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Cap and Trade Derails Climate Ethics, the Motive Force of Carbon Mitigation – Part 1 November 18, 2009

Posted by Michael Hoexter in Efficiency/Conservation, Energy Policy, Green Transport, Renewable Energy.
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In this 3-part post, I will outline how cap and trade’s composite structure contains within it fault lines that help defeat its and the climate action community’s goals.  In this first part, I will sketch out the components of the cap and trade hybrid

Part 1.  A Slow, Ineffective “Monstrous Hybrid” of a Climate and Energy Policy

The record of cap and trade (also called emissions trading) is not impressive despite the bulk of the instrument and its popularity with the current generation of policymakers, some corporate leaders and some activists.  Even before it was applied to carbon dioxide emissions and the global warming problem, cap and trade’s use in the US to cut acid-rain forming emissions has only produced middling results (40% cuts) as compared to cuts elsewhere where traditional “command-and-control” environmental regulation was used (65% cuts).  Furthermore the US acid rain cap and trade system had the benefit of the ready availability of new sources of low sulfur coal in the US as compared to a limited choices in types of coal in most other nations.

In the first 4 years of the implementation of cap and trade as a means to cut greenhouse gases (2005-present), it appears that reductions in emissions, where they have occurred, have been due to, or strongly conditioned by, factors other than participation in cap and trade.  In the first 3 years of the European Union Emissions Trading Scheme or EU-ETS, Sweden for instance cut its emissions by 20% within regulated sectors (9% overall in a country with an already low level of per capita emissions) while neighboring Finland increased emissions by 28% within these sectors.   The managers of the EU-ETS attributed an overall 3% reduction in emissions in 2008 to the EU-ETS’s “price signal” yet the US without a significant cap and trade system nationwide decreased emissions by almost the same amount (2.8%); the role of the massive economic downturn of 2008 would seem to far outweigh the effect of emissions trading.  While most agree now that too many permits were given away or sold too cheaply in the early stages of these cap and trade schemes, there will always be a way to find justifications for failure in such a complex system by pointing to the failures or misalignment of one part or another.  To date, beyond general economic conditions, the actual cutting of emissions as an intentional activity can be attributed to what I am calling below “Climate Keynesianism” rather than as a response to carbon pricing or permit regulation.

Cap and trade systems are not only marginally effective to ineffective but are also hugely cumbersome to implement at a time when we have at most a decade to make serious cuts in our emissions.  It took 7 years after the ratification of the Kyoto treaty (1998) before the cap and trade systems were implemented (2005), which to date, 12 years after the 1997 Kyoto meeting, have not achieved noticeable cuts in emissions. If our political leaders and climate action communities believe that implementing a cap and trade system will be largely responsible for cutting emissions, they and we will soon be in hot water.

I have proposed elsewhere two (1, 2) more effective policy frameworks for cutting greenhouse gas emissions that are based for the most part on more reliable and time-tested methods for implementing technological change and shaping our behavior, which include government energy efficiency and renewable energy programs (Climate Keynesianism), disincentives like taxes or fees, and market incentives.  There is literally no excuse to hang onto the cap and trade instrument given the stakes involved and its unimpressive record of accomplishment.

Primacy, Sunk Costs, and US Political History Outweigh the Facts

The most obvious reason that people who nominally care about the climate’s future cling to cap and trade is that it is the first worldwide regulatory framework.  The “primacy effect” is the observation that we as human beings hold onto the first bits of information that we receive and assign importance to them beyond their actual truth value or relevance.  Many attempts at communication and persuasion use the primacy effect by placing more important information before other information.  Information that comes first often establishes the communicative “frame” or context against which succeeding bits of information are then evaluated.

As the first international carbon mitigation policy, cap and trade has enjoyed the benefit of primacy:  the definition of action on climate change has in the minds of many come to mean instituting a cap and trade system, no other options are considered.  In order to interrupt cap and trade’s primacy effect and arrive at a better solution, we need to circle back to the logical point before one would select ANY climate policy and define what the fundamental tasks of climate policy are in general, keeping in mind our current and emerging set of technological solutions.  I have attempted to do the latter recently here.  Without understanding what climate policy must do independent of any particular policy instrument, we cannot evaluate our current policies nor arrive at new ones.

In addition, cap and trade already has benefited to the detriment of more effective instruments, from sunk costs in that bureaucracies have been erected, labor, time, money, and political capital have been spent in building up the idea of cap and trade as the sole or best climate policy solution.  I am sorry for this effort, some of which is wasted, but this is no reason not to retool or dismantle some of these investments as they have been built on a faulty foundation.  That several thousand mostly well-intentioned people around the world have already invested a good deal of their time within the Kyoto system and affiliates is no reason for them not to turn to a more effective system, learning, as it were, from their experience.  It is a choice between ego and the future of our planet.

Currently in the US, the momentum behind cap and trade-based Congressional bills has the “benefit” of fixation by a large number of environmental organizations and advocates upon cap and trade as the sole instrument.  President Obama, perhaps influenced by the idealized view of markets at the University of Chicago where he taught, gravitated to the cap and trade idea as a solution to global warming.  In these matters, he would have had few alternative sources of information from US environmental groups.  Particularly set on cap and trade is, for instance, the Environmental Defense Fund, whose materials on cap and trade read like a sales prospectus for markets as an institution rather than defense of the environment.  The confusion between celebrating the policy instrument and achieving the policy goal is rampant among those who are trying to “make the sale” of this cumbersome policy behemoth.

The choice of cap and trade as the international regulatory framework for greenhouse gases speaks also to the inordinate influence of the US and internal US politics on the course of events.  Cap and trade was invented in the US as a means to avoid either environmental taxes or direct regulation, in conformance to US political preferences in the immediate post-Reagan era.  As during the 1990’s, the world’s only superpower and still its predominant military power, the US has pressed the world to share its view of the global warming problem and the surrounding politics.  Unfortunately political power and influence does not always yield the most effective policy framework even with substantial backing by that power.

With Kyoto we have the additional complication that the US partially withdrew its support for the framework in midstream, as the US Congress led by the Republican opposition to the then Clinton Administration, refused to ratify the treaty in 1998.  Given its denial of the importance of global warming, there remained no chance that the Bush Administration would press for Kyoto’s instatement.  Among veterans of the Clinton Administration who now surround our current President Obama, some may feel the need to vindicate their political choices and Administration after 8 to 10 years of exile from the international cap and trade process.  The hope seems to be that simply turning up the volume on cap and trade via US participation will admit the US to the circle of climate-virtuous nations and/or transform that process into an effective greenhouse gas regulation regime.

Many key activists and officials have become personally associated with cap and trade so are not as free as others might be to criticize what they have helped institute.  Al Gore, who is genuinely and deeply concerned about the future of the planet, was for a time advocating for a carbon tax though not campaigning against cap and trade.  Since then, with the new Obama Administration gravitating towards the cap and trade instrument, he has said that he is for both cap and trade and a carbon tax.

“Make Only Big Mistakes”

In addition to these more understandable reasons for hanging on to cap and trade, there are also some “sharp practices” involved in selling the instrument to the public and the climate community.  In politics and business there is a school of strategy that is focused on the “sale” to such a degree that long-term value, quality, and effectiveness are sacrificed just to “move product” or “pass the bill”.  One strategy/tactic in the toolbox of people who are focused on the sale above all else is to make only large scale mistakes, which are usually easier to get away with than small errors.  The reasons for this are four-fold:

  1. If you are presenting people with an entire, new (but deeply flawed) self-referential system, you are able to reframe objections to and doubts about it according to the newly presented system rather than to received norms.  This is the benefit of “reframing” a debate and insisting on your framing of it when challenged.
  2. People feel unqualified to criticize something they can barely comprehend that in its design and presentation seems to be the product of wealth, power, and intelligence.
  3. Conversely, a competing more effective framework that is more easily grasped can be dismissed by critics for small errors or points of personal disagreement with what they already know or feel comfortable with.
  4. “The Emperor’s New Clothes”  – pointing out major errors that call into question the competence or reality-basis of others puts critics into the uncomfortable position where some of the negativity you are attributing to the other is cast back upon you.  People will have difficulty believing that upstanding members of a community can singly or as a group be so misleading or misled.

Cap and trade is a very, very big mistake so one can find many, many angles, without trying too hard, to criticize it.  I have too many options in choosing approaches to its deficiencies and I am a person who does not particularly enjoy writing this type of criticism; historically my focus has been on offering solutions.  Unfortunately cap and trade’s self-reinforcing system of assumptions have protected those “inside” the system from seeing what’s wrong.  Furthermore, a number of people including myself have offered alternatives to cap and trade that are readily available and, in many cases, already in practice in some form but these are now not yet recognized or validated as “big picture” climate policy.

The exertion of more moral energy and political power upon the cap and trade instrument, as many climate activists counsel, will not yield substantially better results because the instrument itself is fractured and divided both against itself and against the real intended goals of concerned activists and political leaders.  For one, it actually diffuses or defeats that moral energy rather than concentrating it for better use on the right targets.

Cap and Trade as a Monstrous Hybrid

Cap and trade is, even in climate activists’ “fantasy version” with 100% permit auction, tight caps, and no offsets, a third-best or worse climate policy for a number of reasons.  It is, appropriating the framework of William McDonough, the inventor of “cradle-to-cradle” certification, a “monstrous hybrid” of a policy that is also ineffective (I have no idea what McDonough’s personal view is on this policy and am not pretending to represent it here).  In McDonough’s typology, a “monstrous hybrid” is a material or product that cannot be redesigned, re-used or recycled after its initial life.   An example of a monstrous hybrid is the modern disposable razor or razor cartridges which have metal bonded to plastic and in most circumstances has to be thrown out rather than recycled.

Cap and trade is like physical monstrous hybrids in that it is cumbersome, will install classes of stakeholders that are incentivized only to maintain its systems, and that it will be difficult to adapt it to changing circumstances as McDonough would with a physical product in his cradle-to-cradle process.  Unlike eminently reusable cradle-to-cradle product components it doesn’t “play well with others” tending instead to dominate the policy landscape without concomitant good results to justify its expanding breadth.

I am however expanding McDonough’s usage of the word by adding “ineffective” to “monstrous hybrid”, because the hybridization has not improved the object’s initial usefulness, the whole purpose of creating a hybrid.  One of today’s disposable razor cartridges offer a closer and safer shave than the metal razors of old, for instance, so is highly useful in its first life.  In cap and trade, the hybrid nature of the policy does not help it to do its work.  Its constituent parts are joined together but do not produce results that are an addition of or, better yet, a multiplication of their separate contributions. The “monstrosity” of the cap and trade hybrid is magnified by its poor results to date, comparative disadvantages to other policy frameworks, its unearned hegemony over climate policy thought, and the inconceivably high costs for its failure or ineffectiveness.

Parts of the Hybrid

Cap and trade has four business interfaces, the parts that are supposed to interact with the world and reduce carbon emissions:

  1. a (derived) carbon price,
  2. permit regulation,
  3. a competitive bidding and trading market for permits with accompanying profits and losses
  4. a statement of intent to reduce emissions via the cap

In the real world, besides economic contraction (which also reduces emissions though with unfortunate side-effects), emissions will be reduced when economic actors the world around use energy more efficiently, use clean non-emitting sources of energy, and build up stored carbon in the biosphere through conservation, changes in agricultural and silvicultural techniques.  Here is how the components of cap and trade are supposed to effect these changes:

  1. The carbon price is supposed to be a disincentive to using carbon emitting fuels, an incentive to using fossil energy more efficiently, an incentive for the sequestration of carbon in land use changes and an incentive to switching to non-emitting energy production; as I have documented elsewhere a carbon tax or fee is a far more effective means of representing the cost of carbon to investors and consumers (rather than traders), as the price will be less variable and not be mediated via the gyrations of the carbon permit market.
  2. Permit regulation is the control mechanism of the level of emissions as well as the “mint” of the carbon emissions “currency”.  It is supposed to represent the bulwark of the cap and trade system against dishonest dealing or invalid permits.  In addition, via permit regulation will come the issuance of the ultimate “stop” command via the cap on the total amount of carbon pollution.  Many, many critics of cap and trade or specific implementations of cap and trade have pointed out the severe flaws involved in using carbon offsets (permits/credits from elsewhere) which undermine the validity and honesty of permits, as well as undermine the entire cap and trade system’s effect on polluters in developed countries.  Even if offsets were to be regulated in a satisfactory manner, the enforcement of the ultimate cap by regulators will always be “loose” in that enforcement actions will seem arbitrary relative to emissions intensity and be economically disruptive.  Direct regulation, inclusive of coal moratoria, is a far simpler, more rational, and more forceful means to backstop price regulation and achieve emissions targets.
  3. Cap and trade’s permit trading markets are supposed to create a competitive environment where firms profit by some combination of cutting emissions and clever permit buying and selling.  The profit motive is intended to spur firms to emit less to enable resale of permits.  However, overall, there is a disincentive to overachieve too much in that at some point reselling permits becomes more profitable than further investment in low carbon technology; the policy creates an emissions “set-point” rather than a push towards carbon neutrality.  Furthermore, if emissions are cut in one place, they are allowed in another up to the cap.   In alternative policy frameworks there is no need for an analogue to the permit trading market.
  4. The setting of the cap, a statement of intent, is kind of a “carbon pledge” which may inspire action or at least give off the impression that action is being taken.  The cap is also supposed to function in an international arena as a diplomatic and trading bargaining chip.   As alternatives, there are other means of declaring goals that are paired with more effective instruments, with better track records. The statement of intent is politically seductive as it gives politicians and activists a sense of virtue that distracts them from the flaws of the policy’s 3 other parts, if they are able to discern them.  Also the metaphor of the “cap” has a physicality to it that is betrayed by the policy’s deep flaws.

Dysfunctional Interactions between Cap and Trade’s Components

A “hybrid” is the melding of two or more components into a new synthesis that supposedly is more functional or better than the original components.  In the case of cap and trade, the components actually interfere with each other leading to results that are far less than the sum of its parts.

  1. The regulation of emissions in quantities by permit interferes with the carbon pricing component as well as with the operations of firms in general.  Firms cannot predict exactly how much they will emit and their projections may change during the course of a year.  Furthermore over- or under-buying permits will change the cost of emissions for the firm.  These technicalities distract from investment in emissions reductions or overall decreases in the carbon intensity of production.  The amount of real emissions of any firm will always have a different size of “grain” and timing than that of the permits or their auctioning schedule, imposing additional administrative costs.
  2. The trading and auction markets interfere with the carbon price by introducing variability into the price, making calculations of long-term benefits from cutting emissions extremely difficult.  It is these calculations that lead to investments in low carbon technologies which are the desired outcome of the policy in the first place.  Demand for permits, the ultimate determinant of the price, has at best a tangential relationship with what the carbon price is supposed to measure: the damage or mitigation costs to emit carbon.
  3. As I noted previously in another piece, the carbon price will not act as a signal of coming administrative action if a firm runs out of permits and threatens to violate the cap.  Administrative action will either be endlessly postponed or will come as an arbitrary punishment for failing to buy enough permits with damages to many of the firm’s customers.  For this reason, cap and trade systems have been incredibly lax in the way they distribute permits.
  4. The declaration of the cap as a carbon pledge to mobilize voluntary action to cut emissions interferes with itself in this function and is interfered with by permit regulation and the trading market.  Once someone “overachieves” their permit allocation, it is rational for them to sell their left-over permits, allowing others to pollute more at a price. Permit trading is about establishing an emissions “set point” not pushing emissions down towards zero.

Almost all of this is avoidable if another (set of) policy instruments is chosen.   The design of more effective policies in a rapid and productive manner is not that difficult if we dispense with the cap and trade format.

Denmark Builds the Renewable Electron Economy: NOW on PBS.org Documentary November 15, 2009

Posted by Michael Hoexter in Energy Policy, Green Transport, Renewable Energy.
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A quick “hats off” to David Brancaccio and NOW on PBS for their well-researched and informative documentary on what Denmark is doing to attain energy independence and get off oil by building a version of the Renewable Electron Economy that is suitable for their resource base.

You can view the 23 minute show here:

http://www.pbs.org/now/shows/544/index.html

This installment of NOW does a great job of connecting Denmark’s historical dependence on other countries for energy and their current drive to build renewable energy and electric vehicle infrastructure.  Denmark is one of the first countries/regions to work together with Better Place’s electric vehicle infrastructure.

While the show does a great job in tracing the policy environment which is unusual for a technology focused story, it does miss that Denmark used a feed-in tariff for wind in the 1990′s to jump-start the Danish industry.

