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An “All of the Above” Energy Policy Concedes the Future June 10, 2011

Posted by Michael Hoexter in Climate Policy, Efficiency/Conservation, Energy Policy, Green Transport, Renewable Energy.
3 comments

The dominant theme in President Obama’s 2011 State of the Union address was “winning the future”.  As has become typical during Obama’s tenure in office, the speech and the metaphor selected seemed designed to avoid making a clear and decisive statement and to make peace with his Republican opponents.  However if we take the President’s metaphor seriously, Obama’s energy policies seem more likely to continue conceding the future to other nations who are making real choices in the area of energy.  Rather than take the initiative as he could as President, Obama has chosen in energy to make friends with almost every aspect of the energy industry, green and, in particular, brown.

Choosing “All of the Above”

The 2008 Energy flow diagram for the US (Lawrence Livermore National Laboratory) shows the dominance of fossil energy (bottom three flows) in the US energy use system. A transformation of this energy flow diagram towards sustainable sources of energy will be impossible without aggressive federal government policy

While I had hopes that President Obama would significantly change our approach to energy in favor of sustainable energy choices, as it turns out the best description for his approach would be that it is an “all of the above” energy policy.  Not as aggressively retrograde as his predecessor, George W. Bush, Obama has tried to show that he is not only a reliable friend to the oil and gas lobbies but also is willing to “throw a bone to”  the renewable energy industry and public transit supporters.  He has made a cautious foray into high speed rail though not bold enough to insure that HSR has a secure funding base.  His administration provided loan guarantees to large renewable energy projects that were already in the pipelines.  He seems to treat energy and transport alternatives as, for the most part being representative of a larger political “constituency” which he courts by offering more or less support for their presumed favorite projects or ideas.

The problem with the apparent equivalence in this political strategy is that it ignores the real-world physical energy balance, the depletion curve of fossil energy,  and emissions of US society as well as political and market power differences between these constituencies and industry segments.  Oil, gas and coal companies are the dominant energy companies on the planet and have considerable power in Washington as well as beyond the Beltway in the real economy.  In order for there to be actual equality between these different groups, if that is even a desirable outcome, government institutions would need to favor the “infant industries” of renewable energy and energy efficiency to compensate for years of subsidy and centuries of precedence in the energy and transport sectors for fossil energy.  Our society has to an overwhelming degree been built around oil, gas and coal.

Another approach, that is not even on the table, would be, rather than play to one or the other constituency, to build an energy policy based on the real geological, geopolitical, environmental, and social factors that condition energy availability and energy use.  Such a policy would favor renewable energy and energy efficiency but would also challenge these segments to radically scale up production and reduce emissions sooner rather than later.  Furthermore only government policy can push the now not-inexpensive energies of the future down the cost curve.

Beyond trying to project the image of not playing favorites between industry segments, Obama seems to view energy very much in “Left-Right” terms. The 2009 stimulus package had some promising financing for renewable energy projects (optically “Left”) but these have not so far turned into a durable renewable energy support policy beyond the existing status quo.  In March 2010, Obama announced plans to open new areas to offshore drilling, clearly an effort to blunt the “drill baby drill” mantra of the Republicans (optically “Right”).   Natural gas drilling and fracking continues with the addition of a new drilling safety panel which seems to be an effort to address pro- and anti-fracking lobbies.  Energy efficiency, the no-brainer energy solution, has been given some support but is not highlighted.  An ultra-low energy retrofit of the White House, for instance, is inconceivable within Obama’s current political strategy because it would seem too “Left”, too hippy-ish.

The US High Speed Rail Association projects that its 2030 vision linking most US states by 200 mph high speed rail links would cost $600 Billion dollars. These rail lines would serve "Red" and "Blue" states alike. The relatively cautious approach of the Obama Administration focusing on a few projects does not communicate the potential of high speed and electric rail more generally: it functions as insulation against oil shocks in a nation extremely vulnerable to the price and availability of oil.

Of a piece with this picture is the level and type of support offered to, for instance, high speed rail projects.  Obama “slipped in” $8 billion dollars for 11 high speed rail projects but which in itself would not buy a single high speed rail route on its own.  While this was the single largest investment in high speed rail in the US, it pales in comparison with investments made by China,France or Spain in HSR or, for that matter, the comprehensive vision of the US High Speed Rail Association.

The lack of “bigness” in Obama’s support made it, I believe, much easier to attack from the Right.  Not as many constituencies could be served by the smaller package to be divided between 11 projects.  But more damaging, was the lack of a comprehensible vision for the American people about what HSR was about, as a sustainable alternative to regional air travel throughout the US.  If Obama had presented a multi-year plan to fund any the USHSRA’s 2020 or 2030 vision, he might have had to fight more with Republicans but at the same time, there would be a greater understanding of the utility of having an HSR network rather than single lines that serve fewer constituencies.  In an effort to avoid conflict, the point of the entire effort was not so easy to communicate and win political points or inspire hope.

In energy efficiency and energy conservation, which are together possibly the greenest energy measures, President Obama has introduced some programs that are “rational” but are also not world-leading in their ambition.  The best publicized portions of his energy saving plans have been higher fuel efficiency standards for trucks and cars but these are not world-beating.  He has introduced some sizeable tax incentives for electric vehicles.  He announced an initiative to increase energy efficiency in commercial buildings 20% by 2020 which is better than before but by no means a “stretch” goal.  Strategically these initiatives have gotten buried in the news cycle as the President appears to want to show himself as “not a liberal” which the Right wing associates with energy efficiency and conservation.

Climate Bill Hangover or Ideology?

Many of the energy and environmental initiatives and policy direction of the first year of the Obama Administration were packed in the ACESA climate bill that barely passed by the House of Representatives but which in a modified version stalled in the Senate.  The lack of a filibuster-proof majority in the Senate made the passage of the even less ambitious Senate bill impossible.  At the time, the dysfunction of the US Senate was held responsible by many commentators for its failure, though some noted that Obama was not campaigning heavily for either bill.  The seeming diffidence of Obama in these matters was in retrospect striking, though the standard of comparison in 2009 was the backwards-looking Bush Administration, so by contrast Obama has been praised as the “greenest” President to date.

Without this omnibus bill, Obama’s energy policy has been pieced together and in a manner that indicates that the Obama Administration does not prioritize sustainable energy and climate concerns if they at all conflict with an inside-the-Beltway political calculus.  Luckily the 2009 one-time stimulus package contained greener energy initiatives which continue to yield some benefits, including the HSR funding as well as renewable energy loan guarantees mentioned above.  However within the Obama political strategy, the optically “Left” appearance of ambitious climate and energy action seems to outweigh any upside from real benefits to either the American economy or the global environment of more aggressive policies.  At best, the Obama Administration is “stealthily” green where it will not be noticed by his Republican opponents; Obama seems unwilling to fight about the environment with his opponents who deny the potential of human beings to do harm to the natural world.

The recent offering of coal leases in Wyoming indicates that the Administration is also solidly behind the fossil fuel industries and shows little concern for climate impacts.  We see, at least in this first term of the Obama Administration an “ideology” of trying to offend as few people as possible, court Republicans and right-leaning independents, and in the process putting the United States further behind in green energy and climate.

Paling in International Comparison

While the Obama Administration appears “green” in comparison to the Bush Administration, in energy policy, the US lags most European countries and is actually in many respects has a much weaker climate and energy policy than energy- and coal-hungry China, if the relatively privileged geographical position of the US is considered.  Unlike many European countries and China, the US is not resource constrained when it comes to renewable energy sources and could theoretically build multiple “Renewable Electron Economies” using copious wind and solar resources.  A conservative German government has just committed to doubling the share of electricity generated from renewable sources by 2020 and replacing its nuclear power plants with renewable energy. Denmark is pledging to go 100% renewable by 2050. China, while it continues to pursue an “all of the above” strategy, has been extremely aggressive in pursuing renewable energy and high speed rail.

Not Confronting the Cheap Energy Contract

A fitting explanation for the failings of US energy policy over at least the last three decades is the continued rule of the Cheap Energy Contract, a label I invented three years ago for a common concept in American politics.   A mostly North American social contract, the Cheap Energy Contract is an implicit and explicit commitment by lawmakers in the US and as well as the energy industry itself, that the price of energy must be as cheap as possible in the near term.  An adherence to the Cheap Energy Contract means that adding an energy tax of almost any kind is considered to be political suicide as well as any actions that could be construed as raising energy prices viewed from the perspective of a future political campaign.

President Obama’s apparent unwillingness to confront our fossil fuel energy habits and, moreover his tendency to encourage those habits in the short and medium term, could be viewed as efforts on his part to immunize himself from accusations that he “raised the price of gas” which could lead to election day fallout.  But Obama is not alone in his adherence to the Contract, a current obsession of leftward portions of the political spectrum currently is the role of speculators in the high price of gasoline at the moment.  Bernie Sanders, a reliable voice on the Left for many issues, is very loud in his protests about the role of speculators in raising the price of gas, hurting his mostly rural constituents.  In these discussions, the positive role of an ascending carbon or gasoline tax in weaning America off petroleum is not often mentioned.  Obama in this regard is not exceptional but also not assuming a leadership role in energy at a critical period in our history.

Effective Energy Policy is a “Do or Die” Component for a Sustainable Future

While talk of “energy markets” is common, what is often overlooked is that these energy markets are in part artificial constructs, co-created by years and decades of energy and infrastructure policy by government.  Individual private or sometimes public enterprises may discover or develop a certain energy resource but soon the interconnected nature of how energy is used and produced creates the need for government to create rules and/or provide infrastructure so that energy can be used to the extent and at a price that consumers and businesses demand, while keeping in check monopolistic and oligopolistic excesses via regulation.  Even in market economies, there is more and less planning to be found in energy policy and energy infrastructure, depending on the country.

Against those who hold up the chimera of a completely “free” market, planning by governments is critical for a sound energy policy to emerge.  A lot of this has to do with the fact that energy consumers, when they are using energy, could generally “care less” about how that energy is produced, unless they are participating in a large-scale national or international “mission” related to energy.  If energy is treated as simply a unit of “utility” by the consumer, the sustainability or non-sustainability of the source of energy is ignored. While some of the products (motion, heat) and byproducts (pollutants, fire) of energy use are sensible by people, the energy itself cannot be sensed.  Government policy is under most conceivable conditions the means via which a framework of meaning and measurement can be constructed around energy.  Therefore we rely most on government policy to make distinctions between energy sources.

Energy Policy as a “Funnel” to the Future

Obama’s “all of the above” energy policy, keeps us beholden to the “care less” or “lazy’ reliance on whatever energy source is least expensive or convenient at one moment in time or another.  If we continue to pursue energy opportunistically, like for instance, fully exploit the tar sands of Alberta, and fail to institute a significant and rising carbon tax, we will be unable to build the energy future, or at least others will end up building it and leaving us behind.

Rather than “go every which way” in our search for and use of energy, seeking out and consuming “joules’ in whatever form we may find them, government policy needs to focus energy users on sustainable options, functioning as a “funnel”.  One might think of there being two forces in a policy funnel, positive and negative forces.  A positive force “draws” people towards new sources via incentives or provision of sustainable alternatives.  A negative force, the “sides” of a the funnel, redirects behavior away from harmful uses of energy, either in the form of a prohibition or a price placed on dirty energy.  The ability to say “no” with sufficient political legitimacy is key to the creation of an effective energy policy, as is the provision of adequate positive choices that have low social and environmental external costs.

So far, though President Obama seems intellectually aware of many of the dimensions of the problem in some of his speeches, he has not fought for a “funnel-like” energy policy, instead reinforcing the status quo, out of what appears to be fear of his political opponents.   The politically safe focus on “more innovation” avoids the issue of pushing for policies that deploys the solutions that we already have that can get us a long way to where we need to go.  While this seems to be part of a larger political and economic worldview that unfortunately the President either believes or implicitly accepts as true, energy policy is I believe a critical component for Obama to become a transformational President.  Even if he does not, from the point of view of character, want to be a transformational figure, the real challenges of our society require our leaders to step into this role anyway.

I realize that funnels are not the most attractive concept as applied to human behavior; I invite others to come up with better or more attractive ideas.  I would still caution that one critical component of any effective energy policy or policy metaphor is the introduction of reasonable constraints on human energy-using behavior.  The advocacy of these constraints will always provoke attacks from people operating under a quixotic vision of freedom that has no physical supports or characteristics.  For us to maintain our real freedoms, we must refrain from using up all fossil fuels, starting very soon indeed.

In subsequent posts, I will outline what this policy “funnel” might look like, even though it may fall on deaf ears in Washington.

Two Additional Hurdles to Oil Independence: Fear of Inconveniences and Tax Aversion June 12, 2010

Posted by Michael Hoexter in Climate Policy, Energy Policy, Green Transport, Sustainable Thinking.
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3 comments

(Photo: Thomas Faivre-Duboz/Wikimedia Commons)

A couple weeks ago, I sketched out an Oil Independence Plan for the United States that was based on a combined move to more efficient uses of petroleum as well as a much more aggressive move to oil- (and natural gas-) independent infrastructure, than is currently proposed in existing legislation in the US Congress. [Since posting that plan, Craig Severance has written an equally ambitious and more detailed plan which can seen here.  I also didn’t reference Boone Pickens’ “Pickens Plan” which is an Oil Independence Plan that relies heavily on natural gas and tractor trailer trucks fueled by natural gas.]  The most immediate motivation for such a plan, which we should have embarked upon 35 years ago anyway, was of course the oil disaster in the Gulf as well as the muted and unambitious response to that disaster by the Obama Administration. [There are now rumors that Sen Jeff Merkley may be producing a plan to reduce oil demand in the US which will be announced shortly]

I asserted in that post among other things that planning was a critical missing element in our policy arsenal and that only a plan, and not the cap (cap and dividend, cap and trade) instruments under consideration, would bring the necessary resources to bear in a timely manner.  Not only has there been a failure to plan for the demise of oil as our primary transport fuel, there has been a fundamental failure to accept planning as part of the legitimate role of political leadership.

After outlining this plan in the same post, I identified 6 hurdles which President Obama or another future leader of such a plan to radically reduce our oil dependence would face.  Those hurdles are:

  1. Market Idealization vs. Planning
  2. Deficit Worries and Hysteria
  3. Balancing the Interests of Stakeholders/Mixture of Public and Private Enterprise
  4. Many Americans’ Love of Expansive Resource Use
  5. The Biofuels Distraction
  6. Corporate Funding of and Influence in Politics

Two additional hurdles occurred to me but I felt these deserved their own post.

Hurdle #7: Unwillingness to Accept Inconveniences (or the Prospect of Inconvenience)

This Las Vegas drive-thru wedding chapel is at one extreme of the love of convenience in consumer society. What in most countries and contexts is a lengthy and demanding process of vetting by and meeting with family and clergy is here simply a trip around a driveway without having to get out of your own personal vehicle. The " March of Convenience" tends to orient us towards a single purpose at one time rather than locate us in a web of social relationships and traditional practices with all the possibilities and constraints that that entails. (Photo: Norman Walsh)

The economic history of the last 100 years in developed nations might be called the “March of Convenience” as activities that used to take hours, like procuring and preparing food or traveling to a nearby city, now take minutes.  “Convenience” means the use of a device or the design of a way of life enables desires to be more easily fulfilled.  Fossil fuels have had a critical role in powering almost all of the conveniences that we enjoy, either directly in automobiles or indirectly via a partly fossil-energy powered electric grid.  Americans have led the way in the “March of Convenience”, adopting consumer devices on a mass scale more quickly than other countries, though in recent years we have lagged in many areas of consumer device adoption.

While Europeans, Japanese, and increasingly others in fast developing Asian countries, enjoy many conveniences that Americans do not (better public transportation for one), the American way of life is particularly dependent both on the automobile and the oil-powered delivery truck because of the structure of our towns and cities and the lack of oil-independent infrastructure.  Convenience in America, has come to be defined by easy use of the automobile for either long or short trips to stores, work, and entertainment. The hundred year old trend in real estate development towards sprawl has kept Americans in most locations almost entirely dependent on the automobile.  Additionally “just in time” supply of retail and wholesale goods has become a business practice that demands air freight or relatively energy-inefficient trucking transport for many locations that are not located on major rail lines.

The proposed Oil Independence plan as well as, in my estimation, the plan offered by Craig Severance, would involve a period of one to two decades (or longer) within which, for some trips, people might need to sacrifice some time or convenience in order to avoid using increasingly pricey and eventually scarce oil.  This might mean waiting for others in a carpool or Internet-brokered ride-share, or taking bus service or using a shared van.  It may take 25% or 50% more time to do certain tasks.  For some people, the isolation of their cars is far preferable to any contact with others, so the notion of sharing space with others will be considered a major inconvenience.  These people will, if they are able, pay a higher price for convenience, as the price of oil is bound to go up either via market forces or taxation or both.  Nevertheless, in time, those who prefer self-driven solitary transport and have middle to high income will be able to buy battery electric vehicles or plug-in hybrids.

On the other hand, there are tradeoffs other than cost which eventually may become incentives for others not to use a self-driven vehicle:  when one isn’t driving one can work, socialize or read using our increasingly multi-functional mobile communications devices and networks.  The provision of workable transportation alternatives is key to the success of any of these plans.   While some offer the hope of a “drop-in” solution for oil (a fully-realized battery electric vehicle infrastructure and fleet of tens of millions of BEVs) this is not likely to be scaled up in time to radically reduce our oil demand with no inconveniences.  Depending on increased or the same level of convenience is a liability for a serious plan to get off oil before both its depletion, before more deepwater environmental disasters, as well as to avoid climate tipping points.

