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Just Published on Grist: Piece on “Bill Gates and Our Innovation Addiction” March 3, 2010

Posted by Michael Hoexter in Climate Policy, Energy Policy, Renewable Energy, Sustainable Thinking, Uncategorized.
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The environmental news site Grist, has just published a piece I wrote that is a response to Bill Gates’ recent entry into the climate and energy discussion.

Check it out at:

http://www.grist.org/article/2010-03-02-bill-gates-and-our-innovation-addiction-a-recipe-for-climate/

Enjoy and comment if you like!

Michael

My New Post/Article on Post-Copenhagen Ethics March 3, 2010

Posted by Michael Hoexter in Climate Policy, Efficiency/Conservation, Energy Policy, Green Activism, Renewable Energy, Sustainable Thinking.
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Frustrated with the state of climate action both here in the US and at the COP15 meeting in December, I have been focusing on how to distill thinking about climate action to some simple rules.  I came up with a longer piece that builds on the work of Donald Brown at the Climate Ethics Center at Penn State University.

Since this is a long piece I have posted it in my “Energy and Transport Policy” section as a three part post starting from this page :

http://greenthoughts.us/policy/post-copenhagen/

I also have a PDF version here, which some may find easier to read or refer to.

Please read and comment!

Michael

Cap and Trade: An Unserious Policy Framework.. Towards a Serious Climate Policy – Part 2 December 13, 2009

Posted by Michael Hoexter in Climate Policy, Energy Policy, Sustainable Thinking.
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In part I,  I made the general case for cap and trade as an unserious policy framework that inserts extraneous elements into pricing carbon that threaten the whole enterprise.  I generated general definitions of seriousness and unseriousness and applied them to cap and trade and its market mechanisms.

Dimensions of Cap and Trade’s Unseriousness: Four Aspects

There are a number of aspects of cap and trade’s fundamental unseriousness that apply to specific actors involved in the framework.  On one level the designers of cap and trade had an intellectually speculative distance from their subject matter which suggests that the policy has many characteristics of an economic “thought experiment”.  On another, more obvious level, polluters are encouraged to view the process of obtaining a price on carbon as a game which needs to be played both at government sponsored auctions and in a trading market.  Finally there are invitations, explicitly and implicitly, for third-party financial speculators to become involved in carbon trading markets in search of trading profits.

1. Scientific Unseriousness

The formulation of emissions trading was an effort by social scientists, political operatives, and activists to make environmental regulations acceptable within the US economic policy framework of the 1980’s and 90’s that exaggerated the power of markets to do social good.  Within this historical timeframe, regulators and government officials were to approach powerful economic interests solicitously and without the conviction that they were defending the common good.  Government became the junior partner in regulation, an attitude which has led us to so much grief in the financial sector.  If applied to issues that were a matter of “improving environmental quality” or even the regulation of human-to-human affairs, the unseriousness of the policy would remain a matter of regulatory or political “taste”.  However, in dealing with the unique and largely irreversible damage to the climate system as a whole, the unseriousness of cap and trade becomes catastrophic.

There is a fundamental disconnect between the emissions trading instrument and the domain of action in which that instrument is supposed to act.  While economists have a long history of misrecognizing their models of reality with reality itself (most notably the recent models that did not see the huge asset bubble pre-2008), it appears in cap and trade that this tradition continues with potentially disastrous effects.  Modeling that one MIGHT be able to “cap” global warming pollution by regulating quantities of emissions by selling and trading permits is not the same thing as providing substantial evidence that this would actually work better than the alternatives.  And given the potential that we would be irreversibly altering the biosphere, we need to be choosing from the best tools available.  I will allow that cap and trade could theoretically, using it’s particularly arbitrary administrative component, achieve its targets in an ungainly and economically damaging way but this is  not relying on its much discussed carbon market component.

The sole supposed success story for emissions trading, the US acid-rain cap and trade system, has not been as successful as direct regulation of emissions in Europe and Japan in reducing sulphur dioxide the main acid rain causing pollutant.  Why turn away from what works better for vague or insubstantial reasons?  The unseriousness of arguments for cap and trade is that they are “selling” the idea that one could avoid more traditional government-led ways of controlling emissions and effecting social change.  When one “sells” an idea in the sciences, one overlooks elements of reality that falsify or do not support one’s hypothesis.

One of the prime selling arguments for cap and trade is that it is supposedly a more economical way to cut emissions per tonne, for which I have not yet seen a serious, comparative study.  However this argument for cap and trade, if it has any truth in it at all, overlooks the entire point of carbon mitigation:  to cut emissions radically, securely and fast to avoid major catastrophes.   The costs of NOT achieving carbon emissions goals is  that whatever incremental costs within reason are associated with another instrument (direct regulation or taxation) are well worth playing if those instruments are going to get us there faster and more reliably.  This argument is always left out by cap and trade advocates who continue harping on “least cost” solutions.  In this context any instrument that is more reliable or faster than cap and trade would appear to be much more valuable.

The constant and alarming repetition of the “least cost” doctrine as a fundamental value in discussions of carbon mitigation is also a sign of how distant the designers and advocates of the cap and trade policy are from the actual physical and business domain where emissions are cut.  Many of the large scale cuts in emissions in the area of energy and transportation will be infrastructure projects or high quality durable goods that are meant to last 10 to 50 years.  In this domain “least cost” bids do not necessarily win the job because of concerns by project commissioners/buyers for the financial viability of the constructors and the quality of the resulting product with which they will live for decades.  So “least cost” excludes most of the large-scale emissions cuts that can happen within a period of 3 to 10 years.  The building of infrastructure falls almost entirely out of the orthodoxy of climate economics which assumes an undifferentiated, infinitely divisible mass of carbon mitigation measures which can be efficiently and effectively filtered almost entirely via cost, leaving aside their appurtenance to a given emissions source.

The means by which carbon pricing, of which cap and trade is one type, will transform energy use is to send a “price signal” to owners of polluting facilities to invest in technologies that cut these emissions.  As discussed above cap and trade sends a signal of relatively poor quality as compared to a carbon tax, as it makes it difficult to predict the price of carbon into the next 5 or 10 years.  This is crucial from the point of view of making the long-term investments needed to cut carbon emissions.  So the touted equivalence between cap and trade and carbon taxation which is sometimes uttered by the current generation of environmental economists, is misleading when one considers the type of investments required to actually cut emissions on a firm-by-firm basis.

Cap and trade is actually a hybrid instrument, the mixture of a price and a permit regulatory instrument with an administrative component.  By mixing these two components, cap and trade appears to offer a “one stop shop” to government officials.  However in “mashing together” these two types of instrument, the quality of both components is substantially degraded:  carbon taxes/fees are a much better price instrument and direct regulation and rulemaking, if funded, are far more effective and rational than cap and trade’s administrative measures that will either concern themselves with permit fraud or arbitrary shut down of facilities that have no more permits.

Finally and perhaps most difficult to appreciate is that cap and trade translates the problem domain (carbon mitigation) into it’s own language, foreclosing the possibility for insiders and potentially outsiders to examine how it is doing.  This might be called “cap-and-trade solipsism.”  While there is a long tradition in economics and other social sciences in inventing special use languages and terminology, cap and trade’s language makes everything within this domain a problem of markets and its own artificial market structures to a degree that impedes more general understanding and ultimately troubleshooting or comparison between alternatives.  Recently I exchanged a series of comments with a gentleman who persisted in returning the discussion to one of “allowance prices” when I was bringing up a comparison between cap and trade and carbon tax.  The inability or unwillingness to use a generic framework means discussions become distorted.  There is large-scale epistemological issue for the social sciences here that unfortunately needs to be resolved simultaneously with improving climate policy.   Put in other words, “quality control” in the social sciences is very difficult to put into action because of their fragmented structure.

Instead of basing the world’s most important policy instrument upon social scientific principles that have been shown again and again to alter consumer and investor behavior (clear incentives, clear and stable disincentives [taxes, fees, and rules], funded mandates, public investment), the choice has been made over and over again by people who should know better to go with the “thought experiment” that was assumed to have political benefits but has turned out to be less effective and terribly cumbersome as a policy.  These supposed political benefits also by implication undermine the only stance that is going to significantly reduce emissions: that government action backed by the ethical concern of leaders and the public will impose direct limits on and help restructure our energy use system.  If, according to cap and trade’s philosophy, the market is “doing it by itself” then the public should “stand back” and let the market do its work.  This is a recipe for nothing getting done in the area of substantial emissions cuts.

2. Unseriousness for Politicians

As implied above, cap and trade kicks the political can of responsibility for climate protection “down the road” or “passes the buck” to markets or a future generation of politicians that will have to name a price for carbon mitigation.  The declaration of the cap is the political “candy” with which politicians can claim an easy virtue for themselves without naming costs.  In instituting a cap and trade framework, no leader is fully committing to regulating industry and consumer wants in the name of climate protection.  An effective climate policy simply cannot “pass the buck”.  Cap and trade institutionalizes “buck passing” via deferral to carbon markets, via the use of offsets and by not naming a price on carbon at the outset.  The declaration of the cap, which is largely symbolic because if ambitious it is unenforceable, remains a fig-leaf behind which no pressure or commitment of public or consumer funds is required.

As I have argued here, and in conformance to the fears of many opponents of action on climate change, there is no getting around a strong role for government in transforming our fossil fuel-using habits; cap and trade, at least within the US context, furthers the myth that government is secondary to the process of carbon mitigation, which carbon markets will do better.  If we take SOx regulation as an example, a far simpler task, this will definitely not be the case.  Furthermore achieving carbon neutrality will mean lots of new public or government-incentivized investment in public goods like electric train lines, electric transmission and various large and small public works projects.  To soft-pedal government is a mistake from the outset if you are serious about carbon mitigation.

Within this context there may be a differential perception of cap and trade when viewed in societies with a long history of government social welfare, higher taxes including energy taxes, and an across-the-political spectrum agreement that the government regulation is OK.  To Europeans, for instance, cap and trade is just another regulatory program (that was supposed to be more acceptable to the Americans) that of course involves costs and raising the price of energy (like many European taxes), blending in with other initiatives.  In the American context,  cap and trade is supposed to circumvent government’s role and also promise no or negligible costs.   Cap and trade might appear to be more acceptable in a context where government has a greater role in setting energy prices, planning infrastructure and there is already a fairly high level of taxation.

