Tags: carbon tax, Energy Policy, Oil Independence, rail electrification, Sustainability
A couple weeks ago, I sketched out an Oil Independence Plan for the United States that was based on a combined move to more efficient uses of petroleum as well as a much more aggressive move to oil- (and natural gas-) independent infrastructure, than is currently proposed in existing legislation in the US Congress. [Since posting that plan, Craig Severance has written an equally ambitious and more detailed plan which can seen here. I also didn’t reference Boone Pickens’ “Pickens Plan” which is an Oil Independence Plan that relies heavily on natural gas and tractor trailer trucks fueled by natural gas.] The most immediate motivation for such a plan, which we should have embarked upon 35 years ago anyway, was of course the oil disaster in the Gulf as well as the muted and unambitious response to that disaster by the Obama Administration. [There are now rumors that Sen Jeff Merkley may be producing a plan to reduce oil demand in the US which will be announced shortly]
I asserted in that post among other things that planning was a critical missing element in our policy arsenal and that only a plan, and not the cap (cap and dividend, cap and trade) instruments under consideration, would bring the necessary resources to bear in a timely manner. Not only has there been a failure to plan for the demise of oil as our primary transport fuel, there has been a fundamental failure to accept planning as part of the legitimate role of political leadership.
After outlining this plan in the same post, I identified 6 hurdles which President Obama or another future leader of such a plan to radically reduce our oil dependence would face. Those hurdles are:
- Market Idealization vs. Planning
- Deficit Worries and Hysteria
- Balancing the Interests of Stakeholders/Mixture of Public and Private Enterprise
- Many Americans’ Love of Expansive Resource Use
- The Biofuels Distraction
- Corporate Funding of and Influence in Politics
Two additional hurdles occurred to me but I felt these deserved their own post.
Hurdle #7: Unwillingness to Accept Inconveniences (or the Prospect of Inconvenience)
The economic history of the last 100 years in developed nations might be called the “March of Convenience” as activities that used to take hours, like procuring and preparing food or traveling to a nearby city, now take minutes. “Convenience” means the use of a device or the design of a way of life enables desires to be more easily fulfilled. Fossil fuels have had a critical role in powering almost all of the conveniences that we enjoy, either directly in automobiles or indirectly via a partly fossil-energy powered electric grid. Americans have led the way in the “March of Convenience”, adopting consumer devices on a mass scale more quickly than other countries, though in recent years we have lagged in many areas of consumer device adoption.
While Europeans, Japanese, and increasingly others in fast developing Asian countries, enjoy many conveniences that Americans do not (better public transportation for one), the American way of life is particularly dependent both on the automobile and the oil-powered delivery truck because of the structure of our towns and cities and the lack of oil-independent infrastructure. Convenience in America, has come to be defined by easy use of the automobile for either long or short trips to stores, work, and entertainment. The hundred year old trend in real estate development towards sprawl has kept Americans in most locations almost entirely dependent on the automobile. Additionally “just in time” supply of retail and wholesale goods has become a business practice that demands air freight or relatively energy-inefficient trucking transport for many locations that are not located on major rail lines.
The proposed Oil Independence plan as well as, in my estimation, the plan offered by Craig Severance, would involve a period of one to two decades (or longer) within which, for some trips, people might need to sacrifice some time or convenience in order to avoid using increasingly pricey and eventually scarce oil. This might mean waiting for others in a carpool or Internet-brokered ride-share, or taking bus service or using a shared van. It may take 25% or 50% more time to do certain tasks. For some people, the isolation of their cars is far preferable to any contact with others, so the notion of sharing space with others will be considered a major inconvenience. These people will, if they are able, pay a higher price for convenience, as the price of oil is bound to go up either via market forces or taxation or both. Nevertheless, in time, those who prefer self-driven solitary transport and have middle to high income will be able to buy battery electric vehicles or plug-in hybrids.
On the other hand, there are tradeoffs other than cost which eventually may become incentives for others not to use a self-driven vehicle: when one isn’t driving one can work, socialize or read using our increasingly multi-functional mobile communications devices and networks. The provision of workable transportation alternatives is key to the success of any of these plans. While some offer the hope of a “drop-in” solution for oil (a fully-realized battery electric vehicle infrastructure and fleet of tens of millions of BEVs) this is not likely to be scaled up in time to radically reduce our oil demand with no inconveniences. Depending on increased or the same level of convenience is a liability for a serious plan to get off oil before both its depletion, before more deepwater environmental disasters, as well as to avoid climate tipping points.
There are aspects of an Oil Independence Plan that typically will attract more attention and therefore funding, those which usually offer an increase in convenience for many transport users. A TGV or Shinkansen-class high speed rail network (>160mph average speed) (which is just one of the solutions in my and others’ Oil Independence Plans) represents a net increase in convenience over the status quo for most trips up to 500-600 miles. On high speed rail with Internet access, one is offered a more luxurious ride than either in a self-driven vehicle or experiencing the inconveniences of air travel. The less “sexy” 90 or 110 mph freight or passenger rail may be more difficult to “sell” because they do not in their design offer the promise of increased convenience over the status quo for those who are particularly devoted to automotive travel (where traffic isn’t a problem).
Another area where there is a fairly transition is where the charging or battery-swap infrastructure has been built for battery electric and plug-in hybrid vehicles. These will represent at least an equal level of convenience to gasoline powered vehicles for most local trips, though the technology is not as mature as that for electric rail.
Perhaps more frightening to politicians and to anxious consumers is the mere prospect of change of any kind in the relatively pampered automotive lifestyle that we currently inhabit with gas at somewhere around $3.00/gallon. The actual changes involved in an Oil Independence Plan will with time offer net benefits or at least a livable but more sustainable lifestyle but to those who are clinging to the “edge” or to office, any change seems frightening. The attack campaigns by elements of the political Right, by incumbent industries, or others who base their appeals on fear are almost pre-programmed for efforts that even suggest that people should loosen their grip on the steering wheel.
Some of these fears might be premised on a fear of strangers, “other people” in general or class prejudices. The automobile dominated lifestyle has enabled people to live in relative isolation from each other. Becoming used to dealing with and coordinating movement with others may be a challenge for some. . While the prospect of sharing rides or public transit is uncontroversial for some and almost a sign of personal virtue, at least in the way of advocacy, there are many, many Americans who are either horrified by this notion or would, when push comes to shove, resist having to enact these virtues rather than simply advocate them.
As with the other hurdles, leadership and planning are required to overcome this hurdle. Planning is going to be required to provide Americans with alternatives to automobile travel, per expansion of mass transit, as well as funding more novel systems like internet ride sharing or automated pod-cars. Higher gas prices, whether by market forces or by the imposition of taxes would drive the change faster but only a visionary and persuasive leader is going to be able to convince Americans to accept higher fuel taxes. The offense and defense against inevitable attacks from the anxious and the defenders of the status quo is to engage consumers/citizens/businesses in an epic quest to change our way of life and put it on more sustainable basis. The missing element is principled leadership in both speech and example which would ideally come from the President or another national leader. As it currently stands, the Presidency of Barack Obama has not attempted to engage in such a quest; partial or half-hearted movements towards these goals would expose leaders to attack from those who cling fearfully to present satisfactions and our way of life as it stands. The best defense in this case is offense and commitment to a better future.