There are aspects of an Oil Independence Plan that typically will attract more attention and therefore funding, those which usually offer an increase in convenience for many transport users.  A TGV or Shinkansen-class high speed rail network (>160mph average speed) (which is just one of the solutions in my and others’ Oil Independence Plans) represents a net increase in convenience over the status quo for most trips up to 500-600 miles.  On high speed rail with Internet access, one is offered a more luxurious ride than either in a self-driven vehicle or experiencing the inconveniences of air travel.  The less “sexy” 90 or 110 mph freight or passenger rail may be more difficult to “sell” because they do not in their design offer the promise of increased convenience over the status quo for those who are particularly devoted to automotive travel (where traffic isn’t a problem).

Another area where there is a fairly transition is where the charging or battery-swap infrastructure has been built for battery electric and plug-in hybrid vehicles.  These will represent at least an equal level of convenience to gasoline powered vehicles for most local trips, though the technology is not as mature as that for electric rail.

Perhaps more frightening to politicians and to anxious consumers is the mere prospect of change of any kind in the relatively pampered automotive lifestyle that we currently inhabit with gas at somewhere around $3.00/gallon.  The actual changes involved in an Oil Independence Plan will with time offer net benefits or at least a livable but more sustainable lifestyle but to those who are clinging to the “edge” or to office, any change seems frightening.  The attack campaigns by elements of the political Right, by incumbent industries, or others who base their appeals on fear are almost pre-programmed for efforts that even suggest that people should loosen their grip on the steering wheel.

Some of these fears might be premised on a fear of strangers, “other people” in general or class prejudices.  The automobile dominated lifestyle has enabled people to live in relative isolation from each other.  Becoming used to dealing with and coordinating movement with others may be a challenge for some.  . While the prospect of sharing rides or public transit is uncontroversial for some and almost a sign of personal virtue, at least in the way of advocacy, there are many, many Americans who are either horrified by this notion or would, when push comes to shove, resist having to enact these virtues rather than simply advocate them.

As with the other hurdles, leadership and planning are required to overcome this hurdle.  Planning is going to be required to provide Americans with alternatives to automobile travel, per expansion of mass transit, as well as funding more novel systems like internet ride sharing or automated pod-cars.  Higher gas prices, whether by market forces or by the imposition of taxes would drive the change faster but only a visionary and persuasive leader is going to be able to convince Americans to accept higher fuel taxes.  The offense and defense against inevitable attacks from the anxious and the defenders of the status quo is to engage consumers/citizens/businesses in an epic quest to change our way of life and put it on more sustainable basis.  The missing element is principled leadership in both speech and example which would ideally come from the President or another national leader.  As it currently stands, the Presidency of Barack Obama has not attempted to engage in such a quest; partial or half-hearted movements towards these goals would expose leaders to attack from those who cling fearfully to present satisfactions and our way of life as it stands.  The best defense in this case is offense and commitment to a better future.

Especially with a rise in the cost of fuel, businesses used to “just in time” delivery from distant suppliers may need to reconsider their business practices and inventory strategy.  Long-distance rail freight may not in the first years be able to reproduce the speed of long-distance tractor-trailer trucks which can choose the most direct routes between supplier and buyers.  For local delivery however, the transition to battery power is fairly easy for small and medium duty trucks with shorter ranges.

There are “Peak Oil” narratives, associated with figures like Richard Heinberg or James Howard Kunstler that based on an extreme version of this change in lifestyle, within which society becomes radically localized and many institutions collapse into a friendlier version of the world of “Mad Max”, the 1979 Australian film which portrayed a dystopian future. I don’t share the pessimism of some in the Peak Oil community but their arguments and warnings cannot be dismissed out of hand.  With the cautious and unimaginative leadership shown in the last month here in the US, the likelihood of social collapse or at least a radically downsized society (an outcome which some would find a positive development) is higher rather than lower after a peak in oil production.

The largely mythical notion of a painless transition between one industrial and energy-related way of life and the next holds out the notion for policy makers that they just need to wait for innovation to deliver a new technology that offers only benefits and no tradeoffs.  Economic historian Jeremy Greenwood chronicles how throughout the last two hundred years the acceptance of technologies that we consider to be superior happened over a period of decades in which there were struggles between interest groups and losses of economic benefits as well as gains from the new technologies.  The fantasy of a “drop-in” technological replacement for the internal combustion engine continues to make it difficult for leaders to face hard choices.

Hurdle #8:  Tax Aversion and the Retreat from an Ethic of Social Responsibility

The current "Tea Party" interpretation of the 1773 Boston Tea Party is that it was simply a rebellion against "too much" taxation. The more standard textbook interpretation has been that it was a rebellion about "taxation without representation". A more economic historical view was that it was an anti-monopoly rebellion by colonial merchants against the advantages conferred on the East India Tea Company by the British Crown ; the Tea Act of 1773 was actually a tea tax reduction that made the East India tea cheaper than the competition. (Image from John Gilmary Shea, 1886 Story of a Great Nation New York:Gay Brothers and Company)

Another hurdle to oil independence is tax aversion bordering on tax phobia.  While, in the previous list of hurdles, I underlined the importance of public finance of transport and energy infrastructure, I left open the possibility that deficit spending would be the primary means of financing this infrastructure.  I pointed this out only as a short-term fix during our current deep economic slump.  In better times, tax financing will be crucial to keeping deficits and inflation in check.  Taxes will need to rise on both the well-to-do and also the middle class as counseled by a growing group of economists that NY Times economic columnist David Leonhardt has grouped in his fictitious “Club Wagner”.  Of course tax rates have at times been too high in certain places and times and levied unfairly upon certain activities or groups but now is not one of those times for most tax brackets and taxable entities in the US.

Tax paying and voting are the two main pillars of what ordinary citizens can to do to express a sense of group or social responsibility, the idea that “we are in this together”.  Attacking tax-paying in general as an evil in itself, as has become common, is an almost direct attack on a spirit of national or group responsibility.  Excessively high taxes can stifle individual initiative but excessively low taxes can fray the ability of a society to meet large scale group challenges requiring government investment.  Unfortunately there is no generally agreed-upon economic model of how to set optimal tax rates that accommodates both of these concerns, so tax rates are raised and lowered according to changes in political fashion and power dynamics.

In addition to being a source of funding, the aversive effect of tax is also one of the stronger mechanisms we have to shape our own group behavior via the use of incentives and disincentives.  Pigovian, a.k.a. “sin” taxes, are means of limiting the use of resources or engaging in activities which are not illegal but are considered to have high social costs.  Many conservative economists prefer Pigovian taxes to income taxes under the rubric “tax what you don’t want”.   A significant carbon tax would be one of the most efficient means to limit carbon emissions and fuel taxes of sufficiently high levels curtail the use of various fuels.

To enact significant new Pigovian taxes, these too require a sense of social solidarity or at least a broad social agreement that some activity should be limited at some initial or ongoing monetary cost to society.  One of the key weapons we have in reducing oil consumption is to levy higher taxes on oil.  Ian Parry of Resources for the Future rightly points out that, like an upstream carbon tax, oil should be taxed at the well-head rather than downstream as a fuel tax.  While a upstream carbon tax is preferable as it would include oil, natural gas and coal for addressing GHG emissions, relative to a simple gasoline tax an oil tax has greater coverage as it also would start the search for alternatives to oil in industrial processes and home heating, which makes up 23% and 5% of oil demand respectively.

We have just gone through a 30 year period in the US within which income tax rates have been cut dramatically, particularly on the wealthiest Americans, justified with reference to the largely discredited theories of Arthur Laffer (that tax cuts increase government revenues via economic growth) as well as supply-side, “trickle-down” theories associated with highly influential “Reaganomics” associated with his first budget director David Stockman.  The accumulation of private wealth and therefore productive investment was thought to be smothered by the top level marginal tax rates of post-WWII America;  by allowing rich people to accumulate more wealth it was thought that more would be invested and the economy would grow. Progressive taxation (the taxation of the wealthiest at a higher rate than the less wealthy) and taxation in general have been treated as taboo and as damaging to the economy since the political triumph of Reaganism.  The raising of taxes even slightly became highly politicized as the ideal of a low-taxation, small government society has remained the implicit ideal for politicians in both political parties.  Despite the small government ideal, government has continued to grow though often in ways that are not the social welfare driven “Big Government” that the followers of Reagan have attempted to pillory.  Furthermore savings rates, one of the advertised benefits of lower taxes, have continued to plummet in the US.

The American economy has grown in this period of low taxation but these increases have come largely in the service sector and particularly in financial services.  Low taxation, in combination with a trade policy that undermines domestic production relative to other countries has led to super-consumption, massive increases in private and public debt, trade deficits, investment in and inflation of the value of real estate, and speculative excess in paper assets.  The economic booms of the 1990’s and the early 2000’s that low-tax advocates like to point out as benefits of reduced tax rates has come at the expense of manufacturing capacity, at least in the US.

While taxes are never popular, almost no one stands up now in favor of taxes, despite professed concern about deficits.  Every politician believes that if they were to be the one to raise taxes, they would lose the next election.  With some justification, American taxpayers under 65 feel that they don’t get much benefit from taxes, as there is no comprehensive universal social programs other than for elderly people.  The government spends money on an elaborate military, the world’s gendarme, which offers few direct benefits to Americans domestically.  American industrial and trade policy has allowed jobs to be off-shored, so the government has not exactly stood at the side of the American worker.  President Obama’s health reforms will not be tax-funded with the exception of the expansion of Medicaid, which again biases America’s social spending in favor of distinct disadvantaged groups rather than as a generalized universal principle of social solidarity.

Both the Pigovian side of  (oil and carbon) taxation as well as the revenue generation component are critical for a rapid reduction in oil demand.  An ambitious leader, I’m hoping President Obama, would have to tackle this by “reversing the ethical valence” of popular perceptions of tax-paying and thereby also some of its emotional valence.  To do this, he would need to discuss tax paying as an expression of social responsibility, social solidarity, and responsibility to the future, not merely as a subtraction of monetary funds from one’s perceived economic well-being. To date, the President has tended to reinforce the individualized ethical framework of the low-tax world-view by continual efforts to court those who believe only in individual private initiatives rather than social initiatives.  This “pragmatism” continues to undermine Americans’ fragile sense of social solidarity.

Eight hurdles: Too Many?

While six substantial hurdles was a lot, eight hurdles is even more.  Is it too much to ask of us, our government and President to meet this challenge?

In my mind, this is the matter of, as mentioned above, a “reality principle” that cannot be ignored, so hurdles must be overcome no matter how many of them exist.

However, the path is somewhat easier than my presentation of these as individual free-standing hurdles would suggest.  Many of these hurdles “stand in bunches” or can be surmounted if our leaders adopt a new stance.  Leaders attempting to push the US off its oil addiction need to invoke the following general principles, which in turn will allow these hurdles to be taken as groups:

  1. Re-affirm our sense of social solidarity and social responsibility
  2. Emphasize social and individual resilience over sensitivity to minor hardships like carbon or oil taxes, hassles of coordinating transportation with others over self-driven automobile centered transportation.
  3. Affirm the role of government as a tool for the realization of national ambitions and the necessary backstop for market failures

Within this context, many of the eight hurdles become easily surmountable if the “general case” has been made for these principles.

We can reduce our dependence on oil with sufficient coordinated effort.  With this effort will come a great sense of accomplishment in an era where it had been thought that this kind of challenge was no longer part of the American Dream.

Re: Oil Independence Some Signs of Progress May 21, 2010

Posted by Michael Hoexter in Efficiency/Conservation, Energy Policy, Green Transport.
1 comment so far

Today, the Obama Administration has shown some signs of recognizing the challenge of achieving Oil Independence.   The Administration is mandating higher fuel efficiency standards than the 35.5 mpg CAFE, (corporate average fuel efficiency) standard proposed last month, with numbers upcoming.   Furthermore, the Administration is mandating for the first time fuel efficiency standards for medium and heavy trucks.  Apparently representatives from some of the large truck manufacturers like Volvo were there for the announcement as well as representatives from the major car manufacturers.

Additionally, there was announcement for further support for electric vehicles and vehicle infrastructure.

Though details are still sparse on these new efforts, it sounds like the Administration may be starting to realize that crisis management in the face of the Gulf oil spill cannot overshadow the long-term and even medium term project of getting off of oil.

I am hopeful that more substantive measures on this front as well as a full plan for the US to get off of oil will be announced soon.   There is no time to waste!!

The Deepwater Oil Spill Exposes a Persistent Failure to Plan and Failure to Lead May 16, 2010

Posted by Michael Hoexter in Climate Policy, Efficiency/Conservation, Energy Policy, Green Transport, Renewable Energy.
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The 1969 Santa Barbara Oil Spill catalyzed the environmental movement in the US and inspired some important legislation but did not lead policymakers to take the next step and start the long process of weaning the US from its oil dependency (Photo: Unknown)

President Obama is facing with the explosion of the Deepwater Horizon,  a “local” disaster that exposes a deeper, endemic crisis in US energy policy and the US economy as a whole.  As he has been in office for still just 16 months, Obama does not bear primary responsibility for this ongoing crisis but he has only recently, a couple weeks after the accident, publicly hinted at the “elephant in the room”:  the obvious connection between the undersea oil volcano and our equally obvious need to transition from using oil as our primary transport fuel.  Simple reference to the Kerry-Lieberman climate bill that encourages more offshore drilling does not constitute an answer to our oil dependence.

Unfortunately public rhetoric and policy discussions that hinge on the notion of a dependence on “foreign” oil play the role of a “shortstop” in keeping the discussion from going to the heart of the problem.  The idea that oil produced on American shores will somehow differentially serve American consumers overlooks the international nature of the oil business with total offshore oil reserves destined never to make much of a difference in the overall price and availability of oil.  Estimates put the total reserves of offshore oil in US waters at 18 billion barrels conventionally recoverable and an additional 58 billion barrels “technically recoverable”.   While this oil, if extracted, would just be sold on the world market, it equals the equivalent of 11 years of consumption for the US at our current oil consumption rate of 8 billion barrels/year.   Subtracting the huge costs of oil spill cleanups and damage, most of the economic benefit of offshore drilling would accrue to oil companies and secondarily to state and federal governments in harvesting royalties, however the latter are going to be left “holding the bag” for the really, really big costs.

To ground this discussion in reality for just a moment, the 2009 US DOE Transportation Energy Data Book attributes to the US 2% of the world’s oil reserves, 8% of production, and 24% of consumption while the rest of the non-OPEC world comes out just a little better at 29%, 48% and 67% respectively.  Conventional natural gas is not a much more promising energy source for the future with the US having 3% of the reserves, 18% of the production, and 21 % of the consumption.  In the US, transportation accounts for 70% of all petroleum use and 24% for industrial uses.  Consumption of petroleum for transportation in the US is 84% for road transportation with around 65% for cars and light trucks and 18% for medium and heavy trucks.  Airplanes use 9%, shipping 4.2%, and rail 2.0%.  Even if we consumed petroleum and natural gas in proportion to worldwide production, there are credible predictions that we are somewhere in the neighborhood of the worldwide peak in production whether today or in a decade’s time.  Even if there were two more decades until the peak and we looked away from oil’s climate and local pollution impacts, would it be justified for our generation to run through this exhaustible resource?

The ballooning US trade deficits are attributable in the last decade approximately 55-60% to outgoing payments for petroleum imports but with the 2008 price spike, oil’s proportion climbed to 65%.  With oil prices once again ascending the petroleum related component of the US trade deficit will continue to climb.  With the last US trade surplus in 1973, the total US trade deficit has since 2003 stayed in the range $500B to 800B per year.

Turning back to politics, the President, whether by his own inclination or badly counseled by his advisors, has since taking office had a tendency to let the issues be defined for him rather than shaping policy with original view of his own.  He has approached health care, financial reform, and climate and energy as though there was some pre-formed wisdom which he simply needs to allude to or tap into in order for the American people and Congress to understand.  Erring on the side of being too laid back, perhaps partaking of the Spirit of Aloha, has not always served him well:  to get health care across the line he had to shed the “cool customer” image to actually win the votes in Congress.

The apparent rationale for his laid-back approach to issues, so commentators say, comes from overlearning what is considered to be a mistake of the early Clinton White House.  Clinton’s hands-on approach to policy is supposed to have alienated Congress and doomed Clinton’s health care efforts.  Obama has taken the opposite tack and can claim at least passage of a health care bill, though it is not clear yet how positive an achievement this will be considered when it actually takes effect.

What is missing so far in the Obama Presidency is the President taking the role of educating and perhaps changing the public’s views on important issues, which have been heavily colored by a very strong and organized counter-reform messaging machine.  The President has shied away from using the “bully pulpit” and allows Congress, which is considered by the public at the moment to be corrupt and untrustworthy, to shape the terms of the debate.

With the approach to a climate and energy bill this year, post-health care, the President opened up with a tactic rather than with a strategic plan for energy.  His announcement in March that he would lift the ban on offshore drilling in parts of the Gulf and the East Coast was a means of gaining support from Republicans for the ever more amorphous climate and energy package which is currently in the Senate.  Meanwhile, with so many issues and concerns, it is safe to say that energy is not top-most on most people’s minds in the Great Recession.

But the President has so far treated this as a case of another industrial accident for which liability can be assigned to the owner or commissioner of the oil rig, BP.   President Obama has not even advanced to the rhetorical level of George Bush’s 2006 State of Union where Bush declared America “Addicted to Oil”, despite Bush, in action, being responsible for gutting the regulatory agencies that may have prevented the spill.  While nominally a more “liberal” President and not from the oil patch, Obama has not presented a tangible vision of a post-oil society and, in combination with his preferred policies and speeches, the public is left mired in the oil-dependent present.

Discussions about who is to blame, who will pay, and what can be done in the Gulf to recover from the spill are important but are ultimately distractions from the most important question:

What will the US do to wean itself from its oil dependency?

In media accounts, the effort to make this a conventional tale of corporate or regulatory malfeasance is becoming the favorite of supposedly hard-hitting television journalists.  Yet these interviewers avoid looking into the frightening “maw” of our economy’s fatal dependence on oil.  The President is also looking away, focused as he is on technical and regulatory “fixes” for the offshore drilling disaster.

