Cap and Trade Derails Climate Ethics, the Motive Force of Carbon Mitigation – Part 2 November 18, 2009Posted by Michael Hoexter in Energy Policy, Sustainable Thinking.
Tags: cap and trade, carbon tax, Energy Policy, Sustainability
In the first part of this post, I outlined how the components of cap and trade don’t work together to cut emissions.
2. Cap and Trade’s Perverse Ethics Threaten Climate Policy Effectiveness
The role of ethics in economic policy, and in climate change policy in particular, is misunderstood or underrated. Ethics as an animating principle of government or civic action is not simply a matter of maintaining or broadcasting ethical rectitude by individuals or organizations or avoiding certain lapses or illegalities. Sometimes viewed as optional or of limited use, ethics is often brought into discussions after the fact, explicitly to judge the behavior of individuals or organizations or implicitly to achieve higher personal status. However ethics can be more broadly understood as one of a continuum of means by which value, negative and positive, is assigned to things, people, actions, and ideas. I am using “ethics” as the inclusive term for “ethical codes, values, and morals”.
The choice in ethics on a community or national scale is not only between good and bad or in resolving an unusual and challenging conundrum as is often brought to the attention of professional ethicists, but in the alignment of priorities between what gets more attention and resources and what gets less. The value of climate protection and clean energy is for most people and governments still a somewhat lower priority than, for instance, national defense, as is reflected in their respective budgets in most countries. While some feel that calculated costs and benefits should always determine political and economic decisions, how one accounts for costs and benefits is a matter of a series of ethical choices. Furthermore political and cultural leaders and active social movements can via their ethical commitments and leadership change the priorities of a nation and thereby alter the budgeting, effort and time priority assigned to each set of activities.
Climate Ethics Is Not Optional
In an earlier post, I have compared the fundamental task in climate policy to overcoming an addiction. In an addiction, impulses to use a harmful substance overwhelm the rational thinking and ethical parts of the individual; for addicts, rationality becomes an instrument to search for the supplies of the addictive substance and cover up its consequences, including lying to others and to yourself. To overcome an addiction, most addicts need to install an “external conscience” in the form of a community of people who monitor them and encourage them for years or for the rest of their lives.
Addiction is about putting short-term gain ahead of long-term viability; similarly a society such as ours that depends on fossil fuels or the overexploitation of the soil and forests is placing immediate satisfactions ahead of long-term sustainability. Over the past two hundred years economic growth and activity has been intimately linked with the use of energy-using devices which worldwide depend for 85% of their power on fossil fuels; one could almost define economic development in the last century as the increased use of fossil, hydroelectric and nuclear energy to do work that would in the past have been done by human or draught animal muscle power. Increasing convenience, the shortening of the distance between a wish and its fulfillment enabled by cheap energy, has become a hallmark of individual and social wealth. To enable us to overcome the pull of cheap fossil energy we need not only to listen to speeches about how bad it is but to have an effective policy framework that guides us to reduce our use of fossil fuels and increase the supply of clean energy.
A metaphor from chemistry might also help illuminate the challenge facing us. Some reactions in chemistry happen pretty much spontaneously because there is no or very little of an energetic “hill” or energy of activation to surmount in order for the reaction to proceed. Other reactions, many of them in biological systems, require the presence of one or more catalysts or enzymes (biological catalysts) which decrease or supply the energy of activation of the reaction. The input of energy, like the heat and chemical transformations of a fire, is a catalyst for many reactions including those involved in cooking. Just as spaghetti doesn’t cook itself without boiling water, it is clear that we, as participants in economic systems, are not spontaneously protecting the Holocene climate. Some hold out the hope or subscribe to the philosophy that the only good or “natural” economic activities are those that happen “uncatalyzed” by government or the exertion of ethical will. This philosophy tends to naturalize what already has been achieved with or without government and has no account for how things change or how new challenges can be met: it is a “just-so” story.
While it would be preferable if good things would happen only “by themselves”, without catalysts, we have discovered that this cannot be counted on to induce us to control emissions of greenhouse gases: too many of our satisfactions have come to depend on the use of fossil fuels and we don’t experience the negative consequences directly. Our economies that run largely on narrow self-interest alone will not institute the technological changes necessary spontaneously, because of their costs or the diversions of the other interests that all of us have.
Good climate policy supplies the “energy of activation” or the catalysts for those “reactions” to take place, to enable people to make the decisions they need to make to protect the climate. The basis and power of that policy comes from an ethical commitment of leaders, citizens, and activists to tip the scales in favor of carbon mitigation, and to a lesser degree efforts at adaptation to climate change. In some areas, it may take a mere informational “nudge”, in other areas, it may take a decade or two of costly effort to supply this “energy of activation” yet the costs of inaction are in this case far greater.
Government is the only institution with the potential to enact these ethical commitments on an economy-wide scale and that can level the playing field. Shaping markets is an important part of government’s activities, which is not often welcomed by participants in those markets. This requires the ability to marshal as much support as possible for these tasks from the citizens and business interests as well as the ability to anticipate resistance to these changes from the same groups. There is both economic pain and reward involved both of which should not be ignored.
An embrace of government’s role is not the embrace of a positive utopia or single guiding principle for social and economic life but simply an acknowledgement of a diverse and complex human nature. There are many who struggle against what seems obvious or commonplace in the observation that government plays a necessary but distinct role in the economy, especially in times of crisis or rapid change. There are still many believers in the self-sufficiency of markets which supposes that government’s catalyzing of economic activity is either unnecessary, harmful, or should remain invisible for ideological reasons. Some insist on a largely painless transition to a clean energy future: this is highly unlikely and requires waiting for technological breakthroughs that may not occur in time. Others believe that their policy instrument (cap and trade) will scour the world for all “least cost” opportunities to reduce emissions before any economic pain is inflicted at home. Still others hold out the prospect of a relatively painless status quo, and this seductive notion animates those who deny or minimize climate change.
While we are, in an age of cynicism about government and humanity in general, unused to thinking about government as the instrument of popular morality, most halfway legitimate governments express through the passage of laws and their enforcement the values of their respective communities; without a shared sense of ethical justification for laws, a government quickly loses its legitimacy. By contrast, unregulated markets have tended to promote at best a narrowly utilitarian morality that has little concern beyond the horizon of the next few years, the next few months or the end of the current transaction. Markets encourage most often those transactions that happen pretty much spontaneously, based on a narrow form of self interest as defined by traditional corporate accounting. Governments backed by substantial ethical justification and assent from civil society are the only institutions that can in large number of transactions tip the scales in favor of solutions that address medium- and long-term issues that do not have a major impact on this year’s balance sheet.
Thus returning to the formulation in the title, ethics (duty-bound commitments to the future and to the vulnerable on the planet) are the locomotive of climate action and government action and policy aligned with these commitments are the prime vehicle for their realization. Acts of individual and corporate virtue and creativity will be an integral parts of moving us forward but are no substitute for widely held ethical commitment to these goals that include the highest ranks of government.
Cap and Trade’s Ethical Trap
The “dressing up” of markets, especially trading-based markets, as agents of morality in the last three decades has come at a time that is unfortunate for the future of our favorable climate. Markets have been held up as “better than” government and government’s role. Meanwhile, if viewed dispassionately and without pro- or con- ideology, unregulated markets use resources profligately and without regard for its impacts in search of short-term favorable return on investment. Carbon dioxide emissions do not substantially threaten the economic utility (subjective assessment of value) of the major polluters or many of their customers, in their current perceptions. These factual observations should not be attributable to one political wing or another. Having to re-establish or establish for the first time government’s legitimacy in these matters just adds another political challenge to the process of dealing with climate change
Cap and trade is an effort to clothe the administrative and ethical role of government in the supposed ethics and/or efficiency of markets, in this case, the carbon permit market. The twisted result is a huge policy blunder and is not as good as the more straightforward carbon tax/dumping fee or direct regulations, which acknowledge governments’ leadership role in these matters. A shorthand way to look at emissions trading is that an artificial permit market is supposed to “emit” the carbon price signal to the real market for carbon emissions reductions. The substantial effort involved in rerouting the intentions of government leaders via carbon markets ends up obscuring or voluntarily hamstringing the role of government. It is unfortunate that some of these truths are being pointed out by politicians and others who want no climate policy whatsoever; this does not make their observations about cap and trade completely false.
In the 1990’s, when cap and trade was formulated, a generalization and expansion of the role of derivative trading in the economy was considered to be commonsensical and a sign of economic health. The perspective looks different now, after we have experience a monumental financial collapse which was enabled by the meteoric expansion of derivative trading during the last two decades. The designers and advocates of cap and trade make the derivative trading component, the insertion of a vast market of middlemen, seem a trivial addition to the concept of a carbon price, which is represented most simply as a carbon tax or fee. However as we have seen this trading market substantially changes the determination of a carbon price and diminishes its usefulness as a tool to spur investments in real technologies.
In proposing cap and trade systems as the climate policy of choice, governments also try to insulate themselves from taking direct responsibility for carbon mitigation. Once a cap has been set, the work and responsibility of government is obscured by the activities and vacillations of the carbon market which is then “responsible” for the carbon price that is generated. Ultimately this creates a situation where, in the end, no one is directly responsible for climate protection as government can point to the permit market as being at fault for lagging implementation of carbon emissions reduction. Some may view this as positive, perhaps insulating climate policy from the vicissitudes of politics, but in the end this means that the insulated climate policy will be ineffectual, non-transparent, and corruptible by system stakeholders who are interested in maintaining a fossil fueled status quo. Immediately or in the near future this failure has a high probability of becoming a political liability.
The Pricing of Carbon as an Ethical Enterprise
In the “prospectus” for cap and trade is the claim that beyond setting the cap, the government is allowing markets to set the price of carbon. Somehow this is supposed to make the price of carbon seem more “real” and be more “efficient” to market actors. However, what happens, viewed from the point of view of authorship or responsibility, is that government issues a certain number of permits from which it might be expected that a certain average price will emerge yet afterwards allows both auctions and trading to ultimately determine the carbon price; calculations of economic impacts of the policy will always project prices which are the operative economic units, not numbers of permits. The interplay of what market actors think a permit is worth at one point of time or another in bidding or trading, has not that much to do with the cost of mitigation of carbon emissions or the damage those emissions cause, i.e. their fundamental value. In 2008/2009 carbon prices have doubled and halved in value within the span of a year depending on factors such as the cost of oil and the general strength of the economy; neither of these factors have much to do with pressing on with decarbonizing the economy.
Put another way, the biosphere and atmosphere “don’t care” about the opinions of various permit buyers, the price of oil or economic downturns. Pricing carbon is about impressing the impacts of carbon emissions upon the valuation processes of all economic actors, not the other way around. (Furthermore this impressing of the impacts is supposed to occur within and an investment [longer] and not a trading [shorter] timeframe, so there is a fundamental mismatch between the instrument and the task.) We are already at atmospheric concentrations of 387 ppm carbon dioxide, past what most scientists believe to be the optimal set point for carbon concentration in the atmosphere. The real cost then of additional emissions is at this point in time close to astronomical because all emissions now contribute to irreversible warming. While an astronomical price of carbon is not realistic, to sever the ties of that price to the scientific reality by allowing the interplay of market participants to determine the price is a distraction that serves no purpose according the manifest large-scale goals of any carbon mitigation policy. Furthermore this is again, as above, a case of “diffusion of responsibility”, where introducing more actors into a situation creates the situation where each actor feels less compelled by ethical standards to take responsibility for the situation.