Furthermore, I believe this show should be required viewing for all policymakers who will be attending COP15 or who are currently deliberating about climate legislation in the US Congress, because it is an example of how “things actually get done” in the area of emissions cuts.  There is NO MENTION of cap and trade or emissions trading.  The sole request of the CEO of DONG Energy is that out of COP15 that a (preferably high) price on carbon emerges.

Furthermore, the piece shows the people of Denmark moving quite rapidly (relative to the US at least) towards a much more energy efficient and cleaner energy economy over the past 20 years and into the near future by the application of what might called “Energy (and now Climate) Keynesianism”.  It is no mystery that the Western Europeans have taxed petroleum-derived fuels heavily to, among other uses, build and maintain public transportation.  What the NOW piece shows is that Danish tax policy is designed to relieve congestion, reduce oil dependence, and now to support the growth of renewable energy by bringing in more electric vehicles and therefore more energy storage.

While those readers who are convinced that a “carbon price = cap and trade”  or “carbon policy = cap and trade” will not be persuaded or will miss the signs, what the NOW episode shows that a truly conservative in the best senses of the word climate policy is a “Climate (and Energy) Keynesianism” with an international carbon price that is a dollar/euro/yen/renminbi amount.  We know that we can shape energy use and generation activities by tax policy and by incentives for private development of clean energy generators (feed-in tariffs).  As I have been documenting here in my series on Cap and Trade, we have many very good reasons to doubt with its 12 year history of middling results and expansive bureaucracy that the twisted emissions trading policy will be as effective.  Furthermore it is simply a political end run around the obvious “Climate Keynesian” solution, where government’s and business’s roles are differentiated and validated.   Cap and trade will interfere with or obscure the benefits of Climate Keynesianism.

Cap and Trade: A Tangled Web… A Project-Based Alternative – Part 4 November 5, 2009

Posted by Michael Hoexter in Efficiency/Conservation, Energy Policy, Green Transport, Renewable Energy.
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In the first two parts (part 1 and part 2) of this post, I discussed cap and trade as well-intentioned but a fundamental misapplication of the permit trading policy framework.  I also went on to identify 11 basic elements of any climate policy regardless of instrument.  In the third part, I describe a package of mostly familiar policies that integrated together will have a far more profound effect on emissions that the cap and trade system.  In this, the last part, I offer a second alternative to cap and trade which I believe is the most aggressive and secure approach to cutting emissions, though does not exclude elements of the package in part 3.

Project-Based Carbon Mitigation Policy (PCMP):  A Heterodox Climate Policy Framework

I’ve redesigned an approach that is not entirely new but has been sidelined in current high-level climate and energy policy discussions.  I’m calling it Project-Based Carbon Mitigation Policy– PCMP.  Instead of or in addition to starting with an abstraction like a carbon price, PCMP starts with specific large-scale regional, national or global projects that with greater than 95% probability will cut emissions substantially within the next few years; these projects implement technologies and processes that are known to directly replace fossil fuel use, directly reduce demand for fossil fuel or, with some agreed-upon degree of certainty, sequester carbon emissions. A goal and timeline are set for the reductions based on the implementation of that technology or process then PCMP reverse-engineers the economic and social policies that will enable the project to take place in a timely manner.  PCMP does not exclude nor discourage the use of abstractions like price mechanisms and society-wide or global targets but it starts with the security and relative certainty of projects that are technology- and process-based, supervised by some responsible party or regulator, and funded.   PCMP may end up being a route to a set of policies very much like the Comprehensive policy discussed in Part 3.  A PCMP policy approach also openly acknowledges the role of government leadership in achieving carbon emissions reduction goals, an attitude which has been shunned in recent history in the US and elsewhere.

Viewing projects as the fundamental element of policy also allows necessary supporting infrastructure that facilitate many types of emissions reduction to become the object and focus of high-level climate policy.  Build out of the electric grid and electrification of transport are key to a zero emissions industrial/post-industrial society though, due to the variable carbon intensity of electricity production their exact contribution as separate individual projects cannot be quantified.  A combined approach linking low- or zero-carbon electrical generation with electrification of transport would qualify as PCMP projects.

Carbon mitigation projects based on tested technologies and processes are the only assured means of cutting emissions, along with their supporting infrastructure.  Carbon pricing may influence projects to be initiated but the projects themselves are the primary building blocks of policy.  The focus on what might be called “secondary” or tertiary levels of climate policy has, in my observation, interfered with or at least obscured the importance of these primary on-the-ground projects.

The most directive end of the PCMP project spectrum would be a government program, funded by tax revenue, that uses “command-and-control”  to push through a project that is vital to our ultimate survival as a society implemented either by government contractors or via government employees.  On the other end of the spectrum in terms of directiveness are rulings, changes in tax law, and the institution of technology and process standards that will tweak existing market behavior.  A PCMP project will have a target emissions reduction by a certain date; optimistic goals should be shunned in favor of “worst case” scenarios to ensure that goals are met or exceeded.  Incentives should be aligned for the project leaders, whether they be public or private employees, if they achieve or, better, exceed emissions targets.

Many existing government programs in the area of environmental protection already are project-based policies in that an existing technology, set of technologies or process is chosen for implementation but, to date, not taking the next step to target specific carbon emissions reductions.   In the US, we have a number of house weatherization programs including a grant program for low-income homeowners and rebate programs for other homeowners.   To convert these into PCMP programs, one would need to make specific greenhouse gas mitigation goals and a timeline, tuning the policy instruments to achieve these reductions along the stated time line.  However, the notion behind the PCMP concept is that policies that support one or another project may be generalized to a sector-wide or economy-wide policy or have knock-on effects.  National policies or international agreements would be “reverse-engineered” to support key projects as priorities.

Project-based Policy, Infrastructure and Synergies between Technologies

The building of new infrastructure or its supervision, key to carbon mitigation, almost always falls to government, which undertakes the building of infrastructure on a project by project basis.  The emphasis on market solutions to climate change, which focuses on influencing the decision-making of individual market actors ignores the fact that most infrastructure is built by government planning and programs that anticipate rather than respond to economic demand.  One way to understand the sequence of events in  building infrastructure is perhaps best summarized by the line: “build it and they will come”.   Within this Hollywood formulation, what is captured is the ability of physical infrastructure to create or support markets as well as influence behavior beyond the influence of prices and goods for sale.

The carbon price signal, either the clear carbon tax version or the muddied cap and trade variety, will not by itself initiate the building of new infrastructure in a timely manner, especially if we consider the politically likely (low) level of the carbon price in the next few years.  Even if we look to the history of infrastructure for market behavior shaping infrastructure (“Go West, young man” and the US railroads), in the face of catastrophic climate change we are looking at an accelerated implementation of new infrastructure as replacements for serviceable but polluting infrastructure, requiring a pro-active government role that anticipates rather than responds to trends and price signals.

In addition, basing policy on or limiting policy discussion to carbon pricing alone has been a way to say:  “we don’t know what the solutions will be”.  However, besides ignoring the key role of infrastructure, this is, at this point in history, disingenuous and more importantly time-wasting.  As I have pointed out in two posts I wrote over a year ago, we now have about 24 technologies or processes that together could cut carbon emissions by at least 90%.  These technologies and processes ranged from CSP with storage, internetworked wind powerwith hydroelectric storage, transport electrification, afforestation, to even voluntary (partial) veganism.  Eventually much celebrated technologies like building-integrated photovoltaics will also play a major role.  Other, more “traditional” climate policies that may be established more generally like a carbon price may aid the implementation of a PCMP policy but the combination of a carbon price and PCMP projects will achieve emissions reductions most rapidly.  The project-based approach starts with a core of concrete intended outcomes in the way of realized projects but then welcomes and expects follow-on effects both from the realization of these projects and from the facilitating generalized policies like a carbon tax or fee.

Many of the gains associated with the most powerful of the 24 technologies, with a couple exceptions, are based on synergies between different technologies, not the solo implementation of those technologies.  The impact of electric vehicles on total emissions varies a great deal depending on the type of generation that is used in a particular area of the globe.    A carbon price will help urge this process on but will not of itself incentivize the creation of these synergies.

In renewable electricity generation there are some synergies between technologies, for instance between hydroelectric storage and wind power, which would need to be integrated in a planned manner across numbers of jurisdictions.  These synergies between technologies can only be realized rapidly via integrated resource planning with adequate financing.  Grid operators have already engaged in integrated resource planning anyway throughout the over 100 year history of the electric grid.  Linking this planning with carbon mitigation is a step towards the PCMP policy framework.

Prospective PCMP Projects (US)

PCMP Example #1: CSP with Storage

One of the few standalone, scalable renewable energy technologies that can directly replace fossil electricity generation one-for-one is Concentrating Solar Thermal Electric Power (CSP) with thermal energy storage (TES).  With sufficient transmission and judicious siting, CSP with storage could supply almost all the world’s energy using a small percentage of the area of the world’s deserts.   DESERTEC which is a large CSP investment and policy project for Africa, the Middle East, and Europe, could be configured as a PCMP with specific targets for replacing fossil generation.

The example PCMP project below applying CSP with thermal storage provides close to certainty in emissions reductions and can be accelerated with increased funding.  This contrasts dramatically with the lack of control over emissions under carbon pricing alone inclusive of cap and trade with its false “certainty”.  Effective carbon pricing would catalyze this type of development but would not “cause” it as would a targeted program focused on implementation of the technology.

CSP with TES – American Southwest/West of Mississippi

Region: 6 US States (California, Arizona, Nevada, Utah, New Mexico, Texas) – Replace Energy Production in 19 Western US States.

Emissions Reductions Source: Replace fossil electricity production by specified gas and coal power plants by 241 million MWh/annum by 2020 in the WECC, SPP, MRO and ERCOT grids (50% natural gas/50% coal) without addition of new fossil generation. By 2030 replace 1200 million MWh/annum fossil generation in NERC.

Technology: Concentrating Solar Thermal Electric Power with Storage (Capacity factors from 35% to 70%)  - 50GW installed by 2020, 250 GW installed by 2030 – mean capacity factor >50%.  Formation of CSP industrial base to replace fossil generation.

Target CO2 Emissions reductions from 2007 baseline: 181 million metric tonnes C02/annum by 2020, 905 million metric tonnes CO2/annum by 2030.

Finance mechanisms: guaranteed $.10/kWh rates (inflation adjusted) for 20 years for electricity sales plus $(2 + capacity factor/.25)/W (2010-2013), $(0.5 + capacity factor/.25)/W (2014-2017), $(capacity factor/.50)/W (2018-2020) innovation grant funded through carbon tax/fee (adjusted for the effect of the 30% Investment Tax Credit).  Favorable tax treatment for mothballing and early retirement of fossil generation.

Project Team: US DOE responsible leading industry stakeholder committee (US EPA, Fish and Wildlife, plant developers, utilities, grid operators, state and local political leaders, environmental advocates).

Supporting national and international policies:

  1. Carbon tax/fee facilitates implementation.
  2. Infrastructure: Renewable energy “smart”/supergrid
  3. Guaranteed Rates for Renewable Energy
  4. Contracting with Stakeholders for Greenhouse Gas Reduction Targets
  5. Special Master to Determine Compensation for Retired or Semi-retired Fossil Power Plants
PCMP Example #2:  Combined Renewable Energy Power Plants

A combined renewable power plant connects a diverse set of renewable generators that together produce electricity according to the demands of grid operators and ultimately grid users.  More complex than CSP with storage, this technology is still emerging though simply a matter of organizing existing technologies via smart, renewable-energy oriented transmission network.

Combined Renewable Power Plants – US

Region: All US States (can be generalized to almost any region of the world)

Emissions Reductions Source: Replace fossil electricity production by specified gas and coal power plants by 241 million MWh/annum by 2025 in NERC grids (50% natural gas/50% coal) without addition of new fossil generation. By 2035 replacing 1200 million MWh/annum in NERC.

Technologies: Wind, Solar (CSP, PV), HydroelectricGeothermal, Marine/Wave Energy, Biomass, internetworked generators to load centers, “smart” grid management technologies.

Target CO2 Emissions reductions from 2007 baseline: 181 million metric tonnes C02 by 2025, 905 million metric tonnes CO2 by 2035.

Finance Mechanisms: Bundled wholesale feed-in-tariffs with performance bonuses based on load-responsiveness of combined renewable power plants.  Amount of tariffs as yet undetermined and would vary with renewable resource intensity.

Project Team: US DOE responsible leading industry stakeholder committee (US EPA, Fish and Wildlife, plant developers, utilities, grid operators, state and local political leaders, environmental advocates).

Supporting National and International Policies:

  1. Carbon tax/fee facilitates implementation.
  2. Infrastructure: Renewable energy “smart”/supergrid
  3. Guaranteed rates for renewable energy/feed-in tariffs
  4. Contracting with stakeholders for GHG reduction targets
  5. Special master to determine compensation for retired or semi-retired fossil power plants
PCMP Example #3:  Home Weatherization

The US Department of Energy has a goal of weatherizing over 1 million homes as part of the 2009 American Recovery and Reinvestment Act, a.k.a. the 2009 stimulus package.   This investment of $8 billion dollars is divided between $5 billion for grants via the states to weatherize homes of low-income homeowners and $3 billion dollars for rebates to other homeowners for weatherization upgrades to homes.  The low-income grant program will limit grants to $6500 worth of work per home.

A review of the standard weatherization packages in 2002, indicates that the full package that would cost in the area of $5000-$6500 could cut from up to 7.5 metric tonnes of carbon emissions per year per house in high emissions/high heating demand areas like the Midwest, in particularly inefficient houses.  In areas with lesser heating and cooling demands,  like the Western US, the savings would be maximally 2 tonnes for an inefficient older, small single-family dwelling but the price tag would only be in the order of $2500/home.

However looking at the components of these packages there are certain measures that have much higher carbon reduction return on investment than others, most notably air sealing, programmable thermostat installation, water heater resets, low flow shower heads, and compact fluorescent lighting.  An additional reduced package of these high impact measures would cost from $1000 to $1500 per home leading to emissions reductions of about 2 metric tonnes on average, to as many as 3.4 metric tonnes.  It is possible to design then a “rapid” first-pass program of reducing emissions that would triple or quadruple the number of homes visited per unit expenditure.  Later, a second program could revisit these homes to address the remaining issues like inefficient refrigerators, furnaces, insulation and water heaters that have substantial returns in reducing carbon but are more expensive.

In a few years time, we may have better measures based on among other things passive house technology, which may enable “deep energy retrofits” of existing houses that enable greater energy and emissions cuts with similar or lesser investment.  In these cases, PCMP projects such as this one can revise their targets upwards.

Accelerated Home Weatherization Program with Carbon Targets

Region: All US States (start with high heating/high cooling areas)

Emissions Reductions Source: Reduce domestic combustion of fuel oil, natural gas, reduce domestic demand for electricity, especially at baseload.

Technologies: Building envelope air sealing technologies, insulation, high efficiency fluorescent lamps, refrigerators, water heaters, furnaces, programmable thermostats.

Target CO2 Emissions reductions from 2007 baseline: 60 million metric tonnes by 2020 from 30 million homes, 120 million metric tonnes by 2030 from 60 million homes.

Finance Mechanisms: Tax revenues fund low-income homeowner/renter grants (up to $6500 per home) and consumer rebates for energy efficiency upgrades.

Project Team: US DOE and state weatherization programs, utility officials.

Supporting National and International Policies:

  1. Carbon tax/fee funds and facilitates implementation.
  2. Contracting with stakeholders for greenhouse gas reduction targets
  3. Decoupling investor-owned utility income from energy sales
  4. National and state mandates for energy efficiency
  5. Green building and energy efficiency certifications/standards

A PCMP project once it is approved, organized and financed can move immediately to the generation of detailed design, operational plans and the begin of construction or implementation. The reverse engineering portion comes in figuring out how to get to the point where the technologies or processes can be implemented.  The key difference between a PCMP (aided perhaps by other policies) and a policy that essentially remains entirely agnostic about solutions is that a PCMP adds a stated intention and tasks a skilled project team to achieve a concrete material change in the processes that generate greenhouse gases.  Then policy is built partially around that intention and the project team that is tasked with realizing that intention.

The PCMP approach is I believe the most aggressive and gives those who will be ultimately held responsible for protecting the climate, the world’s governments, maximal ability to accelerate efforts if needed.  To achieve the very ambitious 350 ppm goal and follow  the “Emergency Pathway”, the PCMP approach would have the best chance.

