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Krugman on Building a Green Economy

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Last week’s NY Times Sunday Magazine featured Nobel prize-winning economist Paul Krugman’s take on climate economics.  Krugman notes that climate modelers have gained “enormous credibility” by successfully predicting the past 20 years of global warming.  He concludes that climate trends over decades (which wash out short-term weather fluctuations), show that “the planet is indeed warming” which will lead to “massively disruptive events, like the transformation of the Southwestern United States into a permanent dust bowl over the next few decades.”

Krugman calls for the use of economic tools to curb the climate threat.  He deftly articulates how (“Pigovian”) taxes discourage pollution by placing some of the “externalized” cost of pollution back on polluters, without the inefficiency and intrusiveness of regulations.  He notes that a “cap-and-trade system produces the same incentives to reduce pollution… with the price of licenses effectively serving as a tax on pollution.”  He explains:

A pollution tax… imposes costs on the private sector while generating revenue for the government. Cap and trade with auctioning… is just like a tax.  [But current legislative proposals] involve[s] handing out licenses to existing players, so the potential revenue goes to industry instead of the government… as a way to partly compensate some of the groups whose interests would suffer if a serious climate-change policy were adopted.  This can make passing legislation more feasible.

Krugman also acknowledges Dr. Hansen’s (and our) point that cap/trade punishes individual initiative to reduce GHG emissions.  But Krugman never mentions the possibility of a carbon tax with revenue returned directly to the public, which should do even more to make passing legislation feasible and would avoid the volatility, manipulation and the need for “offsets” that effectively eviscerate the “emissions certainty” of a cap. Moreover, returning revenue to consumers rather than supporting “incumbent technologies” would encourage consumers to make the choices needed to speed our transition to a green economy.

Krugman confronts the problem of discounting the cost of future climate damage. Normal discounting (typically applied to business investments) drastically reduces the present value of future gains or losses; such discounting thus supports only small investments and low carbon taxes to avoid future climate damage. Siding with Sir Nicolas Stern, Krugman concludes that such large discounting is unfair to future generations; it effectively assumes away the potential for global catastrophe.  Thus, despite his political judgment about cap-and-trade, Krugman’s reasoning supports the view that a substantial carbon price with a serious ramp-up is needed.

Senate's New Openness to Carbon Tax Demands New 'Framing'

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With the ranking Republican on the Senate Energy & Natural Resources Committee now urging serious consideration of a revenue-neutral carbon tax, we carbon-tax advocates may want to re-examine our “framing,” even as we call upon cap-and-trade supporters to unite with us behind a carbon tax.

Let’s start with today’s news from GreenWire’s Darren Samuelsohn, which was picked up by The New York Times, that the ice jam blocking sound climate policy is finally beginning to break up:

Anna_AndresThe Senate climate debate detoured from cap-and-trade legislation today as the Energy and Natural Resources Committee weighed alternatives like a carbon tax or even sector-specific limits on power plants.

“We need to dispense with the blind loyalty to cap and trade, or at least begin to question if it is warranted,” said Sen. Lisa Murkowski (R-Alaska). “We should objectively review the strengths and weaknesses of our policy options and develop a measure that protects both our energy and the environment.”

Murkowski, the committee’s ranking member and a co-sponsor last year with Democrats of a cap-and-trade bill, said Americans now associate the cap-and-trade concept as a tax that will raise prices on a range of consumer goods. That, she added, should prompt Congress to consider other less-expensive legislative approaches that take aim at reducing greenhouse gas emissions.

“We need to be honest about those costs, and ensure that the revenues associated with them are returned to the people who will bear the burden of compliance,” Murkowski said.

Here are my takeaways from Murkowski’s statements:

  1. The odds for passing the Waxman-Markey / Kerry-Boxer cap-and-trade bill are worsening steadily.
  2. With Sen. Bob Corker (R-Tenn.) and Rep. Bob Inglis (R-So. Carolina) already in the fold, a semblance of a “GOP Caucus for a Revenue-Neutral Carbon Tax” may be starting to emerge — in contrast to monolithic Republican opposition to carbon cap-and-trade.
  3. The political fallout from cap-and-trade has the potential to make winning public acceptance of a carbon tax even tougher.

The import of Takeaway #3 is obvious: Committing to revenue-neutrality may not be enough to push a carbon tax through the political fog and past the fossil-fuel lobby. And rhetorically tying the carbon tax to a tax-shift and/or dividend may not suffice, either. Radical re-framing may be in order.

One possible approach is to push the tax dividend before the tax itself. That’s precisely what the Canadian environmental campaigner and writer Silver Donald Cameron did in an essay last month, Tax Those Carbon Gluttons:

LEMME TELL YOU about a carbon tax you’re gonna love… The fun starts with the government giving you maybe $2,000 as a carbon dividend.

You like it so far? Thought so. And the government gets the money by imposing a tax on everything that emits carbon dioxide into the air. The total amount raised by the carbon tax is the same amount that’s being distributed as a dividend. So it’s a wash. The government is no better off at the end of the day.

But you’re better off — if you’ve been frugal with energy, living in a snug house with solar hot water and wood heat, travelling on public transport, eating local food. You lose a bit of your dividend in taxes on gasoline and electricity and what-not — but you get to keep a good chunk of your carbon dividend. Let’s say you pay $400 more in taxes. That money just reduces your windfall dividend. The carbon tax still leaves you $1,600 ahead. How does that sound, sonny?

Fred Foulwater doesn’t.

Fred’s a carbon glutton, so he’s definitely worse off. Sure, he also gets his $2,000 dividend — but he lives in a huge house in the outer suburbs, he doesn’t turn down his thermostat and he commutes 60 kilometres to work in a monstrous SUV. He has a penchant for exotic tropical fruit in midwinter and he flies a lot, so in the end he pays a lot of tax — which doesn’t exactly feel like a tax, but feels like higher prices. Let’s say Fred’s profligacy adds $3,600 to his overall tax bill. So the new taxes have eaten up all of his $2,000 dividend — and another $1,600 besides. That’s the $1,600 that ended up in your pocket, buddy.

Pollute if you want. Buy junk if you like. Emit as you choose. But it’s going to cost you — and the money captured from you goes directly to your clever neighbours. As time goes by and the whole society becomes more serious about slashing emissions, the taxes and the dividend go up. Stupidity becomes more and more expensive.

