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

Posted by Michael Hoexter in Climate Policy, Energy Policy, Green Transport, Sustainable Thinking.
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(Photo: Thomas Faivre-Duboz/Wikimedia Commons)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Eight hurdles: Too Many?

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

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

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

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

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

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


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

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

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


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

Please read and comment!


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

Posted by Michael Hoexter in Energy Policy, Sustainable Thinking.
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In the first part of this post, I outlined how the components of cap and trade don’t work together to cut emissions.

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

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

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

Climate Ethics Is Not Optional

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

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

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

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

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

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

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

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

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

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

Cap and Trade’s Ethical Trap

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

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

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

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

The Pricing of Carbon as an Ethical Enterprise

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

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

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

Recognition and Respect for Carbon Investment Stakeholders

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Posted by Michael Hoexter in Efficiency/Conservation, Energy Policy, Green Building, Green Transport, Renewable Energy, Sustainable Thinking, Uncategorized.
Tags: , , , , ,

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”


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

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

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

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

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

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

True Belief in Markets vs. a Baroque Policy Mess

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


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

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

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


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

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

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

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

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

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

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

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

The Fundamental Challenge of Climate Policy

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

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

Climate policy has the unenviable task of

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

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


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

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

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

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

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

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

The Basic Elements of Climate and Energy Policy

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

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

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

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

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

The Concept of Sustainability: Internal Diversity and Points of Conflict October 10, 2006

Posted by Michael Hoexter in Sustainable Thinking.
Tags: , ,

Sustainability has become one of the virtues with which almost every intelligent person and organization wants to associate themselves. The notion of ecological balance or ecology was superseded by “sustainability” largely through the work of the UN’s Brundtland Commission, whose report on sustainable development called “Our Common Future” was published in 1987. Sustainable development was summarized as:

…development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

Though a very elegant formulation, we are still trying to figure out what this would entail as applied to our very complex societies and economies. Scientific advances in both how we measure our predicament and how we can solve it make a continual process of clarification and revision necessary in coming up with a relevant sustainability concept or set of concepts.

As the concept of sustainability has gained currency, moving from the realm of political idealism and academia to that of economic and political reality, how the concept manifests itself has also become more diverse and different aspects of sustainability has emerged. The operationalization (deriving practical level measures and recommendations) of the concept means necessarily becoming more specific and breaking down the enormous task of creating a sustainable society into roles for individuals and organizations. These differing points of emphasis within sustainability often overlap and can often work together harmoniously but there are also points of dispute and tension. Here below are my takes on what are the major salient aspects of sustainability as a concept. Individuals and groups will of necessity gravitate towards a subset of these tendencies depending on their own interests and motivations.

  1. Balanced exchange between humanity and nature – focus on equilibrating energy and matter flowing between human society and non-human/pre-human ecosystems. The ideal state would be a “fair” or balanced exchange between humans and non-human nature.
  2. (Holistic) Systems Thinking – Ecology developed as a science that studied feedback loops and cycles in nature, in particular through study of the ecosystem concept. Ecology emerged as political issue when authors like Rachel Carson started to notice the “feedback” of our activity on non-human nature. Subsequent developments in scientific modeling have discovered further complexity and non-linearity in natural and artificial systems in what has become “complex systems theory” or so-called “chaos theory”.
  3. Long Time Horizon/Responsibility to the Future – Extends time horizon beyond the current generation to future generations. Effects investing and consumption behavior.
  4. Efficiency/Conservation – Conservation of natural resources and the three R’s – reduce, recycle, reuse are all about doing more with less. Efficiency is the most accessible aspect of sustainability for many modern corporations and governments.
  5. Fairness/Equity – Sustainability has become to signify an aspect of we would think of as a “good society” and inherits conceptions of what comprises a good society. There are wide variations between people on what is a fair and equitable, variations that will inform future disputes about what is sustainable or can be linked to sustainability.
  6. Biomimicry and Biophilia – Sustainability and the ecology movement that inspired it are based on theories about how biological systems do and should operate. Some study biological systems for clues about how we might create our own artificial systems while others seek to connect to and raise the value of biological systems and their non-human representatives.
  7. Linking and Re-Valuing the Local and the Global – Sustainability as a concept emerged in an era when the most powerful political entities have been national governments and transnational corporations. Advocates of sustainability push into the forefront what has been left out of consideration by “traditional” late 20th century thinking within the public and private sectors which focused on a mid-level of abstraction between local and global.

