“If we can design a policy that is transparent and easy for people to understand, puts an effective price on carbon, and reimburses average Americans for all or nearly all of their increased energy costs, we have a chance to reverse climate change in a timely manner.” So concludes political scientist Elaine Kamarck, PhD, lecturer in public policy at the Kennedy School of Government, and former head of the national performance review “reinventing government” (1993-97) in the Clinton Administration.

Kamarck’s new paper, “Addressing Climate Change: The Politics of the Policy Options,” begins by reviewing three decades of evolving public consciousness about global warming. She reminds us that cap-and-trade didn’t start as the front runner. In his 1992 book “Earth in the Balance,” Al Gore proposed a carbon tax with revenue used to reduce other taxes, an approach backed by most economists and policy analysts. But two events changed this; the apparent success of the acid rain (SO2) cap-and-trade program written into the 1990 Clean Air Act, and the political failure of Clinton’s BTU tax.

Kamarck points out the key factors behind the success of the acid rain cap-and-trade program: only a few hundred sources had to be “capped,” SO2 scrubber technology was readily available, and deregulation of rail freight prices slashed the cost of western low-sulfur coal. She notes that these factors don’t apply to carbon emissions. Curbing CO2 will require a vast array of new technologies at both the energy production and user levels, along with widespread behavioral changes. Beyond the technology differences, the number of entities regulated in a carbon control system would be many times larger than for acid rain.

Kamarck concludes that policymakers have taken the wrong lesson from the failure of the BTU tax proposal. The measure was complex, for example, taxing gasoline at a higher rate than other fossil fuels without a clear rationale. Policymakers could not answer basic questions about its effect, specifically about its cost to consumers. Kamarck says politicians incorrectly concluded they couldn’t touch tax policy; in fact, we generally accept the idea of “sin” taxes, for example on cigarettes, as both good health policy and an appropriate way to generate revenue.

Complexity, exceptions and inability to demonstrate effectiveness are very serious political disadvantages of cap-and-trade that began to surface as the Lieberman-Warner bill failed in the Senate. Kamarck observes that these drawbacks are becoming even more glaring as the Waxman-Markey bill works its way through the legislative process. Whereas politicians must be able to answer constituents’ question What will this cost me?, the complexity of cap-and-trade invites opponents to make outrageous claims about the cost that are almost impossible to persuasively refute. Moreover, in the wake of the collapse of the financial system, the public is extremely wary of trading systems that appear capable of wreaking financial havoc.

The public is also properly skeptical about a policy whose effectiveness requires the rest of the world to follow suit. Since cap-and-trade systems depend on well-developed regulatory and enforcement systems that are far beyond the capacity of many governments, the prospects for an international system based on cap-and-trade are tenuous, Kamarck concludes. In contrast, most nations have a reasonably effective tax collection system that could be used to administer a carbon tax.

Under any carbon pricing system, revenue recycling is essential, Kamarck concludes, not just for the poorest quintile as Waxman-Markey provides, but for virtually everyone, in order to put the policy on a broad political footing. She refutes cap-and-trade architect Robert Stavins’ assertion that giveaways of allowances don’t affect the integrity or effectiveness of an emissions cap. She cites the European Union’s experience where emitters overestimated past emissions to garner more free allowances which led to a very loose cap. That, in turn, brought about virtually negligible carbon prices with virtually no effect on emissions. Indeed, investment in new coal-fired power plants has increased in the EU, a sign that investors expect carbon permit prices to remain low.

Don’t assume that Waxman-Markey can be made effective, fair and transparent enough to be enacted, Kamarck warns. She suggests we start now to work out an effective system under which we can answer the question How much will it cost? with enough certainty to win enactment. Her, and our “Plan B” is, of course, a revenue-neutral carbon tax which as she points out was the original “Plan A.”

The House of Representatives is scheduled to vote later this week on the “American Clean Energy and Security Act of 2009” (H.R. 2454, “Waxman-Markey” or “ACESA”). We cannot endorse the bill. The hundreds of provisions in ACESA’s 1,000-plus pages do not add up to the steps needed to avert catastrophic climate disruption. Moreover, the bill’s emissions trading provisions create vested interests that would block future reforms.

A growing chorus of environmental and progressive voices is urging Congress to overhaul or scrap the bill. For example, the Progressive Democrats of America and Friends of the Earth are urging their supporters and members of Congress to oppose Waxman-Markey. To see their action alerts, click here and here.

There is little hope of shifting to a low-carbon economy without a clear, transparent price on carbon emissions. While ACESA’s proponents claim that its cap-and-trade provisions “put a price on carbon,” the Congressional Budget Office (CBO) estimates that CO2 allowances would rise to only $26 per ton a decade from now. That equates to a puny 26 cents a gallon of gasoline — in ten years! And ACESA neutralizes increases in the price of coal-generated electricity by giving 35% of the pollution permits to local electricity distribution companies (LDCs) with instructions to pass on that value to consumers.  If utilities pass through allowance value to customers, that will suppress the all-important price signal, and if utilities keep the free allowances they’ll reap a windfall.

The Carbon Tax Center advocates revenue recycling to protect consumers, particularly those with lower incomes, while still providing an effective price signal. In contrast, ACESA’s free allowances to LDCs would not only mute the price signal, but would enrich commercial and industrial firms that use 60% of electricity.

Effective climate legislation is urgently needed, and the upcoming Copenhagen treaty negotiations plus EPA’s process to regulate greenhouse gas emissions have created a much-needed sense of urgency in Congress. But ACESA’s complex, opaque and volatile cap-and-trade provisions are the wrong way to start an international system of carbon pricing. Trying to link cap-and-trade systems across borders would lead to instability, incentivize lax regulation and enforcement, and promote outright fraud as countries compete to become the cheapest supplier of allowances and offsets. We believe that clear U.S. commitments to specific emissions reductions and to funding for international efforts would set the stage for meaningful negotiations far more effectively than trying to build an international treaty around the convoluted structures embodied in ACESA.