(Emphases added.  Cameron’s piece is no longer available at its original Nov. 22 posting at the Nova Scotian / Chronicle Herald, but by clicking here you can download it as an MS-Word doc.)

I happen to like Cameron’s messaging. A lot. I like that he puts the “dividend” up front. (By the way, the dividend could be a tax cut  as well as a check, though the check seems cleaner and clearer.) I like the libertarian, “Pollute if you want … But it’s going to cost you.” And I like the simplicity.

A carbon tax, even revenue-neutral, has always been a tough sell. The fact that cap-and-trade has been partly branded as a carbon tax might make the sell tougher still. But we may be breaking through the “That’s politically impossible” screen. With the right messaging, we could get there — into and through Congress — even faster.

Photo: Flickr /Anna.Andres

Memo to Sen. Kerry: Climate Science Includes Economics

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U.S. climate activists are gleeful at Sen. John Kerry’s demolition of a sometime climate skeptic at a Senate Finance Committee hearing on Tuesday, and justly so. Ken Green, a resident scholar for the corporate-financed American Enterprise Institute, won the respect of carbon tax advocates two years ago, when he co-authored an AEI report that powerfully made the case for a revenue-neutral carbon tax over a cap-and-trade system. But as an invited witness on Climate Change Legislation: Considerations for Future Jobs, Green attempted to argue that Earth’s ecosystems and human civilization could safely accommodate a global temperature rise of 2 degrees Celsius, though he admitted that any larger temperature rises would be dangerous. Kerry skillfully “outed” Green as an amateur in climatology who had published no peer-reviewed studies and could point to none to support his climate blandishments.

The interchange, summarized in a 6½-minute video assembled by Joe Romm at Climate Progress, showcases Sen. Kerry’s skill as a cross-examiner and reveals just how flimsy and muddled the case questioning the climate crisis really is. Lost in the euphoria, however, is evidence of the Senator’s own confusion — not on the need to act to avert climate catastrophe, but on the workings of competing means of pricing carbon emissions.

John_Kerry_The_Minnesota_IndependentIn an earlier part of this week’s hearing, Sen. Kerry repeated a point he made in an August 4 Finance Committee hearing on Climate Change Legislation: Allowance and Revenue Distribution: a carbon tax wouldn’t reduce emissions, Kerry claimed, because polluters would “just pay the tax,” whereas a cap would force them into making the desired reductions.

Of course, as anyone versed in climate economics knows, and as the economist-witnesses explained in August, a carbon price of, say, $20/ton would produce the same emissions reductions whether the price was set by traders in a carbon market or directly via a fee on fossil fuel producers. Under a cap with a $20/ton permit price, emitters would have no greater (and no less) incentive to reduce emissions than they would under a $20/ton tax. Reductions that can be made for up to $20 per ton will be made in either system because they will yield the same savings — as permits that wouldn’t need to be purchased under a cap, or as taxes that wouldn’t have to be paid under a tax. Similarly, reductions costing more than the set price won’t be made because it will be cheaper to “just buy the permits” (to adapt Sen. Kerry’s phrase), or “just pay the tax.”

Under either system, then, emitters retain the flexibility to make reductions when those reductions are cheaper than the carbon price and to pay the allowance cost or tax if that turns out to be cheaper. That flexibility about where, when and how to make reductions is why either a carbon cap or tax is more efficient than source-specific regulations which would force emissions reductions at times and places where they’re more expensive and would miss some reductions that were cheaper.

In the August hearing, Sen. Kerry questioned whether American businesses and households would actually respond to higher fuel and energy prices. In doing so, Sen. Kerry overlooked the vast body of evidence quantifying price-elasticity in virtually every sector of the U.S. economy. He also had evidently forgotten what happened during the summer of 2008 when gasoline hit $4/gallon: traffic congestion eased, carpools, buses and trains filled up, and SUV sales tumbled. And that was only the short-term effect of a price spike; a long-term, predictable carbon emissions price increase would allow sound business planning and create incentives for long-term investment in energy efficiency and low-carbon alternatives.

And that points to a key reason that cap-and-trade is an inferior way to set a price on carbon: the price signal under a cap would be “noisy” due to both volatility and the fact that the price must be “revealed” through the market workings of the cap rather than being stated, explicitly, in the tax code. That noise means that with cap-and-trade it takes a higher price for the economy to “hear it” and respond, even if the general trend is upward.

Sen. Kerry is on solid ground relying on peer-reviewed climate science. But his ongoing misunderstanding of the workings of carbon pricing is almost as shocking as the AEI witness’s misrepresentation this week of climate science. It’s past time for both sides to get it right: The consequences of unmitigated climate change will be grave, whereas clear, simple, predictable carbon pricing is essential to catalyzing the solutions.

Photo: Flickr / The Minnesota Independent

Senate Warned: Cap & trade Volatile, Offsets Ineffective

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CTC Washington rep James Handley shares his notes from yesterday’s Senate Energy & Natural Resources Committee hearing on price volatility and cost containment for cap & trade:

I was encouraged. Many Committee members seem interested in working to make cap & trade more like a price mechanism via a “price collar.” “Revenue recycling” also came up. “Carbon tax” was discussed more than I’ve heard since the House Ways & Means hearings last spring. There was considerable candor and minimal posturing. My summary is a bit long, but the entire hearing was compelling and perhaps significant. I’ve bolded some of the highlights.

(Chairman) Sen. Bingaman: Price volatility as well as total cost, important concerns…

Sen. Murkowski: Climate is serious problem. Alaska witnesses. One reason Lieberman-Warner failed is that it didn’t control costs adequately.

Opening Statements:

Brent Yacobucci, Congressional Research Service: Price collar (floor & ceiling) most comprehensive way to control volatility and overall costs. Ceiling / safety valve is cash payment in lieu of buying allowances. RES passed by ENR does include “safety valve.” Lower limit, — reserve price. ACESA strategic reserve– not certain effective.

Eileen Claussen, Pew Center on Global Climate Change: Cap provides way for gov’t to set limit, business to meet limit with flexibility. Price of offsets and low carbon technology determine allowance price. EIA says if int’l offsets barred, would increase allowance price 65%. Low carbon tech– CCS and nukes would reduce climpliance costs. Multi-year banking provides “when” flexibility for redxns in cap/trade. Advantage of cap — slow economy carbon price drops– automatic adjustment. C-tax would require gov’t to intervene. Strategic reserve pool similar to price cap– w/o detracting from envt’l integrity.