Especially with a rise in the cost of fuel, businesses used to “just in time” delivery from distant suppliers may need to reconsider their business practices and inventory strategy. Long-distance rail freight may not in the first years be able to reproduce the speed of long-distance tractor-trailer trucks which can choose the most direct routes between supplier and buyers. For local delivery however, the transition to battery power is fairly easy for small and medium duty trucks with shorter ranges.
There are “Peak Oil” narratives, associated with figures like Richard Heinberg or James Howard Kunstler that based on an extreme version of this change in lifestyle, within which society becomes radically localized and many institutions collapse into a friendlier version of the world of “Mad Max”, the 1979 Australian film which portrayed a dystopian future. I don’t share the pessimism of some in the Peak Oil community but their arguments and warnings cannot be dismissed out of hand. With the cautious and unimaginative leadership shown in the last month here in the US, the likelihood of social collapse or at least a radically downsized society (an outcome which some would find a positive development) is higher rather than lower after a peak in oil production.
The largely mythical notion of a painless transition between one industrial and energy-related way of life and the next holds out the notion for policy makers that they just need to wait for innovation to deliver a new technology that offers only benefits and no tradeoffs. Economic historian Jeremy Greenwood chronicles how throughout the last two hundred years the acceptance of technologies that we consider to be superior happened over a period of decades in which there were struggles between interest groups and losses of economic benefits as well as gains from the new technologies. The fantasy of a “drop-in” technological replacement for the internal combustion engine continues to make it difficult for leaders to face hard choices.
Hurdle #8: Tax Aversion and the Retreat from an Ethic of Social Responsibility
Another hurdle to oil independence is tax aversion bordering on tax phobia. While, in the previous list of hurdles, I underlined the importance of public finance of transport and energy infrastructure, I left open the possibility that deficit spending would be the primary means of financing this infrastructure. I pointed this out only as a short-term fix during our current deep economic slump. In better times, tax financing will be crucial to keeping deficits and inflation in check. Taxes will need to rise on both the well-to-do and also the middle class as counseled by a growing group of economists that NY Times economic columnist David Leonhardt has grouped in his fictitious “Club Wagner”. Of course tax rates have at times been too high in certain places and times and levied unfairly upon certain activities or groups but now is not one of those times for most tax brackets and taxable entities in the US.
Tax paying and voting are the two main pillars of what ordinary citizens can to do to express a sense of group or social responsibility, the idea that “we are in this together”. Attacking tax-paying in general as an evil in itself, as has become common, is an almost direct attack on a spirit of national or group responsibility. Excessively high taxes can stifle individual initiative but excessively low taxes can fray the ability of a society to meet large scale group challenges requiring government investment. Unfortunately there is no generally agreed-upon economic model of how to set optimal tax rates that accommodates both of these concerns, so tax rates are raised and lowered according to changes in political fashion and power dynamics.
In addition to being a source of funding, the aversive effect of tax is also one of the stronger mechanisms we have to shape our own group behavior via the use of incentives and disincentives. Pigovian, a.k.a. “sin” taxes, are means of limiting the use of resources or engaging in activities which are not illegal but are considered to have high social costs. Many conservative economists prefer Pigovian taxes to income taxes under the rubric “tax what you don’t want”. A significant carbon tax would be one of the most efficient means to limit carbon emissions and fuel taxes of sufficiently high levels curtail the use of various fuels.
To enact significant new Pigovian taxes, these too require a sense of social solidarity or at least a broad social agreement that some activity should be limited at some initial or ongoing monetary cost to society. One of the key weapons we have in reducing oil consumption is to levy higher taxes on oil. Ian Parry of Resources for the Future rightly points out that, like an upstream carbon tax, oil should be taxed at the well-head rather than downstream as a fuel tax. While a upstream carbon tax is preferable as it would include oil, natural gas and coal for addressing GHG emissions, relative to a simple gasoline tax an oil tax has greater coverage as it also would start the search for alternatives to oil in industrial processes and home heating, which makes up 23% and 5% of oil demand respectively.
We have just gone through a 30 year period in the US within which income tax rates have been cut dramatically, particularly on the wealthiest Americans, justified with reference to the largely discredited theories of Arthur Laffer (that tax cuts increase government revenues via economic growth) as well as supply-side, “trickle-down” theories associated with highly influential “Reaganomics” associated with his first budget director David Stockman. The accumulation of private wealth and therefore productive investment was thought to be smothered by the top level marginal tax rates of post-WWII America; by allowing rich people to accumulate more wealth it was thought that more would be invested and the economy would grow. Progressive taxation (the taxation of the wealthiest at a higher rate than the less wealthy) and taxation in general have been treated as taboo and as damaging to the economy since the political triumph of Reaganism. The raising of taxes even slightly became highly politicized as the ideal of a low-taxation, small government society has remained the implicit ideal for politicians in both political parties. Despite the small government ideal, government has continued to grow though often in ways that are not the social welfare driven “Big Government” that the followers of Reagan have attempted to pillory. Furthermore savings rates, one of the advertised benefits of lower taxes, have continued to plummet in the US.
The American economy has grown in this period of low taxation but these increases have come largely in the service sector and particularly in financial services. Low taxation, in combination with a trade policy that undermines domestic production relative to other countries has led to super-consumption, massive increases in private and public debt, trade deficits, investment in and inflation of the value of real estate, and speculative excess in paper assets. The economic booms of the 1990’s and the early 2000’s that low-tax advocates like to point out as benefits of reduced tax rates has come at the expense of manufacturing capacity, at least in the US.
While taxes are never popular, almost no one stands up now in favor of taxes, despite professed concern about deficits. Every politician believes that if they were to be the one to raise taxes, they would lose the next election. With some justification, American taxpayers under 65 feel that they don’t get much benefit from taxes, as there is no comprehensive universal social programs other than for elderly people. The government spends money on an elaborate military, the world’s gendarme, which offers few direct benefits to Americans domestically. American industrial and trade policy has allowed jobs to be off-shored, so the government has not exactly stood at the side of the American worker. President Obama’s health reforms will not be tax-funded with the exception of the expansion of Medicaid, which again biases America’s social spending in favor of distinct disadvantaged groups rather than as a generalized universal principle of social solidarity.
Both the Pigovian side of (oil and carbon) taxation as well as the revenue generation component are critical for a rapid reduction in oil demand. An ambitious leader, I’m hoping President Obama, would have to tackle this by “reversing the ethical valence” of popular perceptions of tax-paying and thereby also some of its emotional valence. To do this, he would need to discuss tax paying as an expression of social responsibility, social solidarity, and responsibility to the future, not merely as a subtraction of monetary funds from one’s perceived economic well-being. To date, the President has tended to reinforce the individualized ethical framework of the low-tax world-view by continual efforts to court those who believe only in individual private initiatives rather than social initiatives. This “pragmatism” continues to undermine Americans’ fragile sense of social solidarity.