Ultimately government leaders will need to take responsibility for leading carbon mitigation efforts inclusive of the associated frustrations and transformations of old habits for business and consumers.  While individual citizens taking responsibility for their own carbon footprints will also be crucial, leaders must lead and provide the matrix within which lower carbon choices are not acts of social and economic exile.  As open as possible a discussion and confrontation with the costs and dislocations associated with this process is not only desirable but entirely necessary.  Cap and trade, wherever the myth of market self-sufficiency is strong, undermines the development of a political discourse where both leaders and the public at large can examine the costs and benefits to action on climate change.

3. Unseriousness for Polluters

The cap and trade policy with its indirection, use of market “games”, and generally lax goals in implementation sends the message to polluters that they shouldn’t take climate change too seriously.  The fundamental problem with cap and trade is that not only is it often in actual implementation a “sweet deal” for large polluters but it distracts them, with its market game playing (auctions, trading, permit allocation debates, offsets) from the serious tasks facing them in making their businesses largely carbon neutral within a couple decades.  Auctions and trading are supposed to tap into the competitive mindset of businesspeople and are efforts to “come over to their side of the table”.   While none of this is necessarily as trivial a game as football or baseball, the insertion of these elements into cap and trade are extraneous to pricing carbon and then letting businesspeople make decisions about how to reduce their carbon costs.  The assumption is made that somehow, perhaps due to short attention spans or a lack of interest in the actual technological and processual challenges in cutting emissions that one would in some sense patronize businesses by creating a carbon “House of Games” from cloth from the (paper trading aspects) of the business world.

Furthermore, the notion that via carbon markets polluters would seek any “least cost” solution to mitigating carbon erases any notion of duty to innovate and stanch one’s own emissions, which might involve perhaps developing a small research and testing function within one’s organization.  The policy, in reiterating what already is the mission of businesses, to reduce their costs, aligns itself with a price oriented rather than a process-oriented approach to emissions controls. The diversion of the market for pollution credits makes the job of mitigating carbon relatively “unserious” for the largest emitters.

4. Unseriousness for Financial Markets

One of the major challenges for many nations currently is to create an environment where long-term infrastructure and capital investment can thrive, especially for the purpose of transforming energy use.  The US economy in particular has deindustrialized considerably and has a decaying infrastructure that is heavily dependent upon fossil fuels of both the imported (oil) and the domestic (coal and natural gas) kinds.  The serious challenge associated with climate change is making the investment in this type of infrastructure and real energy and transport capital more attractive than the more speculative financial instruments based largely on paper rather than real assets which have dominated finance over the last 25 years.

Some economists and critics of the financial excesses of the last decades have called for finance to be made boring (again), meaning less financial engineering and, among other things, more financing of real engineering projects.  The carbon permit market and the potential for the generation of various carbon derivatives opens another lucrative market for financial firms to make the quicker buck by trading rather than becoming involved in a long-term lending relationship with industrial and project development firms.  On Wall Street, it has been an almost non-stop financial “party” over the last few decades as financial rewards have outstripped any meaningful economic value that this work has created.

Cap and trade then works against more general financial reform efforts that attempt to constrain banking and reduce the attractions of trading in favor of productive investments that create real jobs (and cut emissions) in the wider economy.  The trading component of cap and trade and the creation of a new tradable financial abstraction and property right works almost diametrically against the process by which capital would be funneled towards long-term investments in things like wind farms, concentrating solar thermal farms, transmission, electric vehicle charging stations, etc.  To trade is the financial “candy” that allows for high returns to traders within short time frames.

Common Feature of Cap and Trade’s Unseriousness

Cap and trade in its scientific attitude, orientation to politics, financial market design, and permit regulation all have one commonality:  the cap and trade system inserts one or more extraneous elements that do not serve the purpose of cutting emissions or increasing the overall efficiency of the system.   In most cases this “stop” along the way to achieving the goal is some form of “visit” to the carbon market before the actual job of cutting emissions or financing the emissions cutting projects can occur.  The insertion of the carbon market into the process impedes rather than enhances the process of cutting emissions as this inserts variability and the structure of the permit market and its many superfluous stakeholders into the emissions cutting process.

The insertion of extraneous stakeholders into the process of cutting emissions means that there are people who have already developed financial interests in a status quo that will not accelerate emission cutting but will keep it only at a low boil, as they seek profits from price variability.  These stakeholders will try to extract profits from the differences between “buy” and “sell” prices without much oversight or necessitate the erection of an additional regulatory structure WITHIN the cap and trade structure.   As we have as yet not even succeeded in regulating the already existing derivatives market in the broader economy, why should be we be optimistic, as the salespeople of cap and trade will respond, that we would succeed in regulating this market, if the will is even there, once we have set up a structure that insures that variability?   The stupidity of this altogether avoidable situation is mind-boggling.

Some take this to the extreme and say that profit-making itself is wrong or make various efforts to accuse others of making profit off doing good, as a way to impugn their characters.  Instead, profit needs to be made for delivering real value rather than thoughtlessly offering a massive new lease on life to the overblown financial trading sector at a time that we can ill afford it.  An ill-informed, undifferentiated endorsement of all profit-making leads to the giveaway of the planet’s biosphere to a coalition of extremely short-sighted people, while a condemnation of all profit-making insures that the value of efficiently run businesses will be excluded from the discussion.

“Carbon finance” despite its novelty, moors our financial system in the past rather than propels it into the future.  Carbon finance interferes with an orientation towards investment in real assets that cut carbon by offering the “carrot” to financial firms of greater profits from trading carbon derivatives.  Maybe with more time or a flusher economic system we could afford to play around with trading markets and carbon but we literally do not have the time anymore.

A “serious” carbon policy removes the extraneous elements because, frankly, we don’t have time to play around with someone’s intellectual hobby horse or third-parties’ wishes to extract excess trading profits from a transaction between two other parties.  So-called “carbon finance” is not the same thing as project finance or venture investment.  We need finance and investment with reasonable returns on investment without the “sweetening” for financial players of the trading profits associated with carbon trading.

Why is Cap and Trade’s Unseriousness Invisible or Tolerable to Well-Meaning Folk?

Even in an environment of skepticism about financial derivatives, cap and trade seems to have escaped critical scrutiny by people concerned about the climate.  Paul Krugman, for instance, who is highly critical of how Wall Street has been regulated, puts out an occasional Op-Ed or blog post that supports cap and trade.  Joe Romm, a blogger who wrote a good deal last year on his blog about a “global Ponzi scheme” and “rip-offsets”, has as of this year almost nothing critical to say about cap and trade.  Even if writers and bloggers have reasons of personal political position or paychecks involved in exempting this instrument from any meaningful critical gaze, the equation of cap and trade with action on climate is widespread in the mainstream environmental movement and in liberal circles.  Why is this so?

There are components to the “invisibility cloak” that makes it more likely that climate activists and politicians continue to support cap and trade despite (perhaps) knowing better.

1) Consumer Society and Unseriousness

A feature of wealthier consumer societies is that we have become used to pushing away or avoiding difficulties by moving on to the next product or fashion.  After all, President George W. Bush after the 9/11 terrorist attacks recommended that people “go shopping” as a way to fight the terrorists.  While at the time this seemed somewhat logical (keeping the economy going), it remained a superficial response to the dynamics that led to 9/11.

While we can pillory ex-President Bush for his awkward paean to consumerism, the attitude that simply a change of scenery or of product will make a world of difference is deeply embedded in the wealthier societies of the world.  Therefore in this context, a “shopping” or market model for reducing emissions fits right in:  cap and trade suggests that polluters are simply shopping for the “best buy” on the emissions reductions market, which, according to the global free trade ideal, should extend around the world.

Participants, and I include myself in this, in consumer society often become “unserious” people, in the sense that we are often preoccupied by largely trivial distinctions between products and services and questions of our own social identities.  Public information systems and mass media that make the most of the latest scandals and inconsequential aspects of celebrity personalities add to the trivialization of choice.  Cap and trade’s lack of seriousness blends in within this context.

2) Normalization of Derivative Trading-Based Finance

Trading financial instruments involves not seriously committing to a project or firm but simply trying to “work the spread” between buy and sell over a short period of time.  There is a generation of people under 45 or 50 who grew up in a time when banking and finance came to be represented by the “glamorous” lifestyles and reputations of bankers/traders or the individualized pursuit of wealth of the day-trader.  This generation compresses or misrecognizes the difference between investment and financial trading, having no memory of a different time when banking was largely “boring” and involved long-term commitments between financiers and borrowers.  The abstract and individually isolated nature of financial trading hides the externalities (damages to others) created by a trading-dominated financial system.

Cap and trade’s design is a product of the confusion of these two functions of financial markets and misapplies a trading instrument where an investment instrument is actually needed.  I can imagine that younger supporters of cap and trade have difficulty imagining a finance sector that sees its primary duty as issuing long-term loans rather than being involved in fast-paced swaps and trades.

3) Decline of an Ethic of Justified Profit-Making

In earlier periods in the economic history of capitalism there developed in some circles an ethic of justified profit-making: that one needed in some way to show that one had delivered a certain product or service with which one’s wealth became defined.  This allowed the new social class of business owners to find a reason to feel superior to those who simply inherited their wealth or collected rent from large inherited landholdings.  What Max Weber, called the “Protestant work ethic” (that is recently being disputed as being exclusively associated with Protestant portions of early Europe) helped define the mixture of ownership of productive assets (capital) and the entrepreneur’s work which promoted in the business owner a sense of virtue while risking committing the ancient sin of greed.

However, in the periodic speculative bubbles that have marked the history of our economic system, the relationship between entrepreneurial risk-taking in real enterprises and amounts of profit becomes frayed.  In these periods, profits from trading relatively overpriced assets or paper derivatives of those assets can outstrip those earned by real entrepreneurs.  James Galbraith has suggested that there exist a class of economic “predators” that thrive in speculative bubbles by their talent at locating opportunities to make what in other eras would be considered to be unearned profits.