Instead governments need to take responsibility for their (new) role as protectors of the atmosphere and the climate, one part of which (and this is not the only part) is to set a price for carbon that has a real impact on markets and leads nations and the world to meet emissions targets. The setting of this price involves calculations of what it will cost and how these costs will be paid for and their effects mitigated upon the most vulnerable parts of the population. To whom political leaders will listen most and which concerns will trump others is part of the ethical decision making involved. These decisions will not necessarily be perfect but will start a process by which they will enter a dialogue with their constituents and stakeholders where actions are easily understood in terms of their costs and benefits. Cap and trade, with its focus on trading rather than investing, surrounds political decisionmakers with groups of people, who are for the most part not particularly relevant to the process of cutting carbon emissions.
Recognition and Respect for Carbon Investment Stakeholders
Stakeholders other than government and scientists are important to include in carbon pricing decisions. These stakeholders should include the industrial groups, consumers and lenders that are affected by the carbon price, not third-parties with interests in taking advantage of derivative trading markets. Finance is important as a spur to long-term investment but the magnification of its trading component in the cap and trade instrument is the injection of an irrelevant foreign element into the carbon pricing process.
By setting the cap and letting the market “decide” government and regulators are disengaging from the process of determining costs even though, at this point in history, government sponsored engineering studies of various climate solutions are about as accurate information as we have about what it will costs to mitigate carbon emissions. The cap and trade instrument allows climate activists and government to occupy the ethically suspect role of the dilettante that want to keep his or her hands “clean” of discussions about actual monetary amounts. To remain in a position that “floats above” the process of discussing money is at this point in time ethically suspect.
The cap and trade instrument is also fundamentally disrespectful of those who will be making the decisions to cut carbon emissions. The variable carbon price without predictability (at least as a reasonable approximation over a 5 year period) does not give investment decision makers adequate tools to assess which investments they should make. Instead, the variable “wild card” carbon price that results from cap and trade, pushes upon them a frightening responsibility to make decisions under increased uncertainty. They are supposed to do “something” or pay “some money” for permits over a period of years but it is not known how much. The politicians and activists prefer the false moral certainty of the cap which pushes both discussions of money and actual decisions to cut emissions to the “polluters”. Why not make this job , the most important in the whole policy framework, as easy as possible?
I have no illusions that debating over amounts of money will not be loud and obstreperous. However the fight should be carried out as openly and transparently as possible so as many stakeholders as possible can see and understand the results. By contrast, the setting of a cap only has indirect meaning and impact on constituents and stakeholders, which then does not allow an open and honest dialogue and debate about the costs of climate mitigation. Perhaps in the 1990’s, leaders shied away from entering this dialogue because they have not been prepared to do so. Now we can assemble the tools to discuss the costs and benefits of climate action with all. In addition, in the 12 years since Kyoto, it has become more obvious to many people around the world that something is happening to the climate, so open discussion rather than the vague proclamations of intent is more of a possibility.
The Structure of Cap and Trade Defeats the Ethical Force of Climate Action
As it now stands, our short-term self-interests as people living in 2009 are not generally aligned to create a sustainable economy. In the developed world, if it were up to us, we would “party like its 1999” perhaps with a few green tokens that would declare us to be virtuous people in our own self-estimation. In the developing world, many people want to live some approximation of the lifestyle of those in the developed world with their accompanying reliance on conveniences powered by fossil fuels.
The strongest countervailing forces to these tendencies are our own observations and the observations of scientists that we have started to degrade the world by our activity and that we are concerned about the environment that we will leave future generations or force upon the less powerful or privileged parts of the world. These ethical concerns informed by science are the most consistent source of power for climate agreements and climate policy. We require a clear regime of rules, incentives and disincentives combined with leadership in the right direction that are as directly as possible connected with these sentiments and observations.
The complexity and dysfunctional nature of the cap and trade hybrid instrument does not offer a lever or “button” upon which the combined ethical force of those concerned about the future of our planet can “push” to make the instrument actually make substantial cuts in emissions. Once the cap is set, the supposedly impersonal forces of the market will determine the outcome; within the policy’s design by intention no agent is simultaneously directing the investment process and responsive to the calls for climate action. All interactions with low carbon technology and emissions cuts will be filtered through the carbon market paradigm. While this is an advantage to those who want to slow action on climate change, ostensibly the creation of a cap and trade system was to accelerate action on climate change. The policy itself is at war with the ethical justification for its existence.
The declaration of the cap, component “4” of the cap and trade hybrid that I described earlier, also is taken by those who don’t bother with or understand the economic decision-making and technology-specific parts of policy options as a seductive ethical quasi-fait accompli. They might think: “I have subscribed to this policy that pledges this goal (with impenetrable economic explanations attached), therefore I have done my duty”. Unfortunately the devil is in the details which are difficult to delve into without some understanding of how investment decisions are made. The declaration of the cap however “tight” or not gives subscribers to the policy a sense of virtue without really seeing how the policy itself undermines or makes achievement of an ambitious cap much more difficult.
My friends who support cap and trade will point out that they call for a version of the instrument with 100% auction and tighter caps. Surely, they think, this is putting the screws even tighter on the “polluters” and sending the message via higher permit prices that investment must be made in carbon mitigation. While the “fantasy” version has yet to be enacted anywhere in the world and may very well never be enacted, the problem is that a more rigorous cap and trade system makes the job of the people who actually cut carbon emissions much more difficult than it has to be. A predictable price will be a spur to investment, while the swings of a carbon market will slow investment in carbon emissions reductions.
Carbon Taxes/Dumping Fees and Direct Regulation Are Responsive to Climate Ethics
If we contrast this with direct regulation or a carbon tax or fee, the ethical structure of the instruments become more obvious. Imposing a tax on an activity, especially framed as a Pigovian “sin” tax, means that we are penalizing that activity or asking for compensation to society for damages. In essence a carbon tax is consistent with the valuation of carbon emissions as “bad” though not criminal. Auctioning permits to emit says that carbon emissions are neither good nor bad, ie. this activity is permitted but has an indeterminate cost and a market value. Already at this level, cap and trade is “protecting” emitting carbon from moral opprobrium. Like it or not, moral concern, anxiety, anger and outrage expressed and directed wisely is going to have a determinative ongoing role in spurring climate action.
Furthermore, as we are recognizing here that relatively speaking governments have an eye to long-term outcomes to a much greater degree than market participants, the carbon tax or fee gives government actors by extension civil society a direct “say” in the accounting of damages and the remedies for those damages. While cap and trade gives governments only a very indirect instrument to influence market behavior, a carbon tax or fee allows government to put its “hand on the scale” to influence economic decision making directly. Remember that the “certainty” of the cap is illusory because of the cap’s enforcement problems; placing a “dumping fee” on emissions is a much more direct and practical expression of concern.
Both taxes/fees and cap and trade create revenue streams for government which can be directed or misdirected any number of ways. Within the policy choice between a quantity vs. a price instrument is no formula for how to direct the resulting revenue which will be determined by politics and the local economic consequences of the policy itself. However taxation at least historically is understood as a revenue stream, therefore there is greater chance for a transparent accounting and open discussion of where the money will go.
Additionally and more clearly, direct regulation is consistent with our emerging ethical evaluation of carbon emissions in that specific carbon emitting activities can be made illegal over time. For instance in the US, we could make illegal in 10 years time the use of coal to generate electricity without 95% sequestration of emissions securely. We would be making a major ethical statement about our use of coal and the pollution of our common atmosphere. This law would need to be supported by other measures to enable a transition to a clean electric generation mix but it is not difficult to achieve with the appropriate will and incentives. There are dangers of “unfunded mandates” or distortion of incentives with direct regulation, but this does not mean that any and all regulation is bad. The blanket condemnation of regulation is still a political discourse with a constituency but economic reality has shown us that we cannot do without any regulation.
Cap and trade represents something like a moral limbo for the climate action movement into which it has marched without thinking too much about giving up its moral power. Once instituted, participants in a cap and trade system would have a legal right of redress that their permitted and potentially valuable rights to pollute would be taken away from them by laws which forbid carbon emitting activities. Cap and trade thus creates a perverse ethical system. Cap and trade is more of an economic thought-experiment than a confrontation with the economic, technological and ethical realities of cutting carbon emissions.
The faith in markets around which the cap and trade instrument has been built overreached its true place in stimulating the targeted market for low-carbon and zero-carbon technologies. One of the instruments that would truly offer this “button” or “lever” is a carbon tax or fee which if demands were made that it ascend high enough, would stimulate low-carbon investments. The other instrument would be laws which with reasonable time frames and imposed-cost calculation, circumscribed or forbade particular high-emissions activities that destabilize the climate.
Tags: cap and trade, carbon tax, Electric Vehicles, Feed In Tariffs, Infrastructure, rail electrification, Renewable Energy
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In Part 1, I offered a critique of cap and trade in its existing implementations and located key flaws which make it highly unlikely that it will achieve its emissions reduction goals, even if somehow it is strengthened. In part 2, I highlighted two problematic aspects of cap and trade and then went on to examine what are the fundamental challenges of climate policy. Then I offered a list of the general features of any effective climate policy.
Turning to positive solutions rather than criticsms, I will offer here two main options, the first one mainstream and the second heterodox and project-based; both of which are easily configured for quicker and more certain emissions reductions than via cap and trade.
Comprehensive Climate and Energy Policy Package with Carbon Tax/Fee
Climate policy has emerged with a focus on markets and changing market behavior (ignoring infrastructure development to a large degree), so the “mainstream” approach below would also transparently give responsible parties control over the process. While the “one-stop shop” aspect of cap and trade overextends this already misapplied policy, a package of interacting measures that are, with fairly straightforward calibrations, guaranteed to cut emissions quickly can easily be put together. The below policy package avoids handing off climate and energy policy to an unaccountable carbon market and invite undue influence by financial traders. It also has the potential to be much more effective than a cap and trade centered policies. On the other hand it is “market-based” in that it relies on the more accurate carbon tax/fee price signal to shape market behavior rather than cap and trade’s muddy signal.
1) Emissions-Reduction Path with Targets: Set an emissions-reduction path with target goal posts (2015, 2020, 2025, etc.): Not the reassuring “cap” metaphor but an analog to the cap without the false reassurances that it contains. The target or path could be expressed in terms of an average carbon-intensity for economic activity that yields the same path. Using a carbon-intensity target allows adjustments to be made so efforts to cut emissions do not shut down industries before they are able to transition to lower carbon alternatives. I would recommend the “emergency pathway” as defined by Greenhouse Development Rights that uses the 350 parts per million carbon dioxide target, though others may object to its ambitious goals.
2) Carbon Fee or Tax: Set a carbon price in the form of a carbon fee or tax fixed but rising year by year that will, according to at first estimates and then experience, reduce emissions along the path. If the tax does not yield the necessary cuts, increases in the tax/fee levels will be accelerated. A tax or fee enables companies to calculate the value of carbon emissions and make the actual investments that will cut emissions rather than deal with a broad range of expected carbon permit values, as would result from cap and trade.