Eight hurdles: Too Many?
While six substantial hurdles was a lot, eight hurdles is even more. Is it too much to ask of us, our government and President to meet this challenge?
In my mind, this is the matter of, as mentioned above, a “reality principle” that cannot be ignored, so hurdles must be overcome no matter how many of them exist.
However, the path is somewhat easier than my presentation of these as individual free-standing hurdles would suggest. Many of these hurdles “stand in bunches” or can be surmounted if our leaders adopt a new stance. Leaders attempting to push the US off its oil addiction need to invoke the following general principles, which in turn will allow these hurdles to be taken as groups:
- Re-affirm our sense of social solidarity and social responsibility
- Emphasize social and individual resilience over sensitivity to minor hardships like carbon or oil taxes, hassles of coordinating transportation with others over self-driven automobile centered transportation.
- Affirm the role of government as a tool for the realization of national ambitions and the necessary backstop for market failures
Within this context, many of the eight hurdles become easily surmountable if the “general case” has been made for these principles.
We can reduce our dependence on oil with sufficient coordinated effort. With this effort will come a great sense of accomplishment in an era where it had been thought that this kind of challenge was no longer part of the American Dream.
My New Post/Article on Post-Copenhagen Ethics March 3, 2010Posted by Michael Hoexter in Climate Policy, Efficiency/Conservation, Energy Policy, Green Activism, Renewable Energy, Sustainable Thinking.
Tags: Carbon Pricing, carbon tax, Climate Policy, Energy Policy, Renewable Energy, Solar Energy, Sustainability
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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.
I also have a PDF version here, which some may find easier to read or refer to.
Please read and comment!
Cap and Trade: An Unserious Policy Framework for Humanity’s Most Serious Challenge – Part 1 December 12, 2009Posted by Michael Hoexter in Energy Policy, Sustainable Thinking.
Tags: cap and trade, Carbon Pricing, carbon tax, Climate Policy, COP15, Energy Policy
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, 2009Posted by Michael Hoexter in Energy Policy, Sustainable Thinking.
Tags: cap and trade, Carbon Pricing, carbon tax, Climate Keynesianism, Energy Policy
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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, 2009Posted by Michael Hoexter in Energy Policy, Sustainable Thinking.
Tags: cap and trade, carbon tax, Energy Policy, Sustainability
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.
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, 2009Posted by Michael Hoexter in Efficiency/Conservation, Energy Policy, Green Transport, Renewable Energy.
Tags: cap and trade, carbon tax, Energy Policy
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:
- 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.
- 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.
- 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.
- “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:
- a (derived) carbon price,
- permit regulation,
- a competitive bidding and trading market for permits with accompanying profits and losses
- 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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
Cap and Trade: A Tangled Web… A Project-Based Alternative – Part 4 November 5, 2009Posted by Michael Hoexter in Efficiency/Conservation, Energy Policy, Green Transport, Renewable Energy.
Tags: cap and trade, Carbon Pricing, carbon tax, CSP, Electric Grid, electric transmission, Electric Vehicles, energy storage, Feed In Tariffs, Project-based Policy, rail electrification, Solar Energy, Wind 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 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:
- Carbon tax/fee facilitates implementation.
- Infrastructure: Renewable energy “smart”/supergrid
- Guaranteed Rates for Renewable Energy
- Contracting with Stakeholders for Greenhouse Gas Reduction Targets
- 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:
- Carbon tax/fee facilitates implementation.
- Infrastructure: Renewable energy “smart”/supergrid
- Guaranteed rates for renewable energy/feed-in tariffs
- Contracting with stakeholders for GHG reduction targets
- 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:
- Carbon tax/fee funds and facilitates implementation.
- Contracting with stakeholders for greenhouse gas reduction targets
- Decoupling investor-owned utility income from energy sales
- National and state mandates for energy efficiency
- 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.
Tags: cap and trade, carbon tax, Electric Vehicles, Feed In Tariffs, Infrastructure, rail electrification, Renewable Energy
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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.
- 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.
- 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:
- 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).
- One third should be used to help fund infrastructure that enables a zero carbon future (electric trains, electric transmission)
- 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.
- 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.
- 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).
- 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:
- Worldwide Emissions Targets and Path
- 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.
- 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.
- 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.
- 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.
- Renewable Energy Zones – Expedite environmental impact studies for high value renewable energy zones with strong sun, wind, geothermal resouces.
- Feed-in-Tariffs – Funding of private, community and household investment in renewable energy generators via clean energy surcharges to electric bills.
- Electric Freight Transport System
- Grade-separate and improve existing freight railbeds
- Add additional tracks to high traffic railbeds to allow more rail freight
- Electrify all high and moderate traffic rail routes
- Electric Passenger Transport System
- Build high speed rail backbone
- Enable improved track-sharing between freight and passenger traffic for lower-traffic routes.
- Build electrified bus and tram routes in high density/high-traffic city environments.
- Electric Vehicle Recharge Infrastructure
- Trickle charge (220V and lower) public charge network
- Battery-swap infrastructure
- 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.
Tags: cap and trade, carbon tax, Energy Efficiency, Energy Policy, Energy Pricing, Sustainability
In the first part of this post I identified 10 features of cap and trade, the favored climate policy of many policy elites at this point in time, that make the policy ineffectual. I outlined how cap and trade was sold to America and the world based on faulty assumptions as well as its superficial political appeal to the then Clinton Administration. Contrary to the story told in climate activist and sympathetic policy circles, cap and trade has been comparatively ineffective as a means to reduce emissions of either SOx or GHGs. I argue that this is a structural problem with cap and trade, not a mistake in implementation.
The Gulf Between Gutlessness and “All the Guts in the World”
Cap and trade is a hybrid policy, the mixture of a price mechanism and permit regulation. In theory, the three “motors” of cap and trade are the economic pain caused by having to buy permits (or the anticipation thereof), the profit gained by market participants in exploiting the permit and pollution troubles of others, or the prospect of running out of permits and being subject to some penalty inclusive of actual “police action” on the part of regulators. As with any permitting system, permits are meaningless without the threat of, potentially, monetary and criminal penalties. For instance, fish and game wardens need to be able to stop hunters and fishermen from taking animals for which they do not have permits.
However, cap and trade systems hide and, it appears infinitely, postpone the moment where regulators would have to essentially shut down the operations of various industrial or power generation facilities because they no longer possess permits to pollute (which they would have to do to operate using their current technology). For instance if a financially troubled power utility or plant operator ran out of permits on November 5, to meet the cap regulators would have to shut down one or more power plants until January 1. This might mean blackouts and brownouts to homes, businesses and, of course, hospitals. It would therefore take “all the guts in the world” for a regulator or government to enforce the cap, standing down the cries of people who will have to live with no or extremely unreliable electricity. Yes the notions of “banking and borrowing” permits are meant to reassure system users that this day of reckoning will never come. Yet this process undermines the power of the permits and the firmness of the cap.