As if these major flaws aren’t enough, ACESA has these as well:

1) Weak cap further weakened by offsets: ACESA’s greenhouse gas pollutant standard represents reductions of only 1-4% below 1990 levels by 2020, and 68-71% below 1990 levels by 2050. The Intergovernmental Panel on Climate Change concluded that the industrialized nations must cut far more aggressively to maintain atmospheric CO2 levels at or below 450 parts per million to avoid severe climate impacts including widespread drought, deadly storms, pervasive flooding, and sea level rise inundating entire cities and triggering massive refugee crises.

Weak greenhouse gas reduction goals in ACESA are further undermined by the two billion tons of carbon “offsets” available annually — up to two-thirds from international sources. If fully utilized, these offsets will allow U.S. emissions to keep increasing until at least 2040. Moreover, carbon offsets are difficult to monitor and enforce, raising serious doubt about their environmental value. [Ed note: As of 6/24, ACESA’s offset provisions have been further weakened by the Agriculture Committee.]

2) Weak Renewable Energy Standard: ACESA’s Renewable Energy Standard (RES) appropriately focuses on electric utilities and originally mandated that 25% of U.S. electricity come from renewable sources by 2025. That made sense, since the coal-fired electricity sector is the U.S. largest emitter of greenhouse gases. The bad news is that the mandate has now been watered down to just 15% by 2020, a level barely greater than “business-as-usual.” In addition, ACESA now defines “renewable energy” to include waste incineration and also authorizes a “Clean Energy Deployment Administration” to fund dirty energy like nuclear power and coal.

3) Handouts for the Coal and Oil Industries: Through free allowances and a hidden utility tax, the coal industry would receive approximately $150 billion over the lifetime of the bill for “deployment” of carbon capture and sequestration (CCS) technology that presently doesn’t exist and for technological and economic reasons may never materialize. Even if feasible and economical, CCS would require far more coal to be mined, transported and burned to produce the same amount of electricity. Coal mining is destroying communities throughout Appalachia and in other coal mining regions. In addition, ACESA would also give approximately $24 billion to oil refiners under the pretext that the world’s most profitable industry needs still more financial assistance.

4) ACESA over-compensates trade-exposed energy-intensive industries: ACESA allocates 15% of allowances to energy-intensive trade-exposed industries at least through 2025. While some industries merit protection from competitors in unregulated markets, a number of studies indicate that these industries can improve energy efficiency within a few years and that ACESA’s assistance is roughly double the additional cost that energy intensive firms would face.

5) Pre-emption of EPA Authority: ACESA would pre-empt EPA’s authority to regulate sources of greenhouse gas emissions under the Clean Air Act, while also overriding stronger laws at the state and regional levels. By disabling this regulatory backstop, ACESA thus ensures that its failure as climate policy will be catastrophic.

Overhaul or Scrap ACESA

The need to address climate change is urgent, but that urgency should not be used as an excuse to pass seriously flawed legislation. Congress should skip ACESA’s complexities and go back to the drawing board to develop a revenue-neutral carbon tax, managed price or cap-and-dividend approach.

Photo: James Dennett / Flickr.

(Originally posted on May 21 on Grist, under the title, Waxman-Markey: ‘80% less by 2050’ is too hard, let’s do 46%.)

I’ve read humongous books in my time, most memorably Cloudsplitter, Russell Banks’ magisterial cinderblock-sized novel of John Brown, the anti-slavery warrior whose “Bloody Kansas” campaign in the 1850s helped provoke the Civil War.

The similarly supersized Waxman-Markey bill couldn’t be more different – not just in genre, but in attitude. Where Brown gave his life to abolish slavery, the “American Clean Energy and Security Act of 2009” seems intent on postponing Americans’ day of reckoning with climate-damaging fossil fuels.

In a bid to pick up support from coal state Democrats, Waxman and Markey this week pruned their cap-and-trade “20% by 2020” greenhouse gas (GHG) reduction target to 17%. The actual reduction will almost certainly be even less, thanks to the bill’s generous “offset” provisions and the economic collapse that has pushed emissions way below levels from the 2005 base year.

Worse, if a larger share of the GHG reductions comes from “other” greenhouse gases such as methane and nitrous oxide, then reductions from fossil fuel burning will be disproportionately smaller. While that won’t necessarily hurt the climate, it will mean that many of the ancillary but vital benefits from reducing carbon emissions, such as reduced oil dependence and diminished environmental destruction from coal mining, will be watered down.

To make my points, I’m going to go quantitative and speak of emissions in “CO2 equivalent terms,” in which emissions of methane and other GHG’s are scaled up to reflect their true heat-trapping capacities. All figures are in millions of metric tons (“Tg” or trillion grams). Ready?

Total U.S. GHG emissions in 2005 were 7,130 Tg, of which 6,074 Tg was carbon dioxide. A 17% reduction (Waxman-Markey’s 2020 target) requires trimming that by 1,033 Tg to reach 5,042 Tg. But I estimate that due to contractions in driving, flying and use of electricity, CO2 emissions this year will be just 5,770 Tg, or roughly 300 Tg less than in the 2005 base year. Hence, the required reduction from 5,770 to 5,042, which is 728 Tg, is just 12.6% of current emissions. That’s one-fourth less than Waxman-Markey’s advertised 17%.

