton of CO2 emitted would result in an 11 percent decline in CO2 emissions, while raising non-coal-based energy forms modestly. Coal-based energy prices would be affected more strongly, which is to be expected in any plan genuinely intended to reduce GHG emissions. A number of possible mechanisms are available to refund the revenues raised by this tax. On net, these tools could significantly reduce the economic costs of the tax and quite possibly provide economic benefits.
For these reasons, we conclude that if aggressive actions are to be taken to control GHG emissions, carbon-centered tax reform–not GHG emission trading–is the superior policy option.
When we resolved late last year to create the Carbon Tax Center, we thought our big battles would be fought with climate-crisis deniers, plus occasional skirmishes with doctrinaire leftists decrying attempts to graft carbon taxes onto an unjust social and economic structure. Little did we dream that our most contentious disputes would be with fellow environmentalists who had made up their minds that carbon taxing is a political no-sale and that cap-and-trade is the only feasible way to put a price on carbon emissions. (For background on carbon tax v. cap-and-trade see our issue paper on the subject.)
So it’s with some surprise and dismay that we find ourselves debating “tax vs. cap” with the most outspoken Big-Green member of the U.S. Climate Action Partnership, Environmental Defense. The latest round, in May, has played out in the electronic pages of Gristmill. Here in chronological order are
- CTC’s Gristmill post of May 22, 2007 (also posted on Common Dreams)
- ED’s Response on Gristmill, also dated May 22, 2007
- CTC’s Riposte to ED.
We welcome your comments.
— Charles Komanoff, Dan Rosenblum
Strange Bedfellows in Climate Politics
Did lefty pundit Alexander Cockburn and corporate behemoth General Motors secretly agree to swap climate positions?
It looks that way. GM, swallowing hard, recently joined the U.S. Climate Action Partnership, the elite enviro-business coalition pushing cap-and-trade
— a so-called “market-based system” for controlling carbon dioxide emissions. Meanwhile, the famously acidic Cockburn lacerated global warming orthodoxy in his column in the Nation magazine, deriding it as a “fearmongers’ catechism [of] crackpot theories” ginned up by “grant-guzzling climate careerists” and opportunistic politicians looking to ride the greenhouse “threatosphere” all the way to the White House. (Whew!)
But there’s less here than meets the eye. For as the inconvenient details of cap-and-trade schemes start to surface, USCAP is looking less and less like a CO2 control lobby and more like a corporate club seeking to cash in on the rising clamor against free carbon spewing. And Cockburn, it turns out, has been raining on the climate crisis parade for years.
Let’s dispense with Cockburn first. His Nation column is infested with nakedly inverted syllogisms, such as: Al Gore is alarmed by global warming, but Al Gore backed nuclear power as a congressman, ergo alarm over global warming is a ruse to push nukes. Or, The New York Times is alarmed by global warming, but The New York Times whitewashed the Bush Administration’s Iraq WMD lies, ergo alarm over global warming is a lie.
But Gore and the Times are easy targets. The heavyweight in the room is the international climate-science community. To take them down, Cockburn disingenuously recycled a charge by Science magazine’s global warming reporter, Richard Kerr, that “climate modelers have been ‘cheating’ for so long it’s almost become respectable.” It’s yet more illogic: Climate modelers cheat, which makes climate models part and parcel of the “reflexive squawk of the greenhouse fearmongers,” which makes global warming a hoax.
Worse, in the time scale of climate modeling, that “cheating” remark Cockburn lifted is positively ancient. It’s the lead from a May 16, 1997 Science article by Kerr heralding the first climate model to replicate actual climate records without fudge factors, developed at the National Center for Atmospheric Research. And much as the first four-minute mile back in the 1950s unleashed a torrent of sub-four-minute miles, NCAR’s breakthrough triggered a tidal wave of modeling progress that has largely done away with the fudge factors, along with the yawning error bars that surrounded the old forecasts. Twenty-three different models, all unfudged, support the terrifying new finding from the Intergovernmental Panel on Climate Change that the current trajectory toward doubled CO2 levels will raise the mean global temperature above the pre-industrial level by six-and-a-half degrees Fahrenheit, give or take a mere degree.
