Americans Grow Up: We Reject Gas Tax Holiday (Grist)
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.
Michael Bloomberg has made it official. “I am not — and will not be — a candidate for president,” New York City’s mayor said in an op-ed in today’s New York Times.
The article ends months of speculation that Bloomberg, a self-made billionaire who has emphasized a managerial, non-partisan approach to governing, would enter the race as an independent.
Bloomberg’s announcement robs the U.S. election campaign of an outspoken supporter of a national carbon tax. In a highly publicized speech to the U.S. Conference of Mayors last November, which we reported here, Bloomberg proclaimed his strong preference for a carbon tax over a carbon cap-and-trade scheme:
[T]he certainty of a pollution fee — coupled with a tax cut for all Americans — is a much better deal. It would be better for the economy, better for taxpayers and — given the experiences so far in Europe — it would be better for the environment… [W]hy not simplify matters … by charging a direct pollution fee? … a direct fee will generate more long-term savings for consumers, and greater carbon reductions for the environment.
[A carbon tax is] like making one right turn instead of three left turns. You end up going in the same direction, but without going around in a circle first.
Bloomberg made similar remarks favoring carbon taxes over cap-and-trade at the UN Framework Conference on Climate Change in Bali in December.
For carbon tax advocates, the potential silver lining is that Bloomberg might now refocus on gaining city and state legislative approval for his plan to cut traffic and fund transit through a congestion fee to drive into Manhattan.
The conceptual and political parallels are strong between municipal congestion pricing and national carbon taxing. Both entail ending free exploitation of “the commons”; both demand a clear commitment to invest or return the revenues progressively; and both require mobilizing the multitude of citizens, who often don’t grasp that they stand to benefit, to clamor more loudly than the polluting minority whose entitlement is threatened. A congestion pricing win in New York City could undercut the notion
that a carbon tax is politically impossible.
Meanwhile, another prominent American who supports carbon taxes declared his presidential candidacy. Ralph Nader, the consumer advocate and anti-corporate crusader who turned 74 yesterday, entered the race last weekend as an independent candidate.
While Nader has been roundly criticized and even ridiculed as a spoiler and perennial candidate (Nader was the Green Party candidate for president in 1996 and 2000, and he ran as an independent in 2004), his campaign platform includes unambiguous support for a carbon tax. “Adopt a carbon pollution tax” is Issue #6 on Nader’s campaign issues page, Twelve Issues That Matter for 2008.
As a non-profit organization, CTC can’t endorse candidates for elective office. We are non-partisan by temperament as well. We anticipate that Nader’s candidacy could become a double-edged sword with respect to carbon taxes, elevating carbon taxing’s visibility but also hurting its credibility among Americans who have grown disaffected with him.
What do you think?
The news is full of stories about ice caps melting, volatile weather and other dire consequences of climate change. The National Geographic Channel is hyping its upcoming series Six Degrees Could Change the World with promotional material including frightening images of likely consequences.
So, at first glance, it was heartening to see an article in Platts titled Timing of Carbon Control Measures Will Be Critical: EEI’s Kuhn. Could Thomas Kuhn, president and CEO of the Edison Electric Institute, be saying that immediate steps must be taken to reduce carbon dioxide emissions? Could Kuhn have recognized that the world has to reduce CO2 emissions starting NOW to avert runaway climate change? Could he be urging utilities to be receptive to a carbon tax?
Sorry, no. Kuhn’s concern in the story is that utilities be able to meet any carbon control mandates without adverse effects "such as increased strains on natural gas supply and demand." Concern about climate change never came up.
Photo: Silversprite / 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.
During last night’s Democratic Presidential Candidates Debate in New Hampshire, Charles Gibson, ABC-TV News Anchor, noted that none of the candidates on the stage favor a carbon tax and asked whether it’s a bad idea or just too politically unpalatable. No one would ‘fess up to lacking political courage, courage previously demonstrated by Senator Dodd (no longer a candidate), Senator Gravel (not present at the debate), and Mayor Bloomberg (possible candidate). Governor Richardson criticized a carbon tax for passing costs on to consumers and disingenuously implied the same isn’t true for cap-and-trade, Senator Obama was intellectually honest and corrected Governor Richardson. Senator Clinton avoided the question in her response and Senator Edwards didn’t say anything.
MR. GIBSON: All right. Let me turn to something else.
Reversing — you invoked the name of Al Gore a few moments ago.