The upcoming climate bill in the Senate is being sold as an effort to reduce our dependency on oil and other dirty fuels but it contains few aggressive provisions to get us there.  The just released details of the bill, indicate that it’s mild cap and dividend provisions may slightly raise oil prices (starting in the area of $.10-$.20/gallon and increasing by 3-5% over inflation per year).  And offshore drilling provisions are in the current draft, offered now as an opt-out for states that wish to keep the ban in place.   As a whole, the bill postpones until the 2020’s any serious moves to cut emissions and focuses on the implementation of coal carbon capture and storage rather than more promising renewable technologies and grid enhancements.  Ironically, Senator Kerry has mentioned on TV, as if this were a sign of his seriousness, that he had been working with the oil industry on this bill.

If we assume the best intentions of the President and the Congressional leadership, one single legislative session or bill cannot undo 30 years of negligence and foolish disregard in the area of energy.  Whatever his ultimate goals and political commitments as President, Obama, if he endeavored to “do the right thing”, would have a number of hurdles (described below) to overcome.  However right now, he, his Administration and his Congressional allies are managing just a few cosmetic moves in the direction of change. On the issue of oil use and oil dependence, the bill and the Administration’s efforts are weak.

I am proposing here a stronger response that deals directly with America’s oil dependency.

A Strategic Energy Plan for Oil-Independence and Carbon Mitigation

A serious effort to get off oil will involve an equal emphasis on battery electric and grid-tied or grid-optional large vehicles like this trolleybus. The de-electrification of public transportation, while greeted by some as progress, now appears to have been a big mistake. (Photo: Adrian Corcoran)

The only solution to our oil dependency and the inevitable disasters that come from a mad rush to extract as much oil as possible from the earth is to create a strategic national energy plan that addresses both our oil dependence and our climate concerns.  A plan is required because changes in the transportation and energy system involve the coordination and arrangement in a sequence of certain key activities and infrastructure changes, for which market mechanisms, the current “default” preference for policymakers of both Left and Right, are ill-equipped.  Such a plan would also be the occasion for leaders of government to show and exercise leadership rather than look around for a lucky break or well-meaning private actors and companies to step into the breach.  Turning to planning is unfortunately now in America a politically fraught move but there is simply no alternative, if we want to have a sustainable economy, whether in the narrow economic sense or the broader ecological sense.

A growing chorus of corporate leaders and former government officials is calling for an electrified, oil-independent transportation system for national defense reasons as well as environmental ones.  Recently Bill Ford, chairman of Ford Motor Company made the connection between national security and oil, indicating that Ford’s product roadmap will focus on electric drive vehicles in the future.  James Woolsey, former CIA chief under Clinton, has been a long-time advocate of electrification for reasons of national defense.

Other nations are rapidly moving away from oil through plan-based efforts by governments in coordination with the private sector, even as almost every other country is starting from a position of less oil-dependence than the US.  The Chinese leadership, as is well-known, is very concerned about the effects of oil shortages and prices on China’s economic development.  China is in the process of building an extensive high-speed rail network (to Europe too)and is as well working on developing a lead in the area of battery powered vehicles.  President Obama mentioned in a recent speech China’s ambitious rail program as an analogue to his efforts in the US but I believe he knows that there is no comparison between the scale of their efforts and our much modest ones.  Japan and Switzerland have almost entirely electrified rail networks and France has the goal of electrifying its entire rail network by 2025.  Russia, despite its plentiful oil reserves, has electrified the Trans-Siberian and Murmansk lines of its railways in the last 10 years.  Denmark, Japan, France, and Israel all are executing plans to build widespread electric vehicle charge and battery-swap infrastructure.  By contrast, US freight and passenger transportation in all modes is almost totally dependent upon oil, leaving the US vulnerable to political and geological disruptions of supply and price spikes (see Alan Drake’s proposal for a comprehensive electrified train system for the US).

Two Pronged Strategy:  Efficient Use and Oil-Independent Infrastructure

There are two prongs to getting off oil which also share a common path.  One prong is increasing the efficiency of oil use in the US via increasing the person or freight miles traveled per unit petroleum consumed.  The other prong is building an oil-independent transport infrastructure and oil-independent vehicles.  Investment in routes on the path common to both should be favored over those that commit us interminably to oil.

The dream of a quick-fix, a “drop-in” technological solution that will simply replace oil has proved to be elusive and has so far found little basis in the science of energy.  So the proposed solution has a number of parts and involves tradeoffs and some large initial costs.  However, the invitation is there to any readers to find a better, presently available solution and publicize it.

Efficient Use:

  1. Levying a gas tax or price stabilization tax that insures that drivers can plan on a minimum gas price going forward on an ascending schedule.  Instead or in addition, a carbon tax or fee would disincentivize coal use as well, though might be supplemented by a gas tax to reduce gas use. (the Kerry Lieberman bill’s cap and dividend provisions will raise gasoline prices imperceptibly in the first few years).
  2. Enable full use of existing passenger rail and bus transportation infrastructure via adequate funding to increase schedules, keep current fare levels.  Determine via market surveys and statistics optimal service levels for each route.
  3. Encourage shared ride and shared vehicle programs and services using Internet and mobile phone resources to coordinate and develop ride-sharing social networks
  4. Mandating idle-stop systems (a.k.a. “mild hybrid”) on all new trucks and cars as of 2013.  Comprehensive idling reduction program at all truck stops, including incentivizing “shore power” electric hookups and retrofit kits. Mandate Cold ironing facilities at all shipping berths by 2015.
  5. Incentivize Transit Oriented Development via federal incentives for zoning changes at the local government level and developer and homeowner tax incentives.

While focusing on efficient use alone seems “pragmatic”, it actually does not have nearly the appeal and long-term economic stimulative effect of building an infrastructure that moves passenger/driver miles and freight ton-miles off of oil permanently.  To focus on efficient use without building for the long-term is an incomplete strategy.

Oil-Independent, Carbon-Independent Infrastructure:

See Drake et. al. for a slightly different more detailed proposal

  1. Double or multi-tracking the US rail system on all but low traffic lines enabling consistent speeds of 110 mph on non-high speed lines for freight and passenger trains.
  2. Stepwise electrification of rail infrastructure to 100% electric traction.
  3. Building on an accelerated basis dedicated high speed rail lines per the US HSR Association’s recommendation: http://www.ushsr.com/hsrnetwork.html
  4. Electrification of 80% of government vehicle fleets using a variety of battery charging technologies including trickle charge, rapid-charge and battery exchange technologies.
  5. Extended tax incentives for corporate vehicle  fleet conversion to battery power or for plug-in hybrids.
  6. Rapid build-out of a super-grid supportive of renewable energy development throughout the US.
  7. A robust regime of incentives for renewable energy development (advanced feed in tariffs based on cost recovery plus reasonable profit with descending incentives for projects in later years).
  8. Electrification of high traffic bus routes via either trolleybuses or streetcars.
  9. Build out of light rail and regional rail networks to interconnect high and medium density cities and suburbs.
  10. Corporate tax credits for build-out of tele-presence (e.g. Cisco’s product here) technologies and to encourage tele-commuting and tele-meeting

While technologies could evolve in the future that might alter the relative proportions in the above plan, these policy proposals and programs rely on technologies that are available today, some of them with a track-record of over a century.  However, the goal of getting off oil, let alone fossil fuels has not been a priority of US industrial development and government policy, so our rail and transport networks have remained dependent on the happenstance of oil extraction and the oil markets.

Substantial and Insubstantial Hurdles that Delay Us

If our country does not first slide into a state of permanent second or third-class status, it is inevitable that we in the US will move to a post-oil, post-carbon transport system incorporating most of the largely electric-drive technologies listed above.  However this should not lull our current leadership into complacency or half-measures, because sliding into a state of decay and dependency is a distinct possibility.  Will Obama be the President to lead us there, as Eisenhower was the President who built the Interstates?  Or will he be the President who excited hope, talked a good game but gave too much discretion to fossil fuel interests? We can be the last nation in the world to wean ourselves off oil, massively in debt, and always be in the position of borrowing know-how from others or we can start to move “on our own power” towards a position of leadership in this area.

The current Senate climate bill sees most of what is proposed above as distant pipe dreams rather than near future realities.  Most of the electric vehicle provisions in it are termed “pilot programs” with greater favor shown to natural gas vehicles and mild oversight for unconventional natural gas extraction.  Public transportation and rails are given little or no mention.

Leadership will be required to push ahead to the solutions based on what is already known about the physics and technology of transport and energy, instead of stopping at the half-way measures or the dead-end technologies that depend on fossil fuels.  True leadership involves anticipating and overcoming hurdles.  I have listed below the main hurdles which present themselves to whomever, I hope President Obama, decides to place the American economy on a sustainable energy basis.

Hurdle #1:  Market Idealization (Market Fundamentalism) Vs. Planning

One of the greatest hurdles is the ongoing influence of market idealization (or “market fundamentalism“) in Washington in general, on both sides of the aisle in Congress and in the White House.  In the era of market idealization over the last 30 years, planning, especially government planning, got a bad name as markets were supposed to constitute all of economic life as well as being perfect and complete economic institutions.  Through his sojourn at the University of Chicago, one of the centers of market idealization, President Obama was exposed to an environment that celebrated a view of markets as self-sufficient, self-regulating institutions which perhaps continues to color his view of planning and government’s role.

The use of “cap” legislation, carbon pricing, or emissions targets does not substitute for planning because such unspecified “plans” to achieve quantities of emissions reductions cannot substitute for the sequence of timed and specified actions that constitute a plan.  Emissions caps or targets suggest that the market will find its way without planning.  In some areas this works better than planning but in transportation and energy infrastructure, not so much.

Some major problems with markets are that they don’t price in future risks or distant future rewards very well in many sectors, including energy and transport, and, when unregulated, tend to focus market participants on their most immediate concerns.  Markets also do not produce all the conditions for their own survival and continued profitability.  Governments have historically stepped in to provide people and markets with structure for transactions that threaten to undermine trust between market actors.  Additionally, governments of most nations with complex economies provide public goods like infrastructure that enable longer term social and economic goals of both private and public actors to be achieved.  While market-like institutions can be imposed upon the “natural” monopolies of the electricity and the rail businesses, these market reforms do not generally orient these businesses to rapidly change their infrastructure but rather focus them on squeezing value out of existing assets.

Planning can originate from private and non-profit actors as well as from government though this does not release governments from the duty to initiate or help structure plans that effect diverse sets of stakeholders.  The Desertec Initiative is an example of a large-scale international energy plan that has originated in the private and non-profit sectors.  The Desertec Foundation and the Desertec Industrial Initiative (DII) are working on building a renewable energy supergrid that spans Europe, North Africa and the Middle East in order to provide renewable electrical power to the area, balancing wind and solar resources across the region.  Munich Re, a large re-insurance company based in Germany, concerned about environmental and climate risk in the future and along with a consortium of electrical utilities and technology companies, including Siemens, ABB, Abengoa, MAN Solar Millennium has created the DII.  Whether the impulse to plan has come from the private sector or from government, government needs to be involved in making sure that large scale energy and transportation plans serve national interests and are executed and financed in a transparent and fair manner.

As market idealization has been also a particularly fervent form of anti-Communism, government involvement in planning has been associated in the minds of US politicians and sections of the public over the past 30 years with centrally-planned Communist economies.  Due to these still largely unchallenged views of market idealists, politicians making the argument for planning will need to run the political gauntlet of being accused of being a Communist (or, as is common in the precincts of the Tea Party and Fox News, a fascist).  Unfortunately, academic economists too have also been lax in making the case for government planning beyond Left-Right ideology.  Republicans and Democratic Presidents and other government officials between 1940 and 1980 did not generally have to justify their use of planning but since 1980, planners and planning advocates have needed to keep a low profile.

So presenting a full-on Oil-Independence Plan from the side of government would present the President with either having to make a two-stage argument (first for a role for planning and then for the plan) or to compress the two together in one artful package.  The latter is not inconceivable but, our President, so far, has shown more interest in pointing out how much he has in common with the Republican Party that has been almost completely captured by market idealists.

On the other hand, almost everybody in contemporary American politics is for energy independence and national defense.  It is not a stretch to imagine our centrist to right-leaning Democratic President reaching across the aisle to push for a “Oil Independence Transportation Plan”.  This would require preparation, research and political leadership by the President, the Administration and Congress but is eminently do-able.  Thus a brilliant and principled politician, maybe even our current President, could present this plan as a combined act of patriotism and long-term economic good sense.

Hurdle #2:  Deficit Worries and Hysteria

Given that we are in an economic downturn and tax revenues will not be able to be boosted substantially, a post-oil transport infrastructure built in a timely manner will probably involve deficit spending.  Some parts of this system can be built and financed privately and paid back via user fees while others will have the status of public goods, like roads, that will need to paid for via taxes and or potentially inflationary deficit spending, i.e. printing money.

We have been facing a rise in public debt and budget deficits over the course of the Bush administration and the first part of the Obama Administration.  The current level of the public debt stands at approximately 60% of its maximum in relationship to GDP at the end of WWII (108%).  Misinformed politicians, pundits, and financiers take this as an occasion to stir hysteria that is stoked by a combination of fabrications and partial truths about the potential impact of budget deficits on the American economy.   Economists, such as Paul Krugman, Dean Baker and Joe Stiglitz, who have studied economic history and effects of deficit spending on jumpstarting the economy, have attempted to correct these misguided views of deficit spending in the context of a severe economic downturn.

This graph of the "gross" and not the usually cited public debt (now at 67%) indicates that excluding the first year of the Obama Administration the last four Democratic Presidents reduced the gross federal debt while the last four Republican Presidents increased it relative to GDP. In general, economic depressions and wars tend to increase the federal budget deficit.

Deficit hysteria seems to have a strong political component to it, as these fears remained largely dormant in the Republican Administrations that have run up large debts in the past.  As a preventative, those who are opposed to a strong government role in the domestic economy (though generally not to military adventures) have attempted to intimidate the President and others by warning of runaway budget deficits.  There are now some more severe budget problems in other countries (Greece for instance) and the differences between the US situation and these countries are played down to intimidate those who would want to spend deficits on building US domestic economic growth.

While those who stir deficit hysteria tend to be closed-lipped about their large-scale political and economic agenda, they generally are opponents of all government-provided social services and government-led economic initiatives preferring to reserve these functions for private enterprise.  Deficit hysteria implies the idealization of markets, though is a more sophisticated variety that acknowledges that there is “some” role for government, only to minimize that role in every proposal, due to fear of budget deficits.  Unfortunately President Obama has some vulnerability to deficit hysteria, in that he has not come out vigorously in defense of government’s role in the domestic economy, preferring instead to adopt an attitude of compromise and conciliation with people who talk as if there is no legitimate role for government social programs or in the domestic economy.

While budget deficits need to be monitored closely, the US has luckily somewhat more flexibility than many other countries to engage in deficit spending.  A very strong case can be made that deficit spending to help finance a post-oil transportation infrastructure is a very good use of public funds and also shows nations that hold our debt that we are spending in ways that will improve our overall competitiveness and resilience as a nation.  Deficit spending in this way actually works to reduce our trade deficit which is in most years larger than our budget deficit and largely attributable to oil imports.

Hurdle #3:  Balancing the Interests of Stakeholders, Mix of Private and Public Enterprise

The French SNCF is a public benefit corporation that runs and owns the French trains and stations. In order to open up the rails to competition the rails and rights of way are owned by another government-owned company, the RFF, enabling, theoretically, private train companies to compete with SNCF on the same tracks. (Photo: Wikimedia Commons)

An Oil- and Carbon-Independence Plan will require the participation of a number of stakeholders some of whom will be less than enthusiastic participants in this ambitious effort.  The railways in the US are ambivalent about the ambitious plans of advocates for either high-speed rail or electrification.  Like other large infrastructure-dependent businesses, these usually risk-averse corporations make money by squeezing value out of their existing infrastructure and sticking to decades-long incremental capital investment strategies.  Additionally, and ironically, railways, our cleanest and most efficient means of transporting freight even with diesel traction, haul the dirtiest fuel, coal, to power plants of the large coal-burning utilities; the largest source of revenue for railways is coal transport accounting for 21% of 2007 revenue with intermodal (container) being the fastest growing segment.

Left to themselves, the US freight railways would not be able to undertake nor necessarily see it in their short or medium-term interest to electrify their railroads nor embark on a massive program of track build-out.  The railways are in favor of tax incentives to help them continue capital improvements but these alone will probably be not enough to double and triple track mileage. The railways own their own rights of way and are currently entirely self-funding and compete largely on price and capacity with other freight modalities.  In order for massive public investment to be possible, the railways would have to develop an entirely different relationship with the federal government.

If they were intent on executing a Post-Oil transport plan, policymakers would need to lead the railways into a new relationship or perhaps buy some of them out, in part or in full. The massive level of public investment required to enable the railways to carry triple the freight plus 20 to 30 times the passenger volume would transform their capital base with largely public funds or public guarantees to be able to undertake the risk.  Such action would require a combination of vision, leadership and negotiation skills from the side of government.

As diesel locomotion (actually diesel-electric) is still a very efficient method of hauling freight and passengers relative to other modes of transportation, the transition to an Oil-Independent infrastructure could be achieved in two stages:  first railway track build-outs that are electricity-ready and then the electrification of those railroads as a separate project.

An alternate route towards oil-independent transport is possible that “deals in” the trucking industry but requires the adaptation of several existing technologies and an alteration to the interstate system: Using hybrid dual-mode trolley long-distance trucks on dedicated lanes of the interstate that also have a backup generator or battery pack that enable easy on and off and grid-detached travel.  There are no technological breakthroughs required to do this but it needs the backing of a government or government-funded research program that seriously studies electrification of lanes of interstates and the high speed attachment and detachment of trolley poles or pantographs to overhead lines.