Furthermore, at the point when this theoretical moment of enforcement might occur, the net effect would actually show the regulators/government in a very negative light because punishment might come as a consequence of a lack of “clever” permit-market behavior on the part of the power plant operators. Their power plants may be no more carbon intensive than the next but they may simply have been outfoxed by other permit buyers or various manipulators of the permit market. In this case, the punishment will seem arbitrary.
So we can now understand the design and behavior of the designers of real existing cap and trade systems a little better by recognizing this disjuncture between the lax disbursement of permits (Kyoto/EU-ETS and current Congressional bills), the various softening and smoothing mechanisms (banking and borrowing) and the need for some kind of real enforcement of the cap. It would subvert the politics of the policy to actually meet the cap through the harsh regulation that would almost certainly never happen or would be largely meaningless within the cap and trade framework.
While regulatory and political guts will be required to meet the climate change challenge, the imposition of harsh measures should be seen far in advance to allow adequate time for polluters to take action to cut emissions. Cap and trade’s framework does not allow for this type of lead-time before administrative measures are taken.
True Belief in Markets vs. a Baroque Policy Mess
As you might glean from how I write about these matters, I am no market absolutist nor believer in the efficient market hypothesis (EMH) which assumes exclusively rational information processing by market participants in aggregate. I think it is more reasonable to assume that people can be both economically rational and economically irrational or can alternate between the two at different times or in different contexts. Economists are also coming around to realizing how central irrationality is in our economic behavior: there has now been about a decade of behavioral economic research as well as the coming to grips with the fact that our recent crash was in part caused by a belief in the almost total predominance of rational, utility-maximizing economic behavior.
Whatever the balance of rationality and irrationality in human economic behavior, cap and trade (or carbon taxation/fees) with good justification attempts to mobilize the economic rationality of individual market actors in the service of climate protection by introducing a carbon price that will influence procurement and operations decisions. Rational economic man (or woman), according to the theory, only needs the information of price to make rational, optimal decisions. In cap and trade, the carbon price and market is supposed to be the link between merely pro-forma climate action in the form of permit giveaways/postponement of action by regulators and the theoretical, never-to-be-activated harsh punishments for exceeding the cap. Polluters are supposed to know that they are in trouble when they start paying more and more for polluting, sending to them a signal, the price signal that they need to change their operations. Rather than the impingement of some set of rules upon the company’s operations, the price is going to tell that economic actor “how much” it will be worth it for them to do something, so they can make an rational choice among a range of options.
The most productive use of a price signal will be if firms anticipate the economic pain caused by the signal before it gets expensive for them; once they are in trouble and overpaying for permits they will have less of an ability to make expensive long-term investments, especially if they are an emission-intensive business like power generation or cement making. With cap and trade, there may be sudden surprises in the carbon markets which will put firms into trouble even with adequate planning.
I’ve already outlined how flawed cap and trade is in generating the price signal due to the variability of the carbon price that results both via auctioning and via permit trading. In both cases there will be a lot of market “noise” related to how much people think something is worth rather than what it is worth fundamentally in terms of the climate. The “how much” will be almost impossible to calculate accurately under cap and trade as conceived and as urged by climate action groups that believe in cap and trade with all permits auctioned off as the gold standard of climate regulation. This will make investment decision making tools like net present value difficult to use as you cannot calculate the negative cash flows into the future that are attributable to the carbon price. This is not because net present value (NPV) is more environmentally insensitive than any other investment tool: it’s just sloppy policy-making to defeat the purpose for which you are instituting a policy! Cap and trade would have to invent its own more baroque micro-economics and corporate finance tools that will always be more inefficient and fault-prone than using a simple price signal and NPV.
So if true belief in markets and economic rationality of individual market actors is fundamental, then a carbon tax or fee that is correlated directly with the amount of carbon or global warming potential (dealing with more powerful greenhouse gases than carbon dioxide) emitted is the clearest, most predictable price signal. Cap and trade’s baroque double decker market structure is like a climate policy that has been thought up by an overeager 5-year-old who gleefully stacks markets on top of markets because it seems more “market-like”. Having one “meta-market” emit the carbon price to the real market for carbon emissions reduction solutions is a bad idea. An excess of markets in this case does not encourage rational economic behavior on the part of individual market actors.
“It’s All that We Have”: Making Do is not Good Enough
A number of commentators, bloggers, and politicians critical of the state of climate policy nevertheless hang on to cap and trade. Some agree with some of my criticisms while others might find my foregoing criticisms gratuitous or simply giving aid and comfort to climate deniers. Or, even if they are frightened of the monumental hand-off of responsibility that is contained within the cap and trade system, they might feel that so much political capital has been spent on cap and trade that it must be defended as the embodiment of climate policy itself.
Below, I will suggest that in fact we have a wealth of choice in the area of climate policy, almost all of which will be more effective and efficient than cap and trade. For one, governments around the world including the Obama Administration are taking action in other areas that do not deal with carbon pricing or trading of permits or credits/offsets. You could say that governments that openly advocate a cap and trade system might be seen as also hedging their bets. Secondly, it will be fairly easy to replace cap and trade with an ensemble of different measures or a carbon tax with any number of features. If history is any guide, other countries have implemented a carbon tax within months rather than the years long efforts to install cap and trade systems.
It pains me that so many people many of them good-hearted and well-intentioned have expended political capital and reputations on such a faulty instrument. In their own defense, depending on their social scientific or business backgrounds, they could not necessarily have known differently. However, that is no reason to stay with an instrument that has a high probability of gumming up the wheels on climate action rather than speeding it up.
Before describing alternatives to cap and trade, I want to first outline what I think the tasks are that the policy needs to address. Without a common vocabulary for these tasks, stripped of bias towards a particular policy instrument, you, the reader, won’t be able to evaluate whether these are substantially better than what we have already. In most cases I am not reinventing the wheel, but simply observing and compiling what I see is out there already.
The Fundamental Challenge of Climate Policy
The fundamental challenge facing governments, climate activists, green-oriented businesses, and concerned citizens is a neat intersection between a massive policy challenge and a massive political challenge of the early 21st Century. Policy and politics are not always so closely intermingled but in this case they run for historical reasons very closely together.
Instituting cap and trade rather than more effective policies is a bad idea spawned of an era in which government was supposed to become more “market-like” in all matters. We have discovered in so many areas of life that this philosophy of government is flawed, despite continuing political disagreements around this issue in governments around the world. Our current generation of politicians got elected by taking one stance or another (but mostly one stance) on the either/or proposition of whether government or markets were “better”. Markets unregulated, as it turns out, encourage short term thinking and satisfaction of immediate appetites. Fortunately or unfortunately, to face the future threat of climate change, a revision of government’s distinctive place vis-à-vis regulation of markets and our own appetites is required.