Reversing or slowing global warming is going to take sacrifice. I’m
sort of sorry Chris Dodd isn’t here because he’s talked a lot about a
carbon tax in this election. Al Gore favors a carbon tax. None of
you have favored a carbon tax. Is it a bad idea? Or is it just so
politically unpalatable that you guys don’t want to propose it?
GOV. RICHARDSON: It’s — can I answer? You know, I was Energy
secretary. It’s a bad idea because when you have a carbon tax, first
of all, it’s not a mandate. What you want is a mandate on polluters,
on coal companies, on — on — on those that pollute to reduce
greenhouse gas emissions by a certain target — under my plan, 30
percent by the year 2020, 80 percent by the year 2040. It takes
The better way to do it is through a cap-and-trade system, which
is a mandate. Furthermore, a carbon tax, that’s passed on to
consumers. That’s passed on to the average person. That’s money you
take out of the economy. So it’s a bad idea. Cap-and-trade is
mandate, but it’s also going to take presidential leadership. It’s
going to take all of us here, every American, you know, to think more
efficiently about how we transport ourself, what vehicles we purchase,
appliances in our homes.
It’s going to take a transportation policy that doesn’t just build
more highways. We have to have commuter rail, light rail, open
spaces. We got to have — we got to have land use policies where we
improve people’s quality of life.
MR. SPRADLING: Senator Obama?
SEN. OBAMA: Well, I agree with Bill, that I think cap-and-trade
system makes more sense. That’s why I proposed it because you can be
very specific in terms of how we’re going to reduce the greenhouse
gases by a particular l level. Now what you have to do is you have to
combine it with a hundred percent auction. In other words, every
little bit of pollution that is sent up into the atmosphere that
polluter is getting charged for it. Not only does that ensure that
they don’t game the system, but you’re also generating billions of
dollars that can be invested in solar and wind and biodiesel.
I do disagree with one thing, though, that Bill said, and that is
that on a carbon tax the cost will be passed onto consumers and that
won’t happen with a cap-and-trade. Under a cap-and-trade there will
be a cost. Plants are going to have to retrofit their equipment, and
that’s going to cost money, and they will pass it onto consumers. We
have an obligation to use some of the money that we generate to shield
low-income and fixed-income individuals from high electricity prices,
but we’re also going to have to ask the American people to change how
they use energy. Everybody’s going to have to change their light
bulbs. Everybody’s going to have to insulate their homes. And that
will be a sacrifice, but it’s a sacrifice that we can meet. Over the
long term it will generate jobs and businesses and can drive our
economy for many decades.
SEN. CLINTON: Charlie, let me make a connection here that I
think is really important.
I think the economy is slipping toward a recession — the
unemployment figure on Friday hitting 5 percent, the $100 a barrel oil
that we also hit this week, the fall of the dollar.
There’s a lot of pressures on middle-class families, and the kind of
costs that they have to keep up with have all gone up astronomically.
I mean, you know, the energy costs of the typical family in New
Hampshire since George Bush has been president have tripled, and
that’s far beyond what — the cost of the tax cuts that they got from
So what we’ve got to do is use energy as an opportunity to
actually jump-start economic recovery. We need to quickly move toward
energy efficiency. We should require the utilities to begin to work
for energy efficiency and conservation, costs that will be shared and
decrease the pressure on families. We need a weatherization and low-
income heating emergency program that is out there now helping
families in New Hampshire and elsewhere to cover their costs. And we
need to look at how doing what is right about energy is not only good
for our security and good for the fight against global warming, but it
will be essential in dealing with the economic challenges that we
Imagine Mayor Bloomberg had been on the stage and had repeated what he said at the United States Conference of Mayors in November:
Both cap-and-trade and pollution pricing present their own challenges —
but there is an important difference between the two. The primary flaw
of cap-and-trade is economic — price uncertainty. While the primary
flaw of a pollution fee is political, the difficulty of getting it
through Congress. But I’ve never been one to let short-term politics
get in the way of long-term success. The job of an elected official is
to lead – not to stick a finger in the wind. It’s to stand up and say
what we believe — no matter what the polls say is popular or what the
pundits say is political suicide.
Or, Senator Dodd might have repeated his earlier statement that "The American people handle the truth very, very well. What they don’t handle well is people in public life promising results without talking about what has to be done to get those results." Senator Gravel might have repeated his earlier response to the statement that some people say supporting a carbon tax would be political suicide, "I back it in any case."
Political courage is hard to find in a presidential campaign. Fortunately, the real decisions on how to address climate change will likely be made after the November elections when Congress and the new Administration will be able to focus more on economics and good policy.