Michael Wara, Stanford University (Law): Researched emissions trading, offsets under (UN, EU) CDM. Two conclusions: 1) offsets cannot provide cost control and environmental integrity. 2) price collar can provide both. Need durable program, thru 2050. CDM experience suggests that env’tl integrity [of offsets] difficult to measure. Establishing envt’l baseline — difficult. Hardest in heavily regulated sectors. E.g., China, energy sector already regulated, includes subsidies, regulations that already favor renewables and nat’l gas. Can’t determine if benefits are additional. Difficult to produce large enough quantity of credits/ offsets (to manage allowance price). ACESA 20 – 50 times larger than CDM and need higher envt’l integrity. ACESA dependent on offsets. Most redxns — offsets, rather than covered entities. Quantity certainty in doubt. (Price) collar = superior price control. Use $ from price collar to fund GHG reduction projects. Recommends collar instead of offsets.

Joseph Mason, Louisiana State University: Two approaches: quantity (cap/trade), price (carbon tax). Cap/trade assumes banking and borrowing can be optimized. But central banks’ experience with monetary policy shows that controlling money supply (or allowance supply) is very problematic. Bagehot’s rule: liquidity crisis addressed by “lending freely at a penalty rate.” Fed’s “discount window” for lending to banks not used much now. Similarly reserve requirements not used to control monetary policy. Tools for monetary control not well understood and can be gamed by speculators — might try to run up prices to game the bank. banking leads to hoarding, attempts to corner markets. Expiration dates on permits call to mind Zimbabwe’s currency which has expiration dates. Convoluted market design is un-necessary, carbon tax accomplishes directly. Borrowing institutional structures from one realm (monetary system) and applying to another (carbon trading system) rarely works. Tax achieves goal of price certainty.

Jason Grumet – Bipartisan Policy Center: Support price collar, strategic reserve and aggressive oversight of market. Tremendous uncertainty — offsets. 1 billion very unlikely to be available.

Q/A:

Sen. Bingaman: Int’l forestry projects — need to fund. Offsets?

Wara: Need 1) objective baselines, quantify offsets, 2) solidify property rights in develping countries. W/o certainty of prop ownership, more uncertainty about land use. Major developing co’s — delicate issue = land titles.

Grumet: largest source of int’l offsets = forestry. but not avail next 12 – 36 mos.

Claussen: Real possibility, US engage in int’l forestry regime.

Bingaman: EU not recognizing foresty offsets b/c no baseline. Domestic offsets?

Wara: Ag offsets very difficult to do well. Already have programs for tillage. Can monitor smokestack. Field isn’t smokestack. Soil varies, history varies, water, weather… many quantification problems.

Sen. Murkowski: House bill relies so heavily on offsets. People at home scratching heads. How does it work? Rob’t Shapiro (former Clinton Admin) says “trillion dollar mkt securitized by Wall St.” How avoid? Carbon Tax?

Mason: to stabilize prices, (carbon) tax avoids problems. Offset verification, similar problems to mortgage verification. reckless to go into new market. Prop rts critical. must be stable to sell meaningful offset. Developing co’s have political instability. Big investment in offsets could lead to another bailout. Parties (buyer and seller) have incentive to overstate value, game system.

Grumet: Bipartisan carbon tax proposal would gain steam if someone would propose. short of that, collar = elegant solution. reduces potential for malfeasance.

Sen. Cantwell: Mason’s testimony is “music to my ears”. Specificity in EU. Enron needed “the tape” of “get grandma” to trigger investigation. Now see problem in EU. System inherently favors special interests. Predictability = different way.

Mason: Insulate mkts from those w/ overt interests. In Britain, speculators intervened to push strategic reserves. Tax doesn’t need to be set to internalize all costs. Even nominal “user fee” encourages some behavior change. Might get 80% of benefit with moderate price. Can do today.

Sen. Cantwell: Benefit of floor?

Grumet: Wall St / spec interests. but also want to stimulate innovators. floor reduces price uncertainty– now investors must assume zero carbon price. $10 could do a lot.

Wara: Floor means (green energy) investors can go to bank and borrow. EU — downside risk actually greater than hi prices.

Sen. Corker: Rube Goldberg notion – vehicle. price volatility. Why don’t climate chg advocates level and say we need higher C price? floor would reward investors. Why not tax? (I restrained my impulse to applaud.)

Claussen: Would support carbon price / tax if high enough to get redxns. Offsets are low cost reductions.

Sen. Corker: Isn’t a tax a better approach? Aren’t int’l offsets just wealth transfer abroad? Why not recycle revenue into our economy?

Wara: “Vast majority” of reductions would be offsets (under ACESA).

Sen. Corker: Safety valve + price floor, in essence carbon tax. Wish public could hear all this.

Sen. Shaheen: Not sure public should hear. Public would be concerned. how set prices? Market? How do cap and limit prices w/o interfering in market?

Grumet: “Interference” with volatility is salutory. Set floor at $13 – 15 and ceiling at 2x, eg $28 would get redxns. $20 price makes electric convert. $25- 30 sustained.

Claussen: support price floor (but not ceiling). Hard cap, too high. strategic reserve better than price ceiling.

Sen. Shaheen: how set floor?

Grument: price needs to support technol investors. clarity that there will be a price would help a lot. eg $10 floor rising 5 – 10% would be very meaningful. if too low, lose potential to encourage innovation. rate (eg $8 vs 15) is political decision, but certainty is very imp’t.

Mason: Price is zero now. dithering– waste time, investment. Objects to cap/trade because of well identified externality problem. do not know what right amount of carbon is. (unlike acid rain.) could start with modest carbon tax, and later change to quantity-based system.

Sen. Stabenow: quantify Ag offsets. Sec’y of Ag doing great job. Price collar– agree floor and ceiling. also support offsets. Wara — critical of offsets. “Smart design choices” eg re deforestation. Would you eliminate offsets? CBO found that w/ offsets, allowance price in 2030 ~ $40/T. w/o offsets, $138/T. Share Corker’s observation — int’l offsets– want reductions where “ton of carbon = ton of carbon.” Offsets vs Collar?