Climate policy has the unenviable task of
- saying “stop” to our impulses to overuse fossil fuels and overexploit the world’s forests and soils,
- directing, under constant political attack, substantial streams of public and private investment to building a new energy and energy-use system and
- changing our patterns of land use to fix more carbon in plants and soil.
This places government, and government is the only instrument up to the task, at loggerheads with citizens’ and businesses’ impulses to use more and more energy (and non-renewable natural resources), as cheaply as possible with a disregard for the negative consequences. While ideally such policies would enact a form of “aikido” on our wishes, using the momentum of our wants for more and better stuff to instead be used to transform society for good, there still needs to be a firm boundary and governmental “center of gravity” that is clear to all (otherwise it cannot perform aikido on anything). In the end, what is required is the return of government’s legitimate role and moral authority to set this type of reasonable limit and redirect energies that would otherwise go elsewhere.
The analogy of speeding on the highway can bring this closer to our personal experience. Without traffic cops, many of us, including myself, would drive too fast, increasing the possibility of fatal accidents; furthermore automakers have tended to put whatever mechanical efficiency gains that come from among other devices, turbochargers, into making cars more powerful and “fun to drive” than into gains in mileage. Yes, there are those of us with a conscience or without the interest in driving fast but we cannot count on these forces alone to curb fast driving, especially given the powerful automobiles to which we now have access. The police who catch speeders are not very popular but, if they avoid corruption and are not subject to absurd ideological attack, they maintain moral authority and can do their job.
Fossil fuel use (or wanton deforestation) is similar to the propensity to speed in that it offers us and our economy an easy way to satisfy our wants without regard for the long-term consequences. Fossil fuels are notably energy dense and we in most developed or in oil-rich countries do not pay nearly enough for them given their social and environmental costs. In an uncharacteristic moment of clarity within his Presidency, George W. Bush put his finger on it when he said that “America is addicted to oil”. As in addiction, only firm limits and sometimes harsh measures are able to stop the addict from re-using the drug he or she desires. The authority of government to intervene (double entendre!) in the domestic economy has been over the past 30 year undermined by an ongoing political barrage that suggests that government has less legitimacy and moral authority than the market. Cap and trade is an effort to wrap government in the faux moral authority of the market, as promoted by the market fundamentalist creed of the last 3 decades. The market unregulated, as it turns out, is amoral, not caring that much about long term consequences. Markets are not “bad” or essentially immoral, they just are tools that lately have been called on to do tasks to which they are ill-suited. As even Alan Greenspan now attests, they have been fundamentally misunderstood most notably by him and by many others.
Especially in the US but also abroad, governments, in order to do their work, must re-establish moral legitimacy in many areas of domestic policy which have been thrown into question by our decades-long experiment in market fundamentalism. The substance of the politics surrounding cap and trade is largely about the moral authority of government to restructure our energy system and secondarily about the legitimacy of natural science. The content of this moral legitimacy is that government can when functioning well, represent the general or common interest in making and enforcing rules, collecting taxes, and spending that revenue for the purpose of maintaining and improving the future viability of the nation. Even more so in the area of climate change, which will mean over a period of a decade or two, dramatic changes in at least three sectors of our economy, governments’ moral legitimacy needs to be well established to effect whatever policy is chosen.
Cap and trade’s “prospectus” (a.k.a. political sales pitch) suggests that government can after declaring a “cap” essentially recede into the background, while the “hand” of the permit trading market does its work. Its superficial political attraction is that it reinforces the pre-existing “rap” that government is “bad’ or ineffective and the market is “good” and effective. However, to work in any shape or form, climate regulation and policy, including cap and trade systems such as they are, is going to need government action in spades. So, cap and trade sets up its advocates for a long-term political defeat: even if a weakened form of it passes, people will ultimately start to wonder why there is so much government involved in cap and trade (and so ineffectually at that). Maybe its advocates believe that “people know” that cap and trade is really just another government regulatory program and won’t feel betrayed; given the state of civic understanding of government’s role, I believe they are sorely misinformed.
Ultimately the leaders of government(s) are going to need to take responsibility for protecting their people and the environment from substantial degradation via curbing our own emissions of greenhouse gases. The language and parallel institutions of cap and trade interfere directly with the process of by which government leaders would take responsibility, suggesting that automatic processes will “take care of themselves” via the invisible hand of the carbon permit market. I have demonstrated that such an invisible hand will play tricks with the policy itself compromising its effectiveness. Both the policy in its pure form and even more so efforts to curb its tendencies will create a baroque structure that does not work directly and efficiently on the basic tasks that are required to reduce carbon emissions rapidly within a decade.
The Basic Elements of Climate and Energy Policy
To open up the field of alternatives to cap and trade, as well as understand cap and trade better in context, we need to understand what the generic tasks of any climate and energy policy would be. A comprehensive climate and energy policy has most of these elements independent of policy instrument choice:
- Disincentives for (or rules against) the use of fossil fuels, leading either immediately to switching to virtually carbon neutral fuels/energy sources or vastly more efficient use of fossil fuels prior to switching to carbon neutral energy.
- Incentives for private investors to build carbon neutral electric generation and carbon-neutral energy storage as replacements for fossil electric generation.
- Incentives for vastly more efficient energy use of all types in transportation, buildings and industrial processes (or conversely disincentives to “waste energy”).
- Provision of or facilitating the financing of site- and regionally-specific public goods that lead to carbon neutral energy use (electric transmission, electrification of railways, build out of railways, electric vehicle recharging networks).
- Revenue sources for financing public goods and incentive programs that enable a society to cut emissions.
- Incentives for maintaining and increasing carbon sequestration in land use in agriculture, silviculture and in forest preserves.
- Disincentives for (or rules against) the release of sequestered carbon in land, vegetation, and sea.
- Reduce black carbon emissions via introducing emissions controls or alternatives to biomass combustion or other black carbon sources.
- Develop, identify and institute standards for lower- and zero-emissions technologies and processes.
- Generate regional and national plans based on better and best practices to curb emissions
- Fund basic climate and energy research
There is no single policy that does all of these tasks well nor will some policy package address all of them. We see that cap and trade is an attempt to address a number of them with a single instrument, most particularly numbers 1, 3, 5, and 6. As we have indicated cap and trade’s inherent laxness and unclear carbon price signal interfere with 1 and 3 (energy efficiency, fuel switching, and restriction of fossil fuel use). It does offer to join these efforts with 6, which has spurred interest in the developing world. Again there have been difficulties in establishing whether funded carbon sinks/offsets needed the funding and also run into problems with 7, the release of carbon once sequestered. Would development projects need to pay the money back if the forest they are leaving to grow is cut down by them or someone else?
