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

A momentous debate is under way in New York City over the prospect of bringing "congestion pricing" — a concept proven in London, Stockholm and Singapore — to America’s largest and most gridlocked burg. The issue has great resonance for carbon taxing, as I argue in this piece, a slightly different version of which appeared in Gristmill in July. — C.K.

Every so often there arises an environmental controversy that tests the capacity of Americans to face reality. One such case is the Cape Wind dispute, in which well-connected Cape Codders are battling to keep a large array of non-polluting windmills out of Nantucket Sound. Another is emerging in New York City, where Mayor Michael R. Bloomberg has proposed a “congestion fee” on cars and trucks driving into Manhattan.

Backers from the mayor on down tout the fee as a cure-all: it will unsnarl traffic, relieve pollution and create a revenue stream to upgrade subways and buses, while also cutting global warming emissions.

These claims are a bit overstated. More probably there will be a single-digit increase in traffic speeds, a one percent drop in emissions citywide, and perhaps a $400 million revenue infusion for a transportation system whose annual costs top $30 billion.

But even though the immediate benefits of the congestion charge are relatively modest, the act of imposing such a charge is transformative in itself.

The real significance of the congestion charge is this: it establishes the principle that safeguarding “the commons” — our air, water and public space — requires that we exact from ourselves a commensurate price for uses that damage or deplete it.

The congestion charge puts our money where our mouth is.

Although it has mostly gone unstated, the congestion charge rests on ironclad economic logic: street space, being both coveted and finite, has a value; hence, our failure to charge a price for its use in effect substitutes rationing by waiting, for rationing by pricing — which is why New York, Los Angeles, and every city in between have traffic jams.

Accordingly, a congestion charge that confronts those of us who would drive with the cost of traffic delays we impose on each other isn’t just one means of reducing congestion — it’s the only way to do so.

Mayor Bloomberg could place traffic cops at every intersection, airlift every double-parked car and truck, and make the subways free — and gridlock would reappear within a week, as the improvement in traffic flow attracted drivers now deterred by the too-crowded roads.

The only way to permanently open up road space is to impose some form of road valuation, and Mayor Bloomberg’s pricing plan, while blunt and imperfect, is a very good start. Most important of all, though, it establishes the principle.

Much the same applies to the prevailing green paradigm for combating global warming. It’s essentially a scattershot approach built around individual technological fixes: rooftop solar cells, low-wattage fluorescent lights, high-mileage automobiles and so on.

What’s missing — crucially, fatally missing — is a valuation of the atmosphere’s limited capacity to absorb carbon emissions without damaging the climate.

Just as the high value of street space in New York demands a congestion fee, the high value of a carbon-stable atmosphere demands a fee on carbon use — i.e., a carbon tax.

This isn’t to say that tech fixes don’t have their place. They will be needed to help get off carbon, just as car and truck alternatives such as expanded subway service, exclusive bus and bicycle lanes, and, in New York, a cross-harbor rail freight tunnel, must supplement the congestion fee.

But without congestion charges and revenue-neutral carbon taxes that in effect reward every traffic-busting or carbon-reducing choice, the fixes and alternatives will be systematically underused.

The obvious, first-order, unmediated choices that will reduce congestion and carbon are things that no one can make money from — things like fewer and shorter trips, smaller homes, turning stuff off.

Congestion charges and a carbon tax will cause people to make these choices, and that is the only way killer traffic and killer climate change will be brought under control. It won’t happen just by subsidizing technological fixes whose investors have the advantage of an effective lobby.

What, then, is standing in the way of congestion fees and a national carbon tax? The power of an entrenched minority, for one thing. In New York City, fewer than one in 20 working residents drives toll-free into the intended congestion charging zone, but they know who they are and are not shy about protecting their self-awarded entitlement to a toll-free commute.

Conversely, the benefits of congestion pricing will be broadly distributed but not life-changing. Indeed, judging from polls, many New Yorkers don’t even realize they are potential beneficiaries.

“Losers cry louder than winners sing,” said University of Michigan professor Joel Slemrod in explaining the near-impossibility of overhauling the U.S. tax code, and the same holds true for the congestion fee and the carbon tax.

What is more, the benefits from road fees or carbon taxes aren’t just diffuse; because they lie in the future they are by necessity uncertain.

“There is nothing more difficult to take in hand,” Machiavelli observed in The Prince, “than to take the lead in the introduction of a new order of things … the innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the old conditions, and lukewarm defenders in those who may do well under the new.”

That is why enacting the Bloomberg congestion plan is so hard, and so necessary. America’s civic polity is stuck in traffic, so to speak. Getting it moving again will require us to imagine something other than permanent stalemate and act upon that vision.

Photo: SkyShaper / Flickr

The pie charts for electricity, jet fuel, etc. are similar, meaning that carbon
taxing can be made "income-progressive" via pro rata revenue distribution.