No doubt Cockburn would deride this forecast as “hysteria” propounded by IPCC “functionaries and grant farmers.” But perhaps it’s time for Alex to take playwright Harold Pinter’s advice to Bush to “look in the mirror chum.” After all, this is the same Cockburn who, in a nutty 2005 paean to his “aging fleet of 50s and 60s era Chryslers” provocatively titled “The Virtues of Gas Guzzling,” proclaimed: “I don’t believe in any effective role of man-made CO2 in global warming, a natural cyclical trend.” Cockburn then dug his hole deeper, writing that oil itself “doesn’t come from dead dinosaurs and kindred organic matter [but] is a renewable, primordial soup continually manufactured by the Earth under ultrahot conditions and tremendous pressures.” Earth to Alex: where does contrarianism end and madness begin?
But if Cockburn pretty much begs to be dismissed, the boys at the U.S. Climate Action Partnership are sober as pinstripes. From Shell to DuPont, from GE and now GM to the Natural Resources Defense Council and Environmental Defense, the 27-member USCAP is mustering a high-octane campaign (some would call it a stampede) to re-fashion the holy grail of climate protection — attaching a stiff price to carbon pollution — as an emissions-trading poker table with a billion-dollar minimum. Thanks in large part to USCAP, a half-dozen carbon cap-and-trade bills are circulating in Congress, and the A-list of Washington carbon-trading acolytes includes House Speaker Pelosi and Senators (and presidential contenders) McCain, Obama, and Clinton.
Yet cap-and-trade seems a curiously unpromising way to put a price on carbon. Making fossil fuels cost more portends a radical overhaul of the American way of life: people will drive and fly less, industries will rise and fall, cities will redevelop and suburbs will stop sprawling. To make that transition requires a pricing mechanism that’s simple, transparent, and equitable. A straightforward, ecumenical carbon tax meets that standard; devilishly complex cap-and-trade does not. The old Hollywood maxim that a story line can’t exceed 25 words should disqualify cap-and-trade systems from the get-go. And as Americans get wind of the legions of legal and financial functionaries swarming around carbon trading, they’ll likely feel disillusioned if not hoodwinked — and ripe for a reversion to unfettered carbon-burning.
There’s no mystery to General Electric’s and General Motors’ embrace of cap-and-trade. Daily, the climate handwriting on the wall grows clearer, and corporate America knows it’s only a matter of time before it is made to pay for using — and making products that require consumers to use — climate-altering fossil fuels. And unlike a carbon tax, which would resist gaming and could be started quickly, a cap-and-trade system would take years to formulate as powerful interests carved up the revenue pie.
Moreover, that revenue pie — a concomitant of “putting a price on carbon” — will eventually total hundreds of billions of dollars a year. Yes, the carbon price has to be high to internalize the costs of climate damage and for renewable solar and wind power and energy efficiency to be in position to displace and ultimately eliminate fossil fuels. Under a carbon tax, those revenues would be known in advance and could be dedicated to public purposes such as progressive tax-shifting and transition support for affected communities. In contrast, the costs of cap-and-trade systems are likely to become a hidden (and regressive) tax as dollars flow to market participants.
The more interesting question is why some big environmental groups are pushing carbon cap-and-trade. One reason is precedent: Environmental Defense conceived emissions trading in the 1980s and spent years convincing utilities and Congress to make it the vehicle for cutting acid rain pollutants (though in truth that “market” bears as much resemblance to a carbon market as did a French mud hut to the Palace of Versailles). In addition, at the time the green groups were laying the groundwork for USCAP — before Gore’s movie and before the Republicans lost their hold on Congress — the more politically dicey carbon tax alternative may have appeared out of reach. Settling for cap-and-trade may have seemed more sensible than vying for a carbon tax and coming away empty-handed.
Of course, there’s nothing to stop the “green” members of USCAP from pointing to the new facts on the ground and throwing in with the smaller but fast-growing carbon tax forces. No one should hold their breath, however. NRDC, ED, and their partners have invested too much institutional capital in building bridges to big business.
Dig deeper, moreover, and a harder truth emerges. NRDC and ED have gotten very skilled — and grown very prosperous — at cutting deals. What began benignly 20 years ago, with the groups persuading utility regulators to fund innovative energy-efficiency programs, appears to have mushroomed into a perceived entitlement to speak for environmentally concerned citizens, meaning most of us, while being accountable only to their own trustees.
This top-down style, in which “the ways that work,” to borrow ED’s slogan, are formulated in private and presented to the community as a fait accompli, won’t do with something as momentous as putting a price on U.S. carbon emissions. The stakes are too high in both dollars and lives for the environmental position to be decided by a handful of green groups, no matter how accomplished or well-meaning. The path to carbon pricing must be debated and ratified in the open, not negotiated in certified-green offices.