In our current era, we are just beginning to hear calls for something like ethical profit-making, where the ethics is not simply inserted by association with a nominal cause or label attached to enterprise (“green” capitalism) but to the actual mechanism by which rewards are dispersed to individuals.  Was risk taken?  Was the product or service useful and/or socially useful?  Was the compensation scheme just?  In advanced industrial countries like the US, that have deindustrialized, more people are asking the question whether an “industrial policy” or systematic reform of the finance system will redirect capital to productive uses.

As outlined above, cap and trade, while it has a green veneer, creates a massive structure for targeting and achieving trading profits that are not compensation for a useful product or service.  In the cap and trade framework those who profit the most will be not those who cut the most emissions either via innovation, efficiency or implementation.

As the policy’s designers have normalized a financial trading-led economic system they have developed a conception of business profit that does not distinguish between profit from investment and entrepreneurial risk and profits from exploiting asymmetrical information in trading markets.

4) Climate Economics is Tied to Monetarist Ways of Thinking

The economics of climate change has emerged in an era when monetarism had become the new orthodoxy in economics.  Most practitioners of climate economics are focused to an excessive degree upon setting a price on carbon rather than also looking at the specific technological and infrastructure challenges associated with addressing climate change.  A Keynesian approach to economics, which had fallen out of favor in the 80’s and 90’s, enables economists to appreciate the vital role of government investment and leadership, though it doesn’t deliver any ready-made solutions in the area of climate change (in part because it is underdeveloped through recent neglect).  In this context, making the sole choice of policy between two carbon pricing instruments, cap and trade and carbon taxation, flattens some of the differences between the two instruments (though in an objective analysis still favors carbon taxation).  Additional benefits of carbon taxes or fees, that they can complement or do not interfere so much with other policies, are left out of the picture.

5) Knowledge Gap Regarding Relevant Business Investment Decision Making Processes

There is a knowledge gap among the designers of policy, its supporters and those who will actually use the policy to make investment decisions in the domain of energy efficiency and business process reform.  The economists who theorize about cap and trade and the environmental advocates of the policy do not in general have business experience and neither do political decision makers.  Critical knowledge of how capital investment decisions are evaluated within businesses has evaded the notice of most of the policy designers, including the basic cash-flow analysis tools, like NPV and IRR. Many of the business leaders who endorse cap and trade and may be consulted by political leaders are not necessarily motivated to help policy designers to create the most aggressive or most effective policies.  Engineers who understand which measures are relevant to their industries might not have been consulted by either one or the other of these groups.  So those who are motivated to cut emissions do not know how the microeconomics works and they don’t communicate regularly with those who know something about the technical challenges and available equipment.

6) Expectations of a Machiavellian Politics

Speaking mostly of the US, but also taking into account its outsized influence on climate policy, sincere supporters of cap and trade see themselves faced with what amounts to be a false choice:  support any proposal labeled “climate policy”, which unfortunately has been indentified largely with the cap and trade instrument, or implicitly support the rabid denial of climate change coming from opponents of any and all action to stem GHG emissions.  In the US at least this type of choice between principles and pragmatism is particularly stark as negotiations often start with the liberal-left having taken it’s principled position off the table from the start.

While the political Right, which has historically been opposed to action on climate change, has often made proposals that start with their “first principles”, reformers from the center and the left in the US have made political careers lately by starting from a position of compromise or even appeasement.  The successes of the Clinton Administration such as they were, were based on policy efforts that sacrificed principle from the beginning of the negotiation rather than in the middle.  Even if we assume, in a democracy, that no one gets exactly what they want, we find that this self-censorship on the part of the liberal or Left side of the spectrum has, along with massive infusions of money from wealthy interest groups, truncated the scope of reform proposals and narrowed public political discussion.  Unfortunately, the current Obama Administration has inherited some of the Clinton Administration’s emphasis on strategy that divorces itself from principle.

In such an atmosphere, the actual policy proposals for reform become tailored more for communication with an “inside politics” and lobbyist audience rather than the population at large.  It is now common for the press and officials to generate a public discourse of “do-ability” without the need to explain why the focus on legislative success will concretely help the broader public.  Political leaders and journalists want to be “insiders” and the public is expected to acknowledge that their interests may take a back seat in public discussion and in enacted policy.  If one expects policy and politics to be about the self-preservation of political careers, cap and trade blends in, not for the success that it promises but it’s structure that remains impenetrable to all but the inside stakeholders.

Dimensions of Serious Climate Policy

While elsewhere I have offered summaries of two sets of policies and one overarching meta-economic framework for effective (serious) climate policy, here I will offer another point of entry into why I think climate policy needs a thoroughgoing revision.  If we accept that we are in serious situation, an emergency, certain approaches are appropriate while others are not appropriate at all and should be left off the table.  I believe looking at climate policy through the lens of “seriousness” or otherwise can reveal important dimensions of policy.   While I believe I have offered two and half serious climate policies, I do not want these principles to suggest that these are the only possible serious climate policies

A serious climate policy

  1. Can cut greenhouse gas emissions with the highest (or close to the highest) level of rapidity without endangering economic development in the long term.
  2. Can be implemented (started) rapidly
  3. Recognizes and builds on existing emissions-reducing technology
  4. Tracks and promotes promising emerging technologies
  5. Supports energy research and innovation but does not hold policy hostage to unknown future breakthroughs.
  6. Aligns incentives (self-interest) to the greatest degree possible with cutting emissions.
  7. Excludes extraneous, non-climate related concerns from the core of the policy insofar as they may slow or undermine the most rapid action on climate; resist
  8. Can be adjusted to cut more or less emissions
  9. Draws strength from and mobilizes the “moral sentiments” and our sense of duty to each other and to the future.
  10. Enables transparent and equitable negotiations about global obligations and the price of climate change action between nations
  11. Prioritizes stanching the largest sources of emissions (coal-fired electrical power, tropical deforestation, fossil-fueled transport) from day one of the enactment of policy.
  12. Considers “emergency” measures that may lead to more rapid mitigation or cooling effects, inclusive of research into so-called “geo-engineering”.
  13. Addresses the balance between expenditures for aid for climate adaptation and expenditures for climate mitigation
  14. Increases the attractiveness of longer term investments in emissions reductions and sustainability.
  15. Addresses black carbon emissions nationally and internationally.

Wishlist for COP15

As COP15 is proceeding apace this week, I wanted to put out a wishlist for the outcome of that event as relates to a serious climate policy.  Minds may already be made up and I am just one voice but here it goes:

  1. Commit to ambitious targets (30% over 1990 emissions by 2020 for industrialized nations, reduce deforestation related emissions by 90% by 2020)
  2. Do not commit to emissions trading as the means to achieve these goals
  3. Create a standing international committee to evaluate the institution of a price-based international instrument or other, perhaps project-based, alternatives to cap and trade
  4. Commit to a science- and evidence-based approach to policy

Cap and Trade: An Unserious Policy Framework for Humanity’s Most Serious Challenge – Part 1 December 12, 2009

Posted by Michael Hoexter in Energy Policy, Sustainable Thinking.
Tags: , , , , ,
4 comments

In a few days in Copenhagen, world leaders will debate and, we hope, agree upon aggressive targets for humanity’s greatest challenge to date:  to avert devastating man-made climate change by transforming our economies’ use of energy and of land while maintaining and improving social welfare for the world’s peoples.  We have in the past 250 years proceeded on a course of development which has used fossil energy to replace human and animal muscle power with mechanical energy.  Economic development has almost become defined by application of this “exosomatic” energy, 85% of which comes from fossil sources worldwide.  Emissions from fossil energy as well as changes in land use, have dramatically increased the concentration of warming gases in the atmosphere, leading to increases in average annual temperature.  Furthermore, preferences for eating meat, in particular beef and bovine products like milk, have contributed massive amounts of warming potential to the atmosphere.  Finally, combustion of biomass and many fossil fuels has produced black carbon which has contributed substantially to warming.  Balancing the living standards of human beings with the health of the planet has become an unenviably massive set of tasks.

The potential economic and ecological catastrophes from a warmer planet are starting to become clear to us.  The retreat and eventual disappearance of glaciers seems now highly likely, reducing fresh water supplies for billions of earth’s people.  Rising sea levels from the melting of polar ice caps will swamp hundreds of millions more who live in low-lying coastal areas.  Changes in temperature are already disrupting fragile ecosystems with, for instance in North America, the pine beetle now surviving what once were frigid winters and devastating the forests of the Western US and Canada.  Many of the species with which our species has co-evolved will die off in a warmer world.

However, when compared to the magnitude of the threat and the measures needed to meet or exceed intended targets, the instrument chosen during the 1990’s to transform our economies, cap and trade (also known as emissions trading), has proved to be marginally effective to ineffective and extremely cumbersome to implement.  It is as if you, with great fanfare and concern, pointed out that there was a drowning swimmer 100 feet away from you but chose to throw a rubber duck instead of a lifebuoy to save them.  With time running low, it would be a disaster if government ministers and world leaders lock themselves into the cap and trade instrument as the main means to achieve emissions reductions targets.  Cap and trade or emissions trading, has had unimpressive results when compared with more traditional “command and control” regulation in the area of acid-rain forming pollution (SOx) and seems to have been selected as a means to control greenhouse gases largely because it appeared at the time politically expedient to the then-Clinton Administration.  This was humanity’s “first go” at a climate policy and the instrument has shown more weakness than strength.

There was within the Clinton Administration, which has had an outsized influence upon the shape of our first climate policy framework, an openness and vulnerability to the anti-regulatory and anti-tax rhetoric issuing from the Republican Party post-Ronald Reagan, so cap and trade seemed like an elegant domestic political solution.  Clinton, with apparent enthusiasm, declared in 1996 that “the era of Big Government is over,” yet government action and government regulation of markets, as it turns out, are going to be the pivotal institutions in transforming our economies to radically cut emissions (and managing our way out of the Great Recession).  Furthermore the Clinton Administration had more generally a fascination with financial innovation via expanding the influence and reach of financial trading markets and loosening regulations upon them.