CTC’s proposed national carbon tax, $37 per ton of carbon ramped up each year for at
least 10 years, would reduce emissions by almost 4% annually — more than 30% by 2017.

Because CO2 stays “resident” in the atmosphere for at least a century, the U.S.
is responsible for more than 3x as much active greenhouse gas as China.

Because coal has the highest carbon content per Btu, it is
taxed at the heaviest rate under a straight carbon tax.

The Democratic Party’s top power broker on energy policy, Rep. John Dingell (D-Mich.), threw his considerable political weight behind a carbon tax today, upending the Congressional debate on climate and energy and boosting the prospects for a tax on carbon emissions. Dingell, who chairs the House Energy and Commerce Committee, came out foursquare for a national carbon tax in an op-ed article in the Washington Post.

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]

From The Los Angeles Times, July 23, 2007

He means business with carbon tax

Re "Dingell’s roadblock," editorial, July 18:

Yesterday’s Los Angeles Times ran an odd op-ed calling carbon taxes an ineffectual antidote to global warming. Unlike other critiques that brand carbon taxes as politically unpalatable, this one argued that they’re simply not up to the job of cutting carbon emissions:

“Carbon taxes — taxes on energy sources that emit carbon dioxide (CO2) — aren’t a bad idea. But they only work in some situations. Specifically, they do not work in the transportation sector, the source of a whopping 40% of California’s greenhouse gas emissions (and a third of U.S. emissions).”

I’ve known Daniel Sperling, the author of the op-ed, for decades. As the long-time director of the Institute of Transportation Studies at UC-Davis, Dan probably knows as much about automotive engineering as anyone in the world. What’s more, he’s conscientious, tireless and concerned.

So why do I think he’s wrong about carbon taxes? Actually, Dan is part right, but his message is wrong. Let me explain.

It’s been clear for awhile that carbon taxes won’t make a huge dent in carbon emissions from gasoline — relative to their impact on the biggest source of U.S. carbon dioxide: coal-fired electricity generation. There are three reasons:

• Gasoline has less carbon per btu than coal.
• Engines make better use of their btu’s than do power plants.
• Americans are less behaviorally sensitive to higher prices for gas than for electricity.

When we ran the numbers here at the Carbon Tax Center, we found out just how much gasoline would underperform while electricity overachieved under a level carbon tax. Using Colorado as a test case, we estimate that a statewide carbon tax would draw 60% of all of its carbon reductions from the electricity sector (which is responsible for 42-43% of that state’s CO2), but only 10% from gasoline (which accounts for 20% of emissions).

So we agree with Dan on some key facts. But we think he’s let his natural pessimism about price incentives (he’s an engineer, after all) run a bit amok.

For one thing, the low (10% or less) price-sensitivity for gasoline Dan cites (from his own UC-Davis study) is short-run only. The long-run price-elasticity of gasoline demand is invariably much higher since it can reflect long-term investment decisions — by households in buying more efficient vehicles, by automakers in designing and producing them, and by everyone in making location decisions that reduce driving.

Two widely respected transportation economists at UC Irvine, Ken Small and Kurt Van Dender, looked at pretty much the same gasoline data as Dan and observed the same low (under 10%) short-run price-elasticity. Unsurprisingly but importantly, Small and Van Dender found gasoline’s long-run price-elasticity to be much higher, approximately 40%.

Using that figure, and making assumptions similar to Sperling’s about the potential for substituting lower-carbon fuels, we find that a ramped-up carbon tax that increased the price of gas 10 cents a gallon every year for a decade would reduce CO2 emissions from motor vehicles further and faster than the Low-Carbon Fuels Standard Sperling touts in his op-ed.

Again using Colorado as a test case, the same carbon tax would eliminate more than five times as much CO2 in the electricity sector and almost three times as much in “other” sectors (trucking, space heating, aviation, etc.). Indeed, that tax, which in carbon terms tacks on a charge of $37 per ton (or $10 per ton of CO2) each year for 10 years, would lop off almost 40% from that state’s carbon emissions by 2020. And the revenue stream would be enormous — enough to permit the legislature to zero out the widely disliked state Sales Tax and Business Personal Property Tax by the fifth year, even while providing generous per-resident and per-employee rebates, supplementing the federal Earned Income Tax Credit to assist low-income families, and financing targeted investment in energy efficiency and renewable energy.

We’ll grant the point made by Dan (or the Times’ editors) at the top of his piece: Taxes on CO2 emissions alone won’t get us where we need to go. We’ll need judicious and creative incentives and regulations in addition to a carbon tax, and the Low-Carbon Fuel Standard that Dan is helping advance in California fits that bill. But let’s stop the nay-saying over carbon taxes. They’re the powerful tailwind America needs to get our carbon emissions down equitably, efficiently and immediately.

Photo: Tony.Gonzalez’s photostream (Flickr)