Worse, non-CO2 emissions, which accounted for 1,056 Tg in 2005, are probably fertile territory for quick and cost-effective fixes. If that component could be shrunk at twice the overall target rate, i.e., by 34%, it would contribute 359 Tg of the necessary 1,212 Tg total reduction. This would allow a mere 853 Tg of CO2 to be cut from the 2005 base year, or only 549 Tg to be cut from this year’s estimated CO2 emissions of 5,770 Tg. The latter drop, a paltry 9.5%, could be gotten with annual reductions averaging just 0.9%. And of course the use of offsets will dilute those reductions even further.

Let’s round that 0.9% annual CO2 reduction rate from 2009 to 2020, to 1%, and take it out to 2050. At that rate, in 2050 CO2 emissions would have fallen from today’s levels by only one-third. Even if non-CO2 GHG emissions were completely eliminated, total U.S. emissions of greenhouse gases in 2050 would still be down by less than half (46%) from those in the 2005 base year. There’s a world of difference, alas, between that and the ostensible 80% reduction.

I ran a few of these numbers past a journalist I know who follows climate policy. He replied that “The political deal was to eviscerate short-term drivers [reductions and price rises] in order to get a long-term framework in place.” Maybe so, but what’s troubling is that the first GHG reductions are supposed to be easier to get than the last. Not to mention that U.S. environmentalists once had pretensions of making our country a model for the world, and weren’t going to settle for anything less than science-driven reductions.

I know, I know, investments take time to bear fruit, and the bulk of the reductions to mid-century will come via economies of scale and tech breakthroughs and societal tipping points. But at this stage that’s a matter of faith as much as of empirical evidence (as well as a subject for a separate post). And, last time I checked, Congress had not abolished the Law of Diminishing Returns and its corollary about low-hanging fruit.

Some say that Waxman-Markey, while imperfect, is at least a step on the road toward ridding society of fossil fuels. With the anemic numbers shown here, it smacks more of accommodation than abolition. Our atmosphere still awaits its John Brown.

Addendum

On the same day this was posted to Grist, the Economist ran an editorial, Compromise has enfeebled America’s cap-and-trade bill. A carbon tax would be better, roundly criticizing the Waxman-Markey bill. While the entire editorial is worth reading, the conclusion is particularly trenchant:

The weakening of this bill illustrates one of the central problems with cap-and-trade systems. They are complex, obscure and therefore susceptible to horse-trading. A chunk of allowances can be handed out to one lobby, a sliver to another, and soon the system’s effectiveness has been sliced away. The corresponding attraction of a carbon tax, which this newspaper has always supported, is its simplicity. The government sets the rate. Everybody can see what it is. Voters get transparency. Businesses get certainty. And the government gets a large chunk of revenue—not to be sniffed at in these difficult times.

This is an important moment. Thanks to much effort on the part of many well-intentioned people, America is prepared to legislate to control carbon. The country needs to seize this opportunity and introduce a simple carbon tax. Sceptics will howl about the initial cost, but it will be transparent and far, far cheaper than the impact of serious climate change.

Photo: Flickr / fpsurgeons photostream

“For more than 20 years, I have supported a CO2 tax, offset by an equal reduction in taxes elsewhere. However, a cap-and-trade system is also essential and actually offers a better prospect for a global agreement, in part because it is difficult to imagine a harmonized global CO2 tax. Moreover, I have long recognized that our political system has special difficulty in considering a CO2 tax even if it is revenue neutral.” — Al Gore, quoted in New York Times, House Bill for a Carbon Tax to Cut Emissions Faces a Steep Climb, March 7.

Let’s examine Mr. Gore’s points:

Harmonization:  Mr. Gore has raised a crucial concern: Any carbon-reduction policies the U.S. enacts must quickly go global. Acting alone or counter to other nations’ efforts will not suffice.

In their seminal report last February, “Policy Options for Reduction of CO2 Emissions,” Peter Orszag (now Budget Director) and Terry Dinan of the Congressional Budget Office meticulously compared cap-and-trade with carbon tax options. They concluded that a carbon tax would reduce emissions five times more efficiently, primarily because of price volatility under a fixed cap.

CBO had no difficulty “imagining a harmonized global carbon tax.” Chapter 3 of the Orszag-Dinan report, “International Consistency Considerations,” describes straightforward ways to harmonize carbon taxes. If nations choose different carbon tax rates, border tax adjustments permitted under World Trade Organization rules authorize higher-taxing nations to enact tariffs to equalize tax rates on imported products to the same levels applied to similar domestically-produced products.

Indeed, Rep. John Larson’s new carbon tax bill employs precisely this strategy. In effect, the U.S. would collect and retain the revenue generated by equalizing carbon taxes on products imported from countries that haven’t enacted their own or whose carbon tax rate is lower than ours. That will provide a powerful incentive for our trading partners to follow our lead.

In contrast, under cap-and-trade, harmonization would require determining the implicit carbon price in a system where carbon prices are hidden and fluctuating. The CBO report observed, “Linking cap-and-trade programs would… entail additional challenges beyond those associated with harmonizing a tax on CO2.” The report noted, for example, that linked cap-and-trade programs could create perverse incentives for countries to choose less stringent caps so they could become net suppliers of low-cost allowances.

Or, the report continued, if a country that did not allow borrowing future allowances linked with a country that did, firms in both countries would have access to borrowed allowances. CBO concluded that “[O]ther flexible design features — such as banking, offsets, and a safety valve — would be available to all firms in a linked system should any one country allow its firms to comply in those ways.”

In short, national cap-and-trade systems would be nearly impossible to harmonize globally because different countries are likely to enact cap-and-trade systems with differing features that when linked would tend to defeat or de-stabilize each other. On the other hand, harmonization of domestic carbon taxes using border adjustments is a familiar and straightforward process for international trade and tax law experts under WTO.