However, in its capacity of creating a politically acceptable alternative to direct government action in the economy or to the levying of Pigovian (“sin”) taxation on carbon emissions, the proposal to use cap and trade to regulate greenhouse gas emissions has been, in the United States, a miserable political failure.  Opponents of action on climate change have seen through or willfully misinterpreted cap and trade’s “soft” regulatory image.  They are reinforced in their belief that “government is bad” by the effort by their political opponents to hide or make indirect government’s role via cap and trade.  “Fancy footwork” was unfortunately a hallmark of the Clinton Administration’s major policy efforts and cap and trade’s application to global warming is no exception.

I have elsewhere outlined two policy frameworks that with greater certainty would cut emissions more rapidly, based on more robust, reality-based economic and social scientific principles.  Firstly, a carbon tax or fee will function as a much clearer, more consistent incentive to invest in mitigation because of its predictability and clearer price signal to investors and consumers.  If paired with a series of targeted incentives for clean energy (feed in tariffs or other performance-based clean energy incentives) and investment in energy and transport infrastructure (electric transmission, electrified rail, electric vehicle infrastructure), we will see measurable emissions reductions and the emergence of real market choices upon which carbon prices will act.  The combination of incentives, disincentives and public investment might be called a “Comprehensive Climate and Energy Policy”.  Alternatively, a series of 20 to 50 large scale regional and global emissions cutting projects can form the basis for determining what would be the unifying national and international policy instruments, most likely including a carbon tax of some form.  Projects would need to represent certain emissions reductions using existing or emerging technologies within a timeframe or directly enable emissions reductions (transmission to renewable energy zones, electrified rail).

An alternate “meta-economic” framework for effective climate policy is Keynesianism, which after 3 decades of disregard has once again been recognized as the vital guide to economic policy at times of crisis.  What I call “Climate Keynesianism” recognizes the key role of government in leading an economy in crisis, in this case one with both a traditional worldwide economic slump in combination with an ecological crisis of unprecedented proportions.  Most commentators calling for a WWII style mobilization to catalyze economic growth and a greening of our society (a “Green New Deal”) are working with assumptions based on the work of John Maynard Keynes, though not all acknowledge his contribution.  Within a Keynesian framework government planning can supplement and support markets rather than remain invisible in our guiding economic theory or remain foolishly dismissed, as it has been over the past 30 years.  I have recently ventured the hypothesis that most intentional emissions reductions or increases in the efficient use of polluting resources that have occurred in our history have been the product of the implementation of government programs inclusive of the design of tax policy.

Furthermore, as I have argued here, cap and trade shields polluters and government from the ethical pressure of concerned citizens and concerned scientists, which are, in the end, the prime motive forces of climate action.   The new property rights to pollute that are the basis of emissions trading are fairly non-transparent and insulate polluters from the need to maximize emissions cuts sooner rather than later.  Cap and trade, in its implementation rather than in the ideal terms in which some advocates discuss it, sends out “go slow” or inconsistent signals via its complexity, reliance on offsets of often poor quality, soft targets, introduction of non-essential players into the domain of emissions reductions, and the contract not to cut emissions to zero contained within a pollution permit.

Seriousness and Unseriousness

I have above sketched out in broad terms why cap and trade is ineffective and incommensurate to the task of carbon mitigation (elsewhere I have gone into more detail with supporting documentation about why cap and trade is ineffective and resists strengthening).  However these criticisms that I have made are not particularly arcane or difficult to arrive at…why is it that these views are not shared more widely?  If we leave aside self-interested calculation for the time being, I believe there is what might be described as a “reality-orientation” among policymakers and important economic actors, within which cap and trade appears to be a quite acceptable solution despite its “Rube Goldberg” nature and inappropriateness to the task.  This reality orientation shapes perceptions of what is the nature of the challenges facing us and what are acceptable solutions to those challenges.  I would contend that it is possible to judge with some accuracy that some solutions are “serious” and others “unserious”.

On its simplest level, seriousness is an orientation of mind, either temporary or longer term, where we clear away irrelevant facts, irrelevant emotional states, and irrelevant impulses from consideration because of the need to take action.  Seriousness means focusing on only the relevant information for a particular moment or challenge and allowing in new information that is also relevant.  Seriousness means being able to screen information based on its appropriateness to what needs to be done now or very soon; it means understanding the links between an action and its ultimate purpose.

Despite the immediacy-of-action requirement in serious situations, seriousness however might also involve engaging in long-term planning, considering many factors and facts, but nesting and ranking them as to their relative importance, even though first actions are very important.  The observation from the study of complex systems called “sensitivity to initial conditions” a.k.a.  “the Butterfly Effect” explains to some degree why first steps are important even though the road may be long.  The planning and building of large physical structures requires seriousness from the outset to the end of the building process and beyond.  Seriousness most often involves the use of rational thought processes to come to solutions based on the relevant information, though intuitive, “Blink” type, reactions in extremis may yield good results as well.

Another way to look at seriousness from a more biological perspective, is that it is the “fight or flight response” brought under the control of the prefrontal cortex, the center of our brains that is associated with impulse control, deliberation and planning.  The fight or flight response is our basic physical and emotional response to threats, which has analogues across multiple species and has evolved over hundreds of millions of years.  In serious states of mind, the anxieties and dangers that trigger that response are anticipated, and planning is initiated that will reduce the likelihood of our encountering those threatening situations.

Unseriousness by contrast is allowing extraneous concerns and facts into that emergency or near-emergency situation or relying largely on non-rational decision-making processes when time would allow for rational ones.  As seriousness is judged by context and we all have multiple commitments in our lives, some people argue over whether people are “truly” committed to the issue at hand or are using it to further their “other agenda” to which it is assumed they are more committed.   As an example, deniers of climate change or action on climate change are in effect accusing those who are concerned about climate change of unseriousness because they believe them to have invented climate change science  as part of a pre-existing political agenda.  For these people, the pre-existing political conflict (between Left and Right) is the serious part while the science, to them, is unserious.  In this dispute there is a disagreement about which here is the fundamental context upon which to establish true “seriousness”:  the physical world as observed by science or the political and subjective world of human beings.

As “unseriousness” carries with it a pejorative tone, it is not the same thing as “lack of seriousness” in most domains of life where humor and levity is highly valued.   To break up the repetition in this piece I will use “lack of seriousness” to mean “unseriousness” because of the context.  However “to fiddle while Rome burns” can rightfully be called unserious, with all pejorative meanings intended.

To judge someone or something as “serious” or “unserious” appears at first to be a subjective task.  What are extraneous or irrelevant concerns and impulses?  What are rational thought processes?  For instance, I could be deciding at this moment for personal reasons of my own to declare cap and trade to be “unserious” and carbon taxation, a Comprehensive Climate and Energy Policy, and Climate Keynesianism to be “serious”.  Or seriousness could just be a state of mind that comes and goes; I might have a personal preference for serious people or a mood of seriousness (as it turns out this is the not the case).  If one looks or sounds a certain way, one might think, one is or is not taken as “serious”.

However I believe that most readers will be able to agree that certain facts and events in the world are “serious” without reference to the accompanying facial expressions or tones of voice.  What do we mean by “serious” or when something “gets serious”?  When something is “serious” we realize that we have either very little or no choice in an important matter; when something “gets serious” options have been removed and, yet action on our part is required that will have substantial repercussions for us and/or for others.  What most people would consider “necessities of life” are almost by definition “serious” while wants are not necessarily “serious”.  Government is often though not always involved in “serious” life and death situations: fire departments, police departments, courts, national defense etc.  Climate change is one of those serious issues:  we cannot escape the world en masse and we are degrading the biosphere irreversibly through our activity.  I am not making up its seriousness nor am I exaggerating it:  it is matter of humanity being able to live decently or the potential for a much reduced existence for humans and coevolved species in the future.

Also, many people, though perhaps a lesser number, will be able to identify unseriousness in the response to a serious situation.  You might become impatient if you recognize a serious predicament but are being offered information or solutions that are in some way irrelevant to its resolution.  If we are led to believe that we are in an emergency, yet are then offered a solution that is not effective or seems to be an answer to a different question, we need some very strong reasons to pair “Question and Answer A” with “Question and Answer B”.  However, as noted above, in some serious matters there are disputes about what is the “ultimate ground” or context against which acts are judged as more or less relevant: are politics and human relations or is the biophysical world “the ultimate ground”?

Seriousness or unseriousness is also an orientation with regard to the representation of facts and ideas.  In science, only “seriousness” is appropriate in the actual communication of data and their interpretation; there is supposed to be no ambiguity with regard to what something means.  In business or culture, “unseriousness” has its place, as ambiguity is allowed or encouraged.  Given the science-dependent nature of climate and energy policy and the very late hour we are facing these issues, “seriousness” is the only appropriate means to deal with the basic outlines of policies that are supposed to “save the world”.

Unseriousness at the wrong time or in the wrong people can have very real and serious consequences.   Unserious leaders of governments and large corporations can do enormous damage to their organizations or the parts of society that are affected by their actions.

Cap and Trade for Greenhouse Gas Emissions is Unserious Policy

Cap and trade via its adoption in the Kyoto Protocol and elsewhere has morphed into a sizeable set of institutions and worldwide: there are tens of thousands whose work is fed or feeds into its framework; it already has had serious real impacts on some people’s lives.  However despite its institutional massiveness and the grave nature of the climate change challenge it remains at its heart an “unserious” policy.  The frivolousness at the heart of the policy is a frightening irony and potential tragedy given the consequences of failure involved, the seriousness of the work done by many workers in the field as well as the fact of their employ in instituting such a policy.  But unfortunately, we and they have been saddled with a policy that is at odds with its fundamental task as well as the personal intents of many though not all of its supporters and functionaries.

The lack of seriousness of cap and trade can, in part, be traced back to its overreliance on trading and market mechanisms.  Markets, while they have serious consequences in the world, function in part via the lack of commitment of actors within markets to each other or to the goals of society as a whole.  Markets, to function, have to represent a degree of non-compulsion; they are never entirely “free” as some ideologues would like us to believe, but they attempt to be non-deterministic in terms of the outcome of the “play” of relationships and transactions within the market space.

