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4. Cap and Trade: A Tangled Web… A Project-Based Alternative

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 storage, internetworked wind powerwith hydroelectric storage, transport electrification, afforestation, 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.

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1. Cap and Trade Derails Climate Ethics, the Locomotive of Carbon Mitigation – Part 1 « Green Thoughts - November 18, 2009

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