The temptation of policy makers, in their first take on a climate policy to lump a number of concerns together is understandable, especially if climate policy, in relative terms, has been a low priority. However cap and trade has been extremely cumbersome to set up and ineffective or marginally effective in each of these areas with a high probability of continued problems given its long list of inherent flaws. Moving to or at least seriously considering any one of a number of alternatives is advisable given cap and trade’s ability to block other policies and clog governmental channels. Furthermore translating our thinking about climate into its terms limits our ability to imagine other scenarios that will work much better. In every one of these categories there is a more effective instrument than cap and trade, meaning that we of necessity must move to a multiple instrument platform because of cap and trade’s lack of effectiveness as well its (and any instrument’s) lack of comprehensiveness.
I will offer here (in the next part) two main directions, one mainstream and the other “heterodox”, that both will achieve more quickly and easily emissions reductions than cap and trade.
Tags: cap and trade, Carbon Pricing, carbon tax, Climate Policy, Energy Efficiency, Energy Policy, Renewable Energy
I favor some of the more aggressive actions to avert climate catastrophe, actions which nevertheless do not compromise the continuity of human life and well-being. The climate which enabled our evolution as a species and the societies upon which we depend has almost no price attached to it. Averting this calamity, if we can, is the moral equivalent of war. As such it deserves the investment and political priorities that are accorded the military during a war, though the necessary moral and climate-science arguments for this level of investment have not been made clearly by leaders, especially in the US. In our Great Recession, a forward-looking policy to counter climate change would have much needed economic benefits and lay the foundation of the new economy that we are supposed to be building.
Unfortunately, the mental “real estate” of climate activists and politicians has been captured by a monumentally bad idea, a misapplication of an environmental regulatory system that encourages delay and irresponsibility in climate action rather than changing the course of our society’s use of energy and land. Whatever urgency is felt popularly or by leaders, the institutions that will arise from the cap and trade policy framework have a good chance of actually blocking more effective action on climate (more straightforward system of rules, incentives, disincentives, and direct investment), which makes the work of exposing its flaws not simply the matter of my or someone else’s political or economic preferences but one of life and death for future generations and the ecosystems upon which we depend. An unquestioning herd mentality has taken over and encouraged even some of our best social scientific minds, including Nobelist Paul Krugman, to issue statements of support for a policy inspired by an outdated political and economic fashion of which Krugman is himself one of the leading critics.
Somehow a connection is not being made between the monumental collapse of our financial systems over 13 months ago and the design of the twenty-year-old policy instrument to which so much unearned credence has been given. Fundamental to cap and trade is the hand-off of key responsibilities and agency (the ability to act) for cutting carbon emissions to a carbon derivatives trading market, an unnecessary gift to the hyper-caffeinated and overgrown trading sector of finance. Just this week, critics of the Obama Administration’s earlier weaker financial regulatory efforts are now feeling somewhat vindicated in seeing that the Administration is now stepping up its efforts to rein in financial engineering and trading-dominated finance. It is utterly baffling that people who are intelligent enough to design or just understand an over-complicated policy instrument like cap-and-trade have not made the connection between the origins of cap and trade and the vagaries of our financial system. For them, the cap and trade instrument is still wrapped in the mystique of trading-based markets, which outside the climate community have lost much of their appeal.
It is an open secret among people who actually work now in cutting emissions by implementing energy efficiency and renewable energy projects that cap and trade is at best a holding pattern if not a monumental roadblock to pushing ahead with deployment, investment and research in emissions reductions themselves. These voices, generally excluded from the political discussion, contradict the “line” that, for instance, the upcoming legislation from the US Congress centered around cap and trade is a “clean energy jobs bill” and is the very heart of a green economy. While cap and trade is complex, these criticisms come not from a lack of economic or even political understanding but from a realistic appraisal of how actual lower-carbon technology implementation decisions get made, an elementary business process which seems to have escaped study by the policy’s designers. Cap and trade is not too stringent or too effective but not nearly effective enough.
The fundamental problem with cap and trade is that it placates government leaders and activists with manifest good intentions while undermining the effectiveness of the only instruments which could realize those good intentions. Cap and trade inserts a layer of obfuscation and indirection into governments’ ability to make rules, implement programs, build public works, and levy taxes in a fair and transparent manner. On another level, it has a faulty microeconomics, inserting uncertainty about the value of emissions reductions to the businesses that will actually cut emissions via responding to the policy. While working with ineffectual or superficially “P.C.” policy instruments might be acceptable in other matters, in climate policy the massive open-air experiment that has been cap and trade over the past 15 years is an unfolding catastrophe. It is not unlike the Trojan Horse, in that cap and trade appears as a gift, yet gives the vandals or just climate do-nothings command of the citadel. Tragically, the barrage of criticism and invective from the loony political Right or from professional contrarians who have lost a sense of proportion, distracts well-intentioned lawmakers and their supporters from seeing the flaws of their chosen policy.
Cap and Trade in Summary
Briefly, the cap and trade systems under discussion are permit trading systems that attempt to limit emissions of greenhouse gases by allowing polluters to emit greenhouse gases to the amount for which they possess permits. Permits are either given away or auctioned off up to the amount of a society-wide or economic sector-wide “cap” determined by regulators, which is supposed to be “tightened” (meaning reduced) over the years, leading to the decades long equivalent of a game of musical chairs. Regulators, as is planned, will in the future remove “chairs” by reducing the number of permits available to the point where by 2050 there would only be permits for 20% of 1990 greenhouse gas emissions. The “trade” part happens when companies have excess permits, because of having polluted less or owning unneeded permits. They can sell these excess permits for a profit to companies that pollute more than the amount of permits that they own. There have been various attempts to re-brand cap and trade with a name that sounds somewhat less shady, like “market-based cap” etc..
Derived from the speculations of the economists Ronald Coase (1960) and Martin Weitzman (1974), cap and trade, also called emissions trading, was invented in the US in the late 1980’s and early 1990’s during the first Bush Administration as a way to avoid issuing so-called “command-and-control” environmental regulation by government (telling industry exactly what to do and monitoring it) or direct monetary penalties like pollution taxes. The original cap and trade system for acid rain pollution which is still in place in the US, has been declared responsible for reducing by 40% sulfur emissions (SOx) by coal-burning power plants in the period 1990-2004. However, during the same time period, European and Japanese regulators have been markedly more successful using traditional regulations in cutting the emissions of these same pollutants (65%) from power plants, revealing the cap and trade system to be the equivalent of a regulatory stunt: “See! Look Ma…no hands!” In a 2007 review of the results of emissions trading, Gar Lipow has led the way in calling into question the sales pitch for cap and trade.
As an example, the highly coal-dependent, heavily industrial Czech Republic went from in 1990 emitting two times the amount of SOx per capita as the US to in 2004 emitting approximately one-half the amount of SOx per capita as the US (UNECE report page 68). While most post-Communist societies have decreased all types of emissions substantially due de-industrialization, economic hard times, or adoption of modern emissions controls, the Czech Republic had in 2006 twice as much industry as a percentage of GDP and uses as a percentage of total energy supply twice as much coal as the US, revealing the US to be far from a leader in reducing acid rain pollution. Furthermore, the cap and trade system’s success has been aided in America by the accessibility of low-sulfur coal at an equivalent price to coal with higher sulfur content; Wyoming’s Powder River Basin coal deposits have been the “wind beneath the wings” of the US anti-acid rain program such as it is. From the perspective of these results, holding out the SOx regulatory system of the US as the pivotal policy to save the planet stretches credulity.