On any given occasion or in any given organization or individual, not all of these aspects of sustainability are given equal time or emphasis. I would venture that there are three main tendencies which are now exhibited when sustainability is discussed.

Operational Starting Point #1: Economic sustainability

This definition of the word has come to be applied to a firm or organization in isolation: can the organization continue to survive in the current economic system? Does income exceed expense? Without economic sustainability any firm is not going to last unless it is massively subsidized by a larger or richer entity. This simple economic definition is important for long term sustainability of a green or sustainable capitalism but is in and of itself more a part of conventional accounting and corporate finance.

As we have learned, a firm or economic entity (could be a government, town, etc.) can sustain itself at the cost of the local or global ecosystem by enjoying various economic and ecological subsidies. Whether this can continue is based on the ratio of subsidizing to recipient economic entities. The more eco-system unbalancing entities that there are the less sustainable the whole society can be. The only aspect of sustainability compatible with this operational definition is [ Efficiency/Conservation – terraverde].

Operational Starting Point #2: Ecological Sustainability

This definition is the heart of sustainability in the strict sense: does an organization or social entity of some description have a balanced relationship with the surround eco-systems and social systems? If there is an imbalance does it contribute to the social ecological services (sanitation services, reforestation/preservation etc.) in sufficient amounts that help it overall to have a net zero balance or even a restorative effect on the natural ecosystems on which it depends?

How one arrives at the accounting of a “net zero balance” and of “social ecological services” is something that would need to be worked out for a wide variety of organizations and industries. A complex combination of energy and matter flows through all human organizations for which there has been no consensual scheme to define, evaluate and count emissions, products, and consumption.

Other important points to operationalize within ecological sustainability include what constitutes a “long-term” time horizon, long enough to be sustainable? Do sustainable solutions necessarily mimic biological processes? Must we like or love biological processes more to become sustainable? Are local solutions always better than regional, national or international solutions?

It is easier to start with certain key, “make or break” issues like greenhouse gas emissions and the concept of “carbon neutrality” is the closest thing we have to a potentially accountable goal for sustainability. Still the drawing of boundaries around an organization and its sphere of influence will most probably be an area of contention. Is an organization carbon neutral if its supply chain is not? Are carbon emissions being displaced outside the firm? These are all questions that will need to be answered and for which there will be multiple answers.

Within simple ecological sustainability there are no specifications for how relationships between people will be organized. A sustainable society could be very hierarchical, even dictatorial or highly stratified with a class of scavengers who provide “social ecological services” as already occurs in some urban settings in the US and in garbage heap dwellers in developing countries. Robert Costanza, the ecological economist has outlined three potential social arrangements that could yield an sustainable outcome which he calls Ecotopia (resource constraints, social just, moderate government intervention), Big Government (central control of resources in a condition of scarcity), and Star Trek (technological innovation and resource abundance).

Operational Starting Point #3: Ethical Sustainability

Ethics concerns how people should act and most ethical rules have focused upon relationships between people, though ethics with regard to the treatment of natural systems are also possible and desirable. Ethics is a rule based approach to human conduct and can be as minimal or as demanding a set of rules as can be constructed. Ethical usually refers to our “highest and best” set of rules which means a more demanding standard of conduct than the law requires.

Once could have a set of strictly environmental ethics but in common usage “ethical” investment and consumption includes also how people treat other people. It is this wider notion of ethics as encompassing both the relationships between people and the relationships between people and the environment that I am referring to in the notion of ethical sustainability. Ethical sustainability draws heavily from Aspect #5 above (Fairness/Equity).