Good Intentions Alone No Longer Suffice

Cap and trade has been a convenient mechanism for politicians to avoid fundamental but necessary conflicts while giving themselves and others the impression that they are “doing something” about climate change.  As the first international climate policy, it has attracted a community of people that have seen it as the sole alternative to inaction, therefore undeservedly has become a magnet for the good intentions of both the uninformed and the somewhat-better informed.  The “cap” is a reassuring physical metaphor that suggests a level of control over emissions which, as I have demonstrated, the policy itself undermines.  As cap and trade appears to address 5 of the 11 domains of climate policy, it is seductive for politicians to try to set up a “one stop shop” as a means to address the climate and energy problem.

However, there are much better policy frameworks out there of which I have shown two examples.  Cap and trade’s fatal ability to insulate the ultimate decision-makers from the process of pushing for emissions cuts on the ground can be avoided in a number of ways.  Above, I demonstrated a project-based policy framework that I called PCMP, which builds policy from the ground up and puts at the center the key role of developing zero-carbon infrastructure in addition to price-based instruments that influence investment and behavior.  Or, in part 3, I showed how  it is possible to implement a nine-part composite of simpler but synergistic policies that is more flexible, will be more effective, and ultimately more comprehensible to the public at large than cap and trade.  Crucially this set of policies does not give away or obfuscate governments’ responsibility to protect society and the environment.

The cap and trade policy is a twisted remnant of a political era in which government was supposed to pretend that it wasn’t really government.  It has fooled no one except some of its supporters.  Government must be decisively and centrally involved in the implementation of carbon policy and there must be a rapid re-discovery of the value of good government in leading society through difficult times.  Furthermore cap and trade as an instrument contains within it an open invitation for corruption and “capture” by powerful financial interests with few incentives to make concrete investments in the energy or land-use future.  Any effective climate policy must establish clear guidelines and openly acknowledge government’s supervisory role in the transition to a new energy economy.  I wish there were more shades of grey in this regard, but there aren’t.

No set of policies is, however, a magic bullet if there is not strong popular support for decisive action on climate and popular acknowledgement of the necessity for government’s leadership role.  As it currently stands in the United States, the public still is woefully misinformed about climate, with for instance, a prominent pair of columnists for the New York Times perpetuating “global cooling” myths in their latest book.  Against this background, climate policy appears to be a partisan affair rather than actions of the human community as broadly defined as possible that are based on our best science.  If cap and trade is presented as the only alternative, this further undermines the cause of climate action and government responsibility because of the fundamental flaws in the policy.  The equation of cap and trade with good intentions on climate action must be irrevocably broken.

Ultimately, political leaders must campaign with passion for the future of our planet and our societies, with empathy for the economically downtrodden and dispirited, informing the public about the alternatives available to minimize the impact of our two century fossil fuel bacchanal.  Within the context of a better informed citizenry, only then can an effective climate and energy policy truly take effect, though the time to start on both campaigns is now.

Cap and Trade: The Tangled Web… A More Effective Alternative – Part 3 November 5, 2009

Posted by Michael Hoexter in Efficiency/Conservation, Energy Policy, Green Building, Green Transport, Sustainable Thinking.
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In Part 1, I offered a critique of cap and trade in its existing implementations  and located key flaws which make it highly unlikely that it will achieve its emissions reduction goals, even if somehow it is strengthened.   In part 2, I highlighted two problematic aspects of cap and trade and then went on to examine what are the fundamental challenges of climate policy.  Then I offered a list of the general features of any effective climate policy.

Turning to positive solutions rather than criticsms, I will offer here two main options, the first one mainstream and the second heterodox and project-based;   both of which are easily configured for quicker and more certain emissions reductions than via cap and trade.

Comprehensive Climate and Energy Policy Package with Carbon Tax/Fee

Climate policy has emerged with a focus on markets and changing market behavior (ignoring infrastructure development to a large degree), so the “mainstream” approach below would also transparently give responsible parties control over the process.  While the “one-stop shop” aspect of cap and trade overextends this already misapplied policy, a package of interacting measures that are, with fairly straightforward calibrations, guaranteed to cut emissions quickly can easily be put together.  The below policy package avoids handing off climate and energy policy to an unaccountable carbon market and invite undue influence by financial traders. It also has the potential to be much more effective than a cap and trade centered policies.  On the other hand it is “market-based” in that it relies on the more accurate carbon tax/fee price signal to shape market behavior rather than cap and trade’s muddy signal.

1)      Emissions-Reduction Path with Targets:  Set an emissions-reduction path with target goal posts (2015, 2020, 2025, etc.):  Not the reassuring “cap” metaphor but an analog to the cap without the false reassurances that it contains.  The target or path could be expressed in terms of an average carbon-intensity for economic activity that yields the same path.  Using a carbon-intensity target allows adjustments to be made so efforts to cut emissions do not shut down industries before they are able to transition to lower carbon alternatives.  I would recommend the “emergency pathway” as defined by Greenhouse Development Rights that uses the 350 parts per million carbon dioxide target, though others may object to its ambitious goals.

2)      Carbon Fee or Tax:  Set a carbon price in the form of a carbon fee or tax fixed but rising year by year that will, according to at first estimates and then experience, reduce emissions along the path.  If the tax does not yield the necessary cuts, increases in the tax/fee levels will be accelerated.  A tax or fee enables companies to calculate the value of carbon emissions and make the actual investments that will cut emissions rather than deal with a broad range of expected carbon permit values, as would result from cap and trade.

  1. Calibration -  A carbon tax would be calibrated to achieve the emissions targets along the path in bullet “1″ though overachieving will be encouraged.  If tax levels inflict damage on economic well-being or capacity, tax levels may be reduced, though it is to be expected that there will be periods in which some economic pain will be inflicted by the tax to encourage better economic decision-making and innovation.  Expectations need to be set from the outset that some pain is involved in transitioning to a more sustainable economy, though excessive pain is to be avoided.
  2. Revenue stream – There are arguments among tax/fee advocates (as well as cap and trade advocates for the revenues from permit auctions) about where the revenues should go.  Here are my recommendations:
    1. One third of the carbon tax revenues should be used to dampen the effects of the costs of rising energy prices on the poorest, preferably via energy efficiency upgrades to housing (modeled on weatherization programs).
    2. One third should be used to help fund infrastructure that enables a zero carbon future (electric trains, electric transmission)
    3. One third will go into a international carbon trust which will fund development products, changed agricultural practices, forest maintenance and growth efforts with strict performance standards and baseline assumptions.
  3. Exemptions and Credits – Some argue against any exemptions and credits, seeing a flat tax as simpler.  However, I, as an example, believe taxing certain activities that cut carbon is counterproductive.  Additionally I want to show that it is possible to develop and regulate cross-border certified emissions reduction credits in a tax system if such a credit sub-system ends up being desirable.  I believe however that these necessary accommodations to the complexity of the situation are much more transparent and can lead to more productive dispute resolution than via the arcana of the trading system.
    1. It makes no sense to levy the full carbon tax level on the very infrastructure projects that lead to carbon neutrality.  If a construction project embeds fossil emissions in a zero-emission technology (electrification of a train system, renewable energy infrastructure), then the emissions from construction equipment or concrete making for that project should be at least partially exempt.  Alternatively there could be a percentage exemption depending on the level of carbon reduction achieved (coal to natural gas conversions).
    2. Just as with the current offset market it might be made possible to sell certified emissions-reduction credits that represent emissions reductions in other areas or other countries.  These credits would need to be rigorously certified and limited to only a certain fraction of carbon tax liability.

3) International Agreements - Utilizing existing international institutions, nations around the world can come to agreements on both monetary fees for carbon emissions and overall emissions reduction targets.  The addition of a monetary amount will force action by governments and businesses more rapidly than the abstractions of the carbon market. Agreements will focus on:

  1. Worldwide Emissions Targets and Path
  2. International Carbon Price(s) – Calibrated to achieving emissions targets, the international carbon price will be closer to actual microeconomic decision-making than permit pricing system of cap and trade. Choices are either a unitary price or a development-adjusted price depending on level of development.  Some countries may be more “entitled” to pollute given their lesser historical contribution to total atmospheric concentrations of carbon.  On the other hand, despite an “entitlement” to pollute more, some developing countries may want to go “cold turkey” and use the higher carbon tariff of the developed countries to spur sustainable development at home.
  3. Carbon tariff regime – with differential taxation in different countries, countries would levy tariffs upon importation either up to the amount of the unitary international carbon price or up to the amount of the development-adjusted carbon price.  While this contradicts “free trade” orthodoxy, under an international agreement there should be no problem in levying this type of tariff.  The WTO can be outfitted to handle disputes and generating agreements carbon tariffs and integrating climate policy with trade.
  4. International Standards and Best Practices –  Agreement on standards, certifications, and grading systems for energy efficiency and low emissions technologies (see below)

4)     Zero-Carbon Infrastructure Development– While the Obama Administration has embarked on pieces of this, a full-scale climate policy would front-load spending, including deficit spending, on building zero-carbon infrastructure and energy generation.  The main source of funding would come from tax revenues and use fees.  This area is largely neglected by the cap and trade instrument.

  1. Renewable Energy Supergrids and regional grids -  Link high renewable energy areas with demand centers via development of a HVDC and where appropriate high voltage AC transmission.
  2. Renewable Energy Zones -  Expedite environmental impact studies for high value renewable energy zones with strong sun, wind, geothermal resouces.
  3. Feed-in-Tariffs – Funding of private, community and household investment in renewable energy generators via clean energy surcharges to electric bills.
  4. Electric Freight Transport System
    1. Grade-separate and improve existing freight railbeds
    2. Add additional tracks to high traffic railbeds to allow more rail freight
    3. Electrify all high and moderate traffic rail routes
  5. Electric Passenger Transport System
    1. Build high speed rail backbone
    2. Enable improved track-sharing between freight and passenger traffic for lower-traffic routes.
    3. Build electrified bus and tram routes in high density/high-traffic city environments.
  6. Electric Vehicle Recharge Infrastructure
    1. Trickle charge (220V and lower) public charge network
    2. Battery-swap infrastructure
    3. Fast-charge (480V and higher) public charge network

5)      Best Practices, Certifications, Standards and Rulemaking-  Develop for most economic sectors, a set of best practices and standards that are based on cutting emissions as well as other elements of sustainable development (conservation of the earth’s natural wealth).  Standards would be either voluntary or mandatory depending on the level of imposed costs of meeting these standards by market participants and the existence of alternatives to meet the overall goals of the standards.  Rigorous standards like the passive house standard should be encouraged as well as graded standards that represent a “path” to carbon neutral solutions.  In certain vital areas, standards may be come laws to rule out certain practices that are simply unacceptable.  An example of the latter could be a moratorium on new coal power plants.

6)      International Afforestation Program -  Using revenue streams from carbon fees and tariffs, generate local solutions to maintaining living biomass.  Carbon taxes or other disincentives may be levied on activities that release excess carbon into the atmosphere.

7)      International Agricultural Carbon Sequestration Program -  Using revenue streams from carbon fees, incentivize low-emission, high sequestration variants of agriculture and food practices.  In the future, once a baseline for carbon sequestration may be achieved, carbon taxes may be levied on high emission forms of agriculture.

8)      Black Carbon Reduction Program – One of the more tractable climate problems though still a challenge is to introduce existing emissions control technology or develop alternatives to combustion of hydrocarbons and biomass that produce soot or black carbon.  We already have  most of the technology to limit soot emissions from internal combustion engines and factories.  More challenging is coming up with culturally-acceptable solutions for cooking with wood in less developed countries.

9)      International Technical and Scientific Cooperation – Create the equivalent of an international energy and climate research fund that supplements the work being done on national levels towards specific technical solutions to emissions.  Could develop in conjunction with IPCC WG III.  One area of research should be emergency measures like geo-engineering.

If adopted as a package, the above measures address all 11 generic elements of carbon policy and have none of the 10 drawbacks of cap and trade.  This approach transparently identifies governments as the responsible parties for reducing carbon emissions.   This comprehensive climate and energy policy does not interfere with their ability to respond to changing climate circumstances and removes unaccountable financial markets from the core of climate policy.

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.
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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”

fishgamewardens

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.

price_tag_pic

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.

louis-xiv-furniture

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.

Radar_gun

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.

Cap and Trade: A Tangled Web of Good Intentions and Bad Policy – Part 1 October 26, 2009

Posted by Michael Hoexter in Efficiency/Conservation, Energy Policy, Green Transport, Renewable Energy.
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I favor some of the more aggressive actions to avert climate catastrophe, actions which nevertheless do not compromise the continuity of human life and well-being. The climate which enabled our evolution as a species and the societies upon which we depend has almost no price attached to it. Averting this calamity, if we can, is the moral equivalent of war. As such it deserves the investment and political priorities that are accorded the military during a war, though the necessary moral and climate-science arguments for this level of investment have not been made clearly by leaders, especially in the US.   In our Great Recession, a forward-looking policy to counter climate change would have much needed economic benefits and lay the foundation of the new economy that we are supposed to be building.

Unfortunately, the mental “real estate” of climate activists and politicians has been captured by a monumentally bad idea, a misapplication of an environmental regulatory system that encourages delay and irresponsibility in climate action rather than changing the course of our society’s use of energy and land. Whatever urgency is felt popularly or by leaders, the institutions that will arise from the cap and trade policy framework have a good chance of actually blocking more effective action on climate (more straightforward system of rules, incentives, disincentives, and direct investment), which makes the work of exposing its flaws not simply the matter of my or someone else’s political or economic preferences but one of life and death for future generations and the ecosystems upon which we depend. An unquestioning herd mentality has taken over and encouraged even some of our best social scientific minds, including Nobelist Paul Krugman, to issue statements of support for a policy inspired by an outdated political and economic fashion of which Krugman is himself one of the leading critics.

Somehow a connection is not being made between the monumental collapse of our financial systems over 13 months ago and the design of the twenty-year-old policy instrument to which so much unearned credence has been given. Fundamental to cap and trade is the hand-off of key responsibilities and agency (the ability to act) for cutting carbon emissions to a carbon derivatives trading market, an unnecessary gift to the hyper-caffeinated and overgrown trading sector of finance. Just this week, critics of the Obama Administration’s earlier weaker financial regulatory efforts are now feeling somewhat vindicated in seeing that the Administration is now stepping up its efforts to rein in financial engineering and trading-dominated finance. It is utterly baffling that people who are intelligent enough to design or just understand an over-complicated policy instrument like cap-and-trade have not made the connection between the origins of cap and trade and the vagaries of our financial system. For them, the cap and trade instrument is still wrapped in the mystique of trading-based markets, which outside the climate community have lost much of their appeal.

It is an open secret among people who actually work now in cutting emissions by implementing energy efficiency and renewable energy projects that cap and trade is at best a holding pattern if not a monumental roadblock to pushing ahead with deployment, investment and research in emissions reductions themselves. These voices, generally excluded from the political discussion, contradict the “line” that, for instance, the upcoming legislation from the US Congress centered around cap and trade is a “clean energy jobs bill” and is the very heart of a green economy. While cap and trade is complex, these criticisms come not from a lack of economic or even political understanding but from a realistic appraisal of how actual lower-carbon technology implementation decisions get made, an elementary business process which seems to have escaped study by the policy’s designers. Cap and trade is not too stringent or too effective but not nearly effective enough.

The fundamental problem with cap and trade is that it placates government leaders and activists with manifest good intentions while undermining the effectiveness of the only instruments which could realize those good intentions. Cap and trade inserts a layer of obfuscation and indirection into governments’ ability to make rules, implement programs, build public works, and levy taxes in a fair and transparent manner.   On another level, it has a faulty microeconomics, inserting uncertainty about the value of emissions reductions to the businesses that will actually cut emissions via responding to the policy.  While working with ineffectual or superficially “P.C.” policy instruments might be acceptable in other matters, in climate policy the massive open-air experiment that has been cap and trade over the past 15 years is an unfolding catastrophe. It is not unlike the Trojan Horse, in that cap and trade appears as a gift, yet gives the vandals or just climate do-nothings command of the citadel. Tragically, the barrage of criticism and invective from the loony political Right or from professional contrarians who have lost a sense of proportion, distracts well-intentioned lawmakers and their supporters from seeing the flaws of their chosen policy.

Cap and Trade in Summary

Briefly, the cap and trade systems under discussion are permit trading systems that attempt to limit emissions of greenhouse gases by allowing polluters to emit greenhouse gases to the amount for which they possess permits. Permits are either given away or auctioned off up to the amount of a society-wide or economic sector-wide “cap” determined by regulators, which is supposed to be “tightened” (meaning reduced) over the years, leading to the decades long equivalent of a game of musical chairs. Regulators, as is planned, will in the future remove “chairs” by reducing the number of permits available to the point where by 2050 there would only be permits for 20% of 1990 greenhouse gas emissions. The “trade” part happens when companies have excess permits, because of having polluted less or owning unneeded permits. They can sell these excess permits for a profit to companies that pollute more than the amount of permits that they own. There have been various attempts to re-brand cap and trade with a name that sounds somewhat less shady, like “market-based cap” etc..