Cap and Trade and Greenhouse Gases
The road to applying cap and trade to climate change had a number of twists and turns. Before implementing a climate policy, in 1993 the newly-formed Clinton Administration had attempted to institute a BTU energy tax as a means of raising revenue but was rebuffed by Congress. The Administration considered this experience along with its frustrated health care reform effort a major early defeat that shaped later thoughts on policy and political strategy; these fateful events 16 years ago unfortunately have had inordinate effect on US and world climate policy since then.
The Clinton Administration subsequently in the negotiations surrounding the Kyoto treaty to limit greenhouse gas (GHG) emissions favored “flexibility” and helped engineer a consensus in favor of cap and trade and cross-border emissions swaps. While a “wonky” intellectual interest in emissions trading may have played a role, the Clinton Administration also thought that this policy would have domestic political benefits as a means to circumvent a policy that had the “tax” label or appeared to tell industry what exactly to do (direct regulation). Using cap and trade also was an effort to “reach across the aisle” as the first cap and trade system had been implemented under the Presidency of the first George Bush. In other areas of the economy, in tune with economic fashion of the 1980’s and 90’s, the Clinton Administration was as fascinated by markets as its Republican predecessors and, additionally, had a penchant for policy complexity, within which the notion of using a market to regulate other markets seemed almost commonsensical.
In 1998, despite pressing for cap and trade as the international GHG regulating instrument, the Clinton Administration compromised with an intransigent US Congress by not ratifying the Kyoto treaty, insisting that the developing world must be included in the regulation of greenhouse gases. The elaborate political ploy in using cap and trade failed as far as US politics were concerned. Other industrialized nations, most notably Europe and Japan, and the relevant UN bureaucracies continued developing the carbon market and cap and trade concept without direct US involvement during the later Clinton and Bush years. The Protocol went into effect in most industrial countries in 2005 after a lengthy period of negotiation and set-up.
While emissions have been cut in some countries, the experience of the first four years of international carbon regulation via cap and trade have not shown the instrument to be particularly capable of effecting meaningful reductions in carbon emissions. In the European Union Emissions Trading Scheme (EU ETS), affiliated with Kyoto, the effects of the economic downturn or a future upturn are making any evaluation of the effect of cap and trade on emissions a near impossibility. The use of carbon offsets originating in developing countries will further cloud the data. In its initial 3 year period (2005-2007), GHG emissions in the EU ETS went up by 1.9% with wide nation by nation variation ranging from Sweden (-20%) to Finland (+28.5%). Multiple reasons are possible for the wide span between countries and more generally many self-issued excuses are rampant because of the acknowledged complexity of the system; this was a “run-in period” etc. In 2008 there is missing data but it appears that a combination of the economic downturn and high energy prices (not necessarily attributable to a carbon price) led to a fall of GHG emissions of 3% from 2007 in the EU, which the managers of the EU-ETS attributed to the carbon “price signal” generated by the trading scheme. In the same period (2007-2008) without a national GHG cap and trade system, US emissions fell 2.8% for similar reasons, contradicting the claims of EU ETS managers that cap and trade had an effect in 2008. The net contribution of carbon trading to emissions reductions is still, 12 years after Kyoto, indistinguishable from “noise” in the data.
While it is universally agreed that “errors” were made in giving away too many permits in the initial round of Kyoto/EU-ETS, it is a strange repeat of these supposed errors that the now proposed US cap and trade system being debated in Congress will as of this writing also give away most of its permits for about the next decade. Furthermore the use of offsets, the (supposed) emissions cuts by others that are purchased on an international market because they are cheaper than internal investments, has been controversial both in design and in implementation. Whatever one’s view on carbon arbitrage (shopping around for the cheapest reductions around the world), it is universally agreed that offsets reduce pressure on the biggest polluters to take action now in reducing their own emissions. The notion of cap and trade being a system of indulgences for fossil fueled economies is further reinforced by this disturbing propensity of real-existing, as opposed to theoretical-ideal, GHG cap and trade systems to undermine themselves or soften their impact on the biggest sources of emissions.
In Copenhagen in December at COP15, the successor to the Kyoto process (2005-2012) is to be designed and most of the climate community is moving towards a new cap and trade-based treaty that activists hope will be more vigorous than the previous one. Yet the trenchant criticisms of cap and trade systems that emerge from economists, most notably William Nordhaus, and concerned economic actors on the ground are brushed aside by those congregated at these events who seem to feel that their good intentions can substitute for conscientious analysis. For instance, almost every economist, including cap and trade supporter Sir Nicholas Stern, has had to agree at one point or another that carbon taxation is more efficient than the baroque emissions trading systems we have built.
Furthermore, we in the US are put in the difficult position of being a laggard in a process that is based upon our own bad idea, and upon which we really never followed through in its original form. In a way, the Obama Administration is, as it may be doing with its Afghanistan policy, put in the position of fighting the last Democratic President’s war rather than designing a more future-looking policy; having defined the political choice as cap and trade or, as the Republican opposition to Obama would have it, no strong action on climate change, the Democrats and Obama should instead be looking for the way to a more effective climate policy. The cap and trade framework, a product of some tortured political logic from the Bush and Clinton years, has “captured” the discussion, limiting thought and discourse on what are the available instruments to avert this catastrophe.
In its defense, permit trading may be appropriate as a distribution mechanism though not a magical cure-all in certain environmental arenas, most particularly the regulation of fisheries. In many nations now “catch-shares” are allocated to fishers who can trade these shares with other fishers. However, the ultimate success of even this appropriate use is achieved by the government setting limits on the fishing industry, not by yielding to some invisible hand of a fabricated market: the total amount of the permits allowed would need to be determined beforehand with reference to study of the fishery by biologists unaffiliated with industry and fishing limits would need to be enforced by government regulators, albeit according to the number of permits that the fisher owns. The appropriateness of permit trading as a distributional mechanism in this instance is that
- one is trying to calibrate exploitation of a natural resource at a particular level rather than reduce it in one direction (lower is almost always going to be better with GHG emissions for the foreseeable future.
- The permit trading is a just a new layer inside an existing historical market for fish which have an intrinsic positive economic value for people but are not arbitrarily created by people (it’s “inelastic”). Pollution permits are on the other hand entirely an arbitrary creation of government(s), so the determination of a pollution price via the market is similar to playing a game of “guess what’s on my mind.”
- A simple intuitive equation can be made by all fishing market participants between a permit and a tradable object of recognized economic value, i.e. the fish.
All types of permit trading, whether of emissions or other, have provoked ethical controversy with regard to the selling of ownership shares to a public or natural common good. Despite these reservations, in the case of fisheries, fishers already have a longstanding tradition of claiming ownership of what they catch so permit trading represents not much of an innovation in resource ownership in fishing.