Cockburn knows this. Hell, it was Counterpunch’s reporting on those backroom utility deregulation deals in the 1990s that helped alert advocates like me to Big Enviro’s aversion to the democratic process. C’mon Alex, dump the ‘59 Imperial and the climate crisis conspiracy theorizing. You needn’t enlist with the Carbon Tax Center, but the members-only push for cap-and-trade is a worthy target. Load up and let ‘er rip.
Charles Komanoff, an economist and environmental activist, co-founded the Carbon Tax Center earlier this year.
Response from Environmental Defense: Top-down or bottom-up, the goal is cutting carbon
Charles Komanoff’s post is entertaining, but a lot of what he says is wrong. His main proposition is that unlike “devilishly complex” cap-and-trade, a carbon tax is straightforward approach that will resist gaming by special interests. That raises a few questions: is there anything straightforward about the U.S. tax code? Has anyone ever gamed that system? Are there “no legal and financial functionaries” swarming around taxpayers?
Those questions aside, the fact is that a cap is the only way to guarantee the emissions cuts scientists say we need to avert the worst impacts of climate change. No one knows what level of carbon tax will produce what level of emissions cuts — and the science is pretty clear that we need to cut emissions by 80% from current levels by mid-century or we’re in trouble. Guess wrong on a tax and we’re all co-starring in a big-budget disaster movie.
Finally, a carbon cap can pass Congress and a tax can’t, so if we agree climate change is extremely urgent, we don’t have time to waste. Which brings us to the big corporations in USCAP. I’m sure they’ve all got a mix of reasons for pushing strong action on climate, but their motivations aren’t important — getting something passed into law is. There’s little doubt that the USCAP companies can help us get something passed.
Komanoff is worried about the process; we’re worried about cutting carbon emissions enough to avert a real environmental, economic, and human disaster. Top-down, side-to-side, stand-on-our-heads-till-we’re-blue — however it happens, the important thing is getting it done.
Rejoinder to Environmental Defense: Cap-and-Trade Is Looking Like Duck-and-Cover
Can any of ED’s three main points
stand up to scrutiny?
ED: A carbon tax can be gamed as easily as a carbon trading scheme.
CTC: A carbon tax may be subject to gaming, but cap-and-trade positively invites it. USCAP concedes that some allowances will be given out (not auctioned) at the outset, which means protracted, high-stakes negotiations (“a giant food fight,” a leading utility executive called it) over the free allowances that will be worth billions. How will these be allocated? What baseline year? Watch Earth burn as the polluters jockey for the baseline giving them the most allowances! With a carbon tax, by contrast, any tax preferences or exemptions will at least be visible and locked in, and thus potentially removable. This difference is part of why former Commerce Undersecretary Robert Shapiro wrote recently that carbon taxes, compared to cap-and-trade “are much less vulnerable to evasion and market manipulation, providing a more stable and transparent system for consumers and industry alike.”
ED: “A cap is the only way to guarantee the emissions cuts scientists say we need to avert the worst impacts of climate change. No one knows what level of carbon tax will produce what level of emissions cuts … Guess wrong on a tax and we’re all co-starring in a big-budget disaster movie.”
CTC: Thanks guys, but the movie has already started. Here’s what The Financial Times said about it last month: “Getting the amount of emissions a little bit wrong in any year would hardly upset the global climate. But excessive volatility or unduly high prices of quotas on carbon emissions might disrupt the economy severely. [Carbon] taxes create needed certainty about prices, while markets in emission quotas [i.e., cap-and-trade systems] create unnecessary certainty about the short-term quantity of emissions.” And how confident is ED that cap-and-trade won’t come without the dreaded “safety valve” (lift cap if price too high) that will blow its vaunted emissions certainty to smithereens?
ED: “A carbon cap can pass Congress and a tax can’t.”
CTC: A carbon tax may be the turtle, but as sure as the hare lost its lead, a cap will be sidelined for years as the financiers, lawyers and consultants work out the details — which they’ve been doing for four years and counting for the much-touted RGGI compact for capping Northeast U.S. utility emissions. That aside, the climate issue is moving very fast. We have a rare confluence of events that may actually make it possible to go the right route. It would be tragic to lock in an ineffectual approach that would block more effective action. A revenue-neutral carbon tax is no longer anathema, and it’s past time for ED and its brethren to give it the consideration it deserves.