There are however conflicts about how large a set of ethics one needs to have a good society and the range of applicability of ethical standards. Among the sets of ethics that people do not agree upon are disputes about how much of a role government has in the economy whether or not one considers issues of sustainability. In addition there are other ethical disputes about the role of government in regulating social life as well as disputes on what are “good” social relationships.

While I have outlined some of the fault lines within ethical sustainability, there are obviously substantial rewards in espousing ethical responsibility. Sustainability is about claiming leadership and ethics are part of the cultural high ground that leaders must occupy (or at least appear to occupy). Ethics are the short form of the wisdom of a society and sustainability being the latest addition to our cultural wisdom would naturally be joined with other ethical rules.

Instead of a Conclusion

Sustainability is a diverse concept with many constituencies and many tendencies. As you can see above, there is something like a smorgasbord of different organizing principles within the conceptual framework of sustainability from which individuals and organizations can choose.

Operationalizing sustainability means pursuing a combination of these paths to get down to practical, operations level concepts that can be measured yet remain related to the conceptual, holistic framework from which they were derived. The closest to a widely accepted partial operationalization of sustainability is “tons of carbon avoided” which is in itself insufficient and, in my opinion, needs further focusing. Nevertheless, more measures like these need to be formulated to create a fuller picture of what sustainability will mean in a more detailed way.

Biofuels: A Long Detour on the Road to Sustainability? September 26, 2006

Posted by Michael Hoexter in Green Activism, Green Transport, Renewable Energy, Sustainable Thinking.
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I have watched the development of the biofuels debate from something of a remove but also with a generally positive, well-wishing attitude towards the use of renewable biofuels to substitute for the use of fossil fuel energy. What is not to like about a solution to our energy woes that involves helping farmers and growing green plants?

There are however signs that we may very well be setting ourselves up for the type of marketing whiplash that I discussed in relationship to hydrogen. In fact, biofuels, even more than hydrogen, may become an incredibly divisive issue with very large unintended consequences if eco-standards and ethical standards for their cultivation are not set up by international bodies. Let me back up a little and then explain what has changed my thinking recently about biofuels.

Let me first distinguish between what I will call “unproductive” and “productive” biofuels. Late last year and earlier this year, there was a debate about the energy balance of corn-based ethanol between a group of scientists around Daniel Kammen of the University of California at Berkeley and a group around David Pimentel and Tad Patzek, also of Berkeley. There was and is a difference of opinion between these two groups about whether corn actually yields net energy after the energy inputs are balanced against the energy output. Whatever the differences between the groups, there was agreement that corn-based ethanol is a not particularly productive biofuel, only yielding, most optimistically 25% more energy than was put in. By contrast, other ethanol sources, most notably sugar cane in the tropics, yield a much higher energy yield. Butanol and longer-chain alcohols are also thought to be better biofuels due to a higher energy content than ethanol the second shortest alcohol molecule (2 carbons).

In the area of biodiesel there are similar contrasts though in general the energy balances are even greater, as biodiesel is made from plant oils. Growing oil palms in tropical locations can yield 6 to 8 (600 to 800% yields) times as much energy as was put into the growth of the trees. Lesser balances are found with canola/rapeseed and soybean cultivation in temperate and northern climates.

Furthermore, on the horizon there are two different technologies that will potentially raise the productivity of biofuel production further: bio-alcohols from the cellulose(wood and stalks) portions of plants and biodiesel/bioalcohols from fast growing algae in manmade ponds. Neither of these have yet been put into production nor have there been working prototypes produced. Using landfill and sanitation waste to produce biofuels has been discussed but not yet fully made operational.

So, for arguments sake, earlier in 2006, there were, in my view at least, the establishment of two different types of biofuel production: “productive” biofuels that generate at least around 90% more energy than what is put into their making and “unproductive” biofuels that yield only slightly more if not any more energy than what is put into their making (i.e. simply transform petroleum energy into bio-compound energy which is then burned).