- Calibration – A carbon tax would be calibrated to achieve the emissions targets along the path in bullet “1” though overachieving will be encouraged. If tax levels inflict damage on economic well-being or capacity, tax levels may be reduced, though it is to be expected that there will be periods in which some economic pain will be inflicted by the tax to encourage better economic decision-making and innovation. Expectations need to be set from the outset that some pain is involved in transitioning to a more sustainable economy, though excessive pain is to be avoided.
- Revenue stream – There are arguments among tax/fee advocates (as well as cap and trade advocates for the revenues from permit auctions) about where the revenues should go. Here are my recommendations:
- One third of the carbon tax revenues should be used to dampen the effects of the costs of rising energy prices on the poorest, preferably via energy efficiency upgrades to housing (modeled on weatherization programs).
- One third should be used to help fund infrastructure that enables a zero carbon future (electric trains, electric transmission)
- One third will go into a international carbon trust which will fund development products, changed agricultural practices, forest maintenance and growth efforts with strict performance standards and baseline assumptions.
- Exemptions and Credits – Some argue against any exemptions and credits, seeing a flat tax as simpler. However, I, as an example, believe taxing certain activities that cut carbon is counterproductive. Additionally I want to show that it is possible to develop and regulate cross-border certified emissions reduction credits in a tax system if such a credit sub-system ends up being desirable. I believe however that these necessary accommodations to the complexity of the situation are much more transparent and can lead to more productive dispute resolution than via the arcana of the trading system.
- It makes no sense to levy the full carbon tax level on the very infrastructure projects that lead to carbon neutrality. If a construction project embeds fossil emissions in a zero-emission technology (electrification of a train system, renewable energy infrastructure), then the emissions from construction equipment or concrete making for that project should be at least partially exempt. Alternatively there could be a percentage exemption depending on the level of carbon reduction achieved (coal to natural gas conversions).
- Just as with the current offset market it might be made possible to sell certified emissions-reduction credits that represent emissions reductions in other areas or other countries. These credits would need to be rigorously certified and limited to only a certain fraction of carbon tax liability.
3) International Agreements – Utilizing existing international institutions, nations around the world can come to agreements on both monetary fees for carbon emissions and overall emissions reduction targets. The addition of a monetary amount will force action by governments and businesses more rapidly than the abstractions of the carbon market. Agreements will focus on:
- Worldwide Emissions Targets and Path
- International Carbon Price(s) – Calibrated to achieving emissions targets, the international carbon price will be closer to actual microeconomic decision-making than permit pricing system of cap and trade. Choices are either a unitary price or a development-adjusted price depending on level of development. Some countries may be more “entitled” to pollute given their lesser historical contribution to total atmospheric concentrations of carbon. On the other hand, despite an “entitlement” to pollute more, some developing countries may want to go “cold turkey” and use the higher carbon tariff of the developed countries to spur sustainable development at home.
- Carbon tariff regime – with differential taxation in different countries, countries would levy tariffs upon importation either up to the amount of the unitary international carbon price or up to the amount of the development-adjusted carbon price. While this contradicts “free trade” orthodoxy, under an international agreement there should be no problem in levying this type of tariff. The WTO can be outfitted to handle disputes and generating agreements carbon tariffs and integrating climate policy with trade.
- International Standards and Best Practices – Agreement on standards, certifications, and grading systems for energy efficiency and low emissions technologies (see below)
4) Zero-Carbon Infrastructure Development– While the Obama Administration has embarked on pieces of this, a full-scale climate policy would front-load spending, including deficit spending, on building zero-carbon infrastructure and energy generation. The main source of funding would come from tax revenues and use fees. This area is largely neglected by the cap and trade instrument.
- Renewable Energy Supergrids and regional grids – Link high renewable energy areas with demand centers via development of a HVDC and where appropriate high voltage AC transmission.
- Renewable Energy Zones – Expedite environmental impact studies for high value renewable energy zones with strong sun, wind, geothermal resouces.
- Feed-in-Tariffs – Funding of private, community and household investment in renewable energy generators via clean energy surcharges to electric bills.
- Electric Freight Transport System
- Grade-separate and improve existing freight railbeds
- Add additional tracks to high traffic railbeds to allow more rail freight
- Electrify all high and moderate traffic rail routes
- Electric Passenger Transport System
- Build high speed rail backbone
- Enable improved track-sharing between freight and passenger traffic for lower-traffic routes.
- Build electrified bus and tram routes in high density/high-traffic city environments.
- Electric Vehicle Recharge Infrastructure
- Trickle charge (220V and lower) public charge network
- Battery-swap infrastructure
- Fast-charge (480V and higher) public charge network
5) Best Practices, Certifications, Standards and Rulemaking– Develop for most economic sectors, a set of best practices and standards that are based on cutting emissions as well as other elements of sustainable development (conservation of the earth’s natural wealth). Standards would be either voluntary or mandatory depending on the level of imposed costs of meeting these standards by market participants and the existence of alternatives to meet the overall goals of the standards. Rigorous standards like the passive house standard should be encouraged as well as graded standards that represent a “path” to carbon neutral solutions. In certain vital areas, standards may be come laws to rule out certain practices that are simply unacceptable. An example of the latter could be a moratorium on new coal power plants.
6) International Afforestation Program – Using revenue streams from carbon fees and tariffs, generate local solutions to maintaining living biomass. Carbon taxes or other disincentives may be levied on activities that release excess carbon into the atmosphere.
7) International Agricultural Carbon Sequestration Program – Using revenue streams from carbon fees, incentivize low-emission, high sequestration variants of agriculture and food practices. In the future, once a baseline for carbon sequestration may be achieved, carbon taxes may be levied on high emission forms of agriculture.
8) Black Carbon Reduction Program – One of the more tractable climate problems though still a challenge is to introduce existing emissions control technology or develop alternatives to combustion of hydrocarbons and biomass that produce soot or black carbon. We already have most of the technology to limit soot emissions from internal combustion engines and factories. More challenging is coming up with culturally-acceptable solutions for cooking with wood in less developed countries.
9) International Technical and Scientific Cooperation – Create the equivalent of an international energy and climate research fund that supplements the work being done on national levels towards specific technical solutions to emissions. Could develop in conjunction with IPCC WG III. One area of research should be emergency measures like geo-engineering.
If adopted as a package, the above measures address all 11 generic elements of carbon policy and have none of the 10 drawbacks of cap and trade. This approach transparently identifies governments as the responsible parties for reducing carbon emissions. This comprehensive climate and energy policy does not interfere with their ability to respond to changing climate circumstances and removes unaccountable financial markets from the core of climate policy.
Tags: cap and trade, carbon tax, Energy Efficiency, Energy Policy, Energy Pricing, Sustainability
In the first part of this post I identified 10 features of cap and trade, the favored climate policy of many policy elites at this point in time, that make the policy ineffectual. I outlined how cap and trade was sold to America and the world based on faulty assumptions as well as its superficial political appeal to the then Clinton Administration. Contrary to the story told in climate activist and sympathetic policy circles, cap and trade has been comparatively ineffective as a means to reduce emissions of either SOx or GHGs. I argue that this is a structural problem with cap and trade, not a mistake in implementation.
The Gulf Between Gutlessness and “All the Guts in the World”
Cap and trade is a hybrid policy, the mixture of a price mechanism and permit regulation. In theory, the three “motors” of cap and trade are the economic pain caused by having to buy permits (or the anticipation thereof), the profit gained by market participants in exploiting the permit and pollution troubles of others, or the prospect of running out of permits and being subject to some penalty inclusive of actual “police action” on the part of regulators. As with any permitting system, permits are meaningless without the threat of, potentially, monetary and criminal penalties. For instance, fish and game wardens need to be able to stop hunters and fishermen from taking animals for which they do not have permits.
However, cap and trade systems hide and, it appears infinitely, postpone the moment where regulators would have to essentially shut down the operations of various industrial or power generation facilities because they no longer possess permits to pollute (which they would have to do to operate using their current technology). For instance if a financially troubled power utility or plant operator ran out of permits on November 5, to meet the cap regulators would have to shut down one or more power plants until January 1. This might mean blackouts and brownouts to homes, businesses and, of course, hospitals. It would therefore take “all the guts in the world” for a regulator or government to enforce the cap, standing down the cries of people who will have to live with no or extremely unreliable electricity. Yes the notions of “banking and borrowing” permits are meant to reassure system users that this day of reckoning will never come. Yet this process undermines the power of the permits and the firmness of the cap.
Furthermore, at the point when this theoretical moment of enforcement might occur, the net effect would actually show the regulators/government in a very negative light because punishment might come as a consequence of a lack of “clever” permit-market behavior on the part of the power plant operators. Their power plants may be no more carbon intensive than the next but they may simply have been outfoxed by other permit buyers or various manipulators of the permit market. In this case, the punishment will seem arbitrary.
So we can now understand the design and behavior of the designers of real existing cap and trade systems a little better by recognizing this disjuncture between the lax disbursement of permits (Kyoto/EU-ETS and current Congressional bills), the various softening and smoothing mechanisms (banking and borrowing) and the need for some kind of real enforcement of the cap. It would subvert the politics of the policy to actually meet the cap through the harsh regulation that would almost certainly never happen or would be largely meaningless within the cap and trade framework.
While regulatory and political guts will be required to meet the climate change challenge, the imposition of harsh measures should be seen far in advance to allow adequate time for polluters to take action to cut emissions. Cap and trade’s framework does not allow for this type of lead-time before administrative measures are taken.
True Belief in Markets vs. a Baroque Policy Mess
As you might glean from how I write about these matters, I am no market absolutist nor believer in the efficient market hypothesis (EMH) which assumes exclusively rational information processing by market participants in aggregate. I think it is more reasonable to assume that people can be both economically rational and economically irrational or can alternate between the two at different times or in different contexts. Economists are also coming around to realizing how central irrationality is in our economic behavior: there has now been about a decade of behavioral economic research as well as the coming to grips with the fact that our recent crash was in part caused by a belief in the almost total predominance of rational, utility-maximizing economic behavior.
Whatever the balance of rationality and irrationality in human economic behavior, cap and trade (or carbon taxation/fees) with good justification attempts to mobilize the economic rationality of individual market actors in the service of climate protection by introducing a carbon price that will influence procurement and operations decisions. Rational economic man (or woman), according to the theory, only needs the information of price to make rational, optimal decisions. In cap and trade, the carbon price and market is supposed to be the link between merely pro-forma climate action in the form of permit giveaways/postponement of action by regulators and the theoretical, never-to-be-activated harsh punishments for exceeding the cap. Polluters are supposed to know that they are in trouble when they start paying more and more for polluting, sending to them a signal, the price signal that they need to change their operations. Rather than the impingement of some set of rules upon the company’s operations, the price is going to tell that economic actor “how much” it will be worth it for them to do something, so they can make an rational choice among a range of options.
The most productive use of a price signal will be if firms anticipate the economic pain caused by the signal before it gets expensive for them; once they are in trouble and overpaying for permits they will have less of an ability to make expensive long-term investments, especially if they are an emission-intensive business like power generation or cement making. With cap and trade, there may be sudden surprises in the carbon markets which will put firms into trouble even with adequate planning.