Derived from the speculations of the economists Ronald Coase (1960) and Martin Weitzman (1974), cap and trade, also called emissions trading, was invented in the US in the late 1980’s and early 1990’s during the first Bush Administration as a way to avoid issuing  so-called “command-and-control” environmental regulation by government (telling industry exactly what to do and monitoring it) or direct monetary penalties like pollution taxes. The original cap and trade system for acid rain pollution which is still in place in the US, has been declared responsible for reducing by 40% sulfur emissions (SOx) by coal-burning power plants in the period 1990-2004. However, during the same time period, European and Japanese regulators have been markedly more successful using traditional regulations in cutting the emissions of these same pollutants (65%) from power plants, revealing the cap and trade system to be the equivalent of a regulatory stunt: “See! Look Ma…no hands!”  In a 2007 review of  the results of emissions trading, Gar Lipow has led the way in calling into question the sales pitch for cap and trade.

As an example, the highly coal-dependent, heavily industrial Czech Republic went from in 1990 emitting two times the amount of SOx per capita as the US to in 2004 emitting approximately one-half the amount of SOx per capita as the US (UNECE report page 68).  While most post-Communist societies have decreased all types of emissions substantially due de-industrialization, economic hard times, or adoption of modern emissions controls, the Czech Republic had in 2006 twice as much industry as a percentage of GDP and uses as a percentage of total energy supply twice as much coal as the US, revealing the US to be far from a leader in reducing acid rain pollution.   Furthermore, the cap and trade system’s success has been aided in America by the accessibility of low-sulfur coal at an equivalent price to coal with higher sulfur content; Wyoming’s Powder River Basin coal deposits have been the “wind beneath the wings” of the US anti-acid rain program such as it is.   From the perspective of these results, holding out the SOx regulatory system of the US as the pivotal policy to save the planet stretches credulity.

Cap and Trade and Greenhouse Gases

The road to applying cap and trade to climate change had a number of twists and turns. Before implementing a climate policy, in 1993 the newly-formed Clinton Administration had attempted to institute a BTU energy tax as a means of raising revenue but was rebuffed by Congress. The Administration considered this experience along with its frustrated health care reform effort a major early defeat that shaped later thoughts on policy and political strategy; these fateful events 16 years ago unfortunately have had inordinate effect on US and world climate policy since then.

The Clinton Administration subsequently in the negotiations surrounding the Kyoto treaty to limit greenhouse gas (GHG) emissions favored “flexibility” and helped engineer a consensus in favor of cap and trade and cross-border emissions swaps.   While a “wonky” intellectual interest in emissions trading may have played a role, the Clinton Administration also thought that this policy would have domestic political benefits as a means to circumvent a policy that had the “tax” label or appeared to tell industry what exactly to do (direct regulation).   Using cap and trade also was an effort to “reach across the aisle” as the first cap and trade system had been implemented under the Presidency of the first George Bush.  In other areas of the economy, in tune with economic fashion of the 1980’s and 90’s, the Clinton Administration was as fascinated by markets as its Republican predecessors and, additionally, had a penchant for policy complexity, within which the notion of using a market to regulate other markets seemed almost commonsensical.

In 1998, despite pressing for cap and trade as the international GHG regulating instrument, the Clinton Administration compromised with an intransigent US Congress by not ratifying the Kyoto treaty, insisting that the developing world must be included in the regulation of greenhouse gases.  The elaborate political ploy in using cap and trade failed as far as US politics were concerned.  Other industrialized nations, most notably Europe and Japan, and the relevant UN bureaucracies continued developing the carbon market and cap and trade concept without direct US involvement during the later Clinton and Bush years.  The Protocol went into effect in most industrial countries in 2005 after a lengthy period of negotiation and set-up.

While emissions have been cut in some countries, the experience of the first four years of international carbon regulation via cap and trade have not shown the instrument to be particularly capable of effecting meaningful reductions in carbon emissions. In the European Union Emissions Trading Scheme (EU ETS), affiliated with Kyoto, the effects of the economic downturn or a future upturn are making any evaluation of the effect of cap and trade on emissions a near impossibility.   The use of carbon offsets originating in developing countries will further cloud the data.    In its initial 3 year period (2005-2007), GHG emissions in the EU ETS went up by 1.9% with wide nation by nation variation ranging from Sweden (-20%) to Finland (+28.5%).   Multiple reasons are possible for the wide span between countries and more generally many self-issued excuses are rampant because of the acknowledged complexity of the system; this was a “run-in period” etc.  In 2008 there is missing data but it appears that a combination of the economic downturn and high energy prices (not necessarily attributable to a carbon price) led to a fall of GHG emissions of 3% from 2007 in the EU, which the managers of the EU-ETS attributed to the carbon “price signal”  generated by the trading scheme.   In the same period (2007-2008) without a national GHG cap and trade system, US emissions fell 2.8% for similar reasons, contradicting the claims of EU ETS managers that cap and trade had an effect in 2008.   The net contribution of carbon trading to emissions reductions is still, 12 years after Kyoto, indistinguishable from “noise” in the data.

While it is universally agreed that “errors” were made in giving away too many permits in the initial round of Kyoto/EU-ETS, it is a strange repeat of these supposed errors that the now proposed US cap and trade system being debated in Congress will as of this writing also give away most of its permits for about the next decade. Furthermore the use of offsets, the (supposed) emissions cuts by others that are purchased on an international market because they are cheaper than internal investments, has been controversial both in design and in implementation.  Whatever one’s view on carbon arbitrage (shopping around for the cheapest reductions around the world), it is universally agreed that offsets reduce pressure on the biggest polluters to take action now in reducing their own emissions. The notion of cap and trade being a system of indulgences for fossil fueled economies is further reinforced by this disturbing propensity of real-existing, as opposed to theoretical-ideal, GHG cap and trade systems to undermine themselves or soften their impact on the biggest sources of emissions.

In Copenhagen in December at COP15, the successor to the Kyoto process (2005-2012) is to be designed and most of the climate community is moving towards a new cap and trade-based treaty that activists hope will be more vigorous than the previous one. Yet the trenchant criticisms of cap and trade systems that emerge from economists, most notably William Nordhaus, and concerned economic actors on the ground are brushed aside by those congregated at these events who seem to feel that their good intentions can substitute for conscientious analysis. For instance, almost every economist, including cap and trade supporter Sir Nicholas Stern, has had to agree at one point or another that carbon taxation is more efficient than the baroque emissions trading systems we have built.

Furthermore, we in the US are put in the difficult position of being a laggard in a process that is based upon our own bad idea, and upon which we really never followed through in its original form. In a way, the Obama Administration is, as it may be doing with its Afghanistan policy, put in the position of fighting the last Democratic President’s war rather than designing a more future-looking policy; having defined the political choice as cap and trade or, as the Republican opposition to Obama would have it, no strong action on climate change, the Democrats and Obama should instead be looking for the way to a more effective climate policy. The cap and trade framework, a product of some tortured political logic from the Bush and Clinton years, has “captured” the discussion, limiting thought and discourse on what are the available instruments to avert this catastrophe.

In its defense, permit trading may be appropriate as a distribution mechanism though not a magical cure-all in certain environmental arenas, most particularly the regulation of fisheries. In many nations now “catch-shares” are allocated to fishers who can trade these shares with other fishers. However, the ultimate success of even this appropriate use is achieved by the government setting limits on the fishing industry, not by yielding to some invisible hand of a fabricated market: the total amount of the permits allowed would need to be determined beforehand with reference to study of the fishery by biologists unaffiliated with industry and fishing limits would need to be enforced by government regulators, albeit according to the number of permits that the fisher owns. The appropriateness of permit trading as a distributional mechanism in this instance is that

  1. one is trying to calibrate exploitation of a natural resource at a particular level rather than reduce it in one direction (lower is almost always going to be better with GHG emissions for the foreseeable future.
  2. The permit trading is a just a new layer inside an existing historical market for fish which have an intrinsic positive economic value for people but are not arbitrarily created by people (it’s “inelastic”).  Pollution permits are on the other hand entirely an arbitrary creation of government(s), so the determination of a pollution price via the market is similar to playing a game of “guess what’s on my mind.”
  3. A simple intuitive equation can be made by all fishing market participants between a permit and a tradable object of recognized economic value, i.e. the fish.

All types of permit trading, whether of emissions or other, have provoked ethical controversy with regard to the selling of ownership shares to a public or natural common good. Despite these reservations, in the case of fisheries, fishers already have a longstanding tradition of claiming ownership of what they catch so permit trading represents not much of an innovation in resource ownership in fishing.

Why Cap and Trade is Bad News for Our Climate’s Future

There are a number of fundamental problems with cap and trade systems that are deeply embedded within the policy or its likely implementations, which suggest that working towards alternatives, even if they too are imperfect, is preferable. Remember, we do not have as many shots as we would like to deal with this problem, perhaps only one or one and a half, so a decades-long experiment with third-best policies is a foolish game. As Bill McKibben points out in a recent article, we cannot negotiate with non-human nature, unlike some other areas of policy.  So we need to put in policies that are either “right” or that do not install roadblocks that would stand in the way of better solutions.

  1. Cap and trade puts a newly formed financial derivatives market (the carbon permit market) with all its potential for boom and bust cycles and manipulation by powerful and unaccountable players, in a position to distort the real market for low-carbon technology and land-use changes; the stimulation of this real market is the reason for its existence in the first place. Within the fabricated permit market, the profit-seeking activities of permit traders from the financial markets and industry will be able to exert a substantial amount of unintentional control over the real technology choices and solutions implemented to curb our emission and sequester carbon. These traders, as do all traders, have a vested interest in opacity, price variability, and information asymmetries that would enable them to achieve the highest profit levels for their firms. Permit trading may offer some of the highest returns on investment in a cap and trade-dominated climate action world, so financial players will defend these profit streams with all the considerable means at their disposal. These are the most likely candidates for the “Greek raiding party” in the belly of the Trojan Horse, though climate activists and bureaucrats wedded to cap-and-trade are co-responsible for opening up the “citadel”.
  2. As trading looks to be one of the more profitable areas of the carbon business but in itself does not cut emissions, the incentives in the policy are misaligned: the most profitable business within a carbon policy framework should be those lines of business that cut the most emissions either through selling new technologies or processes or implementing them. An unfortunate echo of the go-go 90’s in which it was conceived, activity of trading is given a role far beyond any real value it offers.  On the level of businesses with real polluting assets, cap and trade will also reward those economic actors who are better permit-buying “game-payers” rather than those companies that invest most in emissions reductions.  This type of reward structure has no place in climate policy.
  3. Non-cap-and-trade policies that determine a fixed price for carbon have the advantage of having as an “output” an acknowledged decision-making tool (a monetary amount) that is already historically integrated into every economic transaction.  In permit trading, permit prices are only applicable to large economic actors and have only a “reflected” (and variable) monetary price after the net costs of the cap and trade outcome for that economic actor have been integrated into the pricing of their goods and services.
  4. A variable, uncertain carbon price that arises from market fluctuations and artifacts of the permit auctioning and trading system is not a clear, easily quantifiable incentive for firms and other real economic actors to make the long-term investments in capital equipment required to cut carbon emissions. A predictable carbon price (in the form of a tax or fee) over the long-term, albeit steeply increasing, would provide a much better incentive to make long-term investments that pay off over years. The “net present value” calculations that are the bedrock of investment decision-making depend on the projection of costs and benefits out into the future, which is nearly impossible using the rapid fluctuations and uncertainties of a carbon market.
  5. The salespeople of cap-and-trade claim falsely that the system gives policymakers “certainty” in terms of the amount emitted as compared to a price instrument like a tax/fee.  As the study of  existing cap and trade systems shows this certainty is illusory and gives leaders a false sense of security.  To get this type of certainty in a cap and trade system, regulators would have to engage in some very harsh and disruptive administrative actions, like shutting down a power plant during the last 3 months of a year if its owners ran out of permits.  Alternatively, the owners of the power plant could “borrow” permits from the next year’s allotment, only to create a direr threat for the next year, but the cap for the current year would have been broken.  Again this is punishing players for not playing the permit “game” as smartly as others though not necessarily being the gravest offenders in terms of carbon-inefficiency or overall emissions.
  6. Buying permits from other firms at a higher cost will impose an undue burden on companies or organizations that need to scale up their operations and increase their emissions in the middle of a year in response to an increased demand for their products.  A carbon tax will have no such punitive effects for unplanned growth as its cost will remain constant throughout the year and per unit produced.
  7. The carbon market does not differentiate between upstream and downstream emissions mitigation. “Upstream” means at the source of emissions, while “downstream” means either increasing efficiency of carbon-emitting energy use or absorbing emissions via land use changes. The efforts to make carbon emissions reductions appear as cheap as possible have tended to emphasize downstream solutions or projects in developing countries. However ultimately the main solution to slowing global warming is to eliminate emissions upstream which is currently more expensive, though downstream mitigation is always going to be necessary as well. A carbon policy that addresses upstream emissions immediately is preferable to one that waves a hand of resignation at business as usual in power generation and transport fuels because of initial cost issues.
  8. Cap and trade, because of its complexity, indirection and somewhat mystical faith in markets, has become the lingua franca of the climate action community and in so doing has shut down that community’s ability to critically examine the instrument itself or alternative, more effective instruments. The collective mental bandwidth that this instrument occupies has helped it to “suck in” many of the good intentions and attentions of politicians and activists, drawing their efforts away from other measures.
  9. Cap and trade obscures the vital role of government leadership, responsibility, regulation and direct investment from the public, the climate action community, and the leaders of government themselves. The successes of cap and trade systems such as they are, depend on either external factors independent of policy (economic downturns, low-sulfur coal deposits) or governmental actors setting stringent targets, operating the permit auction and trading system, and enforcing emissions goals. Yet, cap and trade’s sponsors and advocates continue to promote the fallacy that government is only playing an indirect role in its workings, as if this were a strength of the program. According to most of the expectations that have developed about government over the past millennium or so, there’s nothing wrong with governments taking a leading role in averting one of the greatest calamities we have ever faced. Government is the only institution that can represent and press for the realization of our society’s intention to save itself and the climate via implementation of low-carbon technologies and abstaining as a society from using up fossil fuels all at once. Attempts to hide the role of government paradoxically reinforce the position of advocates of a smaller government who can then point to the attempt soft-pedal as supporting evidence for their claims that government, especially “Big Government”, is “bad”. An honest assumption of responsibility by government would enable clearer, more transparent and more decisive policy moves and educational efforts about the dangers and opportunities for taking a sustainable path to economic development associated with climate change
  10. Instituting a cap and trade system because we, pro forma, must put a policy called a climate policy in place now or by December’s Copenhagen climate conference is worse than delaying a few months or a year to put in a better policy once our leaders have examined the alternatives with a more complete understanding of where they are going. The cap and trade systems now and soon to be developed already create considerable institutional and bureaucratic inertia and their own set of interest groups which are not so much incentivized to cut carbon emissions but to manage and justify the cumbersome system.

Any policy will have its strengths and weaknesses but cap and trade creates an economic, social scientific and political lattice-work at a distance from or interfering with the actual climate tasks ahead of us while blocking the way to better climate policy.

[In part 2 I will highlight what I think is the "fundamental challenge" of climate and energy politics and policy, look at the generic tasks that climate and energy policy is supposed to accomplish and suggest alternate route(s) that are more practical and will be infinitely more effective than cap and trade]

Renewable Electron Economy News: Electric Motorcycle Racing Comes to the Isle of Man July 12, 2009

Posted by Michael Hoexter in Green Transport, News and Events.
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The winning bike of the first TTXGP, Team Agni's all electric carried 12 kWh of lithium batteries. A number of well-financed startups apparently had bikes in the race as well but at the moment the field of electric motorcycle fabrication is wide open to garage-based teams. One should expect rapid progress in this field in the next few years.

The winning bike of the first TTXGP, Team Agni's all electric carried 12 kWh of lithium phosphate batteries. A number of well-financed startups apparently had bikes in the race as well but at the moment the field of electric motorcycle fabrication is still wide open to garage-based teams.