Political Feasiblity: Gore also lamented that “our political system has special difficulty considering a carbon tax even if it is revenue neutral.” He has a point. After decades of anti-tax propaganda from the likes of Grover Norquist, Congress is understandably inclined to hide carbon pricing under a name like “cap-and-trade.” But when that first cap-and-trade price spike hits a public that was sold cap-and-trade as the un-tax, won’t its superficial naming advantage evaporate like morning dew? Will “cap-and-trade” still sound better than “revenue-neutral carbon tax” when we’re stuck with a slow, complex, costly and ineffective system?

Moreover, unlike cap-and-trade, a national carbon tax is showing signs of bipartisan support. One reason is that a carbon tax dispenses with the protracted drafting and wrangling inherent in cap-and-trade. British Columbia implemented its carbon tax in five months.

Cap-and-trade is “also essential”: Perhaps to newly-unemployed derivatives traders. But not for the rest of us. The Larson bill assures specific emissions reductions (as surely as with any other system) without the inherent problems of trading carbon derivatives. The bill automatically bumps up the carbon tax rate if emissions stray from an EPA-certified path to cut emissions by 80% from 2005 levels in 2050.

Yes, we can imagine, and yes, we must enact, a harmonized global carbon tax system. Al Gore and Jim Hansen persistently warn us: curbing the menace of uncontrolled climate change requires aggressive world-wide incentives to usher in efficiency and renewables. Price transparency and incentives for other nations to enact carbon taxes are crucial.

Rep. Larson has defied the naysayers; he has put the “t” word back on the table. Not a moment too soon.

Photo: Flickr / pbo31

A planetary crisis “threatening the young and unborn” compels a “substantial, gradually-increasing carbon tax with all revenue distributed directly as monthly ‘dividends’ to each household,” Dr. James Hansen told Congress today.

Hansen, director of NASA’s Goddard Institute for Space Studies and the unofficial dean of climate scientists, testified that measurements of Earth’s historical climate sensitivity to atmospheric CO2 make clear that rising levels are now driving our climate into ranges that will have lethal consequences. Current concentrations of 385 ppm amplify dangerous feedback mechanisms such as loss of reflective ice surfaces and release of methane gas from permafrost, he said. Atmospheric concentrations must be brought below 350 ppm as quickly as possible, Hansen stressed, specifically rejecting the target of 80% reductions by 2050 advocated by leading environmental groups.

Hansen testified at a House Ways & Means Committee hearing this morning, kicking off debate in Congress over legislation to help the U.S. achieve deep cuts in carbon emissions through a cap-and-trade system, a carbon tax, or perhaps a hybrid approach. Hansen and Union of Concerned Scientists geochemist Dr. Brenda Ekwurzel both testified in favor of vigorous action, although they differed on the cap vs. tax question. A third witness, University of Alabama professor John Christy, argued for a go-slow approach.

Hansen told the committee that a transparent carbon tax with direct dividend would “spur rapid replacement of our inefficient infrastructure” and lead to an “efficient phase-out of coal.” He strongly criticized cap-and-trade proposals, calling caps “hidden taxes,” contending that they would undermine essential price signals through price volatility while enriching traders and lobbyists at the expense of the public. He predicted that cap-and-trade could lead to "blackmail" by electricity suppliers, who would force the public to choose between meeting emissions targets and blackouts, and pointed out that the European Union’s cap-and-trade system has failed to reduce carbon emissions.

UCS’s Ekwurzel testified that acidification has already diminished the oceans’ ability to absorb more carbon dioxide — a development that will accelerate global warming. She advocated a “cap and invest” program in which emission permits are auctioned and the proceeds used to finance energy efficiency and renewable energy.

Christy’s appearance was sponsored by Republican members of Ways & Means. He testified that cloud effects outweigh human effects on climate, and contended further that any U.S. actions to reduce emissions would be overwhelmed by emissions from China and India, both of which have rejected carbon caps. He suggested that the best way to reduce CO2 emissions is a massive nuclear power construction program.

Committee Chairman Charles Rangel, who represents Manhattan’s Harlem neighborhood and parts of the Bronx, asked Hansen about the effects of a carbon tax on low-income households. Hansen explained that under his proposal to distribute 100% of carbon tax revenues to U.S. residents, a steadily increasing tax reaching $115 per ton of CO2 would result in estimated dividends of $9,000 per two-child household, assuming that adults got one “share” and each of the first two children got one-half. [Ed. note — Using CTC’s carbon tax impact model, we estimate that a $115/ton carbon tax would provide the average family of four with a $7,500 annual dividend.] Hansen noted that because households that use below-average amounts of fossil fuel would receive more in dividends than they paid in higher energy costs, his program would help the vast majority of middle- and lower-income Americans. Hansen also cited Congressional Budget Office findings that carbon taxes are five times as efficient as caps at reducing emissions.

UCS’s Ekwurzel argued that retrofitting homes and  transportation would be a better use of carbon cap revenue than direct dividends. However, she did not address whether “breaching” strict revenue-neutrality on behalf of energy efficiency and renewables might unleash a torrent of less benign uses of the cap or tax proceeds. For his part, Christy seconded Hansen’s view that a carbon tax would be  more transparent than a carbon cap-and-trade system.

Rep. Dave Camp (R-Mich.) and several other Republican members branded carbon caps as hidden taxes. They insisted that the Ways & Means Committee assert jurisdiction over any cap or carbon tax legislation.