I’ve already outlined how flawed cap and trade is in generating the price signal due to the variability of the carbon price that results both via auctioning and via permit trading. In both cases there will be a lot of market “noise” related to how much people think something is worth rather than what it is worth fundamentally in terms of the climate. The “how much” will be almost impossible to calculate accurately under cap and trade as conceived and as urged by climate action groups that believe in cap and trade with all permits auctioned off as the gold standard of climate regulation. This will make investment decision making tools like net present value difficult to use as you cannot calculate the negative cash flows into the future that are attributable to the carbon price. This is not because net present value (NPV) is more environmentally insensitive than any other investment tool: it’s just sloppy policy-making to defeat the purpose for which you are instituting a policy! Cap and trade would have to invent its own more baroque micro-economics and corporate finance tools that will always be more inefficient and fault-prone than using a simple price signal and NPV.
So if true belief in markets and economic rationality of individual market actors is fundamental, then a carbon tax or fee that is correlated directly with the amount of carbon or global warming potential (dealing with more powerful greenhouse gases than carbon dioxide) emitted is the clearest, most predictable price signal. Cap and trade’s baroque double decker market structure is like a climate policy that has been thought up by an overeager 5-year-old who gleefully stacks markets on top of markets because it seems more “market-like”. Having one “meta-market” emit the carbon price to the real market for carbon emissions reduction solutions is a bad idea. An excess of markets in this case does not encourage rational economic behavior on the part of individual market actors.
“It’s All that We Have”: Making Do is not Good Enough
A number of commentators, bloggers, and politicians critical of the state of climate policy nevertheless hang on to cap and trade. Some agree with some of my criticisms while others might find my foregoing criticisms gratuitous or simply giving aid and comfort to climate deniers. Or, even if they are frightened of the monumental hand-off of responsibility that is contained within the cap and trade system, they might feel that so much political capital has been spent on cap and trade that it must be defended as the embodiment of climate policy itself.
Below, I will suggest that in fact we have a wealth of choice in the area of climate policy, almost all of which will be more effective and efficient than cap and trade. For one, governments around the world including the Obama Administration are taking action in other areas that do not deal with carbon pricing or trading of permits or credits/offsets. You could say that governments that openly advocate a cap and trade system might be seen as also hedging their bets. Secondly, it will be fairly easy to replace cap and trade with an ensemble of different measures or a carbon tax with any number of features. If history is any guide, other countries have implemented a carbon tax within months rather than the years long efforts to install cap and trade systems.
It pains me that so many people many of them good-hearted and well-intentioned have expended political capital and reputations on such a faulty instrument. In their own defense, depending on their social scientific or business backgrounds, they could not necessarily have known differently. However, that is no reason to stay with an instrument that has a high probability of gumming up the wheels on climate action rather than speeding it up.
Before describing alternatives to cap and trade, I want to first outline what I think the tasks are that the policy needs to address. Without a common vocabulary for these tasks, stripped of bias towards a particular policy instrument, you, the reader, won’t be able to evaluate whether these are substantially better than what we have already. In most cases I am not reinventing the wheel, but simply observing and compiling what I see is out there already.
The Fundamental Challenge of Climate Policy
The fundamental challenge facing governments, climate activists, green-oriented businesses, and concerned citizens is a neat intersection between a massive policy challenge and a massive political challenge of the early 21st Century. Policy and politics are not always so closely intermingled but in this case they run for historical reasons very closely together.
Instituting cap and trade rather than more effective policies is a bad idea spawned of an era in which government was supposed to become more “market-like” in all matters. We have discovered in so many areas of life that this philosophy of government is flawed, despite continuing political disagreements around this issue in governments around the world. Our current generation of politicians got elected by taking one stance or another (but mostly one stance) on the either/or proposition of whether government or markets were “better”. Markets unregulated, as it turns out, encourage short term thinking and satisfaction of immediate appetites. Fortunately or unfortunately, to face the future threat of climate change, a revision of government’s distinctive place vis-à-vis regulation of markets and our own appetites is required.
Climate policy has the unenviable task of
- saying “stop” to our impulses to overuse fossil fuels and overexploit the world’s forests and soils,
- directing, under constant political attack, substantial streams of public and private investment to building a new energy and energy-use system and
- changing our patterns of land use to fix more carbon in plants and soil.
This places government, and government is the only instrument up to the task, at loggerheads with citizens’ and businesses’ impulses to use more and more energy (and non-renewable natural resources), as cheaply as possible with a disregard for the negative consequences. While ideally such policies would enact a form of “aikido” on our wishes, using the momentum of our wants for more and better stuff to instead be used to transform society for good, there still needs to be a firm boundary and governmental “center of gravity” that is clear to all (otherwise it cannot perform aikido on anything). In the end, what is required is the return of government’s legitimate role and moral authority to set this type of reasonable limit and redirect energies that would otherwise go elsewhere.
The analogy of speeding on the highway can bring this closer to our personal experience. Without traffic cops, many of us, including myself, would drive too fast, increasing the possibility of fatal accidents; furthermore automakers have tended to put whatever mechanical efficiency gains that come from among other devices, turbochargers, into making cars more powerful and “fun to drive” than into gains in mileage. Yes, there are those of us with a conscience or without the interest in driving fast but we cannot count on these forces alone to curb fast driving, especially given the powerful automobiles to which we now have access. The police who catch speeders are not very popular but, if they avoid corruption and are not subject to absurd ideological attack, they maintain moral authority and can do their job.
Fossil fuel use (or wanton deforestation) is similar to the propensity to speed in that it offers us and our economy an easy way to satisfy our wants without regard for the long-term consequences. Fossil fuels are notably energy dense and we in most developed or in oil-rich countries do not pay nearly enough for them given their social and environmental costs. In an uncharacteristic moment of clarity within his Presidency, George W. Bush put his finger on it when he said that “America is addicted to oil”. As in addiction, only firm limits and sometimes harsh measures are able to stop the addict from re-using the drug he or she desires. The authority of government to intervene (double entendre!) in the domestic economy has been over the past 30 year undermined by an ongoing political barrage that suggests that government has less legitimacy and moral authority than the market. Cap and trade is an effort to wrap government in the faux moral authority of the market, as promoted by the market fundamentalist creed of the last 3 decades. The market unregulated, as it turns out, is amoral, not caring that much about long term consequences. Markets are not “bad” or essentially immoral, they just are tools that lately have been called on to do tasks to which they are ill-suited. As even Alan Greenspan now attests, they have been fundamentally misunderstood most notably by him and by many others.
Especially in the US but also abroad, governments, in order to do their work, must re-establish moral legitimacy in many areas of domestic policy which have been thrown into question by our decades-long experiment in market fundamentalism. The substance of the politics surrounding cap and trade is largely about the moral authority of government to restructure our energy system and secondarily about the legitimacy of natural science. The content of this moral legitimacy is that government can when functioning well, represent the general or common interest in making and enforcing rules, collecting taxes, and spending that revenue for the purpose of maintaining and improving the future viability of the nation. Even more so in the area of climate change, which will mean over a period of a decade or two, dramatic changes in at least three sectors of our economy, governments’ moral legitimacy needs to be well established to effect whatever policy is chosen.
Cap and trade’s “prospectus” (a.k.a. political sales pitch) suggests that government can after declaring a “cap” essentially recede into the background, while the “hand” of the permit trading market does its work. Its superficial political attraction is that it reinforces the pre-existing “rap” that government is “bad’ or ineffective and the market is “good” and effective. However, to work in any shape or form, climate regulation and policy, including cap and trade systems such as they are, is going to need government action in spades. So, cap and trade sets up its advocates for a long-term political defeat: even if a weakened form of it passes, people will ultimately start to wonder why there is so much government involved in cap and trade (and so ineffectually at that). Maybe its advocates believe that “people know” that cap and trade is really just another government regulatory program and won’t feel betrayed; given the state of civic understanding of government’s role, I believe they are sorely misinformed.
Ultimately the leaders of government(s) are going to need to take responsibility for protecting their people and the environment from substantial degradation via curbing our own emissions of greenhouse gases. The language and parallel institutions of cap and trade interfere directly with the process of by which government leaders would take responsibility, suggesting that automatic processes will “take care of themselves” via the invisible hand of the carbon permit market. I have demonstrated that such an invisible hand will play tricks with the policy itself compromising its effectiveness. Both the policy in its pure form and even more so efforts to curb its tendencies will create a baroque structure that does not work directly and efficiently on the basic tasks that are required to reduce carbon emissions rapidly within a decade.
The Basic Elements of Climate and Energy Policy
To open up the field of alternatives to cap and trade, as well as understand cap and trade better in context, we need to understand what the generic tasks of any climate and energy policy would be. A comprehensive climate and energy policy has most of these elements independent of policy instrument choice:
- Disincentives for (or rules against) the use of fossil fuels, leading either immediately to switching to virtually carbon neutral fuels/energy sources or vastly more efficient use of fossil fuels prior to switching to carbon neutral energy.
- Incentives for private investors to build carbon neutral electric generation and carbon-neutral energy storage as replacements for fossil electric generation.
- Incentives for vastly more efficient energy use of all types in transportation, buildings and industrial processes (or conversely disincentives to “waste energy”).
- Provision of or facilitating the financing of site- and regionally-specific public goods that lead to carbon neutral energy use (electric transmission, electrification of railways, build out of railways, electric vehicle recharging networks).
- Revenue sources for financing public goods and incentive programs that enable a society to cut emissions.
- Incentives for maintaining and increasing carbon sequestration in land use in agriculture, silviculture and in forest preserves.
- Disincentives for (or rules against) the release of sequestered carbon in land, vegetation, and sea.
- Reduce black carbon emissions via introducing emissions controls or alternatives to biomass combustion or other black carbon sources.
- Develop, identify and institute standards for lower- and zero-emissions technologies and processes.
- Generate regional and national plans based on better and best practices to curb emissions
- Fund basic climate and energy research
There is no single policy that does all of these tasks well nor will some policy package address all of them. We see that cap and trade is an attempt to address a number of them with a single instrument, most particularly numbers 1, 3, 5, and 6. As we have indicated cap and trade’s inherent laxness and unclear carbon price signal interfere with 1 and 3 (energy efficiency, fuel switching, and restriction of fossil fuel use). It does offer to join these efforts with 6, which has spurred interest in the developing world. Again there have been difficulties in establishing whether funded carbon sinks/offsets needed the funding and also run into problems with 7, the release of carbon once sequestered. Would development projects need to pay the money back if the forest they are leaving to grow is cut down by them or someone else?
The temptation of policy makers, in their first take on a climate policy to lump a number of concerns together is understandable, especially if climate policy, in relative terms, has been a low priority. However cap and trade has been extremely cumbersome to set up and ineffective or marginally effective in each of these areas with a high probability of continued problems given its long list of inherent flaws. Moving to or at least seriously considering any one of a number of alternatives is advisable given cap and trade’s ability to block other policies and clog governmental channels. Furthermore translating our thinking about climate into its terms limits our ability to imagine other scenarios that will work much better. In every one of these categories there is a more effective instrument than cap and trade, meaning that we of necessity must move to a multiple instrument platform because of cap and trade’s lack of effectiveness as well its (and any instrument’s) lack of comprehensiveness.
I will offer here (in the next part) two main directions, one mainstream and the other “heterodox”, that both will achieve more quickly and easily emissions reductions than cap and trade.