Thanks to the reporting of Dexter Ford of the New York Times, we learn about the growing interest in electric motorcycle fabrication and racing.   At the fabled Isle of Man racing circuit there was this year a one lap (37.73 mile) electric motorcycle race won by Team Agni, which mounted its own motors on a Suzuki sport bike chassis combined with 12 kWh of lithium polymer batteries.   The winning bike averaged 87.4 mph through a course with hairpin turns, narrow roads as well as straightaways.  By contrast the fastest circuit on a conventional motorcycle was this year an average of 131 mph.

Apparently, the Isle of  Man has great symbolic importance in the motorcycle racing world as there are every year conventionally powered motorcycle races there on the same circuit called the TT or Tourist Trophy.  The new race sanctioned by the official motorcycle racing body FIM, is called the TTXGP and the organizers are petitioning for the FIM to sanction a series of electric motorcycle races for 2010.

Electric motorcycles have already made a mark on motorcycle drag racing with the advent a couple years ago of the Killacycle which using A123 lithium phosphate batteries achieves 0-60mph in 0.97 seconds.    The Killacycle achieved a world record for an electric vehicle for the quarter mile of 7.8 seconds with a speed at the end of 174 mph in October of last year.

Carbon Pricing is Just One Piece of the Puzzle: Towards a Comprehensive Climate and Energy Policy – Part 5 (of 5) February 26, 2009

Posted by Michael Hoexter in Efficiency/Conservation, Energy Policy, Green Activism, Green Building, Renewable Energy, Sustainable Thinking.
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In the first three parts of this long piece (one, two, three), I outlined how our economic common sense has changed since the economic crisis of late 2008; monetarism/supply-side economics has given way to some newer version of Keynesianism.  I went on to claim that a primary focus on carbon pricing shows traces of the idealized vision of the market that one finds in the “free market” schools of economics; climate activists have pinned most of their hopes on carbon pricing to remedy the singular catastrophic market failure of unaccounted-for carbon emissions.  In part 4, I pointed out that there are two other important market failures which block effective action on climate in the US and elsewhere.  We then have the following list of market failures that are relevant to climate and energy policy:

  1. Externalization of costs of climate change attributable to carbon emissions
  2. Externalization of costs of infrastructure building and maintenance and high fixed capital costs of long-term private capital investment
    1. Deployment of capital intensive clean energy technologies
    2. Coordination of management and finance of upgrades to electric grid.
    3. Re-design and electrification of transport infrastructure
  3. Externalization of costs of scientific research and development

Outline of a Comprehensive Climate and Energy Policy

A comprehensive climate and energy policy is motivated by the emerging crisis in our climate, as we are rapidly approaching tipping points in the self-regulatory processes of our climate system. Significant melting of Arctic and Antarctic ice sheets will increase the absorption of the sun's radiation and spur further warming.

A comprehensive climate and energy policy is motivated by the emerging crisis in our climate, as fossil carbon in the atmosphere is unbalancing the self-regulatory processes of the climate system. Significant melting of Arctic and Antarctic ice sheets will increase the absorption of the sun's radiation and spur further warming.

A comprehensive climate and energy policy can allow for differentiated roles for national states, regional and local governments, and for private businesses and individuals with differing potential contributions to reducing carbon emissions and building a 21st century sustainable economy.  Thus a view of economies as not just a uniform collection of individual actors responding to a pricing regime makes the picture more complex but also potentially more effective.

Assumptions

  1. A reversal in emissions trends is necessary within the next 5 years
  2. Sharp reductions in emissions are necessary within the next 10 years
  3. A “glide path” to zero net emissions needs to be entered into within the next 3 years, there is no time for commitment to new long-lasting infrastructure with incremental reductions.
  4. The US and the world population are generally not yet ready to pay anything more than a fraction of the externalized cost of current carbon emissions.
  5. Uncertainties and changes in economic theory and assumptions require an examination of the degree to which climate policy contains disputed assumptions about economic behavior change and investment behavior.
  6. Government policy and leaders have a key role in addressing failures of the market to respond to challenges both internal to and external to the market.
  7. Costs and benefits of government policies and expenditures must be adequately explained and accounted for by policymakers and political leaders.
  8. The economically stimulative effects and benefits of a comprehensive policy will either match or exceed its net costs for the United States, involving outlays and revenues in the area of several trillion dollars over the period of a decade.


“Traditional” Regulation (partially addresses “Market Failure 1”)

The power sector is particularly used to and suited to traditional regulation as the building and maintenance of power plants is highly regulated in almost every country in the world. The private companies that operate power plants and utilities see regulation and regulators as just one cost and part of their business.

The power sector is particularly used to and suited to traditional regulation as the building and maintenance of power plants is highly regulated in almost every country in the world. New regulations are sometimes feared and resisted but enough pressure and negotiation can make most rules effective in ways that are more difficult in other economic sectors.

If governments can and at times must take a leadership role in managing the economy, they can do so in part by imposing laws that are in our long-term benefit.   Especially if ample consideration is made of the resulting costs and administrative overhead required to implement laws and new rules, these new rules can remove long-standing barriers to making progress in the area of energy, energy efficiency and climate protections.

We have seen that carbon pricing was proposed as a means of avoiding some of the supposed bureaucratic drawbacks of traditional regulation.  As it turns out in the case of sulphur dioxide that traditional regulation that dictated the installation of emissions scrubbers was, in some countries, more effective than the US cap and trade system in reducing acid rain pollution.  In addition to a fascination with a particular partial economic model, relying on carbon pricing alone might be simply an abdication of the authority of government in the face of resistance by industry.  Sometimes leaders need to “put their foot down”, if there is an overwhelming case to be made for new rules made and administered wisely.

  1. Coal Plant Moratorium – The primary regulation that must be a part of a comprehensive climate and energy policy is a moratorium on new coal-fired power plants without carbon capture and sequestration.  If power utilities find this onerous, they must lobby for regulations and subsidies that make this possible for them on all levels of their businesses.  There is no time to wait for the erection of a carbon pricing system to “suggest” that this should happen through an array of artfully calibrated disincentives.
  2. Utility Revenue Decoupling – An additional key regulation that is often overlooked is decoupling the revenues of investor-owned power utilities from the amount of energy sales, which is the regulatory regime in California.  This allows power utilities to participate in energy efficiency projects as it carries with it a fairly significant financial incentive for them to cut energy use by end users as they receive higher power rates the subsequent year from the public utilities commission if they have achieved their goals.
  3. National Building Codes that Meet or Exceed California Title 24 – California has led the nation in energy efficiency requirements for new buildings and renovations with its Title 24 standard.  A much more ambitious standard that would require a revolution in the home construction and renovation industry in the US would be to adopt the passive house standard in which space conditioning costs are slashed by 80 to 90%.  Additionally “smart codes” may help urban planners and developers site and build buildings and communities with lower total energy requirements by developing “in-fill”.
  4. National Renewable Electricity Standard (as Target) -  The adoption of a percentage minimum renewable energy for the national electric grid- is productive as long as it is
    1. ambitious (25% or greater by 2020),
    2. paired with substantial finance support for renewable energy,
    3. a rising percentage of renewable energy projects are built as replacements for fossil resources (dispatchable or synchronous with power demand)
    4. is pro-rated based on renewable resource base per region thereby balancing risk between regions dependent on their resource wealth.
  5. This "passive house" in not so sunny Germany uses high performance windows, very tight construction, super-insulation, and a ventilation system that keeps interior air fresh without losing much heat or cool. Sunlight, heat from appliances, and people keep these houses warm on all but the coldest days and cool in the summer. Using passive houses in the US would slash heating and cooling costs by 80% or more.

    This "passive house" in Germany uses high performance windows, very tight construction, super-insulation, and a high-throughput ventilation system that keeps indoor air fresh without the need for much re-heating or re-cooling. Sunlight, heat from appliances, and people keep these houses warm on all but the coldest days and shading, insulation and the ventilation system keeps out hot air in the summer. Building or renovating homes and commercial buildings to passive house standards in the US would slash heating and cooling costs by 80% or more.

    National Energy Efficiency Standards – Utilities and government can be mandated to cut energy use by an aggressive percentage per 4 year period (10-15%).  As in California, a portion of electric rates collected can be used to pay for a portion of the efficiency upgrades in the form of rebates.   Additionally the Energy Star program and minimum efficiency standards for hard goods should be expanded and made more aggressive. A carbon price can hasten the implementation of an efficiency standard by raising the price of energy.

  6. Aggressive Auto Efficiency Standard (CAFE) - Without high fuel prices, auto efficiency standards are difficult to impose as buyers tend to demand larger, less efficient vehicles.  Still, an efficiency standard can create targets based on engineering best practices that may help automakers plan their auto line as well as function as a public expression of intent.

From a position of government authority but responsiveness about the imposed costs and implementation path, governments can generate new direct regulations that may be as effective or more effective than existing instruments.  If we believe that government has a regulatory role in financial markets, it makes sense to consider how effective rule-making by the government has in the past and can continue to spur economic progress in the area of energy.

Effective Carbon Pricing (partially addresses “Market Failure 1”)

If we take away the expectation that carbon pricing will across the board address all key issues related to a future looking carbon policy, we can more easily define the parameters that would make a carbon pricing system effective.  A carbon pricing model assumes a market of independent actors who have choices to make as to how to structure their business and private lives, which the price will influence to emit less carbon.  Secondarily, depending on a still unfinished political process, the collected revenues may either function to displace other taxes, return a dividend or finance clean energy projects.  The following then should be criteria by which the effectiveness of a carbon pricing policy should be judged (all carbon pricing systems will not qualify for every criterion):

  1. Noticeably effects the price of fossil energy, carbon intensive products, carbon emitting activities and land-use practices whether in or outside the current market.  Must inflict some economic “pain” in its first edition in order to be effective and this pain has to have information value for market participants.
  2. Through this pricing. increases the desirability of lower or non-carbon emitting activities and products
  3. Enables effective choice of a broadening category of lower carbon alternatives on economic grounds alone
  4. Signals a will to curb carbon emissions among the leadership, and additionally inspiring voluntary “above and beyond” cuts in carbon emissions.
  5. Creates a competition between carbon emitters to emit less than their peers.
  6. Generates a revenue stream and incentive structure for allowing movement towards or maintenance of carbon sequestering land use practices
  7. Enables an international trade in or regulation of trade of carbon equivalents
  8. Would dampen or eliminate price volatility in the carbon price to enable effective investment planning on the basis of the carbon price and/or the revenues generated therefrom.
  9. Progressively raises carbon price in a planned sequence to exert pressure for further emissions cuts.
  10. Creates or energizes the market for carbon-emissions reducing innovations, spurring research and development.
  11. Is directly adjustable by regulators/legislators to enable the system to learn from experience.
  12. Is not so onerous to the taxpayers/consumers that it becomes politically vulnerable (this is partly a function of public outreach about the link between climate change, carbon pricing, and economic development as well as design of the system)

Carbon Pricing Instruments

At a House Ways and Means committee hearing earlier today, the options associated with carbon pricing instruments were not fully laid out for lawmakers to review the interlocking parts and options available.  The packages that were presented were “cap and investment” and “tax and dividend”…these are not the only options, policymakers can mix and match depending on how they weight the above criteria.

Pricing Determination and Administration

  1. Carbon Tax

    Grover Norquist, inspired by Ronald Reagan, is one of the main anti-tax activists in the United States. Attitudes about the value and meaning of taxation have a had profound impact on the formulation of climate policies, including the selection of an instrument to administer the carbon price.

    Grover Norquist, inspired by Ronald Reagan, is one of the most influential anti-tax activists in the United States. Attitudes about the value and meaning of taxation have a had profound impact on the formulation of climate policies, including the selection of an instrument to administer the carbon price. The success of libertarians like Norquist in branding taxation as an almost total loss to individuals and their wealth has until recently been almost total.

  2. Cap and Trade – There are many variations to cap and trade — it is an exceedingly complex instrument and outlining all permutations goes beyond the scope of this analysis.
    1. Full Auction of Permits
    2. Partial Auction/Partial give-away
    3. Full give-away of permits (no price)
  3. “Hybrid” Cap and Trade (Price Ceiling and Floor for Permits) – a hybrid of a cap and trade and a carbon tax stabilizing the carbon price in a range.

The selection of the carbon price administration mechanism will emerge from political negotiations between the different interest groups involved.

Revenue Distribution

Any of the above instruments can be mated with any combination of the below mechanisms to distribute the revenue from either permit auctions or tax collection.  There is no inherent relationship of the carbon tax or the cap and trade systems with any particular means to use the resulting funds collected.

  1. Carbon-Emissions Mitigating Investment – devotes the proceeds of the program to emissions reduction
  2. Partial or Complete Dividend – attempts to soften the effect of rising energy and goods prices by returning revenue on a per capita basis
  3. Displacement of other Taxes/Revenue Streams – phasing out a payroll or other taxes by using carbon revenues.
  4. Need-based Dividend or Investment – focal efforts to soften the impact of carbon pricing by either a dividend mechanism or targeted investment in energy efficiency for the neediest.

The selection of the distribution mechanism has everything to do with the political design of the ultimate carbon pricing program and how it is introduced to voters and consumers.  The potential complexity of both the resulting instrument and the process by which we will arrive there makes reliance only on carbon pricing a politically risky maneuver for people who are concerned about protecting the climate.

Design, Fund, Incentivize Zero- and Lower Carbon Infrastructure and Fixed Capital Investment (Addresses Market Failure “2”)

While it would have been preferable for governments to have engaged in a full scale “countercyclical” policy of collecting tax revenue during the boom years of the last few decades to reduce debt, we are now facing a period in which it is “do or die” for economies to stimulate demand, restructure their financial systems, and halt the slide into a Global Great Depression II.  Engaging in deficit spending to build or expand existing infrastructure to halt rising carbon emissions is a worthwhile cause to risk future inflation for current and mid-term economic and environmental benefits.  Some private capital may be organized to build some of this infrastructure but with significant

The Obama Administration's stimulus package has already found a "shovel-ready" renewable energy infrastructure project in building out the transmission system of the federally owned Bonneville Power Administration to serve new wind farms in the Northwest. Bonneville is one of a number of federal agencies that already own transmission leading from the system of federally owned dams in the West. The National Unified Smart Grid will in all probability be partly federally owned and part privately owned.

The Obama Administration's stimulus package has already found a "shovel-ready" renewable energy infrastructure project in building out the transmission system of the federally owned Bonneville Power Administration to serve new wind farms in the Northwest. Bonneville is one of a number of federal agencies that already own transmission leading from the system of federally owned dams in the West. Bonneville's transmission system will most probably form part of the basis of the National Unified Smart Grid, which in all probability will be part government owned and partly owned by private investors.

Different countries and regions have different infrastructure needs but for the US the following projects would add value to communities as well as represent a significant economic stimulus.   China is currently pushing ahead with a much more aggressive infrastructure program than the US, including rail building.  The selection of projects should be based on transparent criteria that include both needs assessment and short, medium and long-term cost/benefit analysis:

  1. Build an electrified passenger and freight rail network for the US
    1. Create a national rail plan that allows efficient co-mingling of freight and passenger rail along existing and new, non-HSR rail lines
    2. Grade separate existing rail lines (with multiple positive externalities associated) in high traffic areas.
    3. Build a high speed rail (HSR) network along high traffic corridors
  2. Incentivize and create the regulatory structures to build a National Unified Smart Grid to link renewable energy zones to demand centers; most likely there will be a mixture of public and private ownership of transmission.
  3. Incentivize the building of renewable electric generators through secure, premium wholesale electricity rates (Renewable Energy Payments).
  4. Rebate and tax credit incentives for energy efficiency upgrades to existing buildings.
  5. Incentivize the building of clean energy storage through incentivizing non-fossil grid ancillary services.
  6. While preserving or extending existing levels of mass transit service, electrify high traffic bus routes.
  7. Incentivize building of electric vehicle fast charge and trickle charge networks in cooperation with municipalities and utilities.

Increase funding for Clean Energy Research and Development (addresses Market Failure 3)

While the federal government has continued to fund clean energy research even through the Bush Administration, an increase in funding for research into renewable energy technologies, clean energy storage, sustainable biofuel alternatives, and cleaner, more efficient nuclear technologies are important to see if we can “leapfrog” existing technologies or reduce costs in the building of clean energy infrastructure.   Some have suggested budgets ranging from $3 billion to as much as $40 billion per year as a means of expanding scientific exploration, creativity and innovation in the area of clean energy.   If there is a reasonable chance that an innovation can open a new source of clean energy or increase the efficiency or cost-effectiveness of existing options, we should not hesitate to pursue it.  On the other hand, oversight over these budgets should keep the focus on what can pay off within the next ten to fifteen years.