Rep. Sander Levin (D-Mich.) responded to Christy’s testimony, saying “nobody is talking about the U.S. acting alone.” Hansen explained that the U.S. could use “average carbon content data” to set tariffs on goods from countries that didn’t enact their own carbon taxes. A U.S. tax with harmonizing tariffs would encourage trading partners to enact their own carbon taxes to negate tariffs and capture tax revenue themselves, he said.

Connecticut Democrat John Larson cited Friends of the Earth’s recent report describing carbon trading as potentially the world’s largest “dark, unregulated” derivatives market and asked why anyone should think that auctioning tradeable permits wouldn’t lead to “a speculative mess.”

During a recess in the hearing, Peter Barnes of Cap and Dividend and Mike Tidwell of Chesapeake Climate Action Network asked Hansen if he would support legislation to cap emissions and recycle revenue via a direct “dividend” to households. Hansen replied, "I don’t see what a cap gets you. We need maximum reductions as soon as possible and a tax gets that."

Committee members asked one cogent question after another. Rep. Jim McDermott (D-Wash.) focused on volatile prices under a cap, which he said would discourage clean energy entrepreneurs. Rep. Chris Van Hollen (D-Md.), a strong supporter of cap-and-dividend, asked about revenue-recycling, noting Hansen’s testimony that a carbon price will need to be high enough to affect behavior and purchasing decisions. Rep. Doggett noted that Exxon now supports a carbon tax after years of climate-change denial.

Hansen stressed the importance of a dividend to ensure continued political support as carbon prices rise. He urged Congress to direct the National Academy of Sciences to report on climate science as a way to end the debate over anthropogenic global warming once and for all. 

After the hearing, I had the good fortune to join Dr. Hansen for lunch. I asked him about clean coal. He said “there is no such thing as clean coal, and there never will be.”

Links to testimony
Hansen: http://waysandmeans.house.gov/hearings.asp?formmode=view&id=7577
Erwurzel: http://waysandmeans.house.gov/media/pdf/111/ekw.pdf
Christy: http://waysandmeans.house.gov/media/pdf/111/ctest.pdf

Photo: Flickr / World Development Movement.

Reported by CTC Washington representative James Handley. Watch this space (and see postscript below) for CTC’s analysis of the USCAP "Blueprint." Meanwhile, read these parallel critiques of USCAP:

• Joseph Romm of the Center for American Progress, via his Climate Progress blog, NRDC and EDF endorse the weak, coal-friendly, rip-offset-heavy USCAP climate plan.
• Statement by Robert Shapiro, director, U.S. Climate Action Task Force, "Policy Experts on U.S. CAP Endorsement of Cap-And-Trade: Right Intent, Wrong Policy — Climate Task Force supports carbon tax as best policy to reduce nation’s greenhouse gas emissions"
  
• Greenpeace Staff Blog: CEOs Guilty of Crimes Against Humanity Seek A Plea Bargain.

The U.S. Climate Action Partnership unveiled its cap-and-trade-based Blueprint for Legislative Action to a half-empty House Cannon Caucus Room Thursday morning. Arriving at the 9 a.m. event, attendees viewed a podium in front of an array of 18 chairs (each with bottled water) marked with names of CEOs and heads of EDF, NRDC, Pew Center, Nature Conservancy and WRI.

At 9:20, the suited “chorus” filed in, taking their assigned places. General Electric CEO Jeffrey Immelt introduced what he described as a “diverse panel” of CEOs and NGO heads. (All but Ursula Burns of Xerox is white; all but three are male. All seemed past the half-century mark.)

Each had a brief speaking role. Jonathan Lash of the World Resources Institute stressed cap-and-trade’s “flexibility and predictability,” saying the blueprint addresses impacts on consumers and includes provisions for emissions offsets to “limit volatility.”

According to the Environmental Defense Fund’s Fred Krupp, “A mandatory cap is the backbone” of USCAP’s proposal to reduce US greenhouse gas emissions from 2005 levels by 80% by 2050, with half the reductions occurring by 2030.  Charles Holliday of DuPont said the plan would maintain competitiveness of U.S. firms. David Crane of NRG Energy touted its “fairness” in “spreading costs through the economy.”  “All components of the plan are linked,” Pew’s Eileen Claussen proclaimed. To “manage price spikes” she pointed to provisions for “banking of emissions allowances,” availability of “strategic verifiable offsets” and a “reserve pool.”

John Deere’s Robert Lane stressed offsets -– credits for 1.5 billion tons of CO₂ reduction activities that would not otherwise be undertaken in sectors not subject to the cap. He noted that USCAP’s blueprint allocates “free permits initially… phasing them out.”  John Rowe of nuclear giant Exelon trumpeted renewable portfolio standards for utilities to encourage building “the lowest carbon energy” — nuclear. He said 40% of the free allowances would go to electric utilities at the distribution level — where, he asserted, cost savings would be passed to consumers.

Burns described Xerox’s early GHG emissions reductions and pointed out the blueprint’s rewards for early actions. Frances Beinecke of the Natural Resources Defense Council called the blueprint a way to “help solve both the economic crisis and the climate crisis” by “regulating all major sources, while funding energy technology research and deployment,” a “stimulus,” she said, along with clean fuel vehicle regulations.

Jim Rogers of Duke Energy, the third largest U.S. coal-burner, asserted that “We must find a way to remove CO₂ emissions from coal,” noting accelerating construction of coal fired power plants in China. He touted the blueprint’s use of auction revenue to fund Carbon Capture and Sequestration research, funding “not subject to the whims of Congress.” He said the blueprint would “require” all new coal fired power plants after 2015 to capture at least 50% of carbon.