Wara: Both design, better than offsets alone. mulitple parties favor cheap offsets. Buyer and seller. regulators have wide discretion. pressure to create credits. favor creation over integrity. Price collar improves integrity of offsets– greater incentives to regulate effectively.

Grumet: Need both. But concern re offsets as (sole) containment. Pressure, low qual offsets. undermined if collar, not unlimited offsets.

Sen. Barrasso (R-Wyo): concern Wall St gaming. cap/ tax green collar crime. abuse, UK suspended energy auditor (Guardian article). SGS suspended 2d company suspended. Another Enron situation?

Wara: SGS suspension = positive step. previously auditors impunity. need incentives for auditors. adequate, no. but improvement, yes.

Mason: pattern familiar financial crisis. 1400 pages (ACESA) lots of places for influence and holes. too little environmental effect for too much cost. Chicago climate exchange hired lobbyists – want lax rules for trading, offsets, early action credits, don’t want limits on who can trade. banks supply credits for allowances.

Sen. Dorgan: day trading oil very volatile. collar discussion. lack of confidence in mkt. not support $1 trillion new mkt. diminishing product year by year. “rolling seas of cap & trade” set price. estimate size of market and range of volatility?

Mason: $1 trillion is under-estimate. volatility — hard to see mkt w/o volatility. if we don’t like volatility, we shouldn’t choose market to set price. will bail out when price goes up (?) energy cos can trade, arbitrage opp’ys.

Sen. Dorgan: derivatives / swaps have already in EU. new products. hang US growth on this? prefer “carbon fee”?

Grumet: since BTU tax, don’t say “tax”. if serious about problem, then support carbon tax. if not, have to fix market.

Sen. Dorgan: regulation of markets, pathetic.

Grumet: collar is training wheels for mkt. balance mkt.

Sen. Dorgan: need to talk about all alternatives– regulation and carbon tax as well as cap/trade.

Sen. Bennett: conclusion of Mason (p 20) “hinging econ growth on complex contract and market design both of which have yet to be tested in the real world”. Any cost / benefit on cap/trade, or carbon tax or command/control?

Wara: NYU law school did cost/benefit analysis of cap/trade and found very positive.

Clausssen: lost of analysis re costs but few on benefits. but believe benefits far exceed costs.

Yacobucci: range of benefit is very wide.

Sen. Bennett: Temp redxns– wide “delta” —  impact on Temp de minimis.

Grumet: Must assume US is leading world. same as any big problem, hunger, poverty, war… price collarwould avoid underminining econ strength. then support taking 2d and 3d steps.

Sen. Bennett: problem– US leads but no one follows, then stuck with program.

Claussen: w/o US action, no world action. if we do act, then (others actions) depend….

Sen. Bennett: Visited EU. $20/T trading. advice they gave– “go slow, start small.”

Sen. Bingaman: “Well we’re certainly following that advice.” (laughter)

Sen. Murkowski: cost concern. mechanism to recognize recession?

Grumet: econ has changed discsn. if pass law now, effective maybe 2014. recession will be past. uncertainty in carbon mkts is deterring investment now.

Wara: Health care analogy apt. existing system — EPA will regulate under CAA. not as if nothing there. do nothing is not an alternative. EPA proceeding.

Sen. Cantwell: transition– EPA estimates $1.4 trillion int’l offsets under ACESA. What could we buy here with that?

Wara: EPA unrealistic. low cost offsets. presumes $1 billion T/yr. Thinks will be much smaller.

Mason: property laws. change rules. no property tax, owners sit on land and don’t use. immediate benefits from carbon price. US shipping pelletized wood to EU for offsets. Where does that make sense?

Sen. Corker: not enough offsets? assuredly “enough hucksters” to sell trillion $ figure. way to benefit taxpayers– rev-n carbon tax, no $$ leaving economy.

Grumet: right goal exactly. challenge– how to give back equitably. (ACESA) efforts to divert allowances to utilities, state regs on utilities — rev’s to ratepayers. cap / dividend?

Mason: Markets — no boundaries. Taxes do (have boundaries).

Wara: distn of revenue. complicated. firms have some (legit) claims. households also. taxes theoretically better. but not necessarily simple. want single rate. hard to do in real world. EU– not simple. $ for adaptation. tax scheme will want exemptions. should explore tax but won’t be simple.

Sen. Corker: Ancillary goal of cap/trade. takle in $ then spend $6 trillion in last year.

Sen. Bennett: “Trust fund” / ear mark defeats appropriations discretion. EU covers utilities not automobiles. why? they only have accurate data on utilities. Saw big pickup truck with sticker “this truck is offset by… ” XYZ website. Real? Accurate data?

Claussen: EU over-allocated. system failed. now have data.

Wara: US EPA doing inventory— reporting GHG emissions. EU mobile sources already taxed. Germany equivalent to $220/T. states regulate at refinery. RAC [Refiner Acquisition Cost & volume of crude oil, reported to EIA] = good data. at pickup truck — not good data.

(Some) Carbon Tax Advocates Are Serious

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CTC rep James Handley’s comment on columnist Eric Pooley’s recent piece “Exxon Works Up New Recipe for Frying the Planet” (Bloomberg) sparked this illuminating, constructive exchange.

Dear Mr. Pooley,

Thanks for your article. Climate crisis deniers are indeed doing great harm. Are they really changing tactics from bogus science to bogus economics or just using both? I was with you until I read this:

“A tax wouldn’t guarantee any carbon reductions, let alone bring about the steep cuts needed to stave off the worst climate changes.”

If you’re suggesting that a cap would “guarantee” emissions reductions in some way that a tax would not, I must disagree.

Consider economist Alan Viard’s Aug. 4 testimony to the Senate Finance Committee:

If the market price of allowances under cap and trade is $20 per ton, every firm has an incentive to take any step that can reduce emissions at a cost of less than $20 per ton, but no incentive to take any step that reduces emissions at greater cost… precisely the incentive that each firm would face if it were subject to a carbon tax of $20 per ton or if it were subject to a cap-and-trade program (with the same $20 allowance price) in which all allowances were auctioned.

… The difference, of course, is that the carbon tax or the auction would raise government revenue equal to the aggregate value of the allowances. If the allowances are freely allocated, then that value instead accrues to firms. Cap and trade with free allocation is equivalent to a carbon tax with transfer payments to firms.” [Emphasis added.]