The Principle of Non-Perfectability

While very simple systems may reach something called “perfection”, complex systems, including living things, social and economic systems, and the earth’s climate will never be “perfected”.  The advocates of self-regulating markets tended to treat markets as a “pure” or perfect social institution.   In chronicling so many market failures and needed programs to remedy them, I am not suggesting that policy will “perfect” the market or be able to completely address these market failures.

Purpose of a Comprehensive Policy

The purpose of this piece is to outline what a revised, reality-based economic and political framework for understanding both the course of previous energy and climate policy and the trajectory for effective future policy will look like.  The lore of a self-sufficient, self-regulating market put policymakers and clean energy advocates on the defensive and narrowed the focus largely to transforming the actions of individual market actors.  In response, efforts were made to “perfect” the market through a carbon price.  If we are to create a reality-based set of policy instruments we have to face facts both about the nature of economic models and the physical realities on which they are supposed to act.  I am supportive of the Repower America program, but feel it does not fill out enough the actual mechanisms by which it would achieve its ambitious goals, therefore the proposed framework.  A comprehensive climate and energy policy addresses both flaws in systemic functioning and problems of incentives and disincentives that cause individual market actors to continue to ignore the very serious consequences of anthropogenic warming.

Carbon Pricing is Just One Piece of the Puzzle: Towards a Comprehensive Climate and Energy Policy – Part 4 February 20, 2009

Posted by Michael Hoexter in Efficiency/Conservation, Energy Policy, Green Building, Green Transport, Renewable Energy, Sustainable Thinking.
2 comments

Why Not Bring Positive Externalities Into Market Pricing?

A testament to the power of renewable energy incentives can be found in California's San Gorgonio and Altamont Passes, where the generous PURPA standard offer contracts of the 1980's created an attractive business opportunity for project developers. Most of California's wind generation portfolio still dates from that period, despite advances in turbine technology.

Evidence of the power of renewable energy incentives can be found in California's San Gorgonio and Altamont Passes, where the generous PURPA standard offer contracts of the 1980's created an attractive business opportunity for project developers. Most of California's wind generation portfolio still dates from that period, despite advances in turbine technology. Newer feed in tariffs based on the standard offer model will be better calibrated to the needs of the current power generation market and will help states and utilities achieve their renewable energy generation goals.

One of the limitations of carbon pricing is that, as a support for renewable energy or other clean generation technologies, it is a roundabout and scattered means of “leveling the playing field”.  Energy markets that still enjoy the climate-altering bonanza of fossil fuels are generally less excited from a narrow utilitarian perspective about renewable energy without heavy policy support, excepting in some areas large onshore wind projects.  One of the motivations in carbon pricing is to level the field by attaching so significant a carbon price to fossil fuels that renewable energy will be competitive with or gain a market advantage over fossil fuels.  As renewable electric generation technologies in general require some form of storage to generate energy in a way that is exactly equivalent or superior to fossil resources as well as perhaps new infrastructure like transmission, the cost of accessory technologies would also need to be accounted for in order to truly level the playing field.  This carbon price would need, in the case of some renewable technologies, to be at least one order of magnitude higher than we expect that price to be (expectations run between $10 to $20/tonne CO2).

The price gap between sources of renewable energy and fossil energy has to do both with the sunk costs of an economy built around fossil fuels plus the comparative physics of renewable vs. fossil energy.  Renewable energy is generally diffuse, except in some extreme locations; otherwise, if it were not diffuse, most living creatures would not have been able to evolve in such a high-energy and therefore harsh.  To capture large swaths of renewable energy requires the building of large facilities that then concentrate or store the energy for use.  These large facilities mean that renewable energy generators require a large up front investment that ultimately, if planned right, returns many times the amount of energy and money that was invested in it but over a period of years.  To surmount this hurdle requires a commitment on the part of policymakers and regulators to renewable energy that operates in a longer time frame than that dictated by fluctuations in the energy markets.  In addition, most renewable energy comes in the form of an energy flow rather than an energy store, which is the form of fossil and nuclear fuels.  Tapping into energy flows to do useful work requires a different engineering orientation as well as additional energy storage devices.

Energy markets, represented by energy traders and energy consumers, remain relatively unmoved by these technical and physical challenges related to the price gap between fossil and clean functional replacements for fossil generators.  The focus of markets is upon the current availability and pricing of energy assets, products and services.  For a longer term view of energy whether fossil, nuclear or renewable to be incorporated into markets almost invariably requires the support and direction of government, either through subsidy or regulations.   The recent drop in oil prices due to the economic downturn has endangered and postponed plans to build renewable generators, as even with the current tax incentives, these investments look less attractive than business as usual.  As with many capital intensive industries, investors need assurances that the long-term investment in large and expensive facilities will pay off over a period of decades.

While a full accounting of the negative externalities of fossil fuel use would put renewable energy in a very favorable light, the sudden application of these costs to the entire economy that is dependent on fossil fuels for 85% of its energy would penalize most energy users severely and disrupt the economy in ways that are not intended by even the advocates of an aggressive carbon pricing regime.  Historically, policymakers have attempted to incentivize renewable energy development by rewarding renewable energy developers with incentives that can viewed as way to price in at least some of the positive externalities related to renewable energy: notably its clean-ness, local or regional origin and its sustainability.

Most studies of the relative cost of various carbon emissions reductions solutions place renewable energy at a significantly higher level than many readily available energy efficiency technologies that under many circumstances now pay for themselves without any aid.  So a carbon price that is designed to level the playing field for some energy efficiency measures, would be far lower than one that made renewable energy projects “win” over existing or even some new fossil resources.  The exception to this are large onshore wind projects that would receive a substantial boost from a lower carbon price, though wind alone cannot, at least with our current technology, fully displace fossil resources.

The foreseeable initial carbon price will also not yet spur some of the more aggressive energy efficiency measures in the area of space conditioning, which accounts for 30% of total energy use in the US.  Ground source heat pumps and solar adsorption cooling are technologies that can radically reduce building energy use but currently offer paybacks in the region of 8 to 12 years depending on the space conditioning load of the building and the climatic zone.   For some building owners these are already affordable but may require an additional incentive for them to consider a new technology.  Again,  leveling the playing field for these promising technology through disincentivizing fossil fuels may not lead the market to embrace a new paradigm without incentives.

The price of electricity is determined through a process of negotiation between public utilities commissions and utilities or via an internal pricing determination by a publicly owned utility under the supervision of a political board. In deregulated markets these negotiations yield a methodology for determining prices on the wholesale electricity market. More and more regions of the country and world are looking for ways to pay for sustainable energy through the electric rate structure.

The price of electricity is determined through a process of negotiation between public utilities commissions and utilities or via an internal pricing determination by a publicly owned utility under the supervision of a political board. In deregulated markets these negotiations yield a methodology for determining prices on the wholesale electricity market. More and more regions of the country and world are looking for ways to pay for sustainable energy through the electric rate structure.

The most direct method of incentivizing renewable energy development is by creating a wholesale electricity rate structure that assigns higher and more secure long-term value to energy generated by different renewable technologies, allowing project developers to get financing for their large upfront fixed capital costs.  The renewable energy payment systems, also called “feed in tariffs” are one means by which legislators and power system regulators have rewarded renewable energy generators for their positive attributes.  Most often, however, the form of this reward is not by enumerating and pricing the specific positive externalities but by using the formula “cost of generation plus a reasonable profit” averaged across an industry at a given point in time.   “Cost plus reasonable profit” is the formula used for building large one-of-a-kind structures either in power generation or construction that because of their uniqueness cannot find a workable price via the market.  The security of this arrangement, guaranteeing them a premium rate for their electricity generated over a period of 20 years, enables project developers to at least survive and with greater cost efficiency to thrive as businesses.  The fixed premium rate allows for cost recovery plus a reasonable profit on the initial investment in the renewable energy facility.

The additional cost of the premium payments are pooled among all electricity ratepayers which raises electricity costs slightly.  However, this rise in electricity rates can also have the virtuous effect of encouraging more energy efficiency, so a renewable energy payment system can create a virtuous economic circle.

Other methods of incentivizing renewable energy development have proved to be less reliable.  Tax credits that have been part of the US toolkit to incentivize renewable energy on and off for 30 years have provided some help but have varied in their effectiveness, in part because they draw on revenue from other parts of government budgets which can lead to disputes about which program deserves to be cut in favor of favorable tax treatment for renewable energy.  Furthermore, these credits have not had the same stimulative effect as feed in tariffs to jump starting a renewable energy industry.  With the current financial crisis, there is also a major shortfall of tax equity, meaning a dropoff in firms and investors that have made their money elsewhere and seek investments in renewable energy as a tax benefit.  If tax benefits are to continue providing an incentivizing effect for renewable energy, other credit instruments like a federally guaranteed renewable energy bank or renewable energy payment systems would need to pick up this shortfall.

Another area where positive externalities can be brought into the market by policy is in the introduction of zero emissions vehicles to the road, most notably electric vehicles.  The initial investment in batteries as opposed to a gas tank, as with renewable energy, adds a sizeable increment to the cost of a vehicle despite its overall lower cost of ownership.  Proposals that offer tax credits or rebates to individuals and businesses that lower this hurdle would again be offering a payment for a positive externality that the market currently does not recognize.  Current economic stimulus packages proposed by the Obama administration as well as the US Senate, include tax incentives for electric vehicles calibrated to the amount of all-electric range these vehicles offer.

Ground source (a.k.a. geothermal) heat pumps, like the appliances above in combination with a long loop of tubing in the ground, use one half to one third the energy of conventional furnaces and air conditioning, generate domestic hot water, run on electricity. While the appliance itself is not that expensive the digging or drilling of the ground loop makes the cost of the system substantially more than conventional units. As this represents a paradigm shift in heating and cooling, rebate programs by utilities or governments can help build a still small industry.

Ground source (a.k.a. geothermal) heat pumps, like the appliances above in combination with a long loop of tubing in the ground, use one half to one third the energy of conventional furnaces and air conditioning, generate domestic hot water, while running on electricity alone. While the appliance itself is not that expensive the digging or drilling of the ground loop makes the cost of the system substantially more than conventional units. As this represents a paradigm shift in heating and cooling, rebate programs by utilities or governments can help build a still small industry.

In the area of energy efficiency, rebates for new technologies have also proved to be a means to generate new markets for somewhat more costly technologies with positive externalities.  California’s energy efficiency rebate program has helped that state level its per capita energy use over the last 30 years and has helped drive the US market for energy efficient devices and innovation.

The relentless focus of policy on a disincentive (the carbon price) ignores key aspects of human psychology within which a combination of incentives and disincentives enables optimal learning rather than the simple application of either one or the other.  The current low ranking of climate change in polls of people’s concerns during the current downturn may have something to do with the general message of restraint that has been paired with climate change rather than opportunity and hope.  If we think about it, children raised only on disincentives (guilt, shame or punishments) or only on incentives (praise, bribes) are likely to end up twisted or lacking self-discipline in ways that are myriad and complex.  Beyond what can be achieved through information, persuasion and expressions of intent, a coherent mixture of carrot and stick approaches seems commonsensical to healthy growth and learning.  As we are entering a new world in transforming the basic energy foundation of our economy from carbon to non-carbon sources and energy use constraint, we and our economic growth engines stand in ways like children before our own demand for energy and the need to change it.  Surely we should apply our best understanding to this task and not just one fraction of what we know.

A Comprehensive Climate and Energy Policy

If we turn our focus from a singular catastrophic market failure to multiple market failures, the form and timing of climate and energy policy initiatives will start to match more closely the actual physical array of assets with which actual real economies are currently working.  The notion of a singular market failure, however huge, bears with it the unspoken assumption (not necessarily a belief of Nicholas Stern) that markets are otherwise self-sufficient and well-functioning.  We have seen that in fact markets, along with their strengths, are, in most sober assessments of economic history, failure-prone or critically dependent on non-market institutions in a number of areas, some which were outlined earlier.  To some, this sounds like heresy but this sensitivity to criticism of markets is more a function of the recent tendency towards hagiography of the market mechanisms rather than the product of a honest effort to balance their benefits and weaknesses.

The monocular or central focus on carbon pricing as a climate policy has borne the traces of the neo-classical economic “tail” wagging the climate and energy “dog”.  An allegiance to an economic theory that overvalues market mechanisms has seemed to have shaped climate policy more than a consideration of the on-the-ground facts.  The notion of the singular market failure leads to the overvaluation of carbon pricing as the prime means to achieve a carbon neutral society.  As we are now experiencing a sea change in our economic common sense, it makes sense to revise climate policy in response to this sea change.

Rather than simply a choice between political preferences or allegiances, there is a concrete difference in how these economic theories and by extension the resulting policy instruments interact with the target of their regulations and investments.  A carbon pricing system acts upon the economy as a series of individual (inclusive of corporations as “individuals”) actors or “atoms” which respond to the price signal in their own unique ways.  A policy orientation that seeks to re-engineer and re-organize economic systems like infrastructure that requires the coordination and cooperation of individual actors and “parts” of the system, interacts with the world as ensembles of actors rather than a series of independent individual actors.  A dogmatic allegiance to the monetarist/supply side view prohibits or proscribes the latter orientation. A realistic assessment of the tasks ahead will require both kinds of orientation to the world built into climate policy.

A Policy Orientation Commensurate with the Task

Prior to the discovery of fossil energy, most exosomatic energy came from animal power supplemented in some contexts by river power and wind power. Creating a highly-developed post-carbon economy in most locations around the globe will involve entering into a "4th" industrial revolution.

Prior to the industrial use of fossil energy, most exosomatic energy came from animal power supplemented in some contexts by river power and wind power. Creating a highly-developed post-carbon economy in most locations around the globe will involve entering into a "4th" industrial revolution; it's not simply a matter of "unplugging" from fossil sources and plugging into clean sources.

Changing our ways of using energy and land is a huge task, a task that advocates have for some understandable reasons attempted to minimize.   Exosomatic energy, energy that comes from non-food sources like fossil fuels, nuclear fuels and renewable energy, has been the primary support for economic development over the course of the various industrial revolutions of the last two centuries.  Up to a certain, fairly high, minimum of energy use, economic development and wealth correlates with exosomatic energy use.  The heroic narrative of increased technological sophistication and human ingenuity has hidden the brute facts of rising consumption of what have been largely fossil fuels.  That one person can now do the work of fifty or one hundred manual laborers has everything to do with the continuous availability of concentrated energy products or services at a fairly low price.  Our economic system is also based on an agricultural, food and fiber system that not only is highly dependent on fossil fuels but also uses land in ways that do not conserve the soil or stabilize atmospheric concentrations of greenhouse gases.

The scientists who have documented our contribution to a changing climate have endured much criticism for suggesting that the energy and land-use foundations of our economy are endangering the long-term sustainability of the earth.  However, understandably, they have not also wanted or been able at one fell swoop to outline how we might reverse the political and economic orientation of our society, which at the time was praising markets and the pursuit of narrow self-interest perhaps leavened with voluntary charitable or altruistic acts.  Both Al Gore and Jim Hansen, the two main targets of much criticism and scorn, have made the goals we have increasingly clear but have, in my opinion, at times held back from exploring the scale and extent of the work and expenditure needed to do an “energy transplant” on our society from dirty to clean energy sources.

If in fact, the future of the world and all of what might be considered human wealth depends on reducing carbon emissions, isn’t it worth it for us to pay something towards that goal?  Policy recommendations should reflect the seriousness of that goal and a recognition that most people should contribute something towards that goal, as it benefits them.  Policy suggestions that minimize the cost or need for participation by a majority of the population in building this new energy basis for our societies are selling people short.

Public Expenditures…for What?

Roosevelt signs the extension of the Lend Lease program in 1943. Most commentators agree that the Great Depression was ended by the massive spending program and mobilization that was World War II. Perhaps it will be easier to justify large public outlays if we declare a "Green Energy War" as has John Geesman.

Roosevelt signs the extension of the Lend Lease program in 1943. Most commentators agree that the Great Depression was ended by the massive spending program and mobilization that was World War II. It remains to be seen whether we will be able to pull ourselves out of the current economic downturn with current levels of government spending or whether we would need to declare a full-scale "Green Energy War" as has John Geesman.

Currently it appears as though as a nation we will spend somewhere between one and four trillion dollars to bail out the banking system after it rushed earlier this decade to take advantage of some highly risky opportunities to make a profit.  Yes, borrowers are also partly to blame for buying houses which they couldn’t afford, but financial common sense had been sacrificed several years before by the leaders of the financial system and by regulators who did not believe in regulation.  We may never see concrete results from this massive expenditure of tax payer dollars only that we may have prevented a full-scale collapse of the financial system and economy into chaos.