Designing and executing an Oil- and Carbon-Independence Transport and Energy Plan would also not necessarily inspire the other large conservative infrastructure-based companies, the power utilities, to join in the spirit of the enterprise.  Similarly to the freight railways, utilities wring value from a decades-old infrastructure and generally adopt change very slowly.  Particularly challenging for many US utilities is a transition away from coal which accounts for approximately 50% of electricity generated in the US.  Selling electricity to railways may be an additional source of revenue but also would involve new infrastructure and might require new generation, which would need to be low- or zero-carbon.  A portion of the electricity demand from railways may be supplied by federal power generation facilities, perhaps by a newly founded Railways Power Administration, modeled on the Western Area Power Administration or similar.  Passenger railway power demand would require daytime generation which would coincide with solar but freight would add to baseload demand as it would operate around the clock.

A clear expression of purpose and demonstration of intent by government leaders to reduce oil demand in the US is a prerequisite for successful negotiation with stakeholders in shaping the post-oil future.  So far the President and Congressional leaders haven’t shown the guts and independence of mind to work this out with industry stakeholders.

Hurdle #4:  Many Americans’ Love of Expansive Resource Use (and Disregarding the Consequences)

Different cultures tend to have differing attitudes towards the material world and what is considered attractive or desirable in the use of resources.  In Japan, with one of the world’s highest population densities, cultural preferences include a focus on small, sometimes intricate objects.  Traditional agriculture in China is highly space- and resource-efficient.  In Europe, culture has emerged from similar resource constraints, for which it is much admired throughout the world.  In the US, we have through a large portion of our early history, not had to deal with as many resource constraints, including a belief that more abundance is always around the next bend.  Europeans came here in search of “El Dorado” and we have had the tendency to believe in “Virgin Land”, either physically or virtually, into which we could move if we “messed up” or wanted to leave our original physical context.

President Jimmy Carter wore a cardigan in some TV addresses to show that he was practicing energy conservation during the winter at the White House. Even though he was presenting Americans with a prudent message, in hindsight with the triumph of Reaganism and reactive resource- and energy-profligacy, our image-obsessed culture has held onto Carter's slight awkwardness, school-teacherly manner and absence of swaggering machismo rather than the content of his message.

The electoral defeat of Jimmy Carter in 1980 by Ronald Reagan and the subsequent growth of a culture of reactive anti-environmentalism has impressed politicians with the dangers of appearing to “wear the cardigan” rather than use resources “like you just don’t care”, yielding a culture of reactive or revived profligacy.  Contrarian anti-environmentalism both on the Right and in the apolitical Center has meant a return for many to the energy and material use patterns with which Americans grew up until the 1973 OPEC Oil embargo.  Because of the political defeat of Carter (for a number of reasons), the 1985-2001 return of cheap oil, and the 2001-2009 Bush Presidency, few politicians have attempted to experiment with what is possible in the way of communicating a stance that counsels wise use of resources while retaining a sense of American identity.

Obviously, we will need leaders to set an example and attempt once again to join the American spirit with an awareness of the earth’s limits and wise use of resources.  Expansive plans to create a post-oil infrastructure can be combined with measures that suggest that the America of the future will not lay waste to the earth.  The ability to break up the cultural “forced choice” between abstemiousness versus expansiveness will involve creativity on the part of political and cultural leaders. Whether the Obama Administration is up to the task and has the will to engage in this vital transition to a new kind of American identity remains to be seen.

Hurdle #5:  The Biofuels Distraction

A few years ago, using biofuels as an oil substitute were treated seriously by some environmentalists and became a big favorite of politically powerful agricultural lobbies.  Since then, it has dawned on most of the environmental movement plus more and more policymakers that biofuels are a poor source of fuel and environmentally may be under many conditions worse than using oil.  The net energy yield, plus land use, plus water use put into making ethanol or biodiesel from dedicated crops rather than waste products turns out to be a net negative for the environment and economically disruptive for food production.  To produce mechanical energy from sunlight it is far more advantageous to erect solar panels or use wind turbines in agriculturally marginal areas, which would occupy far less space, have far lower environmental impact, and produce far more energy.

Unfortunately, in the American heartland, it is difficult, in the absence of renewable electricity policy that is attractive to farmers and higher prices for food crops, to turn away from support for biofuels and the overproduction of corn for that purpose.  While perhaps research may turn up a more sustainable biofuel, a strategy based on biomass production for biofuels other than as a subsidy to farmers is unjustified.  There may in the future be niche uses for some future biofuel process but these will not serve the vast energy demand currently served by oil. A gradual shift to a sustainable agriculture policy that addresses the economic concerns of farmers without continuing our unsustainable corn policy would be the long-term solution.

As an immediate strategy, the policymakers would need simply to slowly back away from biofuel subsidies, while a compelling and well-explained alternative for farmers and farm-belt politicians is developed.

Hurdle #6:  Corporate Funding of and Influence in American Politics

A recurrent theme throughout the last year and half of reform attempts has been the notable influence of incumbent industries and their lobbyists in influencing politicians in Washington of both parties.  While there are many corporations that stand to benefit from an Oil- and Carbon-Independence Plan, these have not yet made common cause and many see their short-term interest in the energy and transport status quo.

The likelihood of formulation and implementation of a plan with the longer term interests of the US in mind, would be greater with corporate money taken out of politics to a very large degree, as then lobbyists would more likely to be seen as advisors and industry representatives rather than represent the co-“employers” of legislators.  This is not to say that there aren’t politicians who bravely stand up now for the long-term view of what is best for the overall American economy.  It can only be hoped that more politicians show this type of courage on a number of policy fronts and, as well, in the service of campaign finance reform.

Are There Any Other Options?

Those who read these recommendations with a jaundiced eye may say:  “You expect too much from government” or “this will never happen”.

My response:  Short of the United States slumping into further energy dependency, accelerated trade deficits, inflation due to spiraling oil prices and accelerated climate change worldwide, what are the other options?

If you have another workable option please share it with me or, better yet, the Administration and the world.

Standing on the side of the fishermen and the wildlife of the Gulf is not an act of excessive and unrealistic belief in human goodness, an underestimation of our energy demand, or an exaggeration of the sensitivity of natural systems.  It is simply the recognition of the unwinding of a model of economic and energy development that has run its course.

Cap and Trade Derails Climate Ethics, the Motive Force of Carbon Mitigation – Part 1 November 18, 2009

Posted by Michael Hoexter in Efficiency/Conservation, Energy Policy, Green Transport, Renewable Energy.
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In this 3-part post, I will outline how cap and trade’s composite structure contains within it fault lines that help defeat its and the climate action community’s goals.  In this first part, I will sketch out the components of the cap and trade hybrid

Part 1.  A Slow, Ineffective “Monstrous Hybrid” of a Climate and Energy Policy

The record of cap and trade (also called emissions trading) is not impressive despite the bulk of the instrument and its popularity with the current generation of policymakers, some corporate leaders and some activists.  Even before it was applied to carbon dioxide emissions and the global warming problem, cap and trade’s use in the US to cut acid-rain forming emissions has only produced middling results (40% cuts) as compared to cuts elsewhere where traditional “command-and-control” environmental regulation was used (65% cuts).  Furthermore the US acid rain cap and trade system had the benefit of the ready availability of new sources of low sulfur coal in the US as compared to a limited choices in types of coal in most other nations.

In the first 4 years of the implementation of cap and trade as a means to cut greenhouse gases (2005-present), it appears that reductions in emissions, where they have occurred, have been due to, or strongly conditioned by, factors other than participation in cap and trade.  In the first 3 years of the European Union Emissions Trading Scheme or EU-ETS, Sweden for instance cut its emissions by 20% within regulated sectors (9% overall in a country with an already low level of per capita emissions) while neighboring Finland increased emissions by 28% within these sectors.   The managers of the EU-ETS attributed an overall 3% reduction in emissions in 2008 to the EU-ETS’s “price signal” yet the US without a significant cap and trade system nationwide decreased emissions by almost the same amount (2.8%); the role of the massive economic downturn of 2008 would seem to far outweigh the effect of emissions trading.  While most agree now that too many permits were given away or sold too cheaply in the early stages of these cap and trade schemes, there will always be a way to find justifications for failure in such a complex system by pointing to the failures or misalignment of one part or another.  To date, beyond general economic conditions, the actual cutting of emissions as an intentional activity can be attributed to what I am calling below “Climate Keynesianism” rather than as a response to carbon pricing or permit regulation.

Cap and trade systems are not only marginally effective to ineffective but are also hugely cumbersome to implement at a time when we have at most a decade to make serious cuts in our emissions.  It took 7 years after the ratification of the Kyoto treaty (1998) before the cap and trade systems were implemented (2005), which to date, 12 years after the 1997 Kyoto meeting, have not achieved noticeable cuts in emissions. If our political leaders and climate action communities believe that implementing a cap and trade system will be largely responsible for cutting emissions, they and we will soon be in hot water.

I have proposed elsewhere two (1, 2) more effective policy frameworks for cutting greenhouse gas emissions that are based for the most part on more reliable and time-tested methods for implementing technological change and shaping our behavior, which include government energy efficiency and renewable energy programs (Climate Keynesianism), disincentives like taxes or fees, and market incentives.  There is literally no excuse to hang onto the cap and trade instrument given the stakes involved and its unimpressive record of accomplishment.

Primacy, Sunk Costs, and US Political History Outweigh the Facts

The most obvious reason that people who nominally care about the climate’s future cling to cap and trade is that it is the first worldwide regulatory framework.  The “primacy effect” is the observation that we as human beings hold onto the first bits of information that we receive and assign importance to them beyond their actual truth value or relevance.  Many attempts at communication and persuasion use the primacy effect by placing more important information before other information.  Information that comes first often establishes the communicative “frame” or context against which succeeding bits of information are then evaluated.

As the first international carbon mitigation policy, cap and trade has enjoyed the benefit of primacy:  the definition of action on climate change has in the minds of many come to mean instituting a cap and trade system, no other options are considered.  In order to interrupt cap and trade’s primacy effect and arrive at a better solution, we need to circle back to the logical point before one would select ANY climate policy and define what the fundamental tasks of climate policy are in general, keeping in mind our current and emerging set of technological solutions.  I have attempted to do the latter recently here.  Without understanding what climate policy must do independent of any particular policy instrument, we cannot evaluate our current policies nor arrive at new ones.

In addition, cap and trade already has benefited to the detriment of more effective instruments, from sunk costs in that bureaucracies have been erected, labor, time, money, and political capital have been spent in building up the idea of cap and trade as the sole or best climate policy solution.  I am sorry for this effort, some of which is wasted, but this is no reason not to retool or dismantle some of these investments as they have been built on a faulty foundation.  That several thousand mostly well-intentioned people around the world have already invested a good deal of their time within the Kyoto system and affiliates is no reason for them not to turn to a more effective system, learning, as it were, from their experience.  It is a choice between ego and the future of our planet.

Currently in the US, the momentum behind cap and trade-based Congressional bills has the “benefit” of fixation by a large number of environmental organizations and advocates upon cap and trade as the sole instrument.  President Obama, perhaps influenced by the idealized view of markets at the University of Chicago where he taught, gravitated to the cap and trade idea as a solution to global warming.  In these matters, he would have had few alternative sources of information from US environmental groups.  Particularly set on cap and trade is, for instance, the Environmental Defense Fund, whose materials on cap and trade read like a sales prospectus for markets as an institution rather than defense of the environment.  The confusion between celebrating the policy instrument and achieving the policy goal is rampant among those who are trying to “make the sale” of this cumbersome policy behemoth.

The choice of cap and trade as the international regulatory framework for greenhouse gases speaks also to the inordinate influence of the US and internal US politics on the course of events.  Cap and trade was invented in the US as a means to avoid either environmental taxes or direct regulation, in conformance to US political preferences in the immediate post-Reagan era.  As during the 1990’s, the world’s only superpower and still its predominant military power, the US has pressed the world to share its view of the global warming problem and the surrounding politics.  Unfortunately political power and influence does not always yield the most effective policy framework even with substantial backing by that power.

With Kyoto we have the additional complication that the US partially withdrew its support for the framework in midstream, as the US Congress led by the Republican opposition to the then Clinton Administration, refused to ratify the treaty in 1998.  Given its denial of the importance of global warming, there remained no chance that the Bush Administration would press for Kyoto’s instatement.  Among veterans of the Clinton Administration who now surround our current President Obama, some may feel the need to vindicate their political choices and Administration after 8 to 10 years of exile from the international cap and trade process.  The hope seems to be that simply turning up the volume on cap and trade via US participation will admit the US to the circle of climate-virtuous nations and/or transform that process into an effective greenhouse gas regulation regime.

Many key activists and officials have become personally associated with cap and trade so are not as free as others might be to criticize what they have helped institute.  Al Gore, who is genuinely and deeply concerned about the future of the planet, was for a time advocating for a carbon tax though not campaigning against cap and trade.  Since then, with the new Obama Administration gravitating towards the cap and trade instrument, he has said that he is for both cap and trade and a carbon tax.

“Make Only Big Mistakes”

In addition to these more understandable reasons for hanging on to cap and trade, there are also some “sharp practices” involved in selling the instrument to the public and the climate community.  In politics and business there is a school of strategy that is focused on the “sale” to such a degree that long-term value, quality, and effectiveness are sacrificed just to “move product” or “pass the bill”.  One strategy/tactic in the toolbox of people who are focused on the sale above all else is to make only large scale mistakes, which are usually easier to get away with than small errors.  The reasons for this are four-fold:

  1. If you are presenting people with an entire, new (but deeply flawed) self-referential system, you are able to reframe objections to and doubts about it according to the newly presented system rather than to received norms.  This is the benefit of “reframing” a debate and insisting on your framing of it when challenged.
  2. People feel unqualified to criticize something they can barely comprehend that in its design and presentation seems to be the product of wealth, power, and intelligence.
  3. Conversely, a competing more effective framework that is more easily grasped can be dismissed by critics for small errors or points of personal disagreement with what they already know or feel comfortable with.
  4. The Emperor’s New Clothes”  – pointing out major errors that call into question the competence or reality-basis of others puts critics into the uncomfortable position where some of the negativity you are attributing to the other is cast back upon you.  People will have difficulty believing that upstanding members of a community can singly or as a group be so misleading or misled.

Cap and trade is a very, very big mistake so one can find many, many angles, without trying too hard, to criticize it.  I have too many options in choosing approaches to its deficiencies and I am a person who does not particularly enjoy writing this type of criticism; historically my focus has been on offering solutions.  Unfortunately cap and trade’s self-reinforcing system of assumptions have protected those “inside” the system from seeing what’s wrong.  Furthermore, a number of people including myself have offered alternatives to cap and trade that are readily available and, in many cases, already in practice in some form but these are now not yet recognized or validated as “big picture” climate policy.

The exertion of more moral energy and political power upon the cap and trade instrument, as many climate activists counsel, will not yield substantially better results because the instrument itself is fractured and divided both against itself and against the real intended goals of concerned activists and political leaders.  For one, it actually diffuses or defeats that moral energy rather than concentrating it for better use on the right targets.

Cap and Trade as a Monstrous Hybrid

Cap and trade is, even in climate activists’ “fantasy version” with 100% permit auction, tight caps, and no offsets, a third-best or worse climate policy for a number of reasons.  It is, appropriating the framework of William McDonough, the inventor of “cradle-to-cradle” certification, a “monstrous hybrid” of a policy that is also ineffective (I have no idea what McDonough’s personal view is on this policy and am not pretending to represent it here).  In McDonough’s typology, a “monstrous hybrid” is a material or product that cannot be redesigned, re-used or recycled after its initial life.   An example of a monstrous hybrid is the modern disposable razor or razor cartridges which have metal bonded to plastic and in most circumstances has to be thrown out rather than recycled.

Cap and trade is like physical monstrous hybrids in that it is cumbersome, will install classes of stakeholders that are incentivized only to maintain its systems, and that it will be difficult to adapt it to changing circumstances as McDonough would with a physical product in his cradle-to-cradle process.  Unlike eminently reusable cradle-to-cradle product components it doesn’t “play well with others” tending instead to dominate the policy landscape without concomitant good results to justify its expanding breadth.

I am however expanding McDonough’s usage of the word by adding “ineffective” to “monstrous hybrid”, because the hybridization has not improved the object’s initial usefulness, the whole purpose of creating a hybrid.  One of today’s disposable razor cartridges offer a closer and safer shave than the metal razors of old, for instance, so is highly useful in its first life.  In cap and trade, the hybrid nature of the policy does not help it to do its work.  Its constituent parts are joined together but do not produce results that are an addition of or, better yet, a multiplication of their separate contributions. The “monstrosity” of the cap and trade hybrid is magnified by its poor results to date, comparative disadvantages to other policy frameworks, its unearned hegemony over climate policy thought, and the inconceivably high costs for its failure or ineffectiveness.