Tags: Climate ethics, Tradeoffs
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In Part 1 of this post I summarized US and worldwide efforts to create legal standards to limit GHG emissions and described the political opposition to these efforts as based on a narrow conception of liberty, negative liberty, popular among conservatives over the last three decades. I introduced two types of ethical system, deontology and utilitarianism as helpful in understanding the debates over climate legislation
The Supposed Wealth vs. Green Tradeoff
One of the more recent and cleverer arguments that counsel inaction on the climate is the notion that fossil fuel use is equivalent to social wealth and this wealth prevents more harm and maximizes more pleasure than the attempt to “go green” and slow global warming. Popularized by Bjorn Lomborg and now repeated by many, this argument is based on the narrower form of utilitarian ethics mentioned in Part 1 that suggests a limited scope of knowledge about future events is wise; present pleasures and pain avoidance loom larger than dangers to future pleasures or the threat of future pain.
A version of the wealth vs. green tradeoff argument most recently available in a column of the New York Times by climate “skeptic” John Tierney, suggests that wealth both precedes and is a cause of the greening of an economy, with wealth premised on fossil fuel use. The general structure of this argument is not new, as opponents of environmentalism have often portrayed environmental protection as a concern of the idle rich or at least inessential to economic growth. Tierney attempts to divert attention from government regulation’s effect on the greening of economies by suggesting that wealthy people start to care about their environment and that somehow from there we see, through a presumed market effect, more efficient and cleaner use of natural resources. Many commenters to Tierney’s blog post (perhaps one positive is that Tierney’s opinionated views function as bait for commenters who actually know what they are talking about…but you have to dig to find them) are quick to point out that the relationship between wealth and environmental improvement is not linear and is initiated almost invariably by government regulations.
Whatever the factual inaccuracies that both Tierney and Lomborg use to reinforce their positions there are some important issues related to fossil fuel use and development that need to be attended to in this discussion. While Tierney and Lomborg counsel slow action or inaction on climate, many countries of the developing world accuse the West of a double standard in seeking to curb fossil fuel use and therefore some representatives of developing countries feel entitled to ramp up the use of fossil fuels to spur their own development. Fossil fuels are energy “caviar”, very concentrated portable energy, stored in molecular form, that are still plentiful and fairly cheap in many areas of the world, though on a world historical scale will eventually become scarce. It is also true that all of the current industrial and now post-industrial powers have had access to and now still use fossil fuel to fuel their development. Furthermore energy use of any kind at some level of energy-intensity is a hallmark of developed or rich countries; development and a society’s wealth can be defined as shifting from using human musclepower alone to using powered equipment to make useful products and deliver useful services. Some commentators call this a shift from exclusively endosomatic (inside the body) to exosomatic (outside the body) energy.
Lomborg styles himself to be a defender of the developing world in suggesting that getting rich by repeating the West’s development path is the highest priority for most of the world, while Tierney sees himself simply as a realist in suggesting that the sequence of events from fossil fuel use to greening the economy is a natural history. However both are prey to a key fallacy that leads to their peculiar views, what might be called the “fallacy of continuity”. Both Lomborg and Tierney assume that change and development happen as a continuous process: that the future is simply an incremental change from the past. In this they are not alone as the U.N.’s International Energy Agency and US Energy Information Agency forecasts for energy use both show a similar tendency to stress continuity (continued growth in fossil fuel and renewable use in parallel) with regard for the climate protection goals enunciated by their sister agencies. Both authors must show themselves to be utterly convinced that climate change will be moderate or insignificant in its effects. And crucially both think that economic development will continue and must continue in the same way it has occurred in the past. This leads Tierney, for instance, who almost always selects those snippets of data that suit his political framework, to overlook the “break points” in the history of environmental quality, when a regulation actually kicked in and reduced emissions or increased energy efficiency.
Put another way, Lomborg and Tierney are, like the majority of financial analysts in 2006 and 2007, ignoring the twin “black swans” of climate change and the political and human reaction to climate change. The term “black swan” has become popularized by writer and financial analyst Nassim Nicholas Taleb, who has pointed out how assumptions about randomness and normality led economists and business analysts to ignore unlikely events, a.k.a. “black swans”. Assuming continuity, while seemingly the “conservative” option, is not always wise when a discontinuity is likely. However, the attractions of keeping intact, in their own minds, their mental models and contrarian ethics keeps them discounting or ignoring these black swans. And to make matters worse for Lomborg and Tierney, climate change and the reaction to climate change are not really “black” at all but at most “off-white” swans, as the data keeps pouring in about the seeming inevitability of both.
The fact is, that Lomborg and Tierney don’t know for sure, nor can they convince using reason rather than fear and innuendo, that
1. Wealth will always and ever be associated with intensive fossil fuel use
2. Less developed countries are condemned or fated to repeat the West’s development path
Due to the threat of climate change, the likelihood is high that through intensive international cooperation a different development path or paths can be organized both for the already developed societies of the world and the developing societies, though not without monumental effort. Lomborg and Tierney both want to make these likely and preferable solutions seem less likely and less preferable for personal or political reasons that are unclear. Certainly a contrarian stance enables one to attract media attention and sell books.
But let’s not kid ourselves that we simply need to continue on a linear “pollution then greening” path that we have already started in the West and will spread to the developing world. As MIT Chemistry professor, Keith Nelson, reminds us in a comment on Tierney’s blog, the stemming of carbon dioxide emissions represents a challenge of a different magnitude than scrubbing out or removing traditional pollutants. Nelson reminds us that the intended chemical reaction that releases energy from fossil fuels by necessity releases carbon dioxide, unlike the release of contaminants like sulfur dioxide or mercury. With 80-85% of worldwide energy use being attributable to fossil fuels, this means entering into another industrial revolution, either the third or the fourth depending on how you count these things.
Tierney’s and Lomborg’s stance is then to ignore or foreclose this oncoming technological revolution or the possibility of it before it really gets started. Besides its denial of reality, the ethical fragility of this stance is evident when we see how the emerging outlines of this revolution are denied or distorted by these two commentators. While they grasp at the utilitarian justification that continuing contemporary pleasures and pain avoidance associated with fossil fuel use justify ignoring the needed future transformation, this stance requires distortions of fact about the seriousness of climate change and how human will as expressed through government regulation and technical innovation have already gotten us a small portion of the way.
Risks of Change vs. Risks of Business as Usual
If ethical arguments are not Tierney’s and Lomborg’s strengths, they are also relying on our natural risk averseness to send a message to their readers/listeners: “don’t risk change, it’s not worth it.” The subtle and not so subtle appeal to fear of change can paralyze those on the fence who otherwise might be spurred to action. Faced with an extremely high probability of continuing disruption to the climate, people and governments, despite our natural conservativism, are girding for a long process by which societies change their emissions and energy systems. While reassurances can be made that all our current satisfactions will remain in the same or similar form (i.e., from fossil-fueled mobility to an equal level of mobility largely fueled via renewable generated electricity) we cannot guarantee that the transition will be smooth and that no changes will occur. Those who share Tierney and Lomborg’s position or similar, attempt to emphasize the potential loss of even the smallest convenience as paramount and more important than the gain of climate security and new forms of wealth.
The risks of business as usual are even greater in terms of their consequences for the planet and our future pleasure and pain as well as in terms of the scope of choices that will be open to us and to our descendants. Our attachment to our current pleasures seems so puny in comparison to the wholesale destruction of many of our future pleasures and pains and freedom to enjoy them. In a way it seems unfair to compare these two risks, perhaps something that has aided Lomborg and Tierney, because opponents may hesitate to go at their main arguments. No one wants to be a scold but sometimes…
A final assumption that Lomborg and to a less extent Tierney communicate is that our current economic system and our satisfactions which support it are fragile and will not survive green initiatives. For them it is better to allow this, in their accounts, fragile “beast” to continue on its way rather than to move aggressively to change our transport and energy systems. However this position, again, normalizes inaction and ignores a history of vigorous efforts to change economies, some of which have had negative outcomes and some which have had positive economic outcomes, like the building of the railways in the US, the Marshall Plan, the WWII mobilization in the US, the US Interstate system, and the Chinese government’s management of the PRC’s economy after Deng Xiaoping. To assume that continuity is the norm is to underestimate our adaptability and our ability to realize our best or at least better intentions when required.
If what, according to the Stern Review we would be facing a 20% drop in world GDP if we continue on our “business as usual” course, a few years of working out a transition to a greener, more sustainable economy would seem to be worth it. However, the risk averse among us will remain unconvinced by anything that does not promise them the same satisfactions or even continuing enlargement of those satisfactions in a linear or geometric progression from today onward.
Are We Free to Pollute the Atmosphere?
To answer the question then of whether we are free to pollute requires, in the great tradition of philosophers and some politicians, to define what we mean by “free”.
The Existential Sense of “Free”
While existential sounds like a fancy word, it just means starting with the reality of human existence rather than from abstract principle. This means “are we now able to” pollute in terms of taking the action now.
The answer is simply and disturbingly, “yes, we, as individuals with sufficient financial means can pollute the atmosphere”; we are now existentially free to pollute given that we have built an economic, transportation, agricultural and industrial system that is dependent on polluting the atmosphere as a free externality, i.e. dumping ground. As we in developed and rapidly developing countries live in this worldwide system of interdependent economies, we are with somewhere close to 99% probability contributing more rather than less to the atmosphere’s concentration of greenhouse gases.
This means I am free to go out and drive my car around, as little or as much as I like, within my financial means and time available, able to buy products that are dependent on emissions within the same financial and time constraints, and able to do work that is dependent on these emissions.
We are also existentially “free” to emit the more potent warming gases, synthetic CFCs, that still exist around us, though in this case we would be breaking laws in most states that regulate these chemicals, not for their warming potential but for their ozone depleting ability.
The Legal Sense of “Free”
Currently there are no federal laws on the books in the US that say that it is in any sense illegal to emit more or less carbon dioxide, methane or nitrous oxide into the atmosphere, though synthetic greenhouse gases like CFCs are now heavily regulated here and in most countries. For power companies in New England, the RGGI cap and trade system has started its first compliance period on the first of this year, which means that these companies will attempt to reduce their carbon dioxide emissions by 10% by 2018. An economy-wide law prohibiting a certain type of greenhouse gas emissions or a cap and trade or other greenhouse gas legislation with an emissions limit would at least in theory draw a line beyond which people and organizations would NOT be free to emit naturally-occurring global warming gases into the atmosphere. The legal “unfreedom” associated with this transgression would depend on the penalties involved in overstepping the legal limit on emissions or breaking the prohibition on a given type of emissions.
At this moment in time, prior to the implementation of either a legal rule or a law with a cap or allotment we are still legally free to emit as much or as little carbon dioxide, nitrous oxide, and methane as we like.
The Ethically Justified Sense of “Free”
An important element in designing effective laws or taking actions to reduce emissions is to clarify the ethical bases of these laws and actions. Ethics is not just the province of legal or ethical specialists; everybody uses and refers to our personal versions of ethical systems we carry around with us to make decisions about a myriad of daily activities. Without a widely accepted public recognition that new laws are good and right according to widely-accepted norms or standards, they may not pass through legislatures or other institutions of government or if they pass they may not be able to be enforced or realized via shortages in funding, as politicians must in some way make reference to ethical arguments in building coalitions in the legislature or figuring out how to appeal to the public.
While the existential view avoids the introduction of universal principles of right and wrong before or after the fact, the ethical systems we have reviewed require either a priori principles or post-hoc analyses to determine right from wrong or better from worse. Previously, we have already established that the only ethical justification for a continuation of business as usual in the use of fossil fuels comes from an extremely reduced version of utilitarian ethics that values the current pleasures and pains of a fraction of the world’s population and its continuance in the very near term over everyone else’s pleasures and pains. Or, a more sophisticated version of this narrow utilitarian vision suggests that the world’s economic system and therefore it’s livelihood is premised on the undisturbed continuation of this particular balance of pleasures and pains and will not be able to withstand the regulation and mitigation efforts related to reducing greenhouse gases.