I work with the Carbon Tax Center because, along with most 3008597225_8813ce8c7ceconomists who’ve considered the question, I’m convinced that a clear, transparent, gradually-increasing price on carbon pollution is essential to spur energy conservation as well as development and implementation of alternatives to fossil fuels. A carbon tax, with revenue recycled directly to households to build political support and mitigate the economic impacts of what portends to be a decades-long trek to a low carbon economy, offers a real “game changer” to move broadly enough to substantially mitigate climate catastrophe.

British Columbia has shown that a revenue-neutral carbon tax can be implemented in a few months and gain public support. And it’s far more effective than trading in carbon allowances, especially with offsets. Price volatility has prevented the EU’s cap-and-trade from spurring investment in alternative energy and conservation. See e.g., EU Cap-and-Trade System Provides Cautionary Tale (Roll Call).

The enemy of my enemy isn’t necessarily my friend. Climate crisis deniers’ opposition to cap-and-trade doesn’t make it a good idea. And the “endorsement” of a carbon tax by (former?) deniers can obscure the fact that a growing environmental and social justice coalition is advocating a carbon tax with revenue-recycled to households. Please don’t help the “deniers” poison the water for the most effective, transparent climate policy.

– James Handley, Carbon Tax Center

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James,

Thank you for your very thoughtful note. A full treatment of the cap v. tax debate was beyond the scope of the column, but I didn’t mean to suggest that a well -designed tax would be unworkable, rather that any tax Exxon would support is likely to be ineffective.

My basic concern here is political rather than economic– that the carbon tax will siphon enough support to derail cap and trade, but not enough to pass, and we will be left with nothing. I tend to agree with Al Gore when he points out that the nations that have been most effective in reducing emissions have both a cap-and-trade program and a carbon tax in place; ultimately we are likely to need both as well, but that’s a ways off. In the meantime, as Gore has said, “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.” The fact is, cap and trade is the only climate program that has a chance of passing now. There’s a big game going on inside the stadium, but the carbon tax proponents are outside in the parking lot, dreaming about next year.

I don’t think cap and trade is (as many tax proponents have argued) a faintly disreputable cousin to the tax which no one would welcome if the tax itself were passable now. I think the cap has real advantages, which I’ll get to. I understand the longing for a simpler approach to the problem but have my suspicions about the simplicity argument; a tax bill would have to respond to the same legitimate regional and sector cost issues that complicated Waxman-Markey, so a bill that could pass would not be simple. How for instance would the straight per capita tax rebate or payroll offset I often see proposed deal with the higher cost burden in coal-dependent states? Staffers on the Hill tell me that adjusting the tax every few years would require a new Act of Congress every few years — it’s hard enough to get this done once.

The free allowance formula devised by EEI and incorporated in Waxman-Markey, by taking into account carbon intensity, isn’t perfect but does a good job of responding to the regional disparity issue. And since the bill requires LDCs [local (electric) distribution companies] to pass on the value of all allowances to their ratepayers, it would prevent the LDCs from enjoying windfalls. Alan Viard’s testimony ignores this requirement when it claims that the value of free allowances accrues to firms. That’s not how the bill works—it’s one of many misconceptions about Waxman-Markey. Overall I’m impressed with the way Waxman et al. learned from the mistakes in the EU ETS. Over-allocation and lack of baseline data were the biggest drivers of volatility there, and this program would avoid those. Nor would utilities be able to charge opportunity costs to their ratepayers, as EU generators did. Giving the transitional allowances to LDCs instead of generators solves other problems as well. It sends a clean price signal to the generators while cushioning ratepayers.

As for the ‘guarantee,’ of course there is no magic wand. But the cap is more than a price signal. We do have the technology to monitor and verify reductions, and I want to see that framework put in place as soon as possible. Finally, no one seems to talk about the penalties for busting the cap, which under Waxman-Markey amount to 2x the allowance price plus a replacement allowance, or three times to compliance incentive — under your $20/ton comparison, the compliance incentive for the cap is actually $60 per allowance, vs. $20 for the tax, plus the strong market signal driven by the knowledge that the cap is ratcheting down over time. The aggressive 2030 reduction target in Waxman-Markey — 42% below 2005 levels —has not received the attention it deserves. It would transform the energy investment decisions of American businesses.

Thanks again for your email and for your work at the Carbon Tax Center. I really would welcome either a tax or a cap. But at the risk of turning your words against you, let me suggest, as someone who has been watching this debate unfold, that it is the carbon tax advocates who have at times been poisoning the water against the cap. Probably both sides have been guilty of this, but it’s too bad that the climate action community is divided at the very moment unity is so badly needed.

– Eric Pooley

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Eric,

Thanks for your reply. I think we’re in strong agreement on most points. I want to respond to three:

1) You wrote: “My basic concern here is political rather than economic– that the carbon tax will siphon enough support to derail cap and trade, but not enough to pass, and we will be left with nothing…”

Fortunately, it’s not ACESA or nothing. Although, given that ACESA’s attempted domestic emissions reductions are so modest, and that its cap-and-trade system would entrench Wall Street traders and purveyors of offsets and set the stage for another financial crisis, I’d probably opt for nothing.

If ACESA fails to pass, EPA can continue to develop a regulatory system under the Clean Air Act, which the Center for Biological Diversity has concluded could be quite comprehensive (and might include a cap-and-trade system). This is likely to be better than ACESA in several key ways. For instance, I gleaned from EPA’s Advance Notice of Proposed Rulemaking last year that its rule would not include offsets. (Can you imagine EPA trying to justify the up to 1.5 billion tons of international offsets — essentially, transfer payments — that make a mockery of the notion of a “hard cap” in ACESA?) Furthermore, ACESA as passed by the full House would eviscerate EPA’s proposal to account for indirect impacts of biofuels (e.g., forest clearing to grow corn for ethanol).

Because the Clean Air Act covers stationary sources, mobile sources and the content of fuels, the scope of an EPA GHG reduction program can be very broad. President Obama’s representatives could go to Copenhagen with an EPA draft rule in hand, pointing out that the U.S. is in the process of regulating (or “capping”) more of its GHG sources than any other industrialized nation. That’s far from the most effective policy (a revenue-neutral carbon tax) but it’s also a long way from “nothing.”