The non-deterministic bent of markets leaves room for participants, in particular participants with sufficient financial resources, to have multiple choices with regard to the satisfaction of their wants.  For some this area of choice becomes a type of game, where players attempt to receive more benefits for less sacrifice of resources.  Offers can be played off against other offers so the costs for items will become more affordable for the buyers, though not necessarily advantageous for the sellers.  In playing one offer off against another there often will be an element of unseriousness or deception, as false commitments or false show of disinterest may lead sellers to increase the favorability of their offer.  To approach markets with total seriousness is often to lose out on opportunities or to be taken advantage of.  Playing games well in markets then becomes for each individual actor a competitive advantage in claiming more of the overall benefit for themselves.

There has been a certain hagiography of markets that has emerged in the last 30 years which has portrayed this scenario of market actors moving fluidly between offers on a market as the sole paradigm of economic activity.  All economic activity has been supposed to strive to emulate markets with the idea being promoted that individual buyers choosing between multiple offers is the almost exclusive foundation of economic progress and efficiency.  However this view of markets is focused on the internals of market functioning and ignores the supporting institutions for the smooth functioning of markets as well as the externalities (the damages and benefits to those not involved in the transaction) they create.  A well-functioning market is a product of (a lot of) work by non-market actors like government officials as well as those who work in economic roles and sectors which do not necessarily function well in the ideal market format.  Furthermore there are a number of economic functions that do not lend themselves well to market functioning, many of which are “natural monopolies” or oligopolies like electricity and transportation infrastructure.

Markets tend to work better the more “discretionary” or flexible a given type of human wish is, as well as where buyers can accurately evaluate the value and likely results of a transaction with their own knowledge base.  We tend to see “ideal” market behavior in areas of life where we are dealing more with luxuries than necessities:  in health care, cosmetic surgeons and dentists can sell their services to a (wealthier) consumer market on an out of pocket basis while in the area of basic medical care there is more likely to be subsidies or public and private insurance schemes.  Thus the “playfulness” of markets fits with things we can literally “do without” or hold out for, i.e. demand is “elastic”.  In those areas of life where demand is high but relatively “inelastic” we tend to see more regulation and/or subsidies by government or the direct provision of goods and services by government.

In the era of the idealization of markets we were supposed to trim all economic activity to the Procrustean bed of a competitive, unregulated market.  As Adam Brandenburger and Barry Nalebuff pointed out in their book Coopetition, cooperative interaction in the business world has been under-theorized while competition has been over-theorized and over-celebrated.  Economic planning, both within firms and in society as a whole, became taboo, as competition through the market was supposed to do almost everything for everybody.  In practice this has meant that certain economic activities that we are now recognizing are crucial (energy and transport) were neglected or subject to a series of exercises in deregulation or “marketization” with mixed but sometimes disastrous outcomes.  This has left, especially in the United States which has been the epicenter of the idealization of markets, energy infrastructure and transportation projects at the margins of high-level economic policy discussions.

Formulated during a period of financial deregulation and a mushrooming of the financial services industry, cap and trade is an offspring of the idealization of markets, a baroque monument to a belief in the market mechanism and financial trading in particular as the self-sufficient and predominant function in economic life.  Cap and trade has a “double decker” market, with the carbon permit market, with its variable price outcomes, regulating the real market for global warming solutions.  It would have been easier and more effective to simply drive the, “lower” level of that stack of markets, the real market for global warming solutions, with a tax but the policy designers were swept up in their belief in competitive markets and feared the appearance of exercising governmental authority via either taxation or direct regulation.  That the Clinton Administration was unsuccessful in 1993 in instituting an non-greenhouse gas related energy tax has shaped international climate policy in measures far beyond the value of that historical moment.

Proponents of cap and trade tend to argue that emissions trading and taxation are equivalent in terms of their usefulness but these assertions are based on an inadequate confrontation with some basic weaknesses in the cap and trade system.  Beyond the problem of offsets and their quality, which is a very large problem, the two most problematic assertions about almost all configurations of cap and trade are:

Assertion #1 –  Cap and trade’s price signal is equivalent as that of a carbon tax” –  This is not true because auctioning and permit trading yield a variable price signal and investment uncertainty.  A variable price signal is much less useful to investors in emissions reducing measures because these investments will pay for themselves in most cases over a period of years.  The value of the investment is then in question with a variable signal.  The economic modeling of this issue ignores the multi-year perspective from the point of view of individual economic actors.  I call this cap and trade’s “faulty microeconomics”.  There are ways to patch this up with price floors and ceilings and a very narrow trading range but then the elaborate structure of cap and trade is no longer necessary.  Cap and trade then becomes a more cumbersome tax with permits and market games attached.

Assertion #2 – “Cap and trade delivers certainty about quantities of emissions reductions (while taxation gives you price certainty).” If “1” is false (which it is without losing many of its trading attributes) then this statement is unlikely to be the case because carbon reducing investments will be less likely under carbon price uncertainty.   The point of carbon pricing (cap and trade or tax) is to stimulate investment in carbon reducing technologies rather than issue fiat regulations that controls amounts of emissions.  However the uncertainty in the price signal will interfere with emissions reductions until the point where regulators will step in and “pull the plug” on either malevolent, ignorant or unlucky losers on the carbon permit markets.  So certainty will be achieved, with an ambitious cap, when regulators will step in with arbitrary-seeming harsh measures.  Neither instrument will give anyone total “certainty” of quantity without the use of direct regulation, though a carbon tax would be easier to calibrate to achieve approximate goals.  Advocates of cap and trade omit the simple fact that carbon price rates can be adjusted perhaps every 3 years to achieve an emissions goal (though not so frequently as to make price projections arbitrary and useless for businesses).  Even with these adjustments the carbon price signal will remain clearer than with cap and trade.

Besides these questionable assertions that are always treated as established fact, invisible in the discussions by cap and trade advocates is the introduction of what is essentially an extraneous element into the process of pricing carbon, the trading markets, which seems to serve no other purpose than to lay at the feet of the market abstraction that the last couple generations of economists have idealized, the most important policy instrument that the world has ever seen.

As individuals, the designers and advocates of cap and trade are sometimes believers in more general financial market reform yet refuse to see how carbon finance pulls financial markets away from reform and towards speculative excess once again, via the insertion of price variability and trading.  Other than personal corruption, which may be the case for some, I do not see how these otherwise smart people continue to exempt cap and trade from what they otherwise would apply to the trading, for instance, of bundled sub-prime mortgages or other shady securities.

If we turn to our definition of “serious” vs. “unserious”, we see in cap and trade the introduction of an extraneous institution (the permit markets), set of concerns (the profit motive via trading of paper and not via producing or financing emissions cuts), and stakeholders (powerful financial groups interested in expansion of derivatives).  These extraneous institutions do not simply remain “quiet” but end up co-steering the course of the policy and interfering with its purpose.  Political and economic favoritism as well as intellectual hobbyhorses are being served instead of the world’s most important set of tasks and investments.

If we accept that our relationship with the biophysical world is the “ultimate ground” of climate policy, introducing an over-elaborate set of political and economic ideas and interest groups that are inessential to the policy’s goals and divert energy and funds to their ends adds a lot of unnecessary risk to the carbon mitigation enterprise.  If we furthermore acknowledge that the state and rate of our degradation of the biophysical world is very serious and approaching dire, the risks are multiplied.

Therefore cap and trade is unserious policy.

Cap and Trade Derails Climate Ethics, the Motive Force of Carbon Mitigation – Part 3 November 18, 2009

Posted by Michael Hoexter in Energy Policy, Sustainable Thinking.
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In the first part of this piece, I discussed how the fractured structure of cap and trade is either non-functional or marginally functional.  In the second part, I pointed out how cap and trade, due to its structure, is largely non-responsive to the ethical power of the climate action movement and concerned political leaders.  Here I offer a context within which individual effective policy instruments can fit together.

3. Climate Keynesianism:  Already at Work Cutting Emissions

As the foregoing account suggests, underlying climate policy and the weighting given to ethical principles in economic decision-making are differences in general theories of economics.  The choice of economic frameworks organizes the world into “Gestalts”, assemblies of meaningful elements that separately do not have as much meaning as they do together.   Certain choices seem to follow more easily from other choices when there are different frameworks for understanding the world.

The monetarist worldview, within which cap and trade emerged, focuses on the effects of prices on the behavior of independent economic actors on a market.  If the right carbon price signal is sent, the hope is that demand for low-carbon products will spur invention of and production of low-carbon solutions.  Those policy proposals that rely exclusively on a predictable carbon tax or fee also “play by the rules” of the monetarist worldview; a carbon tax/fee is a truer and clearer expression of the monetarist belief in the importance of pricing than the double-decker market of cap and trade.  However the carbon tax or fee recognizes or at least does not laboriously circumnavigate government’s direct role in representing the general interest and managing overall emissions-reduction efforts.

The events of last year in the financial markets have called in question monetarist orthodoxy as an exclusive guide to economic policy, which broadly defined includes climate policy.  While some attribute the crisis to improper government involvement in financial markets, most have taken away a view that there was insufficient government regulation of the financial system.  Whatever the causes of that particular collapse, markets in reality require over time the provision of public goods and infrastructure to function, as well as at times the stabilizing force of direct government investment in the private economy.  Support for and focus on public goods is de-legitimized or ignored by the monetarist economic framework leading to stealthy, poorly planned or underfunded government initiatives in these areas.

To remind readers of the recent history, in September 2008 the Bush Administration abandoned any pretense of following monetarist restrictions on government intervention in the economy and moved rapidly in combination with the Federal Reserve Bank to stabilize the US financial sector as other governments throughout the world undertook similar efforts to avert a repeat of the Great Depression of the 1930’s.  The Obama Administration continued these policies and added a $700 billion economic stimulus package which is an effort to bolster economic activity and employment outside of finance.  The US stimulus package includes a number of projects in the area of renewable energy and energy efficiency that would help reduce carbon emissions.