Why Cap and Trade is Bad News for Our Climate’s Future
There are a number of fundamental problems with cap and trade systems that are deeply embedded within the policy or its likely implementations, which suggest that working towards alternatives, even if they too are imperfect, is preferable. Remember, we do not have as many shots as we would like to deal with this problem, perhaps only one or one and a half, so a decades-long experiment with third-best policies is a foolish game. As Bill McKibben points out in a recent article, we cannot negotiate with non-human nature, unlike some other areas of policy. So we need to put in policies that are either “right” or that do not install roadblocks that would stand in the way of better solutions.
- Cap and trade puts a newly formed financial derivatives market (the carbon permit market) with all its potential for boom and bust cycles and manipulation by powerful and unaccountable players, in a position to distort the real market for low-carbon technology and land-use changes; the stimulation of this real market is the reason for its existence in the first place. Within the fabricated permit market, the profit-seeking activities of permit traders from the financial markets and industry will be able to exert a substantial amount of unintentional control over the real technology choices and solutions implemented to curb our emission and sequester carbon. These traders, as do all traders, have a vested interest in opacity, price variability, and information asymmetries that would enable them to achieve the highest profit levels for their firms. Permit trading may offer some of the highest returns on investment in a cap and trade-dominated climate action world, so financial players will defend these profit streams with all the considerable means at their disposal. These are the most likely candidates for the “Greek raiding party” in the belly of the Trojan Horse, though climate activists and bureaucrats wedded to cap-and-trade are co-responsible for opening up the “citadel”.
- As trading looks to be one of the more profitable areas of the carbon business but in itself does not cut emissions, the incentives in the policy are misaligned: the most profitable business within a carbon policy framework should be those lines of business that cut the most emissions either through selling new technologies or processes or implementing them. An unfortunate echo of the go-go 90’s in which it was conceived, activity of trading is given a role far beyond any real value it offers. On the level of businesses with real polluting assets, cap and trade will also reward those economic actors who are better permit-buying “game-payers” rather than those companies that invest most in emissions reductions. This type of reward structure has no place in climate policy.
- Non-cap-and-trade policies that determine a fixed price for carbon have the advantage of having as an “output” an acknowledged decision-making tool (a monetary amount) that is already historically integrated into every economic transaction. In permit trading, permit prices are only applicable to large economic actors and have only a “reflected” (and variable) monetary price after the net costs of the cap and trade outcome for that economic actor have been integrated into the pricing of their goods and services.
- A variable, uncertain carbon price that arises from market fluctuations and artifacts of the permit auctioning and trading system is not a clear, easily quantifiable incentive for firms and other real economic actors to make the long-term investments in capital equipment required to cut carbon emissions. A predictable carbon price (in the form of a tax or fee) over the long-term, albeit steeply increasing, would provide a much better incentive to make long-term investments that pay off over years. The “net present value” calculations that are the bedrock of investment decision-making depend on the projection of costs and benefits out into the future, which is nearly impossible using the rapid fluctuations and uncertainties of a carbon market.
- The salespeople of cap-and-trade claim falsely that the system gives policymakers “certainty” in terms of the amount emitted as compared to a price instrument like a tax/fee. As the study of existing cap and trade systems shows this certainty is illusory and gives leaders a false sense of security. To get this type of certainty in a cap and trade system, regulators would have to engage in some very harsh and disruptive administrative actions, like shutting down a power plant during the last 3 months of a year if its owners ran out of permits. Alternatively, the owners of the power plant could “borrow” permits from the next year’s allotment, only to create a direr threat for the next year, but the cap for the current year would have been broken. Again this is punishing players for not playing the permit “game” as smartly as others though not necessarily being the gravest offenders in terms of carbon-inefficiency or overall emissions.
- Buying permits from other firms at a higher cost will impose an undue burden on companies or organizations that need to scale up their operations and increase their emissions in the middle of a year in response to an increased demand for their products. A carbon tax will have no such punitive effects for unplanned growth as its cost will remain constant throughout the year and per unit produced.
- The carbon market does not differentiate between upstream and downstream emissions mitigation. “Upstream” means at the source of emissions, while “downstream” means either increasing efficiency of carbon-emitting energy use or absorbing emissions via land use changes. The efforts to make carbon emissions reductions appear as cheap as possible have tended to emphasize downstream solutions or projects in developing countries. However ultimately the main solution to slowing global warming is to eliminate emissions upstream which is currently more expensive, though downstream mitigation is always going to be necessary as well. A carbon policy that addresses upstream emissions immediately is preferable to one that waves a hand of resignation at business as usual in power generation and transport fuels because of initial cost issues.
- Cap and trade, because of its complexity, indirection and somewhat mystical faith in markets, has become the lingua franca of the climate action community and in so doing has shut down that community’s ability to critically examine the instrument itself or alternative, more effective instruments. The collective mental bandwidth that this instrument occupies has helped it to “suck in” many of the good intentions and attentions of politicians and activists, drawing their efforts away from other measures.
- Cap and trade obscures the vital role of government leadership, responsibility, regulation and direct investment from the public, the climate action community, and the leaders of government themselves. The successes of cap and trade systems such as they are, depend on either external factors independent of policy (economic downturns, low-sulfur coal deposits) or governmental actors setting stringent targets, operating the permit auction and trading system, and enforcing emissions goals. Yet, cap and trade’s sponsors and advocates continue to promote the fallacy that government is only playing an indirect role in its workings, as if this were a strength of the program. According to most of the expectations that have developed about government over the past millennium or so, there’s nothing wrong with governments taking a leading role in averting one of the greatest calamities we have ever faced. Government is the only institution that can represent and press for the realization of our society’s intention to save itself and the climate via implementation of low-carbon technologies and abstaining as a society from using up fossil fuels all at once. Attempts to hide the role of government paradoxically reinforce the position of advocates of a smaller government who can then point to the attempt soft-pedal as supporting evidence for their claims that government, especially “Big Government”, is “bad”. An honest assumption of responsibility by government would enable clearer, more transparent and more decisive policy moves and educational efforts about the dangers and opportunities for taking a sustainable path to economic development associated with climate change
- Instituting a cap and trade system because we, pro forma, must put a policy called a climate policy in place now or by December’s Copenhagen climate conference is worse than delaying a few months or a year to put in a better policy once our leaders have examined the alternatives with a more complete understanding of where they are going. The cap and trade systems now and soon to be developed already create considerable institutional and bureaucratic inertia and their own set of interest groups which are not so much incentivized to cut carbon emissions but to manage and justify the cumbersome system.
Any policy will have its strengths and weaknesses but cap and trade creates an economic, social scientific and political lattice-work at a distance from or interfering with the actual climate tasks ahead of us while blocking the way to better climate policy.
[In part 2 I will highlight what I think is the “fundamental challenge” of climate and energy politics and policy, look at the generic tasks that climate and energy policy is supposed to accomplish and suggest alternate route(s) that are more practical and will be infinitely more effective than cap and trade]