2) You quote Al Gore “…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.”

Gore’s got it backwards. As the Congressional Budget’s report, “Policy Options for Reduction of CO2 Emissions,” explains, if nations choose different carbon tax rates (or fail to enact them) WTO authorizes border adjustments to equalize tax rates on imported products to the same levels applied to similar domestically-produced products. In effect, the U.S. would collect the carbon tax on imports from any country that didn’t enact its own, providing 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 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 tend to create perverse incentives for countries to choose less stringent caps so they could become net suppliers of low-cost allowances.

Moreover, as Elaine Kamarck of Harvard’s Kennedy School has pointed out, almost every nation has a tax collection mechanism that could be used to administer a carbon tax, but few (if any) have the means to enact and enforce a complex cap-and-trade system. If we’re going for a global carbon reduction system, it’s a carbon tax.

3) You wrote: “…a tax bill would have to respond to the same legitimate regional and sector cost issues that complicated Waxman-Markey, so a bill that could pass would not be simple… adjusting the tax every few years would require a new Act of Congress every few years — it’s hard enough to get this done once.”

The complexity (and length) of Waxman-Markey seems to have much more to do with preserving (and even expanding) the coal industry than with addressing regional disparities in household income caused by carbon pricing, which, in fact, are relatively small. (See our summary: Regional Disparities.)

Economist Dallas Burtraw (Resources for the Future) studied the regional “incidence” of carbon pricing and concluded that regional differences are dwarfed by very large disparities across the income spectrum. CTC’s proposed carbon tax shift would more than compensate for the inherent regressivity of a carbon tax by distributing revenue progressively either through a payroll tax cut (as proposed in legislation introduced by Rep. John Larson) or a direct, equal distribution. Waxman-Markey only attempts to compensate the lowest income group, leaving middle income households to shoulder the burden of carbon pricing. (Burtraw and others have also shown that ACESA’s free allowances to LDCs would mostly benefit commercial, not residential electricity users.)

We recognize that some regional adjustment might also be needed; but that’s a relatively simple proposition under a carbon tax and could be done administratively, without the need for legislation. Rep. Larson’s bill provides for automatic increases in the carbon tax level to ensure that the trajectory of emissions reductions is in line with the scientific consensus.

Thanks again,

James

———-

James,

I think you’re kidding yourself about the EPA’s ability to impose cap-and-trade under CAA. Someone who knows a lot more about politics than either of us, former White House Chief of Staff John Podesta, has said it would be difficult for EPA to do so without Congressional assistance. Protracted litigation would see to it that years went by before such a system came into force. And there is no chance that an administration promise of such rulemaking – which any subsequent administration could undo – could form the basis of a treaty.

Dallas Burtraw is a fine economist, but the many Senators and members of Congress I have been talking to all summer simply do not agree with him. Regional and sectoral disparities are the single biggest obstacle to climate action, and lawmakers do not believe that the “simple carbon tax” solves them. That’s why Rep. Mike Doyle of Pennsylvania backed Waxman-Markey instead of John Larson’s carbon tax. It’s one of the reasons Waxman-Markey passed the House and Larson’s bill didn’t make it to markup. If the politics were reversed and a carbon tax had a shot at passing, I would expect cap-and-traders to get behind the carbon tax and push hard. But right now, it is the cap that has a real chance of passage, and it could be years before the next opportunity presents itself. Please don’t let your strong shoulders go to waste.

– Eric

———-

Eric,

Regional and income disparities arise under either a carbon tax or cap-and-trade (in fact, Burtraw considered it the same problem), but it’s easier to mitigate these regional and income disparities under a transparent carbon tax by directly distributing the revenues to households.

Rep. Larson and the other members of the Ways and Means Committee, which held a series of very illuminating hearings last spring about the very serious volatility and gaming with cap-and-trade, didn’t get a shot at climate legislation because the House leadership didn’t permit amendments – they didn’t want any discussion of alternatives to cap-and-trade.

I agree with economist Robert Shapiro (Clinton undersecretary of Commerce and U.S. Climate Task Force co-chair) who said at our July 13 Senate briefing that ACESA deserves to be defeated. He fears that, as in the E.U., cap-and-trade would fail to reduce emissions and would delay needed reductions by a decade or more. I cannot support a hidden, volatile and regressive carbon tax (set and collected by Wall Street) whose main advantages seem to be that it hides the price and is called “cap-and-trade”. I believe an explicit, predictable and progressive carbon tax with revenue recycled to households is essential. British Columbia’s experience shows that a revenue-neutral carbon tax is politically feasible. But, to return to my original point, first we need to get beyond magical thinking about “caps”.

– James

photo: Flickr / random dude

What Can Replace Faltering Cap-and-Trade?

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Is Waxman-Markey doomed? Revulsion at the special favors and sheer complexity built into the 1,400-page bill that squeaked through the House in June has been building nationwide this summer. Now, a Washington Post editorial signals the impending collapse of not just the bill but of cap-and-trade as the central mechanism for controlling U.S. greenhouse gas emissions.

The Post wrote earlier this week:

The rancorous debate over health reform has given voice to considerable uneasiness among Americans. Many are worried about how a new system will be paid for in an economy that has unraveled, and they are anxious about a kudzu-like expansion of an already unwieldy bureaucracy. Given the herculean effort it will take to get President Obama’s vision of reform through Congress, we’re not convinced that the Senate will have the stomach to tackle cap-and-trade legislation this fall. The growing agitation within the chamber over the creation of another complex system to buy, sell and trade pollution credits only adds to our doubts. (emphasis added)

As the Post editorial noted:

capitol_afagen1The House barely passed the American Clean Energy and Security Act (a.k.a. Waxman-Markey) in June. The 1,400-page bill has a potpourri of measures ranging from new efficiency and renewable energy standards to a cap-and-trade provision that gives away 85 percent of the pollution allowances to various interests. The Senate is proving to be a much tougher sell. Last week, four Democratic senators — Blanche Lincoln (Ark.), Ben Nelson (Neb.), Kent Conrad (N.D.) and Byron L. Dorgan (N.D.) — called on the leadership to strip cap-and-trade completely from the bill that Majority Leader Harry M. Reid (D-Nev.) hopes to start stitching together next month. This comes days after 10 moderate Democratic senators from coal and manufacturing states sent a letter to President Obama warning that they would not go along with any cap-and-trade regime that didn’t “maintain a level playing field for American manufacturing.” (emphasis added)

The fact that the epicenter of discontent is the coal-dependent “heartland” region indicates that Waxman-Markey has been more heavily attacked from the Right than the Left — as the Post itself signaled through its editorial title “Cap and Rage” and subtitle, “The fight over health-care reform could hobble climate-change legislation.” As we see it, the Big Green groups that steered Congress onto the  cap-and-trade path and also failed to insist on 100% permit auctioning and at least near-revenue neutrality share blame for the virulent attacks. Their stance helped turned the House bill into a perfect target for caricature as a “cap-and-tax” bill or “cap-and-trade tax” that would push hard-pressed American families, businesses and industries over the financial edge.