These actions of the Bush and Obama Administrations are rightly considered Keynesian, at a point in history when John Maynard Keynes, the foremost economic theorist of the Great Depression, had been ignored for at least a decade among government and academic economists.  Since these events, Keynes has luckily been rediscovered.  Despite the dramatic and uncommon nature of major market crashes, Keynesianism observations and principles also apply to the relationship between government and markets at less extraordinary times.  It is not clear whether the Obama Administration will embrace a variant of Keynesianism as more than a source of emergency help for a faltering economy, as this would be a stance that appears somewhat to the left of the President’s desired political position.  However circumstances, including rising unemployment, may force him, as they would almost any thinking leader, to adopt a more aggressive Keynesian approach to our Great Recession.

Relative to monetarism, most versions of Keynesianism acknowledge that government needs to provide public goods inclusive of social welfare measures that manage aspects of the economy other than interest rates and the money supply.  One of the key focuses of some Keynesian policies is sustaining demand via various government programs: provision of educational benefits, worker retraining, unemployment insurance and health insurance which allow more discretionary spending by consumers, stimulating demand for goods.  Though never formalized as a package of obligatory measures, these parameters vary but can be broadly construed as Keynesian.

Keynesianism does not explicitly endorse the interaction of traditional ethics with economics but the validation of government’s role in managing the economy and spurring demand has meant that governments with a Keynesian approach to the economy are more responsive to ethical argumentation about new social, economic, and environmental needs.  Those who believe in unregulated markets after Adam Smith see this aspect of Keynesianism as a corruption of the ethic of pure or almost pure self-interest, supply and demand that they feel should animate economic life.

While adherents to monetarism or neoliberalism, the philosophy that markets represent a normative ideal that is most often suppressed by government, will resist the movement towards a new Keynesianism, it seems highly likely that going forward, the lessons of Keynes will be taught once again.  Consequently views of government intervention in the economy are shifting from largely negative to a mixture of negative and highly positive.

Climate Keynesianism:  Suited to the Tasks of Climate Protection and Our Economic Challenges

There is a fundamental dispute between monetarism and neoliberalism with regard to whether government can at times lead an economy.  Monetarists believe it is only private enterprise that can lead the economy while Keynesians believe in a mixture of public and private where the public sector and government can provide leadership in areas where the private economy is incapable of providing direction or delivering services.  Whatever your political preferences in the grand scheme of things, in the area of rapid response to climate change, I see no alternatives to recognizing the role of public leadership in restructuring our energy and land-use systems.

The selection of carbon pricing instrument is an important choice within climate policy but is not nearly the silver bullet that advocates imagine it to be.  An effective climate policy would yield an unparalleled rapid transformation of energy infrastructure and land use patterns the likes of which the world has never seen.  Not only has the building of infrastructure at ordinary pace depended decisively on the help of government but the addition of a rapid tempo of change as part of a plan or stimulus effort to achieve carbon neutrality will require large government investments and planning, often in consultation with private corporations, academics and the general public.

Discussions of high-level climate policy have almost always centered around the addition of the carbon price as the key to progress in cutting emissions.  This emphasis, what might be called “climate monetarism”, has overlooked the importance of existing physical infrastructure, both public and private that constrain our energy and transportation choices in ways that a price will not overcome by itself.   The major infrastructure projects required to move society within reach of carbon neutrality are a renewable energy supergrid or hypergrid, renewable energy generators that are large or internetworked, electric vehicle recharging networks, and an electrified passenger and freight transport system. Unfortunately, infrastructure projects are not often self-financing but are usually either paid for directly through tax revenue or the financing of those projects is secured using tax revenue as a guarantee.

Put another way, the transition to a zero-carbon economy cannot be easily packaged into “product-sized” units to which the appropriate prices can be attached.  Carbon prices will play a role but equally important are the physical contexts within which those products are used.  Therefore changing that physical context should pre-occupy leaders as much as or perhaps even more than assigning a carbon price.  I have no doubt that a sufficiently high carbon price, as did the run up in gas prices in the summer of 2008, will have a galvanizing effect.  However those behavioral changes will become lasting changes if there is an infrastructure to support markets for low- and zero-carbon goods and services.

Despite the costs of these recommended infrastructure projects they also confer benefits beyond their zero- or low-carbon emissions:  we are facing an epic economic crisis which requires both massive economic stimulus and economic leadership to form the basis of the 21st Century economy.  Unemployment is creeping towards levels not seen since the Great Depression and an increasing number of commentators have called for a World War II type mobilization to pull the US economy and by extension other economies out of what might become a long period of stagnation.  The stabilization of the climate would appear to be a massive project that would offer these additional economic benefits if viewed within some form of Keynesian paradigm.

Is Climate Keynesianism Quietly Doing the Heavy Lifting?

Claims are now being made by the managers of the EU-ETS cap and trade system that a “price signal” has been heard leading to a decrease in emissions in 2008.  I have dismissed this above and elsewhere as a suspect assertion given that US emissions fell by approximately the same amount due to the worldwide recession of massive proportions that by some counts started in late 2007 but picked up in 2008.   There are however some countries that also are cutting emissions quite rapidly while others are not cutting emissions much at all.  Perhaps some are feeling the “price signal” and other are not?

Even if we accept that some emissions cuts are happening intentionally within the EU-ETS, we need to ask “how?” they are happening.  What mechanisms are causing people to cut emissions?  Is it a price signal or are these government land use, energy efficiency and renewable energy programs that run independently of the EU-ETS?   If we take the case of Sweden or Denmark, we see many government programs have already been instituted in the form of carbon and energy taxes to cut the net emissions.  Some of the emissions reductions attributed to Sweden, the overachiever in the EU-ETS, are due to work that that government has done in leading initiatives to increase district heating and the use of biomass to heat and generate energy.  Furthermore, the Swedish government has been following the mandates of the 2003 EU Biofuels Directive more assiduously than other European country, which means that it now uses E85 (85% ethanol fuel) and ED95 for an increasing number of vehicle miles traveled in buses and private vehicles, much of which is imported from Brazil and Italy.  For the purposes of this analysis I want to leave aside the highly problematic nature of refined biofuels (but not waste biomass) as a source of emissions reductions.

The Danish government has also embarked on an aggressive program of decarbonizing the Danish economy by using government-sponsored programs, vehicle and fuel taxation, some of which extends back to the 1970’s.  The largely government-owned energy company DONG has been working with Better Place to create an electric vehicle charging network, in part as a means to use Vehicle to Grid (V2G) technology to balance the energy production of Denmark’s many wind turbines.  Tax policy is being reconfigured to give electric vehicles a substantial cost advantage over equivalent gasoline vehicles.

If we take a step further back, we see that Western Europe’s many governments have, since the oil shocks of the 1970’s, converged upon a response to their dependence on imported energy by taxing gasoline at a high level and paying generally high per unit energy costs for energy, encouraging a much more efficient use of energy than we find in North America.  While prior to the 1990’s this could not be considered a “climate policy”,  the Keynesian consensus in Europe’s parliaments has not led to serious political challenges of the notion that government needs to shape a “macro” energy policy that looks at longer term needs than this year’s wholesale petroleum prices.  European governments (and now governments in other parts of the world) have also decided to monetize the positive externalities of clean energy by offering guaranteed premium rates for renewable energy investors (feed-in tariffs) to enable financing of what used to be considered risky investments.  While geography and population density have something to do with it, these policies over a 30 year period have led to European economies having a relatively lower carbon intensity than the US and Canada.

For the purposes of this piece, written in relative haste, I cannot do all the research to fill out this picture but I would like to advance the following two hypotheses to stimulate research by those who are following events on the ground in the EU-ETS:

Hypothesis #1:  Emissions cuts in the last few years and the near future, controlling for external economic downturns or upturns, will be attributable to government regulations enforcement, energy tax measures, government (including the EU) programs, planning and initiatives that I am calling “climate Keynesianism” and not to cap and trade regulation, with the exception of the cap being viewed as representing a “target” or carbon pledge which reinforces these actions by leaders.  It should be fairly easy to test this hypothesis.

Hypothesis #2: A continuing trajectory of cuts downward into the future cannot be achieved without the provision of large government investments or programmatic planning and incentives to build out zero-carbon infrastructure (electrified trains, transit, electric vehicle support infrastructure, electric transmission, electricity system reform, renewable energy generation incentives)

If either of these hypotheses are true, the monocular focus on carbon pricing and in particular cap and trade may simply be window-dressing on coordinated government programs that are doing all the work.  What is getting the job done is not a carbon market but a government motivated to protect it’s people and meet its obligations to its neighbors and the world community.  The structure of reward and discussion has been on the design of carbon markets, when in the background governments have been attempting to do the heavy lifting.  Why not change the focus to look at the reality rather than strain to create the carbon monetarist utopia?

The “dressing up” of climate Keynesianism as cap and trade would do a lot more than cosmetic damage because it would undermine the prospects of the tool that does the work, an adequately funded government engineering regionally appropriate systemic solutions, to get the political support and tax revenue that it needs to do the job.

Creating a Context for Carbon Pricing

Carbon pricing is very important but it must operate within a context which is shaped in part by economic history and geography and in part by government policy.   The focus on carbon pricing and in particular the octopus of cap and trade has crowded out meaningful discussion of what needs to be done on the ground to fundamentally change our use of energy.  What I am calling “Climate Keynesianism” is one way that we can understand how we might create a context around these individual measures so they have “meaning” and therefore propulsive power to motivate changes in investor and consumer behavior.  Some of this context is supplied by government and government, like it or not, has the best shot of reshaping these contexts within which carbon prices will push us in the right direction.

Cap and Trade Derails Climate Ethics, the Motive Force of Carbon Mitigation – Part 2 November 18, 2009

Posted by Michael Hoexter in Energy Policy, Sustainable Thinking.
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2 comments

In the first part of this post, I outlined how the components of cap and trade don’t work together to cut emissions.