If we depart from this exceedingly narrow ethical universe, we will conclude that we are in ethical terms, definitely not free to continue to pollute the atmosphere in excess of its capacity to absorb our emissions of carbon dioxide, methane, and nitrous oxide. A reasonable deontological ethics would mandate that because of our duty to ourselves, to future generations and to those who now emit little in excess of these gases particularly in developing countries, we would need to cease in the shortest order possible. If we expand the utilitarian perspective to take account of climate science and the expectable future pleasures and pains of our own and future generations, inaction on climate would also not lead to the happiest outcomes for the most people. Therefore, from both a more complete utilitarian ethics or a deontological perspective that account for what is becoming common sense in the area of climate science, our existential freedom to use fossil fuels now is unethical. Our current contemporary freedom to use these fuels interferes with the freedom of others to expand their wellbeing currently and most gravely the freedom of future generations to enjoy a decent livelihood.
Limits of a “Climate Virtue-Ethics”
Given the above conclusions, it would seem to be the most righteous path for individuals to cease as quickly as possible emitting fossil fuels so as not to impinge on our own future freedoms and those of others. However an immediate cessation is often not practical and may not be desirable; despite this many of us may experience the need to purify ourselves in the pursuit of greater personal virtue.
In addition to the deontological and utilitarian designs for ethical systems, there is additionally another parallel design for an ethical system that is called a “virtue ethics”. A virtue ethics emphasizes that the good is that which encourages virtue and discourages non-virtuous character traits in people. Virtues are prized traits of individuals; virtues can originate in or correspond to deontological systems of ethics most readily (e.g. honesty = following the rule of telling the truth). Carbon pricing as the leading edge of climate and energy policy can be viewed, perhaps caricatured, as an attempt at a modern climate virtue ethics; the carbon price will encourage climate virtue in individual people and corporations and this will then spread to the social and economic systems in which we live.
The problem with a virtue ethics as a predominant operative ethical framework is that system- and group effects of good and bad behaviors and differences in influence are discounted: the promotion of and development of virtue individual by individual remains key. This leads to an individualized ethical universe which may end up distorting the tasks ahead of us, many of which may need to be undertaken in coordination with other people and with many organizations working in concert. A virtue ethics overlooks the indirect or follow-on effects of people in groups or living in society.
Transitional Use of Fossil Fuels
If we believe that immediate cessation of use of fossil fuels, while virtuous on an individual level, is not optimal from the point of view of building a zero net-carbon society and economy, do we then necessarily arrive at Lomborg’s solution which councils slow or no action? Lomborg suggests that we must remain or become “rich” which he equates with fossil fuel use and disregard for mounting GHG levels.
Those who believe as I do that a zero net carbon society will require a good deal of new electric infrastructure both for electricity generation and electric transportation, using fossil fuels, especially compressed natural gas to power the off-road machinery that helps build the zero-carbon infrastructure may be one important use for some of our remaining fossil fuels. In this I differ with T. Boone Pickens who believes that we need an entire new natural gas fueling infrastructure to power freight transport in the next decades. I believe it is possible to transition more quickly to electricity in the transport of most freight through electric rail and other means. More important in my view, is the powering of the off-road machines like cranes, backhoes, bulldozers, and graders using a portable high concentration fuel until such time as these can be powered via electricity. Therefore I would suggest that the ethically and technically optimal use of natural gas in the next couple decades would be to power off-road and off-grid machines building the zero-carbon infrastructure we will need.
Even on a personal and individual level, if we would strand or reduce our personal “power” by not using fossil fuels in the next few years, it would appear that there would be slim ethical justification for doing so. Even in a deontological ethics, one can and does have a duty to oneself to take care of oneself, even in the most group-oriented versions of such an ethical system, one does so in order to take care of others.
However, we would hope that governments and forward thinking private companies throughout the world will enable these transitional uses to “sunset” into more sustainable forms of energy use rapidly, let’s say within 5 or 10 years. Otherwise the transitional use of fossil fuels will start to look ever more “Lomborgian” and weak in its commitment to facing the challenge.
Changing the Energy System
If we contrast the amount of resistance and the many objections to climate legislation and action on renewable energy that are batted about the media and in political circles with the stark ethical case for decisive action, one is left with the impression that our culture is incredibly tolerant of if not friendly towards an attitude of entitlement and short-sightedness. In fact, that I have taken some pains here to build strong ethical arguments against such flimsy positions is a sign that we normalize and accept thought and political leaders who lead us to an attitude of spoiled indulgence rather than realistic assessment of our options.
Are we “spoiled” and lazy? Are we unable to buck up and face the tasks ahead knowing that perhaps, and just perhaps, there will be some sacrifice involved, along with building a new energy economy, the basis of a more sustainable new economy? The gains are surely greater than the losses but we will over the next period of months and years hear again and again about the how terrible and dangerous the sacrifices that we will make will be.
It is too bad that the policy vehicle, cap and trade, which climate and energy action groups as well as legislators have picked is so flawed. If there has been an unfortunate choice of emphasis, the general mission of those who support it is ethically justified, which is the focus here.
To overcome or outgrow our dependence on fossil energy will require not just a summoning of inner virtues on the part of dispersed individuals nor just lambasting the strongest advocates of our dependence, but developing a clear view of the political and economic path ahead. In my opinion, a full-scale mobilization of economic and political resources will be required, like that which occurred during the Second World War, which goes beyond the visions of carbon pricing advocates. To halt our emissions at the level of 450 parts per million of carbon dioxide or to return to 350 parts per million of carbon dioxide as is now recommended, will require a coordinated effort that will be spurred both by price signals but also by combined efforts by governments and diverse industrial sectors.
Carbon Pricing is Just One Piece of the Puzzle: Towards a Comprehensive Climate and Energy Policy – Part 5 (of 5) February 26, 2009Posted by Michael Hoexter in Efficiency/Conservation, Energy Policy, Green Activism, Green Building, Renewable Energy, Sustainable Thinking.
Tags: Cap and Trade System, carbon tax, Comprehensive Climate and Energy Policy, Electric Vehicles, Electrified Rail, Passive house, Utility Regulation
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:
- Externalization of costs of climate change attributable to carbon emissions
- Externalization of costs of infrastructure building and maintenance and high fixed capital costs of long-term private capital investment
- Deployment of capital intensive clean energy technologies
- Coordination of management and finance of upgrades to electric grid.
- Re-design and electrification of transport infrastructure
- Externalization of costs of scientific research and development
Outline of a Comprehensive Climate and Energy Policy
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.
- A reversal in emissions trends is necessary within the next 5 years
- Sharp reductions in emissions are necessary within the next 10 years
- 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.
- 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.
- 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.
- 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.
- Costs and benefits of government policies and expenditures must be adequately explained and accounted for by policymakers and political leaders.
- 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”)
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.
- 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.
- 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.
- 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”.
- 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
- ambitious (25% or greater by 2020),
- paired with substantial finance support for renewable energy,
- a rising percentage of renewable energy projects are built as replacements for fossil resources (dispatchable or synchronous with power demand)
- is pro-rated based on renewable resource base per region thereby balancing risk between regions dependent on their resource wealth.
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.
- 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):
- 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.
- Through this pricing. increases the desirability of lower or non-carbon emitting activities and products
- Enables effective choice of a broadening category of lower carbon alternatives on economic grounds alone
- Signals a will to curb carbon emissions among the leadership, and additionally inspiring voluntary “above and beyond” cuts in carbon emissions.
- Creates a competition between carbon emitters to emit less than their peers.
- Generates a revenue stream and incentive structure for allowing movement towards or maintenance of carbon sequestering land use practices
- Enables an international trade in or regulation of trade of carbon equivalents
- 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.
- Progressively raises carbon price in a planned sequence to exert pressure for further emissions cuts.
- Creates or energizes the market for carbon-emissions reducing innovations, spurring research and development.
- Is directly adjustable by regulators/legislators to enable the system to learn from experience.
- 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
- Carbon Tax
- 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.
- Full Auction of Permits
- Partial Auction/Partial give-away
- Full give-away of permits (no price)
- “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.
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.
- Carbon-Emissions Mitigating Investment – devotes the proceeds of the program to emissions reduction
- Partial or Complete Dividend – attempts to soften the effect of rising energy and goods prices by returning revenue on a per capita basis
- Displacement of other Taxes/Revenue Streams – phasing out a payroll or other taxes by using carbon revenues.
- 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
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:
- Build an electrified passenger and freight rail network for the US
- Create a national rail plan that allows efficient co-mingling of freight and passenger rail along existing and new, non-HSR rail lines
- Grade separate existing rail lines (with multiple positive externalities associated) in high traffic areas.
- Build a high speed rail (HSR) network along high traffic corridors
- 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.
- Incentivize the building of renewable electric generators through secure, premium wholesale electricity rates (Renewable Energy Payments).
- Rebate and tax credit incentives for energy efficiency upgrades to existing buildings.
- Incentivize the building of clean energy storage through incentivizing non-fossil grid ancillary services.
- While preserving or extending existing levels of mass transit service, electrify high traffic bus routes.
- 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, 2009Posted by Michael Hoexter in Efficiency/Conservation, Energy Policy, Green Building, Green Transport, Renewable Energy, Sustainable Thinking.
Why Not Bring Positive Externalities Into Market Pricing?
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 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.
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
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?
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.
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.
- Externalizes costs of climate change attributable to carbon emissions
- Externalizes costs of infrastructure building and maintenance and high fixed capital costs of long-term private capital investment
- Deployment of capital intensive clean energy technologies
- Coordination of management and finance of upgrades to electric grid.
- Re-design and electrification of transport infrastructure
- 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.
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, 2009Posted by Michael Hoexter in Efficiency/Conservation, Energy Policy, News and Events, Renewable Energy, Sustainable Thinking.
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?
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.
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
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:
- “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.
- (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).
- 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
- 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.
- 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.
- Induces Action – changes in prices induce actions or the propensity to take action.
- 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
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.
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.
Carbon Pricing (Cap and Trade/Carbon Tax) is Just One Piece of the Puzzle: Towards a Comprehensive Climate and Energy Policy – Part 1 January 26, 2009Posted by Michael Hoexter in Efficiency/Conservation, Energy Policy, Renewable Energy, Sustainable Thinking.
In 2006 in the Stern Review on the Economics of Climate Change, the economist Sir Nicholas Stern called climate change, “the greatest market failure the world has seen.” Throughout the almost 20 year history of climate policy, some economists and climate policy designers have attempted to remedy this failure by assigning a price to carbon emissions thereby bringing this negative externality (to the market) into the reckoning of market actors. However I believe the primary focus on carbon pricing ignores certain fundamental realities of economies, of technological development and of physics which will lead to frustration as we try to reach some very ambitious climate and economic goals by 2020 and 2050.
As then President-elect Barack Obama said in a speech to the nation, our economy will not recover if we rely on “worn out dogmas of the past”. Despite the recent emergence of the first proposals for cap and trade systems in the US, a monocular focus on pricing carbon bears many traces of past economic orthodoxies, which are now under revision in light of very recent events. The resistance to carbon pricing on the part of the Bush administration and deniers of climate change has obscured the fact that this policy instrument hovers just a little bit above and to one side of some of the main economic and energy challenges facing us in the next decade. In other words, the enemy (cap and trade) of my enemy (deniers), from the point of view of climate activists, is not necessarily always a friend.