Parts of the Hybrid

Cap and trade has four business interfaces, the parts that are supposed to interact with the world and reduce carbon emissions:

  1. a (derived) carbon price,
  2. permit regulation,
  3. a competitive bidding and trading market for permits with accompanying profits and losses
  4. a statement of intent to reduce emissions via the cap

In the real world, besides economic contraction (which also reduces emissions though with unfortunate side-effects), emissions will be reduced when economic actors the world around use energy more efficiently, use clean non-emitting sources of energy, and build up stored carbon in the biosphere through conservation, changes in agricultural and silvicultural techniques.  Here is how the components of cap and trade are supposed to effect these changes:

  1. The carbon price is supposed to be a disincentive to using carbon emitting fuels, an incentive to using fossil energy more efficiently, an incentive for the sequestration of carbon in land use changes and an incentive to switching to non-emitting energy production; as I have documented elsewhere a carbon tax or fee is a far more effective means of representing the cost of carbon to investors and consumers (rather than traders), as the price will be less variable and not be mediated via the gyrations of the carbon permit market.
  2. Permit regulation is the control mechanism of the level of emissions as well as the “mint” of the carbon emissions “currency”.  It is supposed to represent the bulwark of the cap and trade system against dishonest dealing or invalid permits.  In addition, via permit regulation will come the issuance of the ultimate “stop” command via the cap on the total amount of carbon pollution.  Many, many critics of cap and trade or specific implementations of cap and trade have pointed out the severe flaws involved in using carbon offsets (permits/credits from elsewhere) which undermine the validity and honesty of permits, as well as undermine the entire cap and trade system’s effect on polluters in developed countries.  Even if offsets were to be regulated in a satisfactory manner, the enforcement of the ultimate cap by regulators will always be “loose” in that enforcement actions will seem arbitrary relative to emissions intensity and be economically disruptive.  Direct regulation, inclusive of coal moratoria, is a far simpler, more rational, and more forceful means to backstop price regulation and achieve emissions targets.
  3. Cap and trade’s permit trading markets are supposed to create a competitive environment where firms profit by some combination of cutting emissions and clever permit buying and selling.  The profit motive is intended to spur firms to emit less to enable resale of permits.  However, overall, there is a disincentive to overachieve too much in that at some point reselling permits becomes more profitable than further investment in low carbon technology; the policy creates an emissions “set-point” rather than a push towards carbon neutrality.  Furthermore, if emissions are cut in one place, they are allowed in another up to the cap.   In alternative policy frameworks there is no need for an analogue to the permit trading market.
  4. The setting of the cap, a statement of intent, is kind of a “carbon pledge” which may inspire action or at least give off the impression that action is being taken.  The cap is also supposed to function in an international arena as a diplomatic and trading bargaining chip.   As alternatives, there are other means of declaring goals that are paired with more effective instruments, with better track records. The statement of intent is politically seductive as it gives politicians and activists a sense of virtue that distracts them from the flaws of the policy’s 3 other parts, if they are able to discern them.  Also the metaphor of the “cap” has a physicality to it that is betrayed by the policy’s deep flaws.

Dysfunctional Interactions between Cap and Trade’s Components

A “hybrid” is the melding of two or more components into a new synthesis that supposedly is more functional or better than the original components.  In the case of cap and trade, the components actually interfere with each other leading to results that are far less than the sum of its parts.

  1. The regulation of emissions in quantities by permit interferes with the carbon pricing component as well as with the operations of firms in general.  Firms cannot predict exactly how much they will emit and their projections may change during the course of a year.  Furthermore over- or under-buying permits will change the cost of emissions for the firm.  These technicalities distract from investment in emissions reductions or overall decreases in the carbon intensity of production.  The amount of real emissions of any firm will always have a different size of “grain” and timing than that of the permits or their auctioning schedule, imposing additional administrative costs.
  2. The trading and auction markets interfere with the carbon price by introducing variability into the price, making calculations of long-term benefits from cutting emissions extremely difficult.  It is these calculations that lead to investments in low carbon technologies which are the desired outcome of the policy in the first place.  Demand for permits, the ultimate determinant of the price, has at best a tangential relationship with what the carbon price is supposed to measure: the damage or mitigation costs to emit carbon.
  3. As I noted previously in another piece, the carbon price will not act as a signal of coming administrative action if a firm runs out of permits and threatens to violate the cap.  Administrative action will either be endlessly postponed or will come as an arbitrary punishment for failing to buy enough permits with damages to many of the firm’s customers.  For this reason, cap and trade systems have been incredibly lax in the way they distribute permits.
  4. The declaration of the cap as a carbon pledge to mobilize voluntary action to cut emissions interferes with itself in this function and is interfered with by permit regulation and the trading market.  Once someone “overachieves” their permit allocation, it is rational for them to sell their left-over permits, allowing others to pollute more at a price. Permit trading is about establishing an emissions “set point” not pushing emissions down towards zero.

Almost all of this is avoidable if another (set of) policy instruments is chosen.   The design of more effective policies in a rapid and productive manner is not that difficult if we dispense with the cap and trade format.

Denmark Builds the Renewable Electron Economy: NOW on PBS.org Documentary November 15, 2009

Posted by Michael Hoexter in Energy Policy, Green Transport, Renewable Energy.
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A quick “hats off” to David Brancaccio and NOW on PBS for their well-researched and informative documentary on what Denmark is doing to attain energy independence and get off oil by building a version of the Renewable Electron Economy that is suitable for their resource base.

You can view the 23 minute show here:

http://www.pbs.org/now/shows/544/index.html

This installment of NOW does a great job of connecting Denmark’s historical dependence on other countries for energy and their current drive to build renewable energy and electric vehicle infrastructure.  Denmark is one of the first countries/regions to work together with Better Place’s electric vehicle infrastructure.

While the show does a great job in tracing the policy environment which is unusual for a technology focused story, it does miss that Denmark used a feed-in tariff for wind in the 1990’s to jump-start the Danish industry.

Furthermore, I believe this show should be required viewing for all policymakers who will be attending COP15 or who are currently deliberating about climate legislation in the US Congress, because it is an example of how “things actually get done” in the area of emissions cuts.  There is NO MENTION of cap and trade or emissions trading.  The sole request of the CEO of DONG Energy is that out of COP15 that a (preferably high) price on carbon emerges.

Furthermore, the piece shows the people of Denmark moving quite rapidly (relative to the US at least) towards a much more energy efficient and cleaner energy economy over the past 20 years and into the near future by the application of what might called “Energy (and now Climate) Keynesianism”.  It is no mystery that the Western Europeans have taxed petroleum-derived fuels heavily to, among other uses, build and maintain public transportation.  What the NOW piece shows is that Danish tax policy is designed to relieve congestion, reduce oil dependence, and now to support the growth of renewable energy by bringing in more electric vehicles and therefore more energy storage.

While those readers who are convinced that a “carbon price = cap and trade”  or “carbon policy = cap and trade” will not be persuaded or will miss the signs, what the NOW episode shows that a truly conservative in the best senses of the word climate policy is a “Climate (and Energy) Keynesianism” with an international carbon price that is a dollar/euro/yen/renminbi amount.  We know that we can shape energy use and generation activities by tax policy and by incentives for private development of clean energy generators (feed-in tariffs).  As I have been documenting here in my series on Cap and Trade, we have many very good reasons to doubt with its 12 year history of middling results and expansive bureaucracy that the twisted emissions trading policy will be as effective.  Furthermore it is simply a political end run around the obvious “Climate Keynesian” solution, where government’s and business’s roles are differentiated and validated.   Cap and trade will interfere with or obscure the benefits of Climate Keynesianism.

Cap and Trade: A Tangled Web… A Project-Based Alternative – Part 4 November 5, 2009

Posted by Michael Hoexter in Efficiency/Conservation, Energy Policy, Green Transport, Renewable Energy.
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In the first two parts (part 1 and part 2) of this post, I discussed cap and trade as well-intentioned but a fundamental misapplication of the permit trading policy framework.  I also went on to identify 11 basic elements of any climate policy regardless of instrument.  In the third part, I describe a package of mostly familiar policies that integrated together will have a far more profound effect on emissions that the cap and trade system.  In this, the last part, I offer a second alternative to cap and trade which I believe is the most aggressive and secure approach to cutting emissions, though does not exclude elements of the package in part 3.

Project-Based Carbon Mitigation Policy (PCMP):  A Heterodox Climate Policy Framework

I’ve redesigned an approach that is not entirely new but has been sidelined in current high-level climate and energy policy discussions.  I’m calling it Project-Based Carbon Mitigation Policy– PCMP.  Instead of or in addition to starting with an abstraction like a carbon price, PCMP starts with specific large-scale regional, national or global projects that with greater than 95% probability will cut emissions substantially within the next few years; these projects implement technologies and processes that are known to directly replace fossil fuel use, directly reduce demand for fossil fuel or, with some agreed-upon degree of certainty, sequester carbon emissions. A goal and timeline are set for the reductions based on the implementation of that technology or process then PCMP reverse-engineers the economic and social policies that will enable the project to take place in a timely manner.  PCMP does not exclude nor discourage the use of abstractions like price mechanisms and society-wide or global targets but it starts with the security and relative certainty of projects that are technology- and process-based, supervised by some responsible party or regulator, and funded.   PCMP may end up being a route to a set of policies very much like the Comprehensive policy discussed in Part 3.  A PCMP policy approach also openly acknowledges the role of government leadership in achieving carbon emissions reduction goals, an attitude which has been shunned in recent history in the US and elsewhere.

Viewing projects as the fundamental element of policy also allows necessary supporting infrastructure that facilitate many types of emissions reduction to become the object and focus of high-level climate policy.  Build out of the electric grid and electrification of transport are key to a zero emissions industrial/post-industrial society though, due to the variable carbon intensity of electricity production their exact contribution as separate individual projects cannot be quantified.  A combined approach linking low- or zero-carbon electrical generation with electrification of transport would qualify as PCMP projects.

Carbon mitigation projects based on tested technologies and processes are the only assured means of cutting emissions, along with their supporting infrastructure.  Carbon pricing may influence projects to be initiated but the projects themselves are the primary building blocks of policy.  The focus on what might be called “secondary” or tertiary levels of climate policy has, in my observation, interfered with or at least obscured the importance of these primary on-the-ground projects.

The most directive end of the PCMP project spectrum would be a government program, funded by tax revenue, that uses “command-and-control”  to push through a project that is vital to our ultimate survival as a society implemented either by government contractors or via government employees.  On the other end of the spectrum in terms of directiveness are rulings, changes in tax law, and the institution of technology and process standards that will tweak existing market behavior.  A PCMP project will have a target emissions reduction by a certain date; optimistic goals should be shunned in favor of “worst case” scenarios to ensure that goals are met or exceeded.  Incentives should be aligned for the project leaders, whether they be public or private employees, if they achieve or, better, exceed emissions targets.

Many existing government programs in the area of environmental protection already are project-based policies in that an existing technology, set of technologies or process is chosen for implementation but, to date, not taking the next step to target specific carbon emissions reductions.   In the US, we have a number of house weatherization programs including a grant program for low-income homeowners and rebate programs for other homeowners.   To convert these into PCMP programs, one would need to make specific greenhouse gas mitigation goals and a timeline, tuning the policy instruments to achieve these reductions along the stated time line.  However, the notion behind the PCMP concept is that policies that support one or another project may be generalized to a sector-wide or economy-wide policy or have knock-on effects.  National policies or international agreements would be “reverse-engineered” to support key projects as priorities.

Project-based Policy, Infrastructure and Synergies between Technologies

The building of new infrastructure or its supervision, key to carbon mitigation, almost always falls to government, which undertakes the building of infrastructure on a project by project basis.  The emphasis on market solutions to climate change, which focuses on influencing the decision-making of individual market actors ignores the fact that most infrastructure is built by government planning and programs that anticipate rather than respond to economic demand.  One way to understand the sequence of events in  building infrastructure is perhaps best summarized by the line: “build it and they will come”.   Within this Hollywood formulation, what is captured is the ability of physical infrastructure to create or support markets as well as influence behavior beyond the influence of prices and goods for sale.

The carbon price signal, either the clear carbon tax version or the muddied cap and trade variety, will not by itself initiate the building of new infrastructure in a timely manner, especially if we consider the politically likely (low) level of the carbon price in the next few years.  Even if we look to the history of infrastructure for market behavior shaping infrastructure (“Go West, young man” and the US railroads), in the face of catastrophic climate change we are looking at an accelerated implementation of new infrastructure as replacements for serviceable but polluting infrastructure, requiring a pro-active government role that anticipates rather than responds to trends and price signals.

In addition, basing policy on or limiting policy discussion to carbon pricing alone has been a way to say:  “we don’t know what the solutions will be”.  However, besides ignoring the key role of infrastructure, this is, at this point in history, disingenuous and more importantly time-wasting.  As I have pointed out in two posts I wrote over a year ago, we now have about 24 technologies or processes that together could cut carbon emissions by at least 90%.  These technologies and processes ranged from CSP with storageinternetworked wind powerwith hydroelectric storagetransport electrificationafforestation, to even voluntary (partial) veganism.  Eventually much celebrated technologies like building-integrated photovoltaics will also play a major role.  Other, more “traditional” climate policies that may be established more generally like a carbon price may aid the implementation of a PCMP policy but the combination of a carbon price and PCMP projects will achieve emissions reductions most rapidly.  The project-based approach starts with a core of concrete intended outcomes in the way of realized projects but then welcomes and expects follow-on effects both from the realization of these projects and from the facilitating generalized policies like a carbon tax or fee.

Many of the gains associated with the most powerful of the 24 technologies, with a couple exceptions, are based on synergies between different technologies, not the solo implementation of those technologies.  The impact of electric vehicles on total emissions varies a great deal depending on the type of generation that is used in a particular area of the globe.    A carbon price will help urge this process on but will not of itself incentivize the creation of these synergies.

In renewable electricity generation there are some synergies between technologies, for instance between hydroelectric storage and wind power, which would need to be integrated in a planned manner across numbers of jurisdictions.  These synergies between technologies can only be realized rapidly via integrated resource planning with adequate financing.  Grid operators have already engaged in integrated resource planning anyway throughout the over 100 year history of the electric grid.  Linking this planning with carbon mitigation is a step towards the PCMP policy framework.

Prospective PCMP Projects (US)

PCMP Example #1: CSP with Storage

One of the few standalone, scalable renewable energy technologies that can directly replace fossil electricity generation one-for-one is Concentrating Solar Thermal Electric Power (CSP) with thermal energy storage (TES).  With sufficient transmission and judicious siting, CSP with storage could supply almost all the world’s energy using a small percentage of the area of the world’s deserts.   DESERTEC which is a large CSP investment and policy project for Africa, the Middle East, and Europe, could be configured as a PCMP with specific targets for replacing fossil generation.

The example PCMP project below applying CSP with thermal storage provides close to certainty in emissions reductions and can be accelerated with increased funding.  This contrasts dramatically with the lack of control over emissions under carbon pricing alone inclusive of cap and trade with its false “certainty”.  Effective carbon pricing would catalyze this type of development but would not “cause” it as would a targeted program focused on implementation of the technology.

CSP with TES – American Southwest/West of Mississippi

Region: 6 US States (California, Arizona, Nevada, Utah, New Mexico, Texas) – Replace Energy Production in 19 Western US States.

Emissions Reductions Source: Replace fossil electricity production by specified gas and coal power plants by 241 million MWh/annum by 2020 in the WECC, SPP, MRO and ERCOT grids (50% natural gas/50% coal) without addition of new fossil generation. By 2030 replace 1200 million MWh/annum fossil generation in NERC.

Technology: Concentrating Solar Thermal Electric Power with Storage (Capacity factors from 35% to 70%)  – 50GW installed by 2020, 250 GW installed by 2030 – mean capacity factor >50%.  Formation of CSP industrial base to replace fossil generation.

Target CO2 Emissions reductions from 2007 baseline: 181 million metric tonnes C02/annum by 2020, 905 million metric tonnes CO2/annum by 2030.

Finance mechanisms: guaranteed $.10/kWh rates (inflation adjusted) for 20 years for electricity sales plus $(2 + capacity factor/.25)/W (2010-2013), $(0.5 + capacity factor/.25)/W (2014-2017), $(capacity factor/.50)/W (2018-2020) innovation grant funded through carbon tax/fee (adjusted for the effect of the 30% Investment Tax Credit).  Favorable tax treatment for mothballing and early retirement of fossil generation.

Project Team: US DOE responsible leading industry stakeholder committee (US EPA, Fish and Wildlife, plant developers, utilities, grid operators, state and local political leaders, environmental advocates).

Supporting national and international policies:

  1. Carbon tax/fee facilitates implementation.
  2. Infrastructure: Renewable energy “smart”/supergrid
  3. Guaranteed Rates for Renewable Energy
  4. Contracting with Stakeholders for Greenhouse Gas Reduction Targets
  5. Special Master to Determine Compensation for Retired or Semi-retired Fossil Power Plants
PCMP Example #2:  Combined Renewable Energy Power Plants

A combined renewable power plant connects a diverse set of renewable generators that together produce electricity according to the demands of grid operators and ultimately grid users.  More complex than CSP with storage, this technology is still emerging though simply a matter of organizing existing technologies via smart, renewable-energy oriented transmission network.

Combined Renewable Power Plants – US

Region: All US States (can be generalized to almost any region of the world)

Emissions Reductions Source: Replace fossil electricity production by specified gas and coal power plants by 241 million MWh/annum by 2025 in NERC grids (50% natural gas/50% coal) without addition of new fossil generation. By 2035 replacing 1200 million MWh/annum in NERC.

Technologies: Wind, Solar (CSP, PV), HydroelectricGeothermal, Marine/Wave Energy, Biomass, internetworked generators to load centers, “smart” grid management technologies.

Target CO2 Emissions reductions from 2007 baseline: 181 million metric tonnes C02 by 2025, 905 million metric tonnes CO2 by 2035.

Finance Mechanisms: Bundled wholesale feed-in-tariffs with performance bonuses based on load-responsiveness of combined renewable power plants.  Amount of tariffs as yet undetermined and would vary with renewable resource intensity.

Project Team: US DOE responsible leading industry stakeholder committee (US EPA, Fish and Wildlife, plant developers, utilities, grid operators, state and local political leaders, environmental advocates).