Corn ethanol is unfortunately one of the “unproductive” biofuels and has functioned as another agricultural subsidy for ecologically (and nutritionally) unsound agricultural practicies. This has in part been borne out by the performance of ethanol stocks in the stock market: they are now on the rocks…in part a reflection on the many problems with ethanol production and distribution. However the other biofuels seem(ed) at least more promising.

The investment rush into biofuels has not stopped though, for what in all probability is a combination of reasons. Billionaire George Soros, who has done great philanthropic work with his millions, has recently invested $300 million in Argentine biofuel plantations. Bill Gates and Sun co-founder Vinod Khosla both invested in ethanol. It seems as though biofuels have captured the attention of some of the business and philanthropic leaders of our time.

There is now a confluence of factors that look like the takeoff of the sustainable energy industry. Multimillionaires and billionaires, farmers and environmentalists all seem to be working on the same side, motivated by a combination of business savvy (at least with regard to the long haul expectations of higher biofuel productivity and higher petroleum prices), enlightenment and environmental concern.

But wait… a rising storm of criticism is raining down on the biofuel movement from a wide variety of unexpected quarters including environmentalists. While the interesting but always somewhat jaded sounding Tad Patzek has always been a biofuel sceptic, Lester Brown, one of the biggest-picture thinkers in the US environmental movement, recently has issued a word of warning about biofuel production with the observation that one year’s supply of food for a person can fill an 25-gallon SUV’s tank with ethanol. In his December 2005 column “Worse than Fossil Fuel”, George Monbiot, a columnist for the London Guardian, has painted a still more alarming picture that is echoed by a number of prominent British environmentalists that a confluence of factors now exists that will make biofuels seem like one of the worst ideas ever:

  1. Continuing high demand for liquid fuel by wealthy people with huge energy requirements (to drive large metal cars, SUVs and planes)
  2. Higher prices can now be paid by these people for biofuel crops than for food crops
  3. Highest productivity in biofuel production to be found in the economically poorer tropics (sugar cane and palm plantations)
  4. Oil palm and sugar cane plantations (really any cultivated landscape) have a lower carbon content than tropical forest eco-systems.
  5. Leading to a net carbon release when these areas are first planted and rain forest is destroyed
  6. Farmers both rich and poor have an incentive to produce biofuels and not produce food, which will become still more expensive, priced out of the range of large portion of the population of poorer countries.
  7. Investors still can enjoy the sheen of virtue accorded to biofuels

This seems like a perfect trap for well-intentioned biofuel advocates or maybe the alarm is just misplaced discontent from people unused to finding things that are actually working in this world. But which is it?

I am an optimist when it comes to windmills and solar panels but biofuels unfortunately seem to be very much the trap that these gentlemen outline. They will never be as productive per unit land as windmills or solar panels which are 30 times more energy dense than typical energy crops currently. More intensely productive energy crops may exhaust the soil. Biofuel production, where it is most productive will release more carbon into the atmosphere and make food more expensive.

Biofuels in and of themselves are not wrong and are potential special use energy sources. But there should be very strong international mandates, almost biblical in nature about where and how to produce biofuels. The book of Leviticus, the book of ancient Hebrew rules for living, was written a long time ago, but it might have mandated if written more recently “Thou shalt not pour the fruit of the land into thy SUV. Thou shalt use only the turn of the windmill or the product of the photovoltaic array to fuel sustainable conveyances”.

Here is my proposal for sustainable biofuel production, perhaps the outline for an eco-certification.

  1. Biofuel production must occur on lands that are unsuitable for or not traditionally used for food cultivation
  2. Biofuel production must not impinge upon or become the incentive for destruction of higher biomass ecosystems like forests.
  3. Biofuel production is to be encouraged if it utilizes wastes that pollute or those wastes that are not useful to return fertility to the soil
  4. Biofuel production is to be encouraged with native species that do not require inputs and do not drain the soil of nutrients.

What do you think? A set of rules like these would allow the benefits of biofuels, the hype so to speak, to be realized. Otherwise, there one has a fuzzy environmentalism and a fuzzy but very dangerous business that does not deliver on its promises.