Nevertheless, the Post reports that:

Dropping cap-and-trade from the Senate bill is considered a non-starter by Mr. Reid and environmental advocates for two reasons. First, a long-stated goal of congressional leaders and the president himself is to have emissions-limiting legislation passed and signed into law in time for international climate talks in Copenhagen in December. Second, there is no Plan B. The leadership has put all of its eggs in the cap-and-trade basket.

Fortunately, the Post hastened to remind Majority Leader Reid that there is indeed a Plan B:

Yet there are other options worthy of consideration. Yes, we’re talking about a carbon tax. It would be relatively simple to devise and easy to implement. It would require no new bureaucracy, and the revenue generated could be rebated to the taxpayer in any number of ways — through a payroll tax reduction, for instance. (emphasis added)

The Post editorial acknowledged:

We know we are running counter to Washington’s tax-averse conventional wisdom. But we are not alone in our support of the carbon tax. There were three such bills in the House [including the Larson bill, which is more than 95% revenue-neutral and, with an upward-adjustable tax rate, is the most “cap-like” but without the politically toxic “trade” aspect]. One of the inventors of the cap-and-trade concept, Thomas Crocker, told the Wall Street Journal last week that he favors a carbon tax because he believes it’s easier to enforce.

The editorial concluded:

If Congress fails to pass cap-and-trade legislation, it will rapidly approach a fork in the road in addressing global warming. Members can sit back while unelected bureaucrats at the Environmental Protection Agency follow through on their moves toward regulating greenhouse gas emissions as a pollutant under the Clean Air Act. Or they can entertain a carbon-based tax designed to reduce emissions and give the money back to taxpayers in an equitable manner. A decision on which path to take is bearing down upon us. Not only are the global warming dangers facing the planet reaching the tipping point, but there will also be no climate agreement in Copenhagen without strong leadership in words and deeds from the United States. As the Senate forges ahead, nothing should be off the table.

We agree, of course, that nothing should be off the table. The demise of Waxman-Markey won’t be pretty, but it should spur all who grasp the criticality of the climate crisis to unite behind the quickest, fairest and most effective means to reduce U.S. greenhouse gas emissions: a national, revenue-neutral carbon tax.

Photo: Flickr / afagen.

Does Cap-and-trade Punish Virtue?

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Another question directed to the Carbon Tax Center: Would a carbon emissions cap become an emissions minimum as well as maximum, in effect precluding reductions below the cap level?

A “cap” of the type embedded in the House-passed Waxman-Markey bill (ACESA) is a legislated number of allowances, or permits, corresponding to tons of CO2 to be emitted. If the number of allowances is less than total expected CO2 emissions for that year, the shortfall will create an allowance price sufficient to drive demand down to the cap level. A too-loose cap (where allowances exceed emissions) will cause the carbon permit price to approach zero, as has occurred in the EU’s Emissions Trading Scheme.

Now, what happens if some people “virtuously” reduce emissions for altruistic reasons? Would they simply be making room under the cap for more emissions by someone else? Prof. James Kahn at Washington & Lee University examined a similar issue: the ramifications of hypothetical new low-carbon energy technology under a cap. Using standard tools of economic analysis such as demand curves, Kahn found that the reduction in allowance prices due to the new technology would stimulate new demand that would exactly cancel out the reduction in emissions. Extrapolating from Kahn, it appears reasonable to expect that altruistic reductions under a carbon cap would similarly reduce allowance prices and create a price signal to consume more, thus canceling out those reductions.

revolving_door_megaboobooThis perverse consequence of a carbon cap makes perfect sense, unfortunately. Consider a commuter who, independent of any price signal or federal legislation, resolves to give up solo car commuting for a carpool. Under a cap system, this “exogenous” reduction in demand for carbon emitting will lead to a slightly lower emission permit price — thus stimulating some additional use of fossil fuels elsewhere. The incremental usage might be a reciprocal departure from a carpool, or cranking up the heat, or a return to buying bottled water rather than refilling at the tap … or any of a thousand other ways to burn carbon. The result, in the end, will be the same: virtue in one arena will be offset elsewhere, due to the price-equilibrium-seeking mechanism of the cap.

It gets worse: ACESA includes both a cap and a “renewable electricity standard” (RES) which mandates that electric utilities buy a gradually-increasing fraction of their energy from renewable sources. Resources for the Future studied this same policy combination in Germany. Its finding: Germany’s combination of an RES with a cap caused an increase in the use of coal to generate electricity, as the growth in renewable-energy output created room under the cap for more coal-fired generation elsewhere. In effect, the renewables displaced natural gas-generated electricity instead of coal because gas was more costly, even with coal’s much (roughly 80%) higher carbon content and allowance cost. (This perverse incentive would disappear if allowance prices rose to a level making electricity generation from coal more costly than natural gas.)

To summarize, a carbon cap would tend to cancel out emissions reductions resulting from personal choices and from new technologies. Virtuous conservation and new technologies would reduce allowance prices, stimulating more consumption by others. And, by combining renewable electricity standards with a cap, ACESA would create another perverse incentive because shifting electricity generation to renewables tends to make more room under a cap for coal emissions.

A carbon tax, in contrast, would be free of such “canceling out” mechanisms. Indeed, if anything, “my” tax-induced conservation would tend to encourage “yours” by helping move societal norms away from consumption. And a gradually increasing carbon tax would obviate the need for renewable electricity standards by increasing the cost of high-carbon fuels and stimulating demand for low-carbon alternatives.