Supporting National and International Policies:

  1. Carbon tax/fee facilitates implementation.
  2. Infrastructure: Renewable energy “smart”/supergrid
  3. Guaranteed rates for renewable energy/feed-in tariffs
  4. Contracting with stakeholders for GHG reduction targets
  5. Special master to determine compensation for retired or semi-retired fossil power plants
PCMP Example #3:  Home Weatherization

The US Department of Energy has a goal of weatherizing over 1 million homes as part of the 2009 American Recovery and Reinvestment Act, a.k.a. the 2009 stimulus package.   This investment of $8 billion dollars is divided between $5 billion for grants via the states to weatherize homes of low-income homeowners and $3 billion dollars for rebates to other homeowners for weatherization upgrades to homes.  The low-income grant program will limit grants to $6500 worth of work per home.

A review of the standard weatherization packages in 2002, indicates that the full package that would cost in the area of $5000-$6500 could cut from up to 7.5 metric tonnes of carbon emissions per year per house in high emissions/high heating demand areas like the Midwest, in particularly inefficient houses.  In areas with lesser heating and cooling demands,  like the Western US, the savings would be maximally 2 tonnes for an inefficient older, small single-family dwelling but the price tag would only be in the order of $2500/home.

However looking at the components of these packages there are certain measures that have much higher carbon reduction return on investment than others, most notably air sealing, programmable thermostat installation, water heater resets, low flow shower heads, and compact fluorescent lighting.  An additional reduced package of these high impact measures would cost from $1000 to $1500 per home leading to emissions reductions of about 2 metric tonnes on average, to as many as 3.4 metric tonnes.  It is possible to design then a “rapid” first-pass program of reducing emissions that would triple or quadruple the number of homes visited per unit expenditure.  Later, a second program could revisit these homes to address the remaining issues like inefficient refrigerators, furnaces, insulation and water heaters that have substantial returns in reducing carbon but are more expensive.

In a few years time, we may have better measures based on among other things passive house technology, which may enable “deep energy retrofits” of existing houses that enable greater energy and emissions cuts with similar or lesser investment.  In these cases, PCMP projects such as this one can revise their targets upwards.

Accelerated Home Weatherization Program with Carbon Targets

Region: All US States (start with high heating/high cooling areas)

Emissions Reductions Source: Reduce domestic combustion of fuel oil, natural gas, reduce domestic demand for electricity, especially at baseload.

Technologies: Building envelope air sealing technologies, insulation, high efficiency fluorescent lamps, refrigerators, water heaters, furnaces, programmable thermostats.

Target CO2 Emissions reductions from 2007 baseline: 60 million metric tonnes by 2020 from 30 million homes, 120 million metric tonnes by 2030 from 60 million homes.

Finance Mechanisms: Tax revenues fund low-income homeowner/renter grants (up to $6500 per home) and consumer rebates for energy efficiency upgrades.

Project Team: US DOE and state weatherization programs, utility officials.

Supporting National and International Policies:

  1. Carbon tax/fee funds and facilitates implementation.
  2. Contracting with stakeholders for greenhouse gas reduction targets
  3. Decoupling investor-owned utility income from energy sales
  4. National and state mandates for energy efficiency
  5. Green building and energy efficiency certifications/standards

A PCMP project once it is approved, organized and financed can move immediately to the generation of detailed design, operational plans and the begin of construction or implementation. The reverse engineering portion comes in figuring out how to get to the point where the technologies or processes can be implemented.  The key difference between a PCMP (aided perhaps by other policies) and a policy that essentially remains entirely agnostic about solutions is that a PCMP adds a stated intention and tasks a skilled project team to achieve a concrete material change in the processes that generate greenhouse gases.  Then policy is built partially around that intention and the project team that is tasked with realizing that intention.

The PCMP approach is I believe the most aggressive and gives those who will be ultimately held responsible for protecting the climate, the world’s governments, maximal ability to accelerate efforts if needed.  To achieve the very ambitious 350 ppm goal and follow  the “Emergency Pathway”, the PCMP approach would have the best chance.

Good Intentions Alone No Longer Suffice

Cap and trade has been a convenient mechanism for politicians to avoid fundamental but necessary conflicts while giving themselves and others the impression that they are “doing something” about climate change.  As the first international climate policy, it has attracted a community of people that have seen it as the sole alternative to inaction, therefore undeservedly has become a magnet for the good intentions of both the uninformed and the somewhat-better informed.  The “cap” is a reassuring physical metaphor that suggests a level of control over emissions which, as I have demonstrated, the policy itself undermines.  As cap and trade appears to address 5 of the 11 domains of climate policy, it is seductive for politicians to try to set up a “one stop shop” as a means to address the climate and energy problem.

However, there are much better policy frameworks out there of which I have shown two examples.  Cap and trade’s fatal ability to insulate the ultimate decision-makers from the process of pushing for emissions cuts on the ground can be avoided in a number of ways.  Above, I demonstrated a project-based policy framework that I called PCMP, which builds policy from the ground up and puts at the center the key role of developing zero-carbon infrastructure in addition to price-based instruments that influence investment and behavior.  Or, in part 3, I showed how  it is possible to implement a nine-part composite of simpler but synergistic policies that is more flexible, will be more effective, and ultimately more comprehensible to the public at large than cap and trade.  Crucially this set of policies does not give away or obfuscate governments’ responsibility to protect society and the environment.

The cap and trade policy is a twisted remnant of a political era in which government was supposed to pretend that it wasn’t really government.  It has fooled no one except some of its supporters.  Government must be decisively and centrally involved in the implementation of carbon policy and there must be a rapid re-discovery of the value of good government in leading society through difficult times.  Furthermore cap and trade as an instrument contains within it an open invitation for corruption and “capture” by powerful financial interests with few incentives to make concrete investments in the energy or land-use future.  Any effective climate policy must establish clear guidelines and openly acknowledge government’s supervisory role in the transition to a new energy economy.  I wish there were more shades of grey in this regard, but there aren’t.

No set of policies is, however, a magic bullet if there is not strong popular support for decisive action on climate and popular acknowledgement of the necessity for government’s leadership role.  As it currently stands in the United States, the public still is woefully misinformed about climate, with for instance, a prominent pair of columnists for the New York Times perpetuating “global cooling” myths in their latest book.  Against this background, climate policy appears to be a partisan affair rather than actions of the human community as broadly defined as possible that are based on our best science.  If cap and trade is presented as the only alternative, this further undermines the cause of climate action and government responsibility because of the fundamental flaws in the policy.  The equation of cap and trade with good intentions on climate action must be irrevocably broken.

Ultimately, political leaders must campaign with passion for the future of our planet and our societies, with empathy for the economically downtrodden and dispirited, informing the public about the alternatives available to minimize the impact of our two century fossil fuel bacchanal.  Within the context of a better informed citizenry, only then can an effective climate and energy policy truly take effect, though the time to start on both campaigns is now.

Cap and Trade: The Tangled Web… A More Effective Alternative – Part 3 November 5, 2009

Posted by Michael Hoexter in Efficiency/Conservation, Energy Policy, Green Building, Green Transport, Sustainable Thinking.
Tags: , , , , , ,
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In Part 1, I offered a critique of cap and trade in its existing implementations  and located key flaws which make it highly unlikely that it will achieve its emissions reduction goals, even if somehow it is strengthened.   In part 2, I highlighted two problematic aspects of cap and trade and then went on to examine what are the fundamental challenges of climate policy.  Then I offered a list of the general features of any effective climate policy.

Turning to positive solutions rather than criticsms, I will offer here two main options, the first one mainstream and the second heterodox and project-based;   both of which are easily configured for quicker and more certain emissions reductions than via cap and trade.

Comprehensive Climate and Energy Policy Package with Carbon Tax/Fee

Climate policy has emerged with a focus on markets and changing market behavior (ignoring infrastructure development to a large degree), so the “mainstream” approach below would also transparently give responsible parties control over the process.  While the “one-stop shop” aspect of cap and trade overextends this already misapplied policy, a package of interacting measures that are, with fairly straightforward calibrations, guaranteed to cut emissions quickly can easily be put together.  The below policy package avoids handing off climate and energy policy to an unaccountable carbon market and invite undue influence by financial traders. It also has the potential to be much more effective than a cap and trade centered policies.  On the other hand it is “market-based” in that it relies on the more accurate carbon tax/fee price signal to shape market behavior rather than cap and trade’s muddy signal.

1)      Emissions-Reduction Path with Targets:  Set an emissions-reduction path with target goal posts (2015, 2020, 2025, etc.):  Not the reassuring “cap” metaphor but an analog to the cap without the false reassurances that it contains.  The target or path could be expressed in terms of an average carbon-intensity for economic activity that yields the same path.  Using a carbon-intensity target allows adjustments to be made so efforts to cut emissions do not shut down industries before they are able to transition to lower carbon alternatives.  I would recommend the “emergency pathway” as defined by Greenhouse Development Rights that uses the 350 parts per million carbon dioxide target, though others may object to its ambitious goals.

2)      Carbon Fee or Tax:  Set a carbon price in the form of a carbon fee or tax fixed but rising year by year that will, according to at first estimates and then experience, reduce emissions along the path.  If the tax does not yield the necessary cuts, increases in the tax/fee levels will be accelerated.  A tax or fee enables companies to calculate the value of carbon emissions and make the actual investments that will cut emissions rather than deal with a broad range of expected carbon permit values, as would result from cap and trade.

  1. Calibration –  A carbon tax would be calibrated to achieve the emissions targets along the path in bullet “1” though overachieving will be encouraged.  If tax levels inflict damage on economic well-being or capacity, tax levels may be reduced, though it is to be expected that there will be periods in which some economic pain will be inflicted by the tax to encourage better economic decision-making and innovation.  Expectations need to be set from the outset that some pain is involved in transitioning to a more sustainable economy, though excessive pain is to be avoided.
  2. Revenue stream – There are arguments among tax/fee advocates (as well as cap and trade advocates for the revenues from permit auctions) about where the revenues should go.  Here are my recommendations:
    1. One third of the carbon tax revenues should be used to dampen the effects of the costs of rising energy prices on the poorest, preferably via energy efficiency upgrades to housing (modeled on weatherization programs).
    2. One third should be used to help fund infrastructure that enables a zero carbon future (electric trains, electric transmission)
    3. One third will go into a international carbon trust which will fund development products, changed agricultural practices, forest maintenance and growth efforts with strict performance standards and baseline assumptions.
  3. Exemptions and Credits – Some argue against any exemptions and credits, seeing a flat tax as simpler.  However, I, as an example, believe taxing certain activities that cut carbon is counterproductive.  Additionally I want to show that it is possible to develop and regulate cross-border certified emissions reduction credits in a tax system if such a credit sub-system ends up being desirable.  I believe however that these necessary accommodations to the complexity of the situation are much more transparent and can lead to more productive dispute resolution than via the arcana of the trading system.
    1. It makes no sense to levy the full carbon tax level on the very infrastructure projects that lead to carbon neutrality.  If a construction project embeds fossil emissions in a zero-emission technology (electrification of a train system, renewable energy infrastructure), then the emissions from construction equipment or concrete making for that project should be at least partially exempt.  Alternatively there could be a percentage exemption depending on the level of carbon reduction achieved (coal to natural gas conversions).
    2. Just as with the current offset market it might be made possible to sell certified emissions-reduction credits that represent emissions reductions in other areas or other countries.  These credits would need to be rigorously certified and limited to only a certain fraction of carbon tax liability.

3) International Agreements – Utilizing existing international institutions, nations around the world can come to agreements on both monetary fees for carbon emissions and overall emissions reduction targets.  The addition of a monetary amount will force action by governments and businesses more rapidly than the abstractions of the carbon market. Agreements will focus on:

  1. Worldwide Emissions Targets and Path
  2. International Carbon Price(s) – Calibrated to achieving emissions targets, the international carbon price will be closer to actual microeconomic decision-making than permit pricing system of cap and trade. Choices are either a unitary price or a development-adjusted price depending on level of development.  Some countries may be more “entitled” to pollute given their lesser historical contribution to total atmospheric concentrations of carbon.  On the other hand, despite an “entitlement” to pollute more, some developing countries may want to go “cold turkey” and use the higher carbon tariff of the developed countries to spur sustainable development at home.
  3. Carbon tariff regime – with differential taxation in different countries, countries would levy tariffs upon importation either up to the amount of the unitary international carbon price or up to the amount of the development-adjusted carbon price.  While this contradicts “free trade” orthodoxy, under an international agreement there should be no problem in levying this type of tariff.  The WTO can be outfitted to handle disputes and generating agreements carbon tariffs and integrating climate policy with trade.
  4. International Standards and Best Practices –  Agreement on standards, certifications, and grading systems for energy efficiency and low emissions technologies (see below)

4)     Zero-Carbon Infrastructure Development– While the Obama Administration has embarked on pieces of this, a full-scale climate policy would front-load spending, including deficit spending, on building zero-carbon infrastructure and energy generation.  The main source of funding would come from tax revenues and use fees.  This area is largely neglected by the cap and trade instrument.

  1. Renewable Energy Supergrids and regional grids –  Link high renewable energy areas with demand centers via development of a HVDC and where appropriate high voltage AC transmission.
  2. Renewable Energy Zones –  Expedite environmental impact studies for high value renewable energy zones with strong sun, wind, geothermal resouces.
  3. Feed-in-Tariffs – Funding of private, community and household investment in renewable energy generators via clean energy surcharges to electric bills.
  4. Electric Freight Transport System
    1. Grade-separate and improve existing freight railbeds
    2. Add additional tracks to high traffic railbeds to allow more rail freight
    3. Electrify all high and moderate traffic rail routes
  5. Electric Passenger Transport System
    1. Build high speed rail backbone
    2. Enable improved track-sharing between freight and passenger traffic for lower-traffic routes.
    3. Build electrified bus and tram routes in high density/high-traffic city environments.
  6. Electric Vehicle Recharge Infrastructure
    1. Trickle charge (220V and lower) public charge network
    2. Battery-swap infrastructure
    3. Fast-charge (480V and higher) public charge network

5)      Best Practices, Certifications, Standards and Rulemaking–  Develop for most economic sectors, a set of best practices and standards that are based on cutting emissions as well as other elements of sustainable development (conservation of the earth’s natural wealth).  Standards would be either voluntary or mandatory depending on the level of imposed costs of meeting these standards by market participants and the existence of alternatives to meet the overall goals of the standards.  Rigorous standards like the passive house standard should be encouraged as well as graded standards that represent a “path” to carbon neutral solutions.  In certain vital areas, standards may be come laws to rule out certain practices that are simply unacceptable.  An example of the latter could be a moratorium on new coal power plants.

6)      International Afforestation Program –  Using revenue streams from carbon fees and tariffs, generate local solutions to maintaining living biomass.  Carbon taxes or other disincentives may be levied on activities that release excess carbon into the atmosphere.

7)      International Agricultural Carbon Sequestration Program –  Using revenue streams from carbon fees, incentivize low-emission, high sequestration variants of agriculture and food practices.  In the future, once a baseline for carbon sequestration may be achieved, carbon taxes may be levied on high emission forms of agriculture.

8)      Black Carbon Reduction Program – One of the more tractable climate problems though still a challenge is to introduce existing emissions control technology or develop alternatives to combustion of hydrocarbons and biomass that produce soot or black carbon.  We already have  most of the technology to limit soot emissions from internal combustion engines and factories.  More challenging is coming up with culturally-acceptable solutions for cooking with wood in less developed countries.

9)      International Technical and Scientific Cooperation – Create the equivalent of an international energy and climate research fund that supplements the work being done on national levels towards specific technical solutions to emissions.  Could develop in conjunction with IPCC WG III.  One area of research should be emergency measures like geo-engineering.

If adopted as a package, the above measures address all 11 generic elements of carbon policy and have none of the 10 drawbacks of cap and trade.  This approach transparently identifies governments as the responsible parties for reducing carbon emissions.   This comprehensive climate and energy policy does not interfere with their ability to respond to changing climate circumstances and removes unaccountable financial markets from the core of climate policy.

Cap and Trade: A Tangled Web of Good Intentions and Bad Policy – Part 2 October 29, 2009

Posted by Michael Hoexter in Efficiency/Conservation, Energy Policy, Green Building, Green Transport, Renewable Energy, Sustainable Thinking, Uncategorized.
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In the first part of this post I identified 10 features of cap and trade, the favored climate policy of many policy elites at this point in time, that make the policy ineffectual.  I outlined how cap and trade was sold to America and the world based on faulty assumptions as well as its superficial political appeal to the then Clinton Administration.  Contrary to the story told in climate activist and sympathetic policy circles, cap and trade has been comparatively ineffective as a means to reduce emissions of either SOx or GHGs.  I argue that this is a structural problem with cap and trade, not a mistake in implementation.

The Gulf Between Gutlessness and “All the Guts in the World”

fishgamewardens

A permit system requires its enforcement arm, like these fish and game wardens. The actions of whatever "enforcers" are instituted via a cap and trade system would tend to seem arbitrary given the way the auction and trading system works. These enforcers would have to compound the misery of actors that will already have "lost" on the permit markets (Photo: Debra Hamilton)

Cap and trade is a hybrid policy, the mixture of a price mechanism and permit regulation.  In theory, the three “motors” of cap and trade are the economic pain caused by having to buy permits (or the anticipation thereof), the profit gained by market participants in exploiting the permit and pollution troubles of others, or the prospect of running out of permits and being subject to some penalty inclusive of actual “police action” on the part of regulators.  As with any permitting system, permits are meaningless without the threat of, potentially, monetary and criminal penalties.  For instance, fish and game wardens need to be able to stop hunters and fishermen from taking animals for which they do not have permits.

However, cap and trade systems hide and, it appears infinitely, postpone the moment where regulators would have to essentially shut down the operations of various industrial or power generation facilities because they no longer possess permits to pollute (which they would have to do to operate using their current technology).  For instance if a financially troubled power utility or plant operator ran out of permits on November 5, to meet the cap regulators would have to shut down one or more power plants until January 1.  This might mean blackouts and brownouts to homes, businesses and, of course, hospitals.  It would therefore take “all the guts in the world” for a regulator or government to enforce the cap, standing down the cries of people who will have to live with no or extremely unreliable electricity.  Yes the notions of “banking and borrowing” permits are meant to reassure system users that this day of reckoning will never come.  Yet this process undermines the power of the permits and the firmness of the cap.