Peter Darbee of Pacific Gas & Electric noted that energy-efficiency is the most cost-effective energy “source” and the cheapest way to reduce GHG emissions, costing about 2 cents per kilowatt-hour. The blueprint urges Congress and states to enact regulatory standards, expand rebates for buildings that outperform codes, and enact tax and regulatory incentives for consumers to improve efficiency. Darbee urged “decoupling” of utility earnings from power generated to encourage them to help customers conserve. James Mulva of Conoco-Phillips explained that the USCAP blueprint makes fuel providers “responsible” for reductions in the transportation sector and that it includes performance measures for vehicles.

Noting that forest destruction generates 20% of global GHG emissions, Mark Tercek of Nature Conservancy applauded the blueprint’s “verifiable” offsets to credit forestry projects to capture CO₂. George Noland of Siemens pointed to the plan’s goal of 40-45% reduction of GHG emissions from commercial buildings through design improvements and smarter technology. Jeff Sterba of PNM Resources touted USCAP coalition’s diversity and consensus. Lewis Hay of Florida Power advocated measures to put renewables on a “level playing field,” and Preston Chiaro of mining combine Rio Tinto argued that the plan would motivate other governments to follow.

Reporters asked about the cost of the plan. Claussen contended that its costs can’t be assessed in isolation because the plan would revitalize a new economy — for example, by encouraging building of wind power. I asked the panel why the blueprint didn’t follow President-elect Obama’s pledge of 100% auction of permits and instead sought permit giveaways ("allowances"). Darbee replied that the free permits would go to electricity distribution utilities, which would ensure that consumers benefited from them.   A reporter from Time magazine asked what the target carbon price would be; Claussen said a Carbon Market Board would decide, and that the plan is intended to avoid “a dash for (natural) gas.”

Another reporter asked about EPA authority and federal preemption of state efforts already underway to reduce GHG emissions; Krupp replied that they had not taken a position on EPA or preemption. Asked if coalition members will support the plan jointly or lobby individually, the panel indicated that there will be agreements on some elements and divergences on others.

WRI’s Lash concluded the session: “The economy will recover but without serious steps, the climate will not.” The panel then rushed out to join the first climate legislation hearing of the 111st Congress, before Rep. Waxman’s Energy & Commerce Committee.

Photo: Flickr / James Morrison.

Postscript, after reading USCAP’s vague "blueprint" (few numbers, no graphs):

Does Thirst for Offsets, Allowances Unite "Diverse" USCAP Coalition?

Offsets (1.5 billion tons domestic and 1.5 billion abroad) overwhelm the cap.  When the smoke clears, USCAP’s blueprint amounts to a source of funds for offsets.  Retaining tropical forests as carbon sinks instead of burning them is crucial (and deserves funding), but USCAP would sell "indulgences" for U.S. emissions without "repentance": no reason to reduce.  (See Hill Heat’s graph showing the huge bubble of additional emissions that USCAP’s offsets would accommodate.)

USCAP’s free allowances to downstream electricity distribution utilities would mute (obliterate?) the price signal, reducing incentives for electricity users to conserve and upgrade.

A "cap with free allowances" worked for the acid rain SO2 cap-and-trade program by pressing utilities to install scrubbers and shift to low sulfur coal without passing SO2 permit costs through to consumers.  CO2 is different– we don’t have a way to burn coal without producing CO2.  (Yes, we might someday, but even DOE’s rosy estimates say capture and sequestration would require ~ 1/3 more fuel.) 

Conservation is the cheapest "source" of energy and GHG reductions.  Gradually-rising prices, via a tightening cap without free allowances, or better yet a rising carbon tax, would push all levels of the economy to become the laboratory for efficiency and low-carbon innovation.  For a strong enough price signal without crippling the economy, an offsetting tax shift or "dividend" is needed to dampen the "income effect" (but not the incentive to conserve or substitute) of that price hike.  That’s where auction money (or carbon tax revenue) should go: all the way downstream to households.

In short: Huge offsets mean USCAP’s plan wouldn’t press U.S. industry to shift to renewables (e.g., by building wind capacity) and its free allowances mean consumers wouldn’t have reason to reduce demand anytime soon.  Pretty close to a "nothing-burger."

Reported for the Carbon Tax Center by James F. Handley

[Ed. note — two days after the Capitol Hill briefing, on Thurs. Sept. 18, the House Ways and Means Committee heard testimony on optimal pricing of carbon emissions, including a forceful presentation from carbon tax advocate New York City Mayor Michael Bloomberg; watch this space for CTC’s report.]

At least one Washington politician dares to say “tax” out loud — a carbon tax, no less.

Representative John Larson (D-Conn.) headlined a Capitol Hill panel discussion Tuesday and came out swinging for a revenue-neutral carbon tax. Larson, a member of the Democratic House leadership and the tax-writing Ways and Means Committee, called carbon taxing the most effective way to curb greenhouse gas emissions. Addressing a briefing organized by Clean Air – Cool Planet and the Energy and Environment Study Institute, the five-term Congressman invoked his constituents at Auggie & Ray’s Diner in East Hartford: “They know climate protection comes with a price tag — they want transparency up-front so they know what to expect and can plan ahead. And they want a fair, level playing field.”

Both a carbon tax or the auctioning of permits under a carbon cap-and-trade system would generate huge streams of revenue which would come under the jurisdiction of Ways and Means. The Committee has scheduled a hearing tomorrow, Sept. 18, on revenue recycling, and Larson will be on hand, presumably putting the spotlight on the American Energy Security Trust Fund Act he introduced in August 2007.

Speaking to an overflowing House banquet room, Larson, shown at right, called a carbon tax “simple, efficient, straightforward and effective” and said it will be a boon to the economy if the revenue is recycled to reduce or eliminate distortionary taxes. Following Larson, a politically diverse panel of economists — Robert Repetto, Robert Shapiro, Terry Dinan, and Ken Green — discussed ways to maximize the “double dividend” — benefits to climate and to the economy from recycling revenue from either a carbon tax or the auction proceeds of cap-and-trade.