Finally, a carbon tax would sidestep what is likely to be cap-and-trade’s biggest “toxic” side effect: a volatile new carbon market that would benefit only speculators and could crash world financial markets again.

Photo: Flickr / megabooboo.

G-8 Failure Reflects U.S. Failure on Climate Change

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Guest Post by Jim Hansen

Jim Hansen is director of the NASA Goddard Institute for Space Studies, but he writes on this policy-related topic as a private citizen. This post first appeared on Huffington Post on July 9.

It didn’t take long for the counterfeit climate bill known as Waxman-Markey to push back against President Obama’s agenda. As the president was arriving in Italy for his first Group of Eight summit, the New York Times was reporting that efforts to close ranks on global warming between the G-8 and the emerging economies had already tanked:

The world’s major industrial nations and emerging powers failed to agree Wednesday on significant cuts in heat-trapping gases by 2050, unraveling an effort to build a global consensus to fight climate change, according to people following the talks.

james_hansen_photo_4_sept_2008_publicOf course, emission targets in 2050 have limited practical meaning — present leaders will be dead or doddering by then — so these differences may be patched up. The important point is that other nations are unlikely to make real concessions on emissions if the United States is not addressing the climate matter seriously.

With a workable climate bill in his pocket, President Obama might have been able to begin building that global consensus in Italy. Instead, it looks as if the delegates from other nations may have done what 219 U.S. House members who voted up Waxman-Markey last month did not: critically read the 1,400-page American Clean Energy and Security Act of 2009 and deduce that it’s no more fit to rescue our climate than a V-2 rocket was to land a man on the moon.

I share that conclusion, and have explained why to members of Congress before and will again at a Capitol Hill briefing on July 13. Science has exposed the climate threat and revealed this inconvenient truth: If we burn even half of Earth’s remaining fossil fuels we will destroy the planet as humanity knows it. The added emissions of heat-trapping carbon dioxide will set our Earth irreversibly onto a course toward an ice-free state, a course that will initiate a chain reaction of irreversible and catastrophic climate changes.

The concentration of CO2 in our atmosphere now stands at 387 parts per million, the highest level in 600,000 years and more than 100 ppm higher than the amount at the dawn of the Industrial Revolution. Burning just the oil and gas sitting in known fields will drive atmospheric CO2 well over 400 ppm and ignite a devil’s cauldron of melted icecaps, bubbling permafrost, and combustible forests from which there will be no turning back. But if we cut off the largest source of carbon dioxide, coal, we have a chance to bring CO2 back to 350 ppm and still lower through agricultural and forestry practices that increase carbon storage in trees and soil.

The essential step, then, is to phase out coal emissions over the next two decades. And to declare off limits artificial high-carbon fuels such as tar sands and shale while moving to phase out dependence on conventional petroleum as well.

This requires nothing less than an energy revolution based on efficiency and carbon-free energy sources. Alas, we won’t get there with the Waxman-Markey bill, a monstrous absurdity hatched in Washington after energetic insemination by special interests.

For all its “green” aura, Waxman-Markey locks in fossil fuel business-as-usual and garlands it with a Ponzi-like “cap-and-trade” scheme. Here are a few of the bill’s egregious flaws:

  • It guts the Clean Air Act, removing EPA’s ability to regulate CO2 emissions from power plants.
  • It sets meager targets — 2020 emissions are to be a paltry 13% less than this year’s level — and sabotages even these by permitting fictitious “offsets,” by which other nations are paid to preserve forests — while logging and food production will simply move elsewhere to meet market demand.
  • Its cap-and-trade system, reports former U.S. Undersecretary of Commerce for Economic Affairs Robert Shapiro, “has no provisions to prevent insider trading by utilities and energy companies or a financial meltdown from speculators trading frantically in the permits and their derivatives.”
  • It fails to set predictable prices for carbon, without which, Shapiro notes, “businesses and households won’t be able to calculate whether developing and using less carbon-intensive energy and technologies makes economic sense,” thus ensuring that millions of carbon-critical decisions fall short.

There is an alternative, of course, and that is a carbon fee, applied at the source (mine or port of entry) that rises continually. I prefer the “fee-and-dividend” version of this approach in which all revenues are returned to the public on an equal, per capita basis, so those with below-average carbon footprints come out ahead.

A carbon fee-and-dividend would be an economic stimulus and boon for the public. By the time the fee reached the equivalent of $1/gallon of gasoline ($115/ton of CO2) the rebate in the United States would be $2000-3000 per adult or $6000-9000 for a family with two children.

Fee-and-dividend would work hand-in-glove with new building, appliance, and vehicle efficiency standards. A rising carbon fee is the best enforcement mechanism for building standards, and it provides an incentive to move to ever higher energy efficiencies and carbon-free energy sources. As engineering and cultural tipping points are reached, the phase-over to post-fossil energy sources will accelerate. Tar sands and shale would be dead and there would be no need to drill Earth’s pristine extremes for the last drops of oil.

Some leaders of big environmental organizations have said I’m naive to posit an alternative to cap-and-trade, and have suggested I stick to climate modeling. Let’s pass a bill, any bill, now and improve it later, they say. The real naivete is their belief that they, and not the fossil-fuel interests, are driving the legislative process.

The fact is that the climate course set by Waxman-Markey is a disaster course. Their bill is an astoundingly inefficient way to get a tiny reduction of emissions. It’s less than worthless, because it will delay by at least a decade starting on a path that is fundamentally sound from the standpoints of both economics and climate preservation.

Former Defense Secretary Robert McNamara, who died this week, suffered for 40 years — as did our country — from his failure to turn back from a failed policy. As grave as the blunders of the Vietnam War were, the consequences of a failed climate policy will be more severe by orders of magnitude.

With the Senate debate over climate now beginning, there is still time to turn back from cap-and-trade and toward fee-and-dividend. We need to start now. Without political leadership creating a truly viable policy like a carbon fee, not only won’t we get meaningful climate legislation through the Senate, we won’t be able to create the concerted approach we need globally to prevent catastrophic climate change.

Photo: Flickr / World Development Movement.

Action Alert: Overhaul or Scrap ACESA

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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.

pigs_at_trough_james_dennettThere 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.

Wanted: Cloudsplitter

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(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.

spiral-cash-_-fpsurgeons-photostreamWorse, 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.

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