Much of the risk involved in designing a long-range policy that is intended to have a discrete physical impact on our atmosphere and climate has to do with lack of certainty within economic theories, particular as regards the benefits and limits of market mechanisms. We, and economists, can’t seem to be able to make up our minds about the appropriate types of interaction between public and private actors within a prosperous and, now a carbon-emission-reducing, economy. While some see the range of choices as a sign of our freedom and part of the “fun” of disputes in economic and political discourse, if we are choosing among partial or even false ideas and if the conflict itself causes distortions in our understanding, we are in trouble. Do we need to choose between the “magic of the market” and beneficent government-sponsored programs? Or is the picture more complex, less packagable into sound-bites, but reality-based?
Crisis of the Self-Regulating Market Ideal
In the last several months there has been a sudden and complete about-face in the direction of economic policy actions with regard to the rightness of government’s role in the economy. Conceptual development and informed deliberation about this sudden spate of impromptu regulations and huge expenditures has lagged far behind the actions themselves. Faced with the collapse of major banks and other financial institutions, the conservative Bush Administration and governments around the world suddenly intervened massively in areas of the economy in ways which months before were inconceivable. While perhaps the US President most ideologically committed to the notion that markets can regulate themselves, George Bush in his last few months in office oversaw the expenditure of hundreds of billions of taxpayer money to prop up the economy in moves that have socialized economic risk for many large corporations. These ill-coordinated moves may have nevertheless prevented or at least delayed a slide into pure economic chaos.
A sign of a sea change in economic thinking can be observed in the mild mea culpa’s of Alan Greenspan, the retired head of the US federal reserve bank who had been seen as one of the principle architects of a hands-off market policy by the US government with much influence abroad. While previously a believer in the stabilizing effect of financial derivatives and limiting government regulation of finance, Greenspan recently expressed surprise that lenders had not acted in their own best self-interest by refusing to issue or buy risky loans and loan packages. Dominant in economics and economic policy since the late 1970’s, Greenspan was only the latest dean of the so-called monetarist school which advocates maximal market self-regulation, a tradition that includes economists Milton Friedman and Friedrich von Hayek. Another self-regulating market philosophy, called supply-side economics, also came to have a highly influential role in the United States and elsewhere, which emphasized that simply cutting business and upper-income taxes and decreasing government spending on social welfare would increase private investment and therefore the supply of desirable goods, spurring, in turn, economic growth.
Common among advocates and theorists of self-regulating markets, a.k.a. monetarists and supply-siders, are assumptions that people are more rational and economic information is more accurate than they and it actually are. The recent housing bubble progressed and mushroomed to enormous size resting largely on these assumptions, as borrowers, lenders, securitizing firms, insurers and rating agencies created a self-reinforcing circle of denial of the downsides and risks involved. These views may have been held sincerely, even naively, by some or, for others. as part of a self-interested calculus in which it was OK to assume the best if one also quickly divested oneself of responsibility for or connection with the consequences of risky decisions.
While there is now a large experimental literature in the newer field of behavioral economics that has shown that people are not nearly as rational as self-regulating market theory assumes, the assumption that people are most often protective of their best interests is contained in the numerous policy recommendations and statements by politicians, from the Bush Administration but also Administrations past. The call that the best economic stimulus is always putting more money in private hands via tax cuts or tax rebates, rests on the assumption that these economic actors will always, in all contexts, alone and in aggregate, act in their best interest and in that of the entire economy. In other words, the idea is that economic surpluses are always best left or rapidly returned to individual or corporate actors in markets rather than remain part of a government spending program, however efficient or well-regarded.
In another, conflicting account of the financial collapse, true believers in a totally unregulated and unsubsidized private market, libertarians, contend that the current economic situation is in fact caused by too much regulation and the socialization of risk prior to the credit crunch. Criticizing both the Bush administration and its Democratic critics, these libertarians point out how various companies knew they were “too big to fail” and made risky financial bets on the assumption that they would be bailed out or could in the end rely on government to save them. The Bush administration may have flirted with this more radical policy orientation in allowing Lehman Brothers to fail in September only to become terrified of the resulting credit crunch.
Libertarian advocates of a “pure” market, claim that a consistent, hands-off approach would have better results, helping all corporations and individuals learn to become more responsible market actors. As we have had no governments that adhere to this vision in power in recent memory, it is difficult to say what the consequences would be but in all probability we would see, as happened in the latter half of the 19th Century when laissez faire policies were the norm, an even more extreme polarization of wealth, more pronounced boom and bust cycles, and more rampant environmental degradation without the intermediation of regulation and government programs. There is no room in the “pure” market view for pricing in market externalities, as market actors are thought to be in full command of all economically-relevant issues and information. For some reason, the military and military spending are exempted from this same scrutiny by these commentators, perhaps because there are no private market alternatives to these institutions.
Revived and Updated Keynesianism: A Rush Delivery
The economic school which the latest crop of monetarists and other “free market” advocates reacted against was Keynesianism, which ruled Western economic discourse from the mid 1930’s to the 1970’s. Based on the work of the British economist John Maynard Keynes, the climate of opinion that is Keynesianism believes that government involvement in the economy and in particular government spending is necessary to balance the tendencies of the market towards boom and bust. Keynesians believe that regulation of market actors by government is in many cases warranted. Keynesians in general support some form of social welfare spending, with those to the political left supporting a comprehensive social safety net paid through tax revenue.
Inequality is not only a moral problem to Keynesians but also, in Keynes’s words, a “magneto” (kinetic-mechanical) economic problem leading to insufficient overall demand for goods in economic downturns, demand that needs to be stimulated by loosening monetary policy, direct government spending, including public works programs and unemployment insurance. People with relatively less means tend to spend more of their money as a percentage of their income than the rich, who by virtue of being rich, cannot or can choose not to spend so much and still survive. Keynes observed and theorized that people prefer to hold onto their liquid assets (to save) during economic downturns and the concomitant deflationary period, reducing overall economic activity and further exacerbating the recession. This is one aspect of what is called people’s “liquidity preference”.
From a vocal fringe that has had inordinate influence on popular economic discourse for three decades, libertarians contend that Keynesianism has remained the philosophy of government economic policy even during the Bush Administration despite its talking up of the virtues of the market and private initiative. From this radical perspective, all who interfere with the market are Keynesians or “socialists”, therefore erasing the differences between the regulatory policies of the Bush Administration and what we imagine to the policies of the beginnings of the Obama Administration or the Roosevelt, Eisenhower, and Johnson Administrations of the past. This accusation also overlooks the fact that Keynesianism is itself an effort to preserve capitalism rather than supplant it with another economic system.
Important for this discussion is Keynesianism’s agnosticism towards some forms of economic planning especially as applied to areas of public investment like infrastructure. In the Cold War confrontation with the Soviet Union, planning was thought to be an attribute of Soviet style economies yet in the US, federal, state and local governments continued to plan to manage their own investments and budgets. With the rise of the libertarian ideal in the 1980s, planning was considered to be inefficient or a “taboo”, as the play of market forces was thought to be the optimal solution to all economic problems. If we re-emerge into an era where public funds are once again used to build infrastructure or invest in other public goods, the need for planning once again comes to the fore despite the ideological wars that have surrounded the term. As a sure sign that the rush away from planning has now “bottomed-out”, one hears lifelong capitalist and conservative T. Boone Pickens now publicly lamenting the lack of planning in the area of energy in the US over the past 40 years.
While before the collapse of 2008 and monetarism/supply-side’s precipitous fall from grace, public praise in recent decades for Keynes and Keynesianism was hard to find, we now find ourselves in an era when economists and the public are engaging in a crash study course of the works of Keynes and notable Keynesians like John Kenneth Galbraith. Most significantly, President Obama quoted Keynes almost exactly in his inaugural address by citing that our productive capacity remains underutilized in this financial downturn. Paul Krugman, the recent Nobelist in Economics, has become one of the most vocal advocates for a rediscovery of Keynes in the US, using his influential op-ed pieces and blog at the New York Times to revive interest in a positive relationship to targeted government involvement in the economy. One needn’t however look to a left-leaning economist like Krugman or political leaders to find voices that recommend that government needs to do more to regulate the extremes of the business cycle and business practice, as billionaires Warren Buffett and George Soros have for the last several years questioned the existing hands-off policy.
In current debates, the key arguments are around the role of so-called “fiscal stimulus” to the economy, as opposed to “monetary policy”, as well as the size and duration of that fiscal stimulus. Fiscal stimulus means the government spends money out of its budgets (fiscal) to stimulate economic demand and jumpstart the economy, rather than rely solely on adjusting interest rates. In the years in which Keynesianism was in the political and. to a lesser degree, academic doghouse, fiscal stimulus was considered to be taboo and dangerously inflationary. Using fiscal stimulus can lead to deficit spending, meaning governments running up their deficits and risking decreasing the value of the national currency. Opposition to the stimulus package proposed by President Obama will draw liberally from these criticisms and fears. Economic blogs are rife now with discussions of the potential effects and risks associated with large stimulus programs.
“Monetary policy” usually involves the adjustment of interest rates by central banks, the instrument which has been periodically used throughout the period of monetarism’s dominance of economic discourse. With interest rates currently effectively at zero, monetary policy has no more stimulus to offer to the economy. While in this crisis most commentators on economic policy accept the need for fiscal stimulus of some kind, there are key arguments and decisions to be made about the duration of the fiscal stimulus or direct government involvement in the economy. Is this fiscal spending an emergency measure or part of a new economic common sense?
The responses to our economic crisis that President Obama has announced so far come largely from the Keynesian playbook even though he has not surrounded himself with economic advisors that historically have advocated nor are known for their emphasis on government investment and regulation. From outside Obama’s inner circle, Krugman, former Secretary of Labor Robert Reich, and economic commentator Bob Kuttner have praised the direction of policy but criticized the amount of fiscal stimulus that Obama has proposed, saying that the stimulus amounts will not cover the shortfall in economic activity expected to be caused by the downturn. The calculation of exactly how much stimulus is needed and for how long is a crucial affair, depending largely on one’s theory of how government should act in the economy in a downturn and, just as importantly, during normal economic times.
The role of tax breaks within President Obama’s proposed stimulus is hotly disputed among politicians and within the economic profession and is an area of compromise with the monetarist camp. Monetarists believe that private economic actors, individuals and businesses, will know best what to do with tax monies, and believe that money in their individual pockets will be most effective in stimulating the economy. Keynesians are more conscious of the liquidity trap, where economic uncertainty to the downside leads people to save and not spend. Data collected about the tax rebate of 2008 indicate that the Keynesians in this matter may be right: people tended to pay existing bills or saved the rebate rather than spend it on new purchases. This data point may not be enough to persuade believers in monetarist or supply-side ideals that government can spend social surpluses wisely and effectively outside of the areas of which monetarists approve: defense spending and administering the legal system.
It is not yet clear whether President Obama and for that matter other world leaders are “re-embracing” the notion that government has a rightful place in both good times and bad times in delivering services directly to citizens, building infrastructure, and creating new markets deemed socially useful. It is safe to say that at least some forms of regulation and government oversight are now considered to be desirable on an ongoing basis, so there is a partial move towards the Keynesian playbook worldwide.
Comparing the Monetarist/Supply-Side and the Keynesian Worldviews
These crucial decisions about the economy are based on conflicts in worldviews that underlie the choice of a “free market” vs. a Keynesian approach to economic problems. The various flavors of monetarist and supply-side worldview see economic reality as a composite of “particulate” atoms; actors that act independently and uniformly in their own self interest, more often than not competing with each other. The expansion of the role of markets implies that competition between economic actors is not only the “state of nature” but is universal, necessary and salutary; cooperation is achieved on a case-by-case contractual basis. “Free market” economics which had its heyday among the monied classes prior to the 1929 stock market crash, became in the 1980’s, a populist view, as the notion that people “know what to do with their money” rather than surrender some in taxes flattered people, both the rich and the aspiring-to-be-rich, that they knew better than the government. To maintain the political appeal of freeing the market from regulation, there was an ongoing campaign to downgrade and some would say malign the competency of government to handle money and deliver services. In this worldview, the government is characterized as a covert profit-seeking and overt and covert power-mad entity that wishes to expand itself and enrich itself through intervening in the economy.
The Keynesian world view is more of a climate of opinion than an organized theory and is therefore more difficult to characterize and condense. Keynesianism sees that economic actors come in a number of types, public and private. Also in Keynesianism, there is a legitimate place for the roles of regulator and not-profit-seeking entities like the government to play in the economy; in this view of the world, there is the potential for multiple complementary or cooperative roles rather than the competition of all actors with each other. Because of this complementarity, it is possible to imagine that new systems like infrastructure can be built within the economy with the sponsorship or leadership of government. It is more likely to speak of “systems” and to take a systemic view of the economy or sectors within the economy from a Keynesian point of view.
Keynesianism also offers a larger set of strategy alternatives within macroeconomics (the management of national and global economies) and therefore for political leaders and regulators; this set includes the regulation of the money supply, the monetarists’ main concern and policy tool but goes beyond monetary policy. In the Keynesian view, it is conceivable to imagine that government officials and politicians as well as other economic and political actors could be motivated by impulses other than profit-seeking or narrow self-interest. Therefore in this view, government officials might actually be both motivated to do good and to create value in the economy. To free market advocates, this is all merely a façade covering to them the “real” intentions of government described above, i.e. the acquisition of more power and money.
There is also a crucial difference in how each camp classifies human desires, which is not simply a matter of academic or philosophical interest for economists and for policy makers. Monetarists and laissez-faire oriented political actors are inclined to lump all desires into the category of “wants” as does conventional neoclassical economics. A theoretical entirely unregulated market system would tend to treat all desires as optional and discretionary. The health care proposals put forward, for instance, by the McCain campaign last year, suggested that people could treat health care expenditure as part of each person’s or family’s individual discretionary budget and would compete with other wants and spending. In Keynesianism, though also an heir to the neoclassical tradition, it is possible for government to except certain activities from being treated simply as another “want” in the marketplace by mandating programs that for instance guarantee pensions, health care, etc. In this way, there is a recognition of “needs” or as they are sometimes called “entitlements” rather than simply a category which mixes all “wants” together. Free market advocates recognize that entitlement programs exist but view them as sub-optimal departures from a philosophy that views all desires as optional.
The two worldviews also diverge in the valuation placed on human knowledge, science and forethought. Monetarists and other free-market advocates tend to see human knowledge as fatally flawed when extended beyond a personal or local orbit and requiring the turn of events or experience to validate the rightness of any bit of knowledge or understanding. Even then that knowledge is thought to be mostly of temporary or local value. Keynesians may share some of this utilitarian view but additionally are more likely to view science and accumulated human knowledge as having some validity through time and space and therefore potentially the basis for action for the common good now or in the future. These fundamental differences in philosophy lead to radically different valuations of natural science and the ability for us to plan aspects of our future based on current knowledge and projections into the future.
The “mixedness” and diversity of the Keynesian playbook and worldview, which might be a strength in giving governments a greater range of policy choices, has also been a political liability for it in comparison to the relatively simple message of monetarists and supply-siders, as broadcast by Ronald Reagan, Margaret Thatcher and their successors. In the Keynesian world there is not such a stark division between economic good and evil, while in monetarist and supply-side views, the bad government folk are almost always the economic enemy. Keynesians, who range from just right of center to left-liberal and social democratic, have not developed the compact political message that their monetarist critics have been able to project.
The Obama Administration has shown signs that it is aware of the challenges of re-creating a positive role for government in the economy after three decades, in which many elected officials heaped negatives onto the government that they were supposedly leading. The creation of a Chief Performance Officer position to which President Obama has appointed Nancy Killefer, indicates that Obama wants government institutions to become more economically efficient. Contained within at least its conceptualization is the belief in a positive good to be delivered by government which can and should be delivered better. Under a number of previous Administrations, we might imagine that someone in this position would be focused only on cutting budgets and, with that, services. We are hoping that this new Administration can deliver on the promise of better, not necessarily less, government services delivered more cost-effectively, perhaps developing a self-disciplined Keynesian approach to government’s role.
The qualitative characterizations of these two worldviews are not simply “hand-waving” arguments but form the basis for concrete policies that involve investments of billions of dollars on a regular basis as well as quite different legal frameworks that govern economic activity. How people believe people and social and economic institutions behave and select the essential truths of and goods in social and economic life turns out to be more than simply a philosophical argument.
Part II will continue by describing the economic assumptions and designs of proposed carbon pricing systems.
Tags: 350 ppm, Al Gore, Bill McKibben, Decision Space, Emotion and Decision-making, Green Infrastructure, Infrastructure Economics, James Hansen, Mark Jacobson, Target CO2
In my last post on “picking winners”, the role of political and economic leaders and experts in helping shape the future low or post-carbon society started to become clear. We will not be able to rely solely on the impersonal forces of a market or market-based regulatory regime like carbon pricing and trading to build clean energy infrastructure rapidly. Even in our current economy, infrastructure always bears the brush-strokes of large-scale government programs or the work of the largest corporate entities and their founders. The framework of the US economy of the last century bears the marks of people such as Andrew Carnegie, John D. Rockefeller, Thomas Edison, George Westinghouse, Theodore Roosevelt, Franklin Delano Roosevelt, Robert Moses and Dwight D. Eisenhower. (Analogously, in the world of computer code, early sometimes arbitrary decisions by coders are still felt decades later as they become part of the legacy of various pieces of still-useful software.) Infrastructure and even the finer grain of economic life is not only attributable to impersonal forces but shaped as well by individual or group decision making.
While the results of earlier decisions may function as monuments to these individuals, we also live with both the negative and positive consequences of these partly personally motivated decisions. The Interstate Highway System bears the mark of Eisenhower’s own experience in attempting to traverse the nation in 1919, encountering the deficits in the existing highway system. It also bears the marks of economic forces at work around Eisenhower, including the shared belief that individual and family auto-mobility fueled by petroleum was and would continue to become the dominant means by which Americans moved about and structured their built environment. Yet, within that framework of assumptions, which have attracted increasing numbers of critics, the Interstate system is a triumph of social and economic planning.
Planning the Framework for the Post-Carbon Economy
Planning the infrastructure for a post-carbon world will have, in some senses, more exacting requirements placed on it than previous great pulses of public works construction. Applied to the work will be the metric of carbon emissions invested in the construction itself against the potential for carbon emissions reduced by that infrastructure over its lifetime. Furthermore if we accept the target of 350 ppm carbon dioxide within a decade or two, a net reduction from the current 382 ppm with an accelerating rate of carbon emissions and a half-life of hundreds of years for carbon dioxide in the atmosphere, there are very high demands for rapidity in the building of an infrastructure that would support this level of decline in emissions. Furthermore, as we have become unused to massive infrastructure projects over the last few decades, we will have to become reaccustomed to the expense and practical impact of these projects. Finally, we now live in a uniquely information-loaded society with a 24 hour news-cycle, where there is expectation for a high level of transparency in most public proceedings and the capacity for even greater levels of transparency. While our very sophisticated information systems may be helpful in some regards they also can place every decision under a microscope.
Making the right choices in building this new infrastructure will rely heavily on rigorous scientific and engineering analysis but in addition will employ some guesswork as projections will need to be made for usage patterns and energy demand in 10, 20 and 30 years in the future. The assumptions that are employed will be key but should always be based as much as possible on either known quantities or reliable scientific theories. The cultural trend in the US of the last three decades has been a progressive questioning of the values of science and technology, yet, despite the anti-science vogue now it seems ending with the Obama administration, we have good reason to believe that we still have the know-how to design and break ground on these projects.
Key Post-Carbon Technology Choices in the Energy Domain
At a recent meeting convened by the climatologist Jim Hansen, the central focus was on providing a menu of choices for policymakers and industry executives on ways to reduce substantially or eliminate GHG emissions. For that meeting I formulated the notion of a decision space to allow for a standardized yet rigorous model for deciding between or weighing apples and oranges. More later on decision spaces.
I would describe the fundamental post-carbon decision making domains as follows, some of which were discussed at the Nov. 3rd meeting, though have been the subject of many discussions online and in the real world for a number of years now:
- Electricity (including Electrochemical Batteries and Capacitors)
- Non-biosource synfuel
Functional and Economic Role
- Energy supply
- Energy demand (efficiency and conservation)
Fundamental Geographical Unit of Analysis
- Multiplex (simultaneous geographical levels)
- Small-scale renewable
- Large-scale/Any-scale renewable
- Conventional (3rd-generation) nuclear
- 4th-generation nuclear (experimental)
- Coal/Natural Gas with Carbon Capture and Sequestration (experimental)
- Biomass Plus Carbon Sequestration/ Biochar burial
Electricity Transmission Current Type
- High Voltage AC
Electricity Transmission Form Factor
- Underground transmission lines
- Above ground transmission lines
Energy Storage Technology
- Thermal energy storage (solar – high temperature)
- Pumped hydroelectric
- Large-scale batteries
- Small-scale distributed batteries/vehicle to grid (V2G)
- Hydrogen extraction, compression and storage
- Biomass (woody and cellulosic)
- Biofuel (liquid)
- Biogas (gaseous)
Carriageways and Traffic Design
- Overhaul existing railbeds (allowing higher speeds)
- New high speed rail
- Grade-separation of existing rail
- Magnetic levitation rail (maglev)
- New light rail (urban/suburban and aboveground/underground)
- New suburban/regional rail
- Bus rapid transit and busways
- Podcar/Personal Rapid Transit
- Linear induction motor rail (experimental)
- Bicycle friendly traffic design
- Pedestrian friendly traffic design
Transport Energy Conversion and Distribution
- Electrify new and existing rail
- Plug-in 480 volt+ (quick charge) infrastructure and grid reinforcement
- Public battery exchange
- Multifamily and street 120-240 volt (trickle) charge infrastructure
- Electrify local roadways (trolleybuses and trolleytrucks)
- Electrify highways (experimental)
- Biofuel refineries and distribution systems (pipelines, etc.)
- Hydrogen electrolysis and distribution infrastructure (a.k.a Hydrogen “Highway”)
- Home electrolysis (for hydrogen)
Optimize use of existing transport infrastructure
- Public bicycle rental (Velib model)
- Internet and mobile phone enabled ride sharing
- Improved vehicle sharing infrastructure