Furthermore, at the point when this theoretical moment of enforcement might occur, the net effect would actually show the regulators/government in a very negative light because punishment might come as a consequence of a lack of “clever” permit-market behavior on the part of the power plant operators.  Their power plants may be no more carbon intensive than the next but they may simply have been outfoxed by other permit buyers or various manipulators of the permit market.  In this case, the punishment will seem arbitrary.

So we can now understand the design and behavior of the designers of real existing cap and trade systems a little better by recognizing this disjuncture between the  lax disbursement of permits (Kyoto/EU-ETS and current Congressional bills), the various softening and smoothing mechanisms (banking and borrowing) and the need for some kind of real enforcement of the cap.   It would subvert the politics of the policy to actually meet the cap through the harsh regulation that would almost certainly never happen or would be largely meaningless within the cap and trade framework.

While regulatory and political guts will be required to meet the climate change challenge, the imposition of harsh measures should be seen far in advance to allow adequate time for polluters to take action to cut emissions.  Cap and trade’s framework does not allow for this type of lead-time before administrative measures are taken.

True Belief in Markets vs. a Baroque Policy Mess

As you might glean from how I write about these matters, I am no market absolutist nor believer in the efficient market hypothesis (EMH) which assumes exclusively rational information processing by market participants in aggregate.  I think it is more reasonable to assume that people can be both economically rational and economically irrational or can alternate between the two at different times or in different contexts.  Economists are also coming around to realizing how central irrationality is in our economic behavior:  there has now been about a decade of behavioral economic research as well as the coming to grips with the fact that our recent crash was in part caused by a belief in the almost total predominance of rational, utility-maximizing economic behavior.

price_tag_pic

In economic theory, people are thought to use price as the key decision criterion for making purchases. From these price tags for vodka, consumers probably will be using the differences in prices as a guide to the quality or social status value of the vodka or its ability to be wet and alcoholic at little sacrifice to them, or some compromise between price and product attributes. (Photo: Jayd Tags)

Whatever the balance of rationality and irrationality in human economic behavior, cap and trade (or carbon taxation/fees) with good justification attempts to mobilize the economic rationality of individual market actors in the service of climate protection by introducing a carbon price that will influence procurement and operations decisions.  Rational economic man (or woman), according to the theory, only needs the information of price to make rational, optimal decisions.  In cap and trade, the carbon price and market is supposed to be the link between merely pro-forma climate action in the form of permit giveaways/postponement of action by regulators and the theoretical, never-to-be-activated harsh punishments for exceeding the cap.  Polluters are supposed to know that they are in trouble when they start paying more and more for polluting, sending to them a signal, the price signal that they need to change their operations.  Rather than the impingement of some set of rules upon the company’s operations, the price is going to tell that economic actor “how much” it will be worth it for them to do something, so they can make an rational choice among a range of options.

The most productive use of a price signal will be if firms anticipate the economic pain caused by the signal before it gets expensive for them; once they are in trouble and overpaying for permits they will have less of an ability to make expensive long-term investments, especially if they are an emission-intensive business like power generation or cement making.  With cap and trade, there may be sudden surprises in the carbon markets which will put firms into trouble even with adequate planning.

louis-xiv-furniture

The Baroque visual style emphasized curves and flourishes, like this side table. In the area of climate policy, too many curves and flourishes in policy leave hiding places for footdragging, corruption, and unearned profits, weighing down policy when it needs to be fleet and effective. Our stylistic preferences are secondary to getting the job done.

I’ve already outlined how flawed cap and trade is in generating the price signal due to the variability of the carbon price that results both via auctioning and via permit trading.  In both cases there will be a lot of market “noise” related to how much people think something is worth rather than what it is worth fundamentally in terms of the climate.  The “how much” will be almost impossible to calculate accurately under cap and trade as conceived and as urged by climate action groups that believe in cap and trade with all permits auctioned off as the gold standard of climate regulation.  This will make investment decision making tools like net present value difficult to use as you cannot calculate the negative cash flows into the future that are attributable to the carbon price.  This is not because net present value (NPV) is more environmentally insensitive than any other investment tool: it’s just sloppy policy-making to defeat the purpose for which you are instituting a policy!  Cap and trade would have to invent its own more baroque micro-economics and corporate finance tools that will always be more inefficient and fault-prone than using a simple price signal and NPV.

So if true belief in markets and economic rationality of individual market actors is fundamental, then a carbon tax or fee that is correlated directly with the amount of carbon or global warming potential (dealing with more powerful greenhouse gases than carbon dioxide) emitted is the clearest, most predictable price signal.  Cap and trade’s baroque double decker market structure is like a climate policy that has been thought up by an overeager 5-year-old who gleefully stacks markets on top of markets because it seems more “market-like”.    Having one “meta-market” emit the carbon price to the real market for carbon emissions reduction solutions is a bad idea.  An excess of markets in this case does not encourage rational economic behavior on the part of individual market actors.

“It’s All that We Have”:  Making Do is not Good Enough

A number of commentators, bloggers, and politicians critical of the state of climate policy nevertheless hang on to cap and trade.  Some agree with some of my criticisms while others might find my foregoing criticisms gratuitous or simply giving aid and comfort to climate deniers.  Or, even if they are frightened of the monumental hand-off of responsibility that is contained within the cap and trade system, they might feel that so much political capital has been spent on cap and trade that it must be defended as the embodiment of climate policy itself.

Below, I will suggest that in fact we have a wealth of choice in the area of climate policy, almost all of which will be more effective and efficient than cap and trade.  For one, governments around the world including the Obama Administration are taking action in other areas that do not deal with carbon pricing or trading of permits or credits/offsets.  You could say that governments that openly advocate a cap and trade system might be seen as also hedging their bets.  Secondly, it will be fairly easy to replace cap and trade with an ensemble of different measures or a carbon tax with any number of features.  If history is any guide, other countries have implemented a carbon tax within months rather than the years long efforts to install cap and trade systems.

It pains me that so many people many of them good-hearted and well-intentioned have expended political capital and reputations on such a faulty instrument.  In their own defense, depending on their social scientific or business backgrounds, they could not necessarily have known differently.  However, that is no reason to stay with an instrument that has a high probability of gumming up the wheels on climate action rather than speeding it up.

Before describing alternatives to cap and trade, I want to first outline what I think the tasks are that the policy needs to address.  Without a common vocabulary for these tasks, stripped of bias towards a particular policy instrument, you, the reader, won’t be able to evaluate whether these are substantially better than what we have already.  In most cases I am not reinventing the wheel, but simply observing and compiling what I see is out there already.

The Fundamental Challenge of Climate Policy

The fundamental challenge facing governments, climate activists, green-oriented businesses, and concerned citizens is a neat intersection between a massive policy challenge and a massive political challenge of the early 21st Century.  Policy and politics are not always so closely intermingled but in this case they run for historical reasons very closely together.

Instituting cap and trade rather than more effective policies is a bad idea spawned of an era in which government was supposed to become more “market-like” in all matters.  We have discovered in so many areas of life that this philosophy of government is flawed, despite continuing political disagreements around this issue in governments around the world.  Our current generation of politicians got elected by taking one stance or another (but mostly one stance) on the either/or proposition of whether government or markets were “better”.  Markets unregulated, as it turns out, encourage short term thinking and satisfaction of immediate appetites.  Fortunately or unfortunately, to face the future threat of climate change, a revision of government’s distinctive place vis-à-vis regulation of markets and our own appetites is required.

Climate policy has the unenviable task of

  1. saying “stop” to our impulses to overuse fossil fuels and overexploit the world’s forests and soils,
  2. directing, under constant political attack, substantial streams of public and private investment to building a new energy and energy-use system and
  3. changing our patterns of land use to fix more carbon in plants and soil.

This places government, and government is the only instrument up to the task, at loggerheads with citizens’ and businesses’ impulses to use more and more energy (and non-renewable natural resources), as cheaply as possible with a disregard for the negative consequences.  While ideally such policies would enact a form of “aikido” on our wishes, using the momentum of our wants for more and better stuff to instead be used to transform society for good, there still needs to be a firm boundary and governmental “center of gravity” that is clear to all (otherwise it cannot perform aikido on anything).  In the end, what is required is the return of government’s legitimate role and moral authority to set this type of reasonable limit and redirect energies that would otherwise go elsewhere.

Radar_gun

Police are not generally appreciated for catching speeders; to get caught speeding almost always feels like an injustice to an individual driver. Still, the net effect of fairly enforced speeding laws makes driving a safer experience for all drivers. Government needs to be accorded the same legitimacy with regard to curbing GHG emissions in order for there to be an effective climate policy of any description. (Photo: Sgt. Lek Mateo)

The analogy of speeding on the highway can bring this closer to our personal experience.  Without traffic cops, many of us, including myself, would drive too fast, increasing the possibility of fatal accidents; furthermore automakers have tended to put whatever mechanical efficiency gains that come from among other devices, turbochargers, into making cars more powerful and “fun to drive” than into gains in mileage.  Yes, there are those of us with a conscience or without the interest in driving fast but we cannot count on these forces alone to curb fast driving, especially given the powerful automobiles to which we now have access.  The police who catch speeders are not very popular but, if they avoid corruption and are not subject to absurd ideological attack, they maintain moral authority and can do their job.

Fossil fuel use (or wanton deforestation) is similar to the propensity to speed in that it offers us and our economy an easy way to satisfy our wants without regard for the long-term consequences.  Fossil fuels are notably energy dense and we in most developed or in oil-rich countries do not pay nearly enough for them given their social and environmental costs. In an uncharacteristic moment of clarity within his Presidency, George W. Bush put his finger on it when he said that “America is addicted to oil”.  As in addiction, only firm limits and sometimes harsh measures are able to stop the addict from re-using the drug he or she desires.  The authority of government to intervene (double entendre!) in the domestic economy has been over the past 30 year undermined by an ongoing political barrage that suggests that government has less legitimacy and moral authority than the market.  Cap and trade is an effort to wrap government in the faux moral authority of the market, as promoted by the market fundamentalist creed of the last 3 decades.  The market unregulated, as it turns out, is amoral, not caring that much about long term consequences.  Markets are not “bad” or essentially immoral, they just are tools that lately have been called on to do tasks to which they are ill-suited.  As even Alan Greenspan now attests, they have been fundamentally misunderstood most notably by him and by many others.

Especially in the US but also abroad, governments, in order to do their work, must re-establish moral legitimacy in many areas of domestic policy which have been thrown into question by our decades-long experiment in market fundamentalism.  The substance of the politics surrounding cap and trade is largely about the moral authority of government to restructure our energy system and secondarily about the legitimacy of natural science.  The content of this moral legitimacy is that government can when functioning well, represent the general or common interest in making and enforcing rules, collecting taxes, and spending that revenue for the purpose of maintaining and improving the future viability of the nation. Even more so in the area of climate change, which will mean over a period of a decade or two, dramatic changes in at least three sectors of our economy, governments’ moral legitimacy needs to be well established to effect whatever policy is chosen.

Cap and trade’s “prospectus” (a.k.a. political sales pitch) suggests that government can after declaring a “cap” essentially recede into the background, while the “hand” of the permit trading market does its work.  Its superficial political attraction is that it reinforces the pre-existing “rap” that government is “bad’ or ineffective and the market is “good” and effective.  However, to work in any shape or form, climate regulation and policy, including cap and trade systems such as they are, is going to need government action in spades.  So, cap and trade sets up its advocates for a long-term political defeat:  even if a weakened form of it passes, people will ultimately start to wonder why there is so much government involved in cap and trade (and so ineffectually at that).  Maybe its advocates believe that “people know” that cap and trade is really just another government regulatory program and won’t feel betrayed; given the state of civic understanding of government’s role, I believe they are sorely misinformed.

Ultimately the leaders of government(s) are going to need to take responsibility for protecting their people and the environment from substantial degradation via curbing our own emissions of greenhouse gases.  The language and parallel institutions of cap and trade interfere directly with the process of by which government leaders would take responsibility, suggesting that automatic processes will “take care of themselves” via the invisible hand of the carbon permit market.  I have demonstrated that such an invisible hand will play tricks with the policy itself compromising its effectiveness.  Both the policy in its pure form and even more so efforts to curb its tendencies will create a baroque structure that does not work directly and efficiently on the basic tasks that are required to reduce carbon emissions rapidly within a decade.

The Basic Elements of Climate and Energy Policy

To open up the field of alternatives to cap and trade, as well as understand cap and trade better in context, we need to understand what the generic tasks of any climate and energy policy would be.  A comprehensive climate and energy policy has most of these elements independent of  policy instrument choice:

  1. Disincentives for (or rules against) the use of fossil fuels, leading either immediately to switching to virtually carbon neutral fuels/energy sources or vastly more efficient use of fossil fuels prior to switching to carbon neutral energy.
  2. Incentives for private investors to build carbon neutral electric generation and carbon-neutral energy storage as replacements for fossil electric generation.
  3. Incentives for vastly more efficient energy use of all types in transportation, buildings and industrial processes (or conversely disincentives to “waste energy”).
  4. Provision of or facilitating the financing of site- and regionally-specific public goods that lead to carbon neutral energy use (electric transmission, electrification of railways, build out of railways, electric vehicle recharging networks).
  5. Revenue sources for financing public goods and incentive programs that enable a society to cut emissions.
  6. Incentives for maintaining and increasing carbon sequestration in land use in agriculture, silviculture and in forest preserves.
  7. Disincentives for (or rules against) the release of sequestered carbon in land, vegetation, and sea.
  8. Reduce black carbon emissions via introducing emissions controls or alternatives to biomass combustion or other black carbon sources.
  9. Develop, identify and institute standards for lower- and zero-emissions technologies and processes.
  10. Generate regional and national plans based on better and best practices to curb emissions
  11. Fund basic climate and energy research

There is no single policy that does all of these tasks well nor will some policy package address all of them.   We see that cap and trade is an attempt to address a number of them with a single instrument, most particularly numbers 1, 3, 5, and 6.  As we have indicated cap and trade’s inherent laxness and unclear carbon price signal interfere with 1 and 3 (energy efficiency, fuel switching, and restriction of fossil fuel use).  It does offer to join these efforts with 6, which has spurred interest in the developing world.  Again there have been difficulties in establishing whether funded carbon sinks/offsets needed the funding and also run into problems with 7, the release of carbon once sequestered.  Would development projects need to pay the money back if the forest they are leaving to grow is cut down by them or someone else?

The temptation of policy makers, in their first take on a climate policy to lump a number of concerns together is understandable, especially if climate policy, in relative terms, has been a low priority.  However cap and trade has been extremely cumbersome to set up and ineffective or marginally effective in each of these areas with a high probability of continued problems given its long list of inherent flaws.   Moving to or at least seriously considering any one of a number of alternatives is advisable given cap and trade’s ability to block other policies and clog governmental channels.   Furthermore translating our thinking about climate into its terms limits our ability to imagine other scenarios that will work much better.  In every one of these categories there is a more effective instrument than cap and trade, meaning that we of necessity must move to a multiple instrument platform because of cap and trade’s lack of effectiveness as well its (and any instrument’s) lack of comprehensiveness.

I will offer here (in the next part) two main directions, one mainstream and the other “heterodox”, that both will achieve more quickly and easily emissions reductions than cap and trade.

Cap and Trade: A Tangled Web of Good Intentions and Bad Policy – Part 1 October 26, 2009

Posted by Michael Hoexter in Efficiency/Conservation, Energy Policy, Green Transport, Renewable Energy.
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3 comments

I favor some of the more aggressive actions to avert climate catastrophe, actions which nevertheless do not compromise the continuity of human life and well-being. The climate which enabled our evolution as a species and the societies upon which we depend has almost no price attached to it. Averting this calamity, if we can, is the moral equivalent of war. As such it deserves the investment and political priorities that are accorded the military during a war, though the necessary moral and climate-science arguments for this level of investment have not been made clearly by leaders, especially in the US.   In our Great Recession, a forward-looking policy to counter climate change would have much needed economic benefits and lay the foundation of the new economy that we are supposed to be building.

Unfortunately, the mental “real estate” of climate activists and politicians has been captured by a monumentally bad idea, a misapplication of an environmental regulatory system that encourages delay and irresponsibility in climate action rather than changing the course of our society’s use of energy and land. Whatever urgency is felt popularly or by leaders, the institutions that will arise from the cap and trade policy framework have a good chance of actually blocking more effective action on climate (more straightforward system of rules, incentives, disincentives, and direct investment), which makes the work of exposing its flaws not simply the matter of my or someone else’s political or economic preferences but one of life and death for future generations and the ecosystems upon which we depend. An unquestioning herd mentality has taken over and encouraged even some of our best social scientific minds, including Nobelist Paul Krugman, to issue statements of support for a policy inspired by an outdated political and economic fashion of which Krugman is himself one of the leading critics.

Somehow a connection is not being made between the monumental collapse of our financial systems over 13 months ago and the design of the twenty-year-old policy instrument to which so much unearned credence has been given. Fundamental to cap and trade is the hand-off of key responsibilities and agency (the ability to act) for cutting carbon emissions to a carbon derivatives trading market, an unnecessary gift to the hyper-caffeinated and overgrown trading sector of finance. Just this week, critics of the Obama Administration’s earlier weaker financial regulatory efforts are now feeling somewhat vindicated in seeing that the Administration is now stepping up its efforts to rein in financial engineering and trading-dominated finance. It is utterly baffling that people who are intelligent enough to design or just understand an over-complicated policy instrument like cap-and-trade have not made the connection between the origins of cap and trade and the vagaries of our financial system. For them, the cap and trade instrument is still wrapped in the mystique of trading-based markets, which outside the climate community have lost much of their appeal.

