Search Results for: cap and trade

“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