2. Cap and Trade’s Perverse Ethics Threaten Climate Policy Effectiveness

The role of ethics in economic policy, and in climate change policy in particular, is misunderstood or underrated.  Ethics as an animating principle of government or civic action is not simply a matter of maintaining or broadcasting ethical rectitude by individuals or organizations or avoiding certain lapses or illegalities.  Sometimes viewed as optional or of limited use, ethics is often brought into discussions after the fact, explicitly to judge the behavior of individuals or organizations or implicitly to achieve higher personal status.  However ethics can be more broadly understood as one of a continuum of means by which value, negative and positive, is assigned to things, people, actions, and ideas.  I am using “ethics” as the inclusive term for “ethical codes, values, and morals”.

The choice in ethics on a community or national scale is not only between good and bad or in resolving an unusual and challenging conundrum as is often brought to the attention of professional ethicists, but in the alignment of priorities between what gets more attention and resources and what gets less.  The value of climate protection and clean energy is for most people and governments still a somewhat lower priority than, for instance, national defense, as is reflected in their respective budgets in most countries.  While some feel that calculated costs and benefits should always determine political and economic decisions, how one accounts for costs and benefits is a matter of a series of ethical choices.  Furthermore political and cultural leaders and active social movements can via their ethical commitments and leadership change the priorities of a nation and thereby alter the budgeting, effort and time priority assigned to each set of activities.

Climate Ethics Is Not Optional

In an earlier post, I have compared the fundamental task in climate policy to overcoming an addiction.  In an addiction, impulses to use a harmful substance overwhelm the rational thinking and ethical parts of the individual; for addicts, rationality becomes an instrument to search for the supplies of the addictive substance and cover up its consequences, including lying to others and to yourself.   To overcome an addiction, most addicts need to install an “external conscience” in the form of a community of people who monitor them and encourage them for years or for the rest of their lives.

Addiction is about putting short-term gain ahead of long-term viability; similarly a society such as ours that depends on fossil fuels or the overexploitation of the soil and forests is placing immediate satisfactions ahead of long-term sustainability.  Over the past two hundred years economic growth and activity has been intimately linked with the use of energy-using devices which worldwide depend for 85% of their power on fossil fuels; one could almost define economic development in the last century as the increased use of fossil, hydroelectric and nuclear energy to do work that would in the past have been done by human or draught animal muscle power.  Increasing convenience, the shortening of the distance between a wish and its fulfillment enabled by cheap energy, has become a hallmark of individual and social wealth.  To enable us to overcome the pull of cheap fossil energy we need not only to listen to speeches about how bad it is but to have an effective policy framework that guides us to reduce our use of fossil fuels and increase the supply of clean energy.

In chemistry many reactions have to go over an energy "hill" called the "energy of activation" to occur. This "hill" is lowered by the presence of one or more catalysts which lower the amount of energy required for the reaction to occur. Government's role can be viewed as a catalyst for certain economic transactions that don't happen spontaneously but are socially or economically desirable. (Image: UNIScience.net)

A metaphor from chemistry might also help illuminate the challenge facing us.  Some reactions in chemistry happen pretty much spontaneously because there is no or very little of an energetic “hill” or energy of activation to surmount in order for the reaction to proceed.  Other reactions, many of them in biological systems, require the presence of one or more catalysts or enzymes (biological catalysts) which decrease or supply the energy of activation of the reaction.  The input of energy, like the heat and chemical transformations of a fire, is a catalyst for many reactions including those involved in cooking.  Just as spaghetti doesn’t cook itself without boiling water, it is clear that we, as participants in economic systems, are not spontaneously protecting the Holocene climate.  Some hold out the hope or subscribe to the philosophy that the only good or “natural” economic activities are those that happen “uncatalyzed” by government or the exertion of ethical will.  This philosophy tends to naturalize what already has been achieved with or without government and has no account for how things change or how new challenges can be met:  it is a “just-so” story.

While it would be preferable if good things would happen only “by themselves”, without catalysts, we have discovered that this cannot be counted on to induce us to control emissions of greenhouse gases:  too many of our satisfactions have come to depend on the use of fossil fuels and we don’t experience the negative consequences directly.   Our economies that run largely on narrow self-interest alone will not institute the technological changes necessary spontaneously, because of their costs or the diversions of the other interests that all of us have.

Good climate policy supplies the “energy of activation” or the catalysts for those “reactions” to take place, to enable people to make the decisions they need to make to protect the climate.  The basis and power of that policy comes from an ethical commitment of leaders, citizens, and activists to tip the scales in favor of carbon mitigation, and to a lesser degree efforts at adaptation to climate change.  In some areas, it may take a mere informational “nudge”, in other areas, it may take a decade or two of costly effort to supply this “energy of activation” yet the costs of inaction are in this case far greater.

Government is the only institution with the potential to enact these ethical commitments on an economy-wide scale and that can level the playing field.  Shaping markets is an important part of government’s activities, which is not often welcomed by participants in those markets.  This requires the ability to marshal as much support as possible for these tasks from the citizens and business interests as well as the ability to anticipate resistance to these changes from the same groups.  There is both economic pain and reward involved both of which should not be ignored.

An embrace of government’s role is not the embrace of a positive utopia or single guiding principle for social and economic life but simply an acknowledgement of a diverse and complex human nature.  There are many who struggle against what seems obvious or commonplace in the observation that government plays a necessary but distinct role in the economy, especially in times of crisis or rapid change.  There are still many believers in the self-sufficiency of markets which supposes that government’s catalyzing of economic activity is either unnecessary, harmful, or should remain invisible for ideological reasons.  Some insist on a largely painless transition to a clean energy future: this is highly unlikely and requires waiting for technological breakthroughs that may not occur in time.  Others believe that their policy instrument (cap and trade) will scour the world for all “least cost” opportunities to reduce emissions before any economic pain is inflicted at home.  Still others hold out the prospect of a relatively painless status quo, and this seductive notion animates those who deny or minimize climate change.

While we are, in an age of cynicism about government and humanity in general, unused to thinking about government as the instrument of popular morality, most halfway legitimate governments express through the passage of laws and their enforcement the values of their respective communities;  without a shared sense of ethical justification for laws, a government quickly loses its legitimacy.  By contrast, unregulated markets have tended to promote at best a narrowly utilitarian morality that has little concern beyond the horizon of the next few years, the next few months or the end of the current transaction.  Markets encourage most often those transactions that happen pretty much spontaneously, based on a narrow form of self interest as defined by traditional corporate accounting.  Governments backed by substantial ethical justification and assent from civil society are the only institutions that can in large number of transactions tip the scales in favor of solutions that address medium- and long-term issues that do not have a major impact on this year’s balance sheet.

Thus returning to the formulation in the title, ethics (duty-bound commitments to the future and to the vulnerable on the planet) are the locomotive of climate action and government action and policy aligned with these commitments are the prime vehicle for their realization.  Acts of individual and corporate virtue and creativity will be an integral parts of moving us forward but are no substitute for widely held ethical commitment to these goals that include the highest ranks of government.

Cap and Trade’s Ethical Trap

The “dressing up” of markets, especially trading-based markets, as agents of morality in the last three decades has come at a time that is unfortunate for the future of our favorable climate.  Markets have been held up as “better than” government and government’s role.  Meanwhile, if viewed dispassionately and without pro- or con- ideology, unregulated markets use resources profligately and without regard for its impacts in search of short-term favorable return on investment.  Carbon dioxide emissions do not substantially threaten the economic utility (subjective assessment of value) of the major polluters or many of their customers, in their current perceptions.  These factual observations should not be attributable to one political wing or another.  Having to re-establish or establish for the first time government’s legitimacy in these matters just adds another political challenge to the process of dealing with climate change

Cap and trade is an effort to clothe the administrative and ethical role of government in the supposed ethics and/or efficiency of markets, in this case, the carbon permit market.  The twisted result is a huge policy blunder and is not as good as the more straightforward carbon tax/dumping fee or direct regulations, which acknowledge governments’ leadership role in these matters.  A shorthand way to look at emissions trading is that an artificial permit market is supposed to “emit” the carbon price signal to the real market for carbon emissions reductions.   The substantial effort involved in rerouting the intentions of government leaders via carbon markets ends up obscuring or voluntarily hamstringing the role of government.   It is unfortunate that some of these truths are being pointed out by politicians and others who want no climate policy whatsoever; this does not make their observations about cap and trade completely false.

In the 1990’s, when cap and trade was formulated, a generalization and expansion of the role of derivative trading in the economy was considered to be commonsensical and a sign of economic health.  The perspective looks different now, after we have experience a monumental financial collapse which was enabled by the meteoric expansion of derivative trading during the last two decades.  The designers and advocates of cap and trade make the derivative trading component, the insertion of a vast market of middlemen, seem a trivial addition to the concept of a carbon price, which is represented most simply as a carbon tax or fee.   However as we have seen this trading market substantially changes the determination of a carbon price and diminishes its usefulness as a tool to spur investments in real technologies.

In proposing cap and trade systems as the climate policy of choice, governments also try to insulate themselves from taking direct responsibility for carbon mitigation.   Once a cap has been set, the work and responsibility of government is obscured by the activities and vacillations of the carbon market which is then “responsible” for the carbon price that is generated.  Ultimately this creates a situation where, in the end, no one is directly responsible for climate protection as government can point to the permit market as being at fault for lagging implementation of carbon emissions reduction.  Some may view this as positive, perhaps insulating climate policy from the vicissitudes of politics, but in the end this means that the insulated climate policy will be ineffectual, non-transparent, and corruptible by system stakeholders who are interested in maintaining a fossil fueled status quo.  Immediately or in the near future this failure has a high probability of becoming a political liability.

The Pricing of Carbon as an Ethical Enterprise

In the “prospectus” for cap and trade is the claim that beyond setting the cap, the government is allowing markets to set the price of carbon.  Somehow this is supposed to make the price of carbon seem more “real” and be more “efficient” to market actors.  However, what happens, viewed from the point of view of authorship or responsibility, is that government issues a certain number of permits from which it might be expected that a certain average price will emerge yet afterwards allows both auctions and trading to ultimately determine the carbon price;  calculations of economic impacts of the policy will always project prices which are the operative economic units, not numbers of permits.  The interplay of what market actors think a permit is worth at one point of time or another in bidding or trading, has not that much to do with the cost of mitigation of carbon emissions or the damage those emissions cause, i.e. their fundamental value.  In 2008/2009 carbon prices have doubled and halved in value within the span of a year depending on factors such as the cost of oil and the general strength of the economy; neither of these factors have much to do with pressing on with decarbonizing the economy.