It is an open secret among people who actually work now in cutting emissions by implementing energy efficiency and renewable energy projects that cap and trade is at best a holding pattern if not a monumental roadblock to pushing ahead with deployment, investment and research in emissions reductions themselves. These voices, generally excluded from the political discussion, contradict the “line” that, for instance, the upcoming legislation from the US Congress centered around cap and trade is a “clean energy jobs bill” and is the very heart of a green economy. While cap and trade is complex, these criticisms come not from a lack of economic or even political understanding but from a realistic appraisal of how actual lower-carbon technology implementation decisions get made, an elementary business process which seems to have escaped study by the policy’s designers. Cap and trade is not too stringent or too effective but not nearly effective enough.

The fundamental problem with cap and trade is that it placates government leaders and activists with manifest good intentions while undermining the effectiveness of the only instruments which could realize those good intentions. Cap and trade inserts a layer of obfuscation and indirection into governments’ ability to make rules, implement programs, build public works, and levy taxes in a fair and transparent manner.   On another level, it has a faulty microeconomics, inserting uncertainty about the value of emissions reductions to the businesses that will actually cut emissions via responding to the policy.  While working with ineffectual or superficially “P.C.” policy instruments might be acceptable in other matters, in climate policy the massive open-air experiment that has been cap and trade over the past 15 years is an unfolding catastrophe. It is not unlike the Trojan Horse, in that cap and trade appears as a gift, yet gives the vandals or just climate do-nothings command of the citadel. Tragically, the barrage of criticism and invective from the loony political Right or from professional contrarians who have lost a sense of proportion, distracts well-intentioned lawmakers and their supporters from seeing the flaws of their chosen policy.

Cap and Trade in Summary

Briefly, the cap and trade systems under discussion are permit trading systems that attempt to limit emissions of greenhouse gases by allowing polluters to emit greenhouse gases to the amount for which they possess permits. Permits are either given away or auctioned off up to the amount of a society-wide or economic sector-wide “cap” determined by regulators, which is supposed to be “tightened” (meaning reduced) over the years, leading to the decades long equivalent of a game of musical chairs. Regulators, as is planned, will in the future remove “chairs” by reducing the number of permits available to the point where by 2050 there would only be permits for 20% of 1990 greenhouse gas emissions. The “trade” part happens when companies have excess permits, because of having polluted less or owning unneeded permits. They can sell these excess permits for a profit to companies that pollute more than the amount of permits that they own. There have been various attempts to re-brand cap and trade with a name that sounds somewhat less shady, like “market-based cap” etc..

Derived from the speculations of the economists Ronald Coase (1960) and Martin Weitzman (1974), cap and trade, also called emissions trading, was invented in the US in the late 1980’s and early 1990’s during the first Bush Administration as a way to avoid issuing  so-called “command-and-control” environmental regulation by government (telling industry exactly what to do and monitoring it) or direct monetary penalties like pollution taxes. The original cap and trade system for acid rain pollution which is still in place in the US, has been declared responsible for reducing by 40% sulfur emissions (SOx) by coal-burning power plants in the period 1990-2004. However, during the same time period, European and Japanese regulators have been markedly more successful using traditional regulations in cutting the emissions of these same pollutants (65%) from power plants, revealing the cap and trade system to be the equivalent of a regulatory stunt: “See! Look Ma…no hands!”  In a 2007 review of  the results of emissions trading, Gar Lipow has led the way in calling into question the sales pitch for cap and trade.

As an example, the highly coal-dependent, heavily industrial Czech Republic went from in 1990 emitting two times the amount of SOx per capita as the US to in 2004 emitting approximately one-half the amount of SOx per capita as the US (UNECE report page 68).  While most post-Communist societies have decreased all types of emissions substantially due de-industrialization, economic hard times, or adoption of modern emissions controls, the Czech Republic had in 2006 twice as much industry as a percentage of GDP and uses as a percentage of total energy supply twice as much coal as the US, revealing the US to be far from a leader in reducing acid rain pollution.   Furthermore, the cap and trade system’s success has been aided in America by the accessibility of low-sulfur coal at an equivalent price to coal with higher sulfur content; Wyoming’s Powder River Basin coal deposits have been the “wind beneath the wings” of the US anti-acid rain program such as it is.   From the perspective of these results, holding out the SOx regulatory system of the US as the pivotal policy to save the planet stretches credulity.

Cap and Trade and Greenhouse Gases

The road to applying cap and trade to climate change had a number of twists and turns. Before implementing a climate policy, in 1993 the newly-formed Clinton Administration had attempted to institute a BTU energy tax as a means of raising revenue but was rebuffed by Congress. The Administration considered this experience along with its frustrated health care reform effort a major early defeat that shaped later thoughts on policy and political strategy; these fateful events 16 years ago unfortunately have had inordinate effect on US and world climate policy since then.

The Clinton Administration subsequently in the negotiations surrounding the Kyoto treaty to limit greenhouse gas (GHG) emissions favored “flexibility” and helped engineer a consensus in favor of cap and trade and cross-border emissions swaps.   While a “wonky” intellectual interest in emissions trading may have played a role, the Clinton Administration also thought that this policy would have domestic political benefits as a means to circumvent a policy that had the “tax” label or appeared to tell industry what exactly to do (direct regulation).   Using cap and trade also was an effort to “reach across the aisle” as the first cap and trade system had been implemented under the Presidency of the first George Bush.  In other areas of the economy, in tune with economic fashion of the 1980’s and 90’s, the Clinton Administration was as fascinated by markets as its Republican predecessors and, additionally, had a penchant for policy complexity, within which the notion of using a market to regulate other markets seemed almost commonsensical.

In 1998, despite pressing for cap and trade as the international GHG regulating instrument, the Clinton Administration compromised with an intransigent US Congress by not ratifying the Kyoto treaty, insisting that the developing world must be included in the regulation of greenhouse gases.  The elaborate political ploy in using cap and trade failed as far as US politics were concerned.  Other industrialized nations, most notably Europe and Japan, and the relevant UN bureaucracies continued developing the carbon market and cap and trade concept without direct US involvement during the later Clinton and Bush years.  The Protocol went into effect in most industrial countries in 2005 after a lengthy period of negotiation and set-up.

While emissions have been cut in some countries, the experience of the first four years of international carbon regulation via cap and trade have not shown the instrument to be particularly capable of effecting meaningful reductions in carbon emissions. In the European Union Emissions Trading Scheme (EU ETS), affiliated with Kyoto, the effects of the economic downturn or a future upturn are making any evaluation of the effect of cap and trade on emissions a near impossibility.   The use of carbon offsets originating in developing countries will further cloud the data.    In its initial 3 year period (2005-2007), GHG emissions in the EU ETS went up by 1.9% with wide nation by nation variation ranging from Sweden (-20%) to Finland (+28.5%).   Multiple reasons are possible for the wide span between countries and more generally many self-issued excuses are rampant because of the acknowledged complexity of the system; this was a “run-in period” etc.  In 2008 there is missing data but it appears that a combination of the economic downturn and high energy prices (not necessarily attributable to a carbon price) led to a fall of GHG emissions of 3% from 2007 in the EU, which the managers of the EU-ETS attributed to the carbon “price signal”  generated by the trading scheme.   In the same period (2007-2008) without a national GHG cap and trade system, US emissions fell 2.8% for similar reasons, contradicting the claims of EU ETS managers that cap and trade had an effect in 2008.   The net contribution of carbon trading to emissions reductions is still, 12 years after Kyoto, indistinguishable from “noise” in the data.

While it is universally agreed that “errors” were made in giving away too many permits in the initial round of Kyoto/EU-ETS, it is a strange repeat of these supposed errors that the now proposed US cap and trade system being debated in Congress will as of this writing also give away most of its permits for about the next decade. Furthermore the use of offsets, the (supposed) emissions cuts by others that are purchased on an international market because they are cheaper than internal investments, has been controversial both in design and in implementation.  Whatever one’s view on carbon arbitrage (shopping around for the cheapest reductions around the world), it is universally agreed that offsets reduce pressure on the biggest polluters to take action now in reducing their own emissions. The notion of cap and trade being a system of indulgences for fossil fueled economies is further reinforced by this disturbing propensity of real-existing, as opposed to theoretical-ideal, GHG cap and trade systems to undermine themselves or soften their impact on the biggest sources of emissions.

In Copenhagen in December at COP15, the successor to the Kyoto process (2005-2012) is to be designed and most of the climate community is moving towards a new cap and trade-based treaty that activists hope will be more vigorous than the previous one. Yet the trenchant criticisms of cap and trade systems that emerge from economists, most notably William Nordhaus, and concerned economic actors on the ground are brushed aside by those congregated at these events who seem to feel that their good intentions can substitute for conscientious analysis. For instance, almost every economist, including cap and trade supporter Sir Nicholas Stern, has had to agree at one point or another that carbon taxation is more efficient than the baroque emissions trading systems we have built.

Furthermore, we in the US are put in the difficult position of being a laggard in a process that is based upon our own bad idea, and upon which we really never followed through in its original form. In a way, the Obama Administration is, as it may be doing with its Afghanistan policy, put in the position of fighting the last Democratic President’s war rather than designing a more future-looking policy; having defined the political choice as cap and trade or, as the Republican opposition to Obama would have it, no strong action on climate change, the Democrats and Obama should instead be looking for the way to a more effective climate policy. The cap and trade framework, a product of some tortured political logic from the Bush and Clinton years, has “captured” the discussion, limiting thought and discourse on what are the available instruments to avert this catastrophe.

In its defense, permit trading may be appropriate as a distribution mechanism though not a magical cure-all in certain environmental arenas, most particularly the regulation of fisheries. In many nations now “catch-shares” are allocated to fishers who can trade these shares with other fishers. However, the ultimate success of even this appropriate use is achieved by the government setting limits on the fishing industry, not by yielding to some invisible hand of a fabricated market: the total amount of the permits allowed would need to be determined beforehand with reference to study of the fishery by biologists unaffiliated with industry and fishing limits would need to be enforced by government regulators, albeit according to the number of permits that the fisher owns. The appropriateness of permit trading as a distributional mechanism in this instance is that

  1. one is trying to calibrate exploitation of a natural resource at a particular level rather than reduce it in one direction (lower is almost always going to be better with GHG emissions for the foreseeable future.
  2. The permit trading is a just a new layer inside an existing historical market for fish which have an intrinsic positive economic value for people but are not arbitrarily created by people (it’s “inelastic”).  Pollution permits are on the other hand entirely an arbitrary creation of government(s), so the determination of a pollution price via the market is similar to playing a game of “guess what’s on my mind.”
  3. A simple intuitive equation can be made by all fishing market participants between a permit and a tradable object of recognized economic value, i.e. the fish.

All types of permit trading, whether of emissions or other, have provoked ethical controversy with regard to the selling of ownership shares to a public or natural common good. Despite these reservations, in the case of fisheries, fishers already have a longstanding tradition of claiming ownership of what they catch so permit trading represents not much of an innovation in resource ownership in fishing.

Why Cap and Trade is Bad News for Our Climate’s Future

There are a number of fundamental problems with cap and trade systems that are deeply embedded within the policy or its likely implementations, which suggest that working towards alternatives, even if they too are imperfect, is preferable. Remember, we do not have as many shots as we would like to deal with this problem, perhaps only one or one and a half, so a decades-long experiment with third-best policies is a foolish game. As Bill McKibben points out in a recent article, we cannot negotiate with non-human nature, unlike some other areas of policy.  So we need to put in policies that are either “right” or that do not install roadblocks that would stand in the way of better solutions.

  1. Cap and trade puts a newly formed financial derivatives market (the carbon permit market) with all its potential for boom and bust cycles and manipulation by powerful and unaccountable players, in a position to distort the real market for low-carbon technology and land-use changes; the stimulation of this real market is the reason for its existence in the first place. Within the fabricated permit market, the profit-seeking activities of permit traders from the financial markets and industry will be able to exert a substantial amount of unintentional control over the real technology choices and solutions implemented to curb our emission and sequester carbon. These traders, as do all traders, have a vested interest in opacity, price variability, and information asymmetries that would enable them to achieve the highest profit levels for their firms. Permit trading may offer some of the highest returns on investment in a cap and trade-dominated climate action world, so financial players will defend these profit streams with all the considerable means at their disposal. These are the most likely candidates for the “Greek raiding party” in the belly of the Trojan Horse, though climate activists and bureaucrats wedded to cap-and-trade are co-responsible for opening up the “citadel”.
  2. As trading looks to be one of the more profitable areas of the carbon business but in itself does not cut emissions, the incentives in the policy are misaligned: the most profitable business within a carbon policy framework should be those lines of business that cut the most emissions either through selling new technologies or processes or implementing them. An unfortunate echo of the go-go 90’s in which it was conceived, activity of trading is given a role far beyond any real value it offers.  On the level of businesses with real polluting assets, cap and trade will also reward those economic actors who are better permit-buying “game-payers” rather than those companies that invest most in emissions reductions.  This type of reward structure has no place in climate policy.
  3. Non-cap-and-trade policies that determine a fixed price for carbon have the advantage of having as an “output” an acknowledged decision-making tool (a monetary amount) that is already historically integrated into every economic transaction.  In permit trading, permit prices are only applicable to large economic actors and have only a “reflected” (and variable) monetary price after the net costs of the cap and trade outcome for that economic actor have been integrated into the pricing of their goods and services.
  4. A variable, uncertain carbon price that arises from market fluctuations and artifacts of the permit auctioning and trading system is not a clear, easily quantifiable incentive for firms and other real economic actors to make the long-term investments in capital equipment required to cut carbon emissions. A predictable carbon price (in the form of a tax or fee) over the long-term, albeit steeply increasing, would provide a much better incentive to make long-term investments that pay off over years. The “net present value” calculations that are the bedrock of investment decision-making depend on the projection of costs and benefits out into the future, which is nearly impossible using the rapid fluctuations and uncertainties of a carbon market.
  5. The salespeople of cap-and-trade claim falsely that the system gives policymakers “certainty” in terms of the amount emitted as compared to a price instrument like a tax/fee.  As the study of  existing cap and trade systems shows this certainty is illusory and gives leaders a false sense of security.  To get this type of certainty in a cap and trade system, regulators would have to engage in some very harsh and disruptive administrative actions, like shutting down a power plant during the last 3 months of a year if its owners ran out of permits.  Alternatively, the owners of the power plant could “borrow” permits from the next year’s allotment, only to create a direr threat for the next year, but the cap for the current year would have been broken.  Again this is punishing players for not playing the permit “game” as smartly as others though not necessarily being the gravest offenders in terms of carbon-inefficiency or overall emissions.
  6. Buying permits from other firms at a higher cost will impose an undue burden on companies or organizations that need to scale up their operations and increase their emissions in the middle of a year in response to an increased demand for their products.  A carbon tax will have no such punitive effects for unplanned growth as its cost will remain constant throughout the year and per unit produced.
  7. The carbon market does not differentiate between upstream and downstream emissions mitigation. “Upstream” means at the source of emissions, while “downstream” means either increasing efficiency of carbon-emitting energy use or absorbing emissions via land use changes. The efforts to make carbon emissions reductions appear as cheap as possible have tended to emphasize downstream solutions or projects in developing countries. However ultimately the main solution to slowing global warming is to eliminate emissions upstream which is currently more expensive, though downstream mitigation is always going to be necessary as well. A carbon policy that addresses upstream emissions immediately is preferable to one that waves a hand of resignation at business as usual in power generation and transport fuels because of initial cost issues.
  8. Cap and trade, because of its complexity, indirection and somewhat mystical faith in markets, has become the lingua franca of the climate action community and in so doing has shut down that community’s ability to critically examine the instrument itself or alternative, more effective instruments. The collective mental bandwidth that this instrument occupies has helped it to “suck in” many of the good intentions and attentions of politicians and activists, drawing their efforts away from other measures.
  9. Cap and trade obscures the vital role of government leadership, responsibility, regulation and direct investment from the public, the climate action community, and the leaders of government themselves. The successes of cap and trade systems such as they are, depend on either external factors independent of policy (economic downturns, low-sulfur coal deposits) or governmental actors setting stringent targets, operating the permit auction and trading system, and enforcing emissions goals. Yet, cap and trade’s sponsors and advocates continue to promote the fallacy that government is only playing an indirect role in its workings, as if this were a strength of the program. According to most of the expectations that have developed about government over the past millennium or so, there’s nothing wrong with governments taking a leading role in averting one of the greatest calamities we have ever faced. Government is the only institution that can represent and press for the realization of our society’s intention to save itself and the climate via implementation of low-carbon technologies and abstaining as a society from using up fossil fuels all at once. Attempts to hide the role of government paradoxically reinforce the position of advocates of a smaller government who can then point to the attempt soft-pedal as supporting evidence for their claims that government, especially “Big Government”, is “bad”. An honest assumption of responsibility by government would enable clearer, more transparent and more decisive policy moves and educational efforts about the dangers and opportunities for taking a sustainable path to economic development associated with climate change
  10. Instituting a cap and trade system because we, pro forma, must put a policy called a climate policy in place now or by December’s Copenhagen climate conference is worse than delaying a few months or a year to put in a better policy once our leaders have examined the alternatives with a more complete understanding of where they are going. The cap and trade systems now and soon to be developed already create considerable institutional and bureaucratic inertia and their own set of interest groups which are not so much incentivized to cut carbon emissions but to manage and justify the cumbersome system.

Any policy will have its strengths and weaknesses but cap and trade creates an economic, social scientific and political lattice-work at a distance from or interfering with the actual climate tasks ahead of us while blocking the way to better climate policy.

[In part 2 I will highlight what I think is the “fundamental challenge” of climate and energy politics and policy, look at the generic tasks that climate and energy policy is supposed to accomplish and suggest alternate route(s) that are more practical and will be infinitely more effective than cap and trade]