An even more controversial area to discuss is the degree to which the government should commit resources to the already overweighted housing sector, now in a deep crisis.  Not only has the economy expanded in the area of finance but also became overly dependent on housing and real estate before the big crash of 2008.  Many Americans were simply not earning enough money to afford the homes that were being built or sold in the last few years of the bubble.   Should a  large portion of our public assets be committed to propping up home values beyond the ability of Americans to pay for those homes through income from other sectors of the economy?  A balance may need to be struck between managing the crisis, future housing needs, real estate as investment, and non-housing sectors of the economy.

On the other hand, a transformation of our energy and transport system will boost an underweighted area of our economy.   I have termed the US historical relationship with energy, the “Cheap Energy Contract” which restricts the amount of money that the energy sector can charge per unit energy; to build a clean energy economy quickly, there will need to be revenue from a variety of sources in excess of what we currently spend to build the useful infrastructure required.  Industrial and construction jobs, far from being part of our past, may become again part of what helps bring living wages and buying power back to the American consumer, independent of commercial and residential real estate and finance sectors.

Furthermore, our infrastructure is deteriorating and as noted in Part III, inadequate to the task of reducing carbon emissions.  There is no other way to pay for some of this infrastructure other than through public funds and it will serve the public and other businesses well to have a better rail system, a cleaner electricity and energy system, and avoiding dependence on the fossil fuel roller-coaster.  Therefore everything speaks for a substantial commitment of public funds to these public goods which support the economy as a whole, especially now that we are in search of the economic solutions to our dire situation.  In the end, the amount of

A Climate and Energy Policy for the Committed and the Indifferent

Currently climate change ranks as one of the last concerns in polls of American public opinion, despite the commitment of the Obama administration to take steps towards reducing carbon dioxide emissions.  The task then for both climate activists and the new Administration is then to construct a climate policy that, in addition to educating the public about the dangers of continued unchecked carbon emissions, makes it worthwhile for people to care about climate change.

An important element of the existing climate action proposals is that they both try to lower their profiles in terms of fiscal impact and rely largely on “negative reinforcement” or punishment of “bad behavior” in relationship to emitting carbon.  While the small minority of the population that is appropriately terrified of the effects of climate change or has enough financial liquidity to pay the penalties is accepting of these disincentives, the vast majority either doesn’t understand the proposals or is worried about their impact on their personal finances.  A vocal minority opposes any and all climate regulations or regulations in general, and are increasingly a force to be acknowledged in passing but not taken into consideration in formulating effective policy.

What I am calling a “Comprehensive Climate and Energy Policy” is designed then to be an instrument that addresses the concerns of the vast majority of people who care about their communities and families but is not yet predicated on an overwhelming concern for the climate.  A Comprehensive Climate and Energy Policy, relying on both incentives and disincentives, will help address the more pressing concerns of Americans as well as be a more effective means to achieve many of the goals of the climate action community.   Including areas where there is overlap between the goals of these communities can help create momentum for our economy in general and in particular, towards an economy that emits less carbon into the atmosphere.

At Mesalands Community College in New Mexico, students study wind energy and turbine maintenance using a single utility scale wind turbine erected for training purposes. For there to be a successful and long-lasting green jobs movement, there will need to be more training facilities such as this for skilled workers and engineering students.

At Mesalands Community College in New Mexico, students study wind energy and turbine maintenance using a single utility scale wind turbine erected for training purposes. For there to be a successful and long-lasting green jobs movement, there will need to be more training facilities such as this for skilled workers and engineering students.

The Green Jobs movement, led by among others Van Jones, has pioneered this approach to climate policy with an emphasis on the jobs generated by building a new clean energy infrastructure.  One of the products of a Comprehensive Climate and Energy Policy would be the stable domestic jobs that Jones and others have called for.

If general economic theory needs to borrow from Keynes as well as neoclassical economics, shapers of climate and energy strategy may be then freer to choose the appropriate instruments for the many tasks related to building a post-carbon economy.  In a society dependent upon market exchange of goods and services, economic policy and with it climate and energy policy are meant to address failures within the spontaneous commerce of markets to deliver goods and services that are vital for economic and social wellbeing.

We have located here not one but approximately three and half market failures that are relevant to climate and energy policy which specifically address the challenges related to our upcoming climate and energy challenges in the US.

Market Failures

  1. Externalizes costs of climate change attributable to carbon emissions
  2. Externalizes costs of infrastructure building and maintenance and high fixed capital costs of long-term private capital investment
    1. Deployment of capital intensive clean energy technologies
    2. Coordination of management and finance of upgrades to electric grid.
    3. Re-design and electrification of transport infrastructure
  3. Externalizes costs of scientific research and development

Rather than subsume all of these challenges under “1”, a comprehensive climate and energy policy is able to flexibly address the existing challenges in a given context by applying measures where needed to reduce carbon emissions with the goal of a carbon neutral society

The value of a comprehensive policy becomes clear if we look at national differences in emissions level, infrastructure and other sunk costs, and overall level of economic development.  In Switzerland, for instance, per capita carbon emissions are approximately one quarter of those in the US.  Much more densely populated, Switzerland already possesses an almost entirely electrified rail network and adequate public transportation in many of their cities and towns.  Electricity in Switzerland is generated largely via hydro and nuclear.   Already possessing an infrastructure than can be configured for lower or zero-carbon emissions, a carbon pricing regime may help Swiss consumers and businesses utilize that infrastructure even more efficiently and use energy more efficiently.  By contrast, the United States has a long way to go in building an infrastructure with a similar capability.

Following the American and European model of economic development is problematic for India and other densely populated, rapidly industrializing nations not only from the point of view of carbon emissions. India has some of the world's worst traffic, even when a majority of the population cannot afford cars or other motorized conveyances. The Indian government will need to take a leadership role in figuring out a way a more prosperous citizenry can enjoy some of the freedoms afforded by increased wealth without impairing the quality of life of other Indians, including the building of the appropriate infrastructure.

Following the American and European model of economic development is problematic for India and other densely populated, rapidly industrializing nations not only from the point of view of carbon emissions. India has some of the world's worst traffic, even when a majority of the population cannot afford cars or other motorized conveyances. The Indian government will need to take a leadership role in figuring out a way a more prosperous citizenry can enjoy some of the freedoms afforded by increased wealth without impairing the quality of life of other Indians, including the building of the appropriate infrastructure.

With 4 times the population of the US and 150 times the population of Switzerland, India possesses still different challenges as it is both a rapidly industrializing and a less-developed country depending on region, economic sector and social class.  India has a per capita emissions level one quarter of that of Switzerland and one sixteenth that of the US but because of its massive and growing population is starting to contribute substantially to overall worldwide carbon emissions.   The Indian government and the world development community would like to see the average Indian make substantial strides in terms of their overall welfare and use of services with a stable level and even a decrease in net per capital carbon emissions.  In the last few years before the current downturn, there has been a move by the rapidly growing Indian middle class to emulate the petroleum and energy consuming ways of the West including the use of petroleum-fueled automobiles.  Because of its high population density, it would make sense for India to build a potentially zero-carbon electric public transport system, as there would be literally no physical space in India to build a car culture like that of North America, even if all those vehicles were zero emissions. Carbon pricing alone will neither inspire nor finance such a massive undertaking.  On the other hand, within the carbon trading system, some projects have been built as part of the “Clean Development Mechanism” and some version of this may remain a source of investment for projects that can show a quick reduction in carbon emissions.

The “hard problem” of rapidly industrializing and less developed countries becomes a little easier if we don’t assume that governments in those countries are passive bystanders or simply funnels for a global carbon pricing regime.  The Indian government, as will other governments, need to devise national and regional strategies that rely on public was well as private funding of low- and zero-carbon facilities.

Carbon Pricing is Just One Piece of the Puzzle: Towards a Comprehensive Climate and Energy Policy – Part 2 February 4, 2009

Posted by Michael Hoexter in Efficiency/Conservation, Energy Policy, News and Events, Renewable Energy, Sustainable Thinking.
8 comments

In Part 1,  I called attention to the rapid shift in general economic policy in the last 6 months.  I developed an outline of two distinct economic schools, one that holds up the ideal of a self-sufficient, self-regulating market and another that sees markets as having shortcomings that require government to supplement and regulate where the market fails.  The first school might be called monetarist/supply-side and the second Keynesian with varying tendencies within that school.   I highlighted how each of these schools is attached to a particular worldview or set of worldviews.  The conflict within economics will necessarily have impacts on climate policy.

Reliance on Carbon Pricing:  Hanging Onto an Idealized View of Markets?

The Scottish inventor, James Watt, invented the steam engine, powered by coal in the 1760's and 1770's. Most accounts of the history of the industrial revolution and of economics downplay the importance of fossil fuels in spurring economic growth and the modern economy.

The Scottish inventor, James Watt, invented the steam engine, powered by coal, in the 1760's and 1770's. At that point in time, coal had already a long history as a heat source. Most accounts of the history of the industrial revolution and of modern economies downplay the importance of fossil fuels in spurring economic growth and the modern economy and focus on changes in end-use technologies. A post-carbon economy will require a revolution in our thinking about and focus on energy and how it is sourced.

Climate activists have been focused since the early 1990’s on instituting a cap and trade system that they feel, almost singlehandedly, would induce or compel economic actors to emit only up to a certain “cap” of greenhouse gas emissions.  The Kyoto Protocol, ratified by 180 countries, is an attempt at an international cap and trade system.  Both cap and trade and its near competitor, a carbon tax are “market-based” policy instruments that attempt to curb greenhouse gas emissions by assigning a price to greenhouse gases.   The price will function as a signal (largely in the form of a disincentive) to market actors to change technologies and procedures to emit less carbon into the atmosphere.  These policies are “market-based” because they rely on the pricing mechanism and allow market actors to decide how they reduce their emissions as opposed to more directive, so-called “command and control” regulations that tell market actors what exactly they must do.  An environmentally-sensitized variation on the monetarist/free market worldview and policy orientation, the idea is that the private economic actors, mostly businesses, know best what to do if given the appropriate price signal.

Climate change concerns and a climate protection movement have emerged in the last two decades, an era of monetarist/free market dominance of economic policy and to a lesser extent the economics profession.  Carbon taxes, though a tax and therefore viewed with suspicion by free market advocates, have a single “market-based” layer in introducing a carbon price into the calculations of market actors, a disincentive to which they can respond as they choose.  Cap and trade systems add an additional carbon permit and offset trading market, in addition to introducing a (varying) price on carbon, so are doubly market-based.  Despite these efforts made to introduce market-emulating mechanisms into environmental regulation, the political advocates of free markets are almost universally opposed to cap and trade, carbon taxes and direct regulation; they generally show themselves to be unconcerned about climate change and are more concerned about how any regulation will interfere with smooth and unhindered market functioning, which to them is the summum bonum (Latin for the highest ethical good).

Much discussion and dispute has been focused on the choice of which of the two main market-based instruments will do the heavy lifting in climate policy.  The carbon tax assigns a price directly to carbon emissions and is levied directly by governments.  It is relatively simple instrument, favored by many economists and some industries, but criticized by many climate activists who feel that it is insufficiently rigorous.  Others have criticized a tax because it is politically unpalatable in an anti-tax era, still others because it does not in its initial designs utilize carbon trading.  Despite this, two leaders in the climate protection movement, Al Gore and Jim Hansen, prefer an stringent carbon tax policy to the cap and trade systems proposed, though both have suggested that it should not represent a net increase in the overall tax burden by cutting other taxes or returning a dividend.

Carbon taxes and cap and trade can be distinguished as follows:  the cap and trade system sets the amount of allowable GHG pollution and, if permits are auctioned rather than given away, the price follows from the cap; a carbon tax sets the price which would limit emissions via the amount of direct economic losses inflicted or fear thereof on economic actors.  In a cap and trade systems, punitive fines and potential criminal proceedings can follow from exceeding the permitted amount of pollution.  A lower cap produces fewer and therefore more expensive permits (in an auction) and a higher carbon tax inhibits emissions because of their increased expense thereby leading economic actors to lower levels of emissions.

The revenues from both permit auctions and the carbon tax can be directed any number of different ways:  to offset or reduce other taxes, to be spent on carbon emissions reduction, or be returned to taxpayers in the form of a dividend.  The latter idea is an effort to diminish the generally regressive income distribution effect of carbon pricing:  the carbon price will, percentage-wise, through higher prices for energy and high-carbon intensity represent a higher portion of the budgets of lower income families more than upper-income ones.  The latter system is called a “cap and dividend” or a carbon tax dividend.  As it has been developed, the basic carbon pricing “concept” does not recommend or entail any particular use for the funds collected, therefore the diversity of proposals.

Cap and trade regulations were originally applied as a way to incentivize power utilities to install expensive sulphur dioxide emissions scrubbers on their coal fired power plants, like the unit attached to the smokestack above. While these emission scrubbers sometimes cost upwards of $1 billion, more than the original cost of some power plants. Ultimately the joint cost of complying with regulations and the technology itself is borne by utility ratepayers through increases in the cost of somewhat cleaner electricity, which still has not addressed the still larger problem of carbon dioxide emissions.

Cap and trade regulations were originally applied as a way to incentivize power utilities to install sulphur dioxide emissions scrubbers on their coal fired power plants, like the unit attached to the smokestack above. While these emission scrubbers sometimes cost upwards of $1 billion, more than the original cost of some power plants, they significantly reduce acid rain but do not reduce carbon dioxide emissions. Ultimately the joint cost of complying with regulations and the technology itself is borne by utility ratepayers through increases in the cost of electricity, which ends up being an indirect route to pay for the positive externality of less acid rain.

Despite the support of some renowned climate activists for the carbon tax, during the years of the Bush Presidency support for a cap and trade system with 100% auction of permits and a tight, progressively more restrictive cap, has been considered to be the mark of serious action to stem carbon emissions.  The historical model for greenhouse gas cap and trade systems were the systems introduced in North America in 1990 to limit the emission of acid rain causing pollution from power plants, called SOx emissions.  Designed explicitly as an experiment in market based regulation and an alternative to directive regulation of power plants by governments, these power plants were incentivized to adopt SOx scrubbing technology by being allowed to pollute up to the number of permits that they purchased in a permit auction.  If the power utility was able to emit less than the permits they purchased, they could sell these permits to firms that polluted more at a profit, introducing, per the market-oriented theory behind the program design, a profit motive into the process of adopting the emissions scrubber technology.

Carbon cap and trade systems are similar in design to SOx cap and trade systems but are many times larger in the scope of their application and also present market actors with a vastly larger number of possible choices to reduce or offset their emissions as compared to the SOx systems.  The most rigorous cap and trade system uses 100% auction of pollution permits with a high reserve price and an aggressive overall pollution cap.  The least aggressive gives out permits and has a “loose” or higher cap, which has been a criticism of the initial round of the Kyoto protocol.  As compared to carbon taxes, a cap and trade system is much more complicated.  However, there are hybrid systems that place pricing floors and caps on pollution permit prices, effectively offering a carbon price within a range, similar to a variable carbon tax.

Carbon Pricing and “Not Knowing” the Solutions

The premise of carbon pricing as a complete climate solution, as opposed to “command and control” regulation, is that regulators and the designers of a carbon pricing do not know the technological solutions to reducing carbon emissions, in keeping with the monetarist/free market tendency to view scientific knowledge as limited in scope and not generalizable.  The market becomes a “black box” that produces innovation or favorable and/or efficient social results.  In practical terms this could mean that designers of the policy are thought not to be cognizant of industry inside knowledge or that no one can know what the future will bring in terms of technological development.  Entering into a carbon pricing system then means embarking on a technological and economic “voyage of discovery”.

If one believes that one knows or we know at least a portion of the technological solutions to reducing carbon emissions, carbon pricing would be in many instances a roundabout solution for supporting those solutions.

The Benefits and Limits of Carbon Pricing

In an era of lingering climate change denial and resistance by fossil fuel and industrial interests to change, the real consequences of carbon pricing policies have tended to be glossed over by its advocates.  The thought has been “we must get this passed, no matter what”, “you’re for us or you’re against us”, or alternatively “this is the only politically realistic climate policy.”  Usually these sentiments are applied to the more widely considered and discussed cap and trade systems.