Several noted the most egregious flaws of the defeated Lieberman cap-and-trade bill: it would have given away emission permits and auction revenues, mainly to fossil fuel industries, rather than recycling auction revenues downstream to consumers. Panelists noted that energy firms pass their costs downstream to consumers — who will need assistance. Only Repetto, of the UN Foundation, preferred cap-and-trade over a carbon tax, but with either, he wants a tax-shift — auctioning all permits and dedicating revenues to reduce other taxes.

Shapiro, a former Undersecretary of Commerce, warned of the costs and instability from price volatility under cap-and-trade, citing the U.S. acid rain program whose permit prices slosh around as much as 80% and the similarly volatile EU climate program which has achieved zero net greenhouse gas reductions. The morning after a disastrously volatile day on Wall Street, Shapiro called volatility the enemy of rational planning and efficient economic decision-making. Shapiro advocates recycling 90% of carbon tax revenue with the remaining 10% dedicated to R&D on low-carbon alternatives.

Dinan, author of a series of weighty CBO studies on climate policy documenting the advantages of a carbon tax, suggested ways to move cap-and-trade closer in efficiency to a carbon tax, for example by adding safety valves to limit price volatility. She underscored the efficiency advantages of applying revenues to reduce distortionary taxes such as payroll taxes, vs. distributing revenues equally with pro rata dividends. But Dinan and the new RFF study caution that unlike a straight dividend approach, tax-shifting out of payroll taxes would be acutely regressive, mainly because many low-income people, including elderly and the unemployed, don’t pay payroll taxes and thus wouldn’t benefit from payroll tax reductions. In contrast, dividends would go to everyone, equally, thus benefiting a clear majority of less-well-off individuals and households.

Ken Green, AEI resident economist and scientist who has written extensively about the “double dividend” from reducing distortionary taxes with carbon revenues, is rare among conservatives for supporting strong medicine to combat climate change. Because our entire society and every activity in it is built around energy consumption, changing energy prices will have profound effects, he noted, some of which must be offset. Green warned that politicizing climate change legislation or otherwise attempting to favor some constituents over others will “torpedo” the serious effort that is needed. Cap-and-trade hides the truth that we must use prices to change consumption patterns, said Green, and it will breed cynicism and undermine public support for climate protection. The public needs to understand that although fossil fuel prices will rise, they will be “made whole” as a group.

During Q&A an audience member noted the consensus for a carbon tax but asked panelists how a tax would provide the certainty that is often touted as the chief advantage of cap-and-trade. Shapiro suggested that carbon tax levels may need to be adjusted periodically to assure that emissions targets are being met. Green contended that powerful incentives for cheating and market manipulation will render cap-and-trade’s emissions certainty largely illusory. He called cap-and-trade a government-mandated constraint on supply, likening it to OPEC’s mission to limit oil supply to support prices. Just as in OPEC, cap-and-trade will bring irresistible temptation to cheat by selling outside the system and will eventually destroy public confidence, Green said.

Photo courtesy of Clean Air – Cool Planet

Guest post by Wyatt Boyd, an intern at the Carbon Tax Center and graduate student in Columbia University’s Climate and Society Program
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It usually doesn’t take long for conversations about carbon taxes to turn to “emissions migration.” Won’t a U.S. carbon price, it is asked, simply push coal-fired power plants, factories and jobs out of the country? It turns out, however, that the issue of emissions migration perfectly illustrates the merits of revenue-neutral carbon taxes.

During an internship with the Carbon Tax Center this summer, as part of my graduate work at Columbia University, I prepared a working paper that weighs the costs and benefits of a carbon tax and emissions migration. My main finding is that the risks of not pricing carbon far outweigh the possible pitfalls of carbon taxes. Click here to see a copy of my paper, Global Emissions Migration and a Revenue Neutral Carbon Tax.

My paper demonstrates that the gloom and doom about America’s industries packing their bags and heading for low-cost countries in Asia or elsewhere at the first serious sign of a U.S. carbon price is grossly exaggerated. In fact, if carbon taxing leads the U.S. to reward labor and income more, and greenhouse gas emissions less, the opposite is more likely to occur. Placing a clear and certain price signal on carbon, which by the way is elusive with a cap and trade design for all the reasons described in an issue paper prepared by the Carbon Tax Center, has huge implications for the 10 trillion dollars of new capital the IEA estimates will be available for energy investments by 2030. With a revenue neutral tax, capital will neither be left sitting on the sidelines waiting for the rules to be clarified, or, still worse, locked up in soon to be obsolete or outlawed dirty coal plants. Instead, with clean energy a clear winner on their balance sheets thanks to a tax shift, U.S. firms will capture a huge new competitive advantage in the “next big thing” in the global economy – clean, carbon-free energy. The new investments will create many new middle-income jobs at home and contribute to a sustainable infrastructure driven boom. According to the excellent new book Earth: The Sequel by Fred Krupp, President of the Environment Defense Fund, clean tech typically provides twice the jobs per investment as traditional nuclear or coal plants. The costs of not enacting a carbon tax are millions of jobs lost and trillions of dollars of new investments stuck in limbo in the coming decades. The people who harp on emissions migration rarely mention this sobering opportunity cost to not pricing CO2. 