Put another way, the biosphere and atmosphere “don’t care” about the opinions of various permit buyers, the price of oil or economic downturns.  Pricing carbon is about impressing the impacts of carbon emissions upon the valuation processes of all economic actors, not the other way around.  (Furthermore this impressing of the impacts is supposed to occur within and an investment [longer] and not a trading [shorter] timeframe, so there is a fundamental mismatch between the instrument and the task.) We are already at atmospheric concentrations of 387 ppm carbon dioxide, past what most scientists believe to be the optimal set point for carbon concentration in the atmosphere.  The real cost then of additional emissions is at this point in time close to astronomical because all emissions now contribute to irreversible warming.  While an astronomical price of carbon is not realistic, to sever the ties of that price to the scientific reality by allowing the interplay of market participants to determine the price is a distraction that serves no purpose according the manifest large-scale goals of any carbon mitigation policy.  Furthermore this is again, as above, a case of “diffusion of responsibility”, where introducing more actors into a situation creates the situation where each actor feels less compelled by ethical standards to take responsibility for the situation.

Instead governments need to take responsibility for their (new) role as protectors of the atmosphere and the climate, one part of which (and this is not the only part) is to set a price for carbon that has a real impact on markets and leads nations and the world to meet emissions targets.  The setting of this price involves calculations of what it will cost and how these costs will be paid for and their effects mitigated upon the most vulnerable parts of the population.   To whom political leaders will listen most and which concerns will trump others is part of the ethical decision making involved.  These decisions will not necessarily be perfect but will start a process by which they will enter a dialogue with their constituents and stakeholders where actions are easily understood in terms of their costs and benefits.  Cap and trade, with its focus on trading rather than investing, surrounds political decisionmakers with groups of people, who are for the most part not particularly relevant to the process of cutting carbon emissions.

Recognition and Respect for Carbon Investment Stakeholders

Stakeholders other than government and scientists are important to include in carbon pricing decisions.  These stakeholders should include the industrial groups, consumers and lenders that are affected by the carbon price, not third-parties with interests in taking advantage of derivative trading markets.   Finance is important as a spur to long-term investment but the magnification of its trading component in the cap and trade instrument is the injection of an irrelevant foreign element into the carbon pricing process.

By setting the cap and letting the market “decide” government and regulators are disengaging from the process of determining costs even though, at this point in history, government sponsored engineering studies of various climate solutions are about as accurate information as we have about what it will costs to mitigate carbon emissions.  The cap and trade instrument allows climate activists and government to occupy the ethically suspect role of the dilettante that want to keep his or her hands “clean” of discussions about actual monetary amounts.  To remain in a position that “floats above” the process of discussing money is at this point in time ethically suspect.

The cap and trade instrument is also fundamentally disrespectful of those who will be making the decisions to cut carbon emissions.  The variable carbon price without predictability (at least as a reasonable approximation over a 5 year period) does not give investment decision makers adequate tools to assess which investments they should make.  Instead, the variable “wild card” carbon price that results from cap and trade, pushes upon them a frightening responsibility to make decisions under increased uncertainty.  They are supposed to do “something” or pay “some money” for permits over a period of years but it is not known how much.  The politicians and activists prefer the false moral certainty of the cap which pushes both discussions of money and actual decisions to cut emissions to the “polluters”.  Why not make this job , the most important in the whole policy framework, as easy as possible?

I have no illusions that debating over amounts of money will not be loud and obstreperous.  However the fight should be carried out as openly and transparently as possible so as many stakeholders as possible can see and understand the results.  By contrast, the setting of a cap only has indirect meaning and impact on constituents and stakeholders, which then does not allow an open and honest dialogue and debate about the costs of climate mitigation.  Perhaps in the 1990’s, leaders shied away from entering this dialogue because they have not been prepared to do so.  Now we can assemble the tools to discuss the costs and benefits of climate action with all.  In addition, in the 12 years since Kyoto, it has become more obvious to many people around the world that something is happening to the climate, so open discussion rather than the vague proclamations of intent is more of a possibility.

The Structure of Cap and Trade Defeats the Ethical Force of Climate Action

As it now stands, our short-term self-interests as people living in 2009 are not generally aligned to create a sustainable economy.  In the developed world, if it were up to us, we would “party like its 1999” perhaps with a few green tokens that would declare us to be virtuous people in our own self-estimation.  In the developing world, many people want to live some approximation of the lifestyle of those in the developed world with their accompanying reliance on conveniences powered by fossil fuels.

The strongest countervailing forces to these tendencies are our own observations and the observations of scientists that we have started to degrade the world by our activity and that we are concerned about the environment that we will leave future generations or force upon the less powerful or privileged parts of the world.  These ethical concerns informed by science are the most consistent source of power for climate agreements and climate policy.  We require a clear regime of rules, incentives and disincentives combined with leadership in the right direction that are as directly as possible connected with these sentiments and observations.

The complexity and dysfunctional nature of the cap and trade hybrid instrument does not offer a lever or “button” upon which the combined ethical force of those concerned about the future of our planet can “push” to make the instrument actually make substantial cuts in emissions.  Once the cap is set, the supposedly impersonal forces of the market will determine the outcome; within the policy’s design by intention no agent is simultaneously directing the investment process and responsive to the calls for climate action. All interactions with low carbon technology and emissions cuts will be filtered through the carbon market paradigm.  While this is an advantage to those who want to slow action on climate change, ostensibly the creation of a cap and trade system was to accelerate action on climate change.  The policy itself is at war with the ethical justification for its existence.

The declaration of the cap, component “4” of the cap and trade hybrid that I described earlier, also is taken by those who don’t bother with or understand the economic decision-making and technology-specific parts of policy options as a seductive ethical quasi-fait accompli.  They might think: “I have subscribed to this policy that pledges this goal (with impenetrable economic explanations attached), therefore I have done my duty”.  Unfortunately the devil is in the details which are difficult to delve into without some understanding of how investment decisions are made.  The declaration of the cap however “tight” or not gives subscribers to the policy a sense of virtue without really seeing how the policy itself undermines or makes achievement of an ambitious cap much more difficult.

My friends who support cap and trade will point out that they call for a version of the instrument with 100% auction and tighter caps.  Surely, they think, this is putting the screws even tighter on the “polluters” and sending the message via higher permit prices that investment must be made in carbon mitigation.  While the “fantasy” version has yet to be enacted anywhere in the world and may very well never be enacted, the problem is that a more rigorous cap and trade system makes the job of the people who actually cut carbon emissions much more difficult than it has to be.  A predictable price will be a spur to investment, while the swings of a carbon market will slow investment in carbon emissions reductions.

Carbon Taxes/Dumping Fees and Direct Regulation Are Responsive to Climate Ethics

If we contrast this with direct regulation or a carbon tax or fee, the ethical structure of the instruments become more obvious.  Imposing a tax on an activity, especially framed as a Pigovian “sin” tax, means that we are penalizing that activity or asking for compensation to society for damages.  In essence a carbon tax is consistent with the valuation of carbon emissions as “bad” though not criminal.  Auctioning permits to emit says that carbon emissions are neither good nor bad, ie. this activity is permitted but has an indeterminate cost and a market value. Already at this level, cap and trade is “protecting” emitting carbon from moral opprobrium.   Like it or not, moral concern, anxiety, anger and outrage expressed and directed wisely is going to have a determinative ongoing role in spurring climate action.

Furthermore, as we are recognizing here that relatively speaking governments have an eye to long-term outcomes to a much greater degree than market participants, the carbon tax or fee gives government actors by extension civil society a direct “say” in the accounting of damages and the remedies for those damages.  While cap and trade gives governments only a very indirect instrument to influence market behavior, a carbon tax or fee allows government to put its “hand on the scale” to influence economic decision making directly.  Remember that the “certainty” of the cap is illusory because of the cap’s enforcement problems; placing a “dumping fee” on emissions is a much more direct and practical expression of concern.

Both taxes/fees and cap and trade create revenue streams for government which can be directed or misdirected any number of ways.  Within the policy choice between a quantity vs. a price instrument is no formula for how to direct the resulting revenue which will be determined by politics and the local economic consequences of the policy itself.  However taxation at least historically is understood as a revenue stream, therefore there is greater chance for a transparent accounting and open discussion of where the money will go.

Additionally and more clearly, direct regulation is consistent with our emerging ethical evaluation of carbon emissions in that specific carbon emitting activities can be made illegal over time.  For instance in the US, we could make illegal in 10 years time the use of coal to generate electricity without 95% sequestration of emissions securely.  We would be making a major ethical statement about our use of coal and the pollution of our common atmosphere.  This law would need to be supported by other measures to enable a transition to a clean electric generation mix but it is not difficult to achieve with the appropriate will and incentives.  There are dangers of “unfunded mandates” or distortion of incentives with direct regulation, but this does not mean that any and all regulation is bad.  The blanket condemnation of regulation is still a political discourse with a constituency but economic reality has shown us that we cannot do without any regulation.

Cap and trade represents something like a moral limbo for the climate action movement into which it has marched without thinking too much about giving up its moral power.  Once instituted, participants in a cap and trade system would have a legal right of redress that their permitted and potentially valuable rights to pollute would be taken away from them by laws which forbid carbon emitting activities.  Cap and trade thus creates a perverse ethical system.  Cap and trade is more of an economic thought-experiment than a confrontation with the economic, technological and ethical realities of cutting carbon emissions.

The faith in markets around which the cap and trade instrument has been built overreached its true place in stimulating the targeted market for low-carbon and zero-carbon technologies.   One of the instruments that would truly offer this “button” or “lever” is a carbon tax or fee which if demands were made that it ascend high enough, would stimulate low-carbon investments.  The other instrument would be laws which with reasonable time frames and imposed-cost calculation, circumscribed or forbade particular high-emissions activities that destabilize the climate.

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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3 comments

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.
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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.