Troubling though is the finding that these policies, in particular cap and trade systems, were selected because of allegiances to now-questioned but politically popular economic theories, rather than the real effectiveness of these policies.  In a little noticed review, Gar Lipow has pointed out that straight “command and control” regulatory schemes in Germany and Italy reduced acid rain pollution far more than the US SOx cap and trade system upon which the Kyoto protocol and other cap and trade systems were based.   In Germany SOx emissions fell 87%, in Italy 62%, while in the US in the same period they only fell 31%, with comparable disparities in the absolute levels of these pollutants on the two continents at the end of the study period (2001).

Furthermore, the notion that cap and trade systems spurred innovation has come under question by economists.  Margaret Taylor in an analysis of patenting activity has found that patents related to emissions scrubbers for SOx were not significantly affected by the institution of cap and trade systems as opposed to a spate of other regulatory mechanisms worldwide.   Studies have also shown that the costs to firms to reduce their SOx under a cap and trade systems as opposed to direct regulation were roughly equivalent.

If conventional regulation is simpler, about as costly, and substantially more effective than historical cap and trade systems, why the enthusiasm for cap and trade to tackle the far broader problem of carbon dioxide and GHG emissions?  The coincidence of the now somewhat discredited political fashion for expanding market mechanisms to almost every social problem seems to account at least in part for the adoption of cap and trade systems during the market-focused 1990’s and early 2000’s.

Additionally the choice of cap and trade in the 1990’s may have seemed more justifiable out of a sense by international regulators of uncertainty about what the technological solutions to curbing carbon emissions might be.   We have advanced since then in our understanding of workable technological solutions to reduce carbon emissions substantially, some which are now “marketable” and some of which require the help of supportive policies or regulations to make it on the markets.  We have not arrived necessarily at definitive solutions for all technological carbon emissions reduction challenges but we have many adequate “starter” solutions.

Assessing the Benefits of Carbon Pricing

The Kyoto cap and trade system's Clean Development Mechanism or CDM, enables organizations from richer countries to fund carbon emissions reductions efforts in less developed countries to "offset" their emissions. At this project in Karnataka, India, field wastes are collected and used to generate electricity and heat, which otherwise would decompose in the fields. CDM has been an area of controversy because some CDM offsets have either not represented real emissions reductions or those projects were not truly "additional", meaning they would not have happened otherwise.

The Kyoto cap and trade system's Clean Development Mechanism or CDM, enables organizations from richer countries to fund carbon emissions reductions efforts in less developed countries to "offset" that organization's domestic emissions. At this project in Karnataka, India, field wastes are collected and used to generate electricity and heat, which otherwise would decompose in the fields. CDM has been an area of controversy because some CDM offsets have either not represented real emissions reductions or those projects were not truly "additional", meaning they would not have happened otherwise.

In our era of idealized and now somewhat disenchanted views of what markets are and how they function, it is difficult to make a neutral assessment of the benefits of carbon pricing especially cap and trade;  in other words, we have a somewhat “bipolar” conception of markets and the self-interested behavior upon which they rest.  Not only is this a matter of perception but a deep economic and sociological problem:  we have no rigorous description of markets as institutions like other institutions so we tend to treat them as “sui generis”.   If markets are unique it is more difficult to formulate how to reshape or re-energize them, if that is what is on the agenda.

Advocates of carbon pricing have tended to list the fact that cap and trade, in particular, is “market-based” as in-and-of-itself a recommendation of these instruments.  If this is simply a matter of saying that it conforms to the monetarist economic fashion of the last three decades, then this is no longer such a recommendation, at least to many who are now viewing the economy of the recent past more critically.   A finance-heavy economy dependent upon trading seems to have had more of a downside than its proponents and defenders would have had us believe.

Furthermore, beyond intellectual allegiances, if the trading element or market-based element was a signal to powerful economic interests that carbon regulation would potentially be a profitable instrument within some reasonable bounds this might be politically and ethically defensible.  However if the rush to declare carbon regulations as market-based a signal that they might be corruptible instruments with the lure of windfall profits, this would appear unseemly and, in the end, defeat the purpose of carbon regulation, regulations that would raise energy and goods prices for all sectors within the economy.

Here I will attempt to abstract from the proposed structure of carbon pricing in both its carbon tax and cap and trade forms, the “socially useful” and politically defensible components of carbon pricing that go beyond theoretical commitment to the market mechanism:

  1. “Viral” – The influence of a carbon price could spread virally – as carbon pricing will be applied to energy and other basic goods, the price will effect all economic sectors and “work its way” into many unforeseen types of transactions that ultimately will influence carbon emissions.
  2. (Potentially) Global – A tradable carbon credit or permit could allow cross-border involvement and participation of less-developed countries in carbon sequestration and emissions reduction efforts (addressing the global nature of climate change).
  3. Incremental – Carbon pricing will encourage incremental changes based on the price level -  carbon pricing then will encourage energy efficiency, behavior changes with approximately equivalent costs, land use change, bio-sequestration, and small to mid-sized capital investments
  4. Monetary – Carbon pricing is directly attached to money and financial calculations, the most compact decision-making form for individuals and organizations.  I have proposed a much more complex decision making tool for big, high-level decisions but a simple price fits relatively snugly into most existing financial instruments like cash flows, net present value, etc.
  5. Quasi-universal equivalent or signifier – Related to “2” and “4”, the carbon price can allow comparison and trade of equivalents between unlike activities like afforestation, energy efficiency and renewable energy.  They all would be assigned a monetary value according to their impact on carbon emissions.
  6. Induces Action – changes in prices induce actions or the propensity to take action.
  7. Internalizing Carbon Externality – Of course, the main reason for the program, to attach to global warming gases an disincentive/incentive that creates a carbon market or carbon “line-item” in economic calculations.

The Limitations of Carbon Pricing

Even if we accept that policy is always co-produced by political and economic vogues and enthusiasms, there are troubling limits to relying exclusively or largely on carbon pricing to drive innovation or rapid deployment of clean technologies.  Below are a listing of some questionable assumptions in and real constraints on carbon pricing.

1)    “Private actors know best” – For one, the assumption that businesses and individuals will know which solutions will work best for them to reduce emissions is flawed.  Most businesses will be following the recommendations of government sponsored studies of which technologies will work and which will not.  Most businesses and families do not monitor and measure their GHG emissions as a matter of course, nor are they necessarily experts in the selection of new technologies, some of which will never have been deployed before on the market en masse.  Furthermore, to become experts in the selection of technologies, firms will need to spend resources, potentially reduplicating the efforts of other firms, often outside the areas of their core competencies.

2)    “Price signal will be clear” – As a result of the above, both cap and trade and carbon tax

The price of goods and services is one of the primary attributes that influence buying decisions. A lower price means that buyers do not have to sacrifice other buying opportunities for the purchase in question. The hope in carbon pricing is that lower emissions goods and services will succeed in the marketplace against goods and services that represent higher carbon emissions.

The price of goods and services is one of the primary attributes that influence buying decisions. A lower price means that buyers do not have to sacrifice as many other buying opportunities for the purchase in question. In a small segment of premium goods, a higher price may signal to some potential buyers higher quality or prestige. The hope in carbon pricing is that lower emissions goods and services will succeed in the marketplace against goods and services that represent higher carbon emissions.

systems will probably end up relying on large “look-up tables” of engineering analyses of different technologies and use some type of carbon emissions calculator to assess the degree to which they will be able to reduce greenhouse gases.  The price “signal” will not be the original means by which firms will calibrate their efforts to reduce greenhouse gases but will instead be facing a series of capital investment decisions that will yield either discrete emissions reductions “equivalents” or a range of reductions depending upon their actual usage, which would need to be measured after the fact.  Therefore the market in emissions will involve a series of translations of expected emissions reductions with actual reductions that independent monitors will verify.   So the price signal will be felt over a period of time and will not be necessarily clear.   Probably the most effective aspect of this signal would be the perception that in the future, economic losses will be very high as rises in the carbon price are anticipated, so the price signal may be most effective as a blunt instrument of fear.

3)    Politically feasible carbon price is low -  Almost all observers agree that carbon pricing, whether arrived at through permit auctions or via direct taxation, will not in the first years be particularly high.  Expectations put pricing in the neighborhood of $15/tonne or less; the current worldwide price in the economic downturn is around $12/tonne .  At this price level, some efforts to improve efficiency or purchase offsets will be inspired but the effect on energy prices will be minimal, the equivalent of 13 cents per gallon of gasoline or less.  Most affected at this price level will be energy intensive industries which if subject to the carbon price will be incentivized to pursue energy efficiency measures.  However at these low price levels not much action will occur though as a society we will start to “at least go in the right direction”.  More impressive to businesses and private citizens would be the future threat of increases in this carbon price within the framework of an aggressively administered and supported program.  Political sentiment may change enabling more aggressive and higher carbon pricing which will boost the effectiveness of the carbon price substantially.

4)    “Economic actors already have choice on the solutions market” The market paradigm is effective in the short term if market actors have a choice between two significantly different alternatives in terms of their carbon emissions that are made attractive or even tenable investments with the aid of the carbon price.  Exceptions to this requirement are costless conservation measures and changes in behavior.  Solutions need to be “on the market” or emerging onto the market for the price to actually effect decisions.  The hope and theory in carbon pricing is that innovators will be providing these solutions that respond to demand from people and companies suffering or anticipating suffering from paying more for emissions-intensive products and energy.  Demand for product innovation could be driven just as well or in addition by other mechanisms including straight energy taxes, conventional regulations, positive incentives, or government investment.  In many sectors and technology areas, currently a very low or zero carbon alternative technology is either a) not yet on the market, b) requires a very high carbon price to be made competitive or c) requires the presence of technological preconditions, i.e. infrastructure, for the cleaner technology to function as an equivalent to existing polluting technologies.  We see this in many elements of building the renewable electron economy and/or the Repower America plan.   The carbon pricing model seems most appropriate to increasing energy and resource efficiency, the marketing of offsets, land-use changes or encouraging some behavioral changes by individuals rather than new paradigm development or infrastructure change.   Energy efficiency or carbon offsets (which can be packaged in increments) allow for the incremental approach in the world of actual emissions reductions that matches the gradual increase of the carbon price.
5)    “Emitters are morally responsible for climate change” – While designers of carbon pricing schemes may deny that they are attaching a moral evaluation to the amount of carbon tax or pollution permits that a polluter pays, the market based system ultimately holds individual or individual corporate actors responsible for solutions and implies that the worst polluters will suffer the consequences of their polluting ways.  Eventually some of the economic pain would be spread around but would depend upon the actions or inaction of the polluters.  This focus on what I have called a “particulate” or atomized set of actors, denies the integrated or systemic view of an economy which demands certain products that historically have required carbon emissions.  A strong ethical case can be made that those who demand goods and services that depend on fossil resources or GHG emissions are as responsible as the actual emitters.  Co-responsibility through a systemic approach might augment or in some areas replace a model that turns on pinning responsibility on polluters.  Both individual responsibility and societal co-responsibility should not be viewed as mutually exclusive alternatives.
6)    Carbon price will fluctuate dramatically (cap and trade) –  The instability of the carbon price under cap and trade will make long-term investments difficult because there will be substantial uncertainty about the costs over time of paying for permits or reducing emissions to be able to re-sell permits.  Carbon prices, because of the economic slowdown and the dramatic drops in the price of fossil energy, have sunk from $30/tonne in the summer 0f 2008 to currently around $12/tonne.  This will make calculating financial benefits of various emissions-reduction investments using instruments like net present value difficult if not impossible.  Additionally, on the other side of permit auctions, if the proceeds of carbon auctions under cap and trade systems are used as a revenue source or dividend, it will be an unreliable revenue source.  This will also make long-term investments that depend on revenues from carbon auctions difficult.
7)    Carbon pricing is, like all boosts in energy prices, regressive – As are all energy-related taxes or fees, carbon pricing is regressive, meaning that the resulting changes in prices will effect the middle class and the poor more than the rich.  There are a number of suggestions about how to remedy this including returning all the resulting revenues as a flat dividend to people or to replace regressive taxes like the payroll tax with carbon taxes.  The dividend idea will mute the price signal of the carbon price to some degree for the less advantaged.
8)    Non-specific and frontloaded promotion of more costly solutions – One of the intentions of carbon pricing is to “level the playing field” for renewable energy and other more expensive clean energy generation systems.  However, the carbon price by raising the price of fossil fuels and contributing to raising the price of almost every good in society, will only spur the development of renewable energy at a high price level if purchasing decisions are made based largely on present or near-term cost.  This is the equivalent of building a large and elaborate scaffolding around a tree to reach the top of it rather than using a ladder or a “bucket truck”.
9)    Unintended suppression of economic activity with poor calibration – If emissions reduction or energy efficiency technology is not ready or not affordable, there may be a net reduction in economic activity.  This would reduce emissions but not as intended by cap and trade or carbon tax policy designers.  There could be sector by sector systems that calibrate to a given market but this would defeat some of the intentions of a price on carbon and would increase complexity considerably.  Business interests which want to do nothing about climate will use this as an excuse to try to delay or stop climate legislation.
10)    Ties climate policy and activism to the downside of climate change – The theory of carbon pricing is so relentlessly focused on the downside of climate change that it is left open what positive emissions-reducing activities would be funded by revenues from either a carbon tax or cap and trade auctions; the negative, punitive effect of the price signal alone is supposed to suffice.  Disincentives outweigh incentives in carbon pricing systems; carbon pricing is designed to say “stop” to polluters (us).  The negativity of this policy instrument is a political liability, as popular support for taking steps to address climate change is key in designing an effective policy.
11)    Assumes symmetry of opposites between problem and remedy – The mechanism of carbon pricing is structured as an economic force that is both symmetrically arrayed against and opposed to the emission of GHGs into the atmosphere.  Carbon pricing is so relentlessly focused on emissions themselves that it may blind leaders and market actors to the possibility that the remedy for carbon emissions may be assymetrical with the problem itself.  The solution may “reframe” the problem rather simply remain focused on the problem itself alone.  For instance, related to “8” above, the remedy may be to invent new positive reasons to take action on climate and change our way of producing goods and services.  While it is hoped in carbon pricing that the black box of the market will produce this new positive post-carbon society, there are reasons to believe that a more directive approach in certain areas may be necessary, especially with the tight timeframe given to us by climate scientists.

Lawrence Berkeley National Laboratory is one of a series of research laboratories funded in part or in full by the government, that have produced many scientific and technological innovations. In the innovation process, the market seems to have a greater role in the latter stages of development of scientific and technological ideas.

Lawrence Berkeley National Laboratory is one of a series of research laboratories funded in part or in full by the government, that have produced many scientific and technological innovations. In the innovation process, the market seems to have a greater role in the latter stages of development of scientific and technological ideas.

12)    Technological innovation often originates outside of the market – The idealization of market mechanisms has attributed much innovation to the market when, in fact, non-market mechanisms have shepherded much technical innovation to the prototype stage or further.  The market is treated by those who idealize it as a magical innovation “black box”.  While fame and fortune are clear motivations for many innovators, the initial contexts or financing sources of innovation are often in government run laboratories or grants to university or industry scientists and engineers.  With large capital goods, it is difficult for innovation to occur without the sponsorship, support, or regulatory approval of government.  The presence “somewhere” of a market outlet for innovative ideas is often important but the market is not as much the site of innovation that was assumed in the context of the idealized market phenomenon.
13)    Value of third-party carbon traders unclear (cap and trade) – If we accept the idealized picture of the market, the role of third-party traders add liquidity to markets.  However if we view markets as one mechanism among a number, third-party carbon traders may lead to businesses either paying too much or too little for permits and add to carbon permit price volatility.  Additionally, the potential for bad or disengaged market actors manipulating markets increases, interfering with the ability of businesses to make long-term investments in carbon reduction technologies.
14)    “No one is in control” (cap and trade) – A cap and trade system sets up a complex system that is mandated by governments but runs in parallel to them and if it fails in some way, direct intervention is difficult; the carbon market is supposed to run on its own.  Within the monetarist/free market worldview (amended to include the carbon emissions externality) the notion that “no one is in control” is a good thing, seeing that this frustrates what this group feels to be the power-hungry ambitions of governments.   However, if we shift to the Keynesian or some “not anti-Keynesian” view that some government direction and regulation is necessary, the need for someone to be “at the switches” may be desirable in regulating carbon policy.  This would speak for a carbon tax system, which could be changed quickly by legislative motion or executive fiat to better calibrate it.

Given the above, the carbon pricing instrument looks more limited in its scope of application than is usually discussed.   Carbon pricing has some potential but expectations need to be tempered.   As we shall see, a combination of a number of instruments is going to be more effective than loading every expectation onto carbon pricing policy.

In Part III, we will look at crucial market failures that are not adequately addressed by carbon pricing.

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