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

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

3. Climate Keynesianism:  Already at Work Cutting Emissions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Is Climate Keynesianism Quietly Doing the Heavy Lifting?

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

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

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

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

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

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

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

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

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

Creating a Context for Carbon Pricing

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

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