Our country’s dependence on foreign oil creates huge economic, environmental and national security issues.   Reliance on dirty coal is an environmental disaster, with new coal plants locking us into either intolerable emissions or the need to throw away money by shutting the plants before the end of their useful lives. By providing a powerful new incentive for clean energy development and deployment, the United States will not just see new investment and sustainable economic growth for decades to come, but get way ahead of the innovation curve in key areas like concentrated solar – and export these technologies to the world! Technologies like solar thermal, direct current transmission lines and clean coal + carbon capture are rapidly maturing today. The problem is they have to compete with coal, which is literally and figuratively as cheap as dirt, when its true costs are not factored into its price. Alas, with our current stagnant and backwards energy plan, Germany and Japan are dominating the field of clean tech (about 90% market share) while the U.S. sits paralyzed for lack of responsible public policy. The real issue is not emissions migration, a drop in the bucket compared to the torrent of new investments and development that would flow from a revenue neutral price on carbon. The real issue is when will the U.S. stop searching high and low for excuses and scapegoats like emissions migration, and develop a real energy plan?

Photo: Flickr / cjohnson7

In a major address yesterday, Al Gore asked his fellow citizens to accept the challenge "for America to be running on 100 percent zero-carbon electricity in 10 years." The press coverage only hints at the power and importance of the speech. Summarizing or paraphrasing the speech isn’t enough. See and listen to it yourself, or just read it, by clicking here.

If you don’t have the time, here’s my favorite part:

Of course, we could and should speed up this transition by insisting that the price of carbon-based energy include the costs of the environmental damage it causes. I have long supported a sharp reduction in payroll taxes with the difference made up in CO2 taxes. We should tax what we burn, not what we earn. This is the single most important policy change we can make.

Here is Gore’s conclusion:

So I ask you to join with me to call on every candidate, at every level, to accept this challenge – for America to be running on 100 percent zero-carbon electricity in 10 years. It’s time for us to move beyond empty rhetoric. We need to act now.

This is a generational moment. A moment when we decide our own path and our collective fate. I’m asking you – each of you – to join me and build this future. Please join the WE campaign at wecansolveit.org.We need you. And we need you now. We’re committed to changing not just light bulbs, but laws. And laws will only change with leadership.

On July 16, 1969, the United States of America was finally ready to meet President Kennedy’s challenge of landing Americans on the moon. I will never forget standing beside my father a few miles from the launch site, waiting for the giant Saturn 5 rocket to lift Apollo 11 into the sky. I was a young man, 21 years old, who had graduated from college a month before and was enlisting in the United States Army three weeks later.

I will never forget the inspiration of those minutes. The power and the vibration of the giant rocket’s engines shook my entire body. As I watched the rocket rise, slowly at first and then with great speed, the sound was deafening. We craned our necks to follow its path until we were looking straight up into the air. And then four days later, I watched along with hundreds of millions of others around the world as Neil Armstrong took one small step to the surface of the moon and changed the history of the human race.

We must now lift our nation to reach another goal that will change history. Our entire civilization depends upon us now embarking on a new journey of exploration and discovery. Our success depends on our willingness as a people to undertake this journey and to complete it within 10 years. Once again, we have an opportunity to take a giant leap for humankind.

Canada Day — the First of July — is observed "not only throughout the nation, but also internationally." This year, Canada’s third-most populous province is giving the world extra cause to celebrate: on July 1, British Columbia becomes the first state or province in the Western Hemisphere with a comprehensive, revenue-neutral carbon tax.

The BC carbon tax starts at a level of $10 (Canadian) per metric ton of carbon dioxide, equivalent to 2.41 (Canadian) cents per litre of gasoline. In U.S. terms and at current exchange rates, that’s $8.91 per short ton, or just under 9 cents per gallon of gas. The rate rises by $5 in each of the next four years, reaching $30 Canadian per tonne (U.S. $26.73 per ton) in 2012.

The tax is revenue-neutral. As we reported in April, the province’s Finance Ministry has dedicated the revenues to four tax reduction measures:

• A new Climate Action Credit will pay lower-income BC’ers $100 per adult and $30 per child per year.

• The bottom two personal income tax rates have been reduced by 2% on the first $70,000 in earnings.

• The corporate income tax rate has been reduced to 11% from the current 12%.

• The small business tax rate has been cut to 3.5% from 4.5%.

Each provision will expand in tandem with the tax rate. And, showing impressive political pitch, the ministry last week preceded the tax with what it calls “an immediate Climate Action Dividend” — $100 for every man, woman and child in British Columbia — via dividend checks sent to province residents.

The BC program has catalyzed an intensive discussion of carbon taxes across Canada. Liberal Party Leader Stéphane
Dion is staking his party’s campaign to replace the Conservative government on a carbon tax featuring a $15.4 billion, four-year Green Shift. Canadians are receiving, and participating in, a national tutorial on carbon pricing, “tax vs. cap” and revenue-neutrality.

The BC tax is modest. One
source says it will deliver less than a tenth of the province’s legislated greenhouse gas reductions for 2020. That’s partly because abundant hydropower has obviated the need for fossil fuels to generate electricity. (Memo to BC: please consider an excise tax on electricity; power surpluses from price-induced conservation could be sold into the grid, with revenues flowing to the Climate Action Dividend.)

Still, the tax is a giant step — even a leap. At midnight tonight, North America will have its first large-scale, socially-mandated carbon price. Millions of carbon-impacting decisions will begin to be made with at least some recognition of the climate-curing effect of reduced carbon emissions.

Starting now, BC residents who use less carbon than average will be rewarded with an income boost. With luck, the province’s ruling Liberal Party will be rewarded as well by voters for showing courage, vision and populist appeal. And perhaps in the not too distant future the U.S. will take a page from its northern neighbor’s play book and supplement its imports of ice-hockey players and Canadian Club with something even more sustaining.

Graph: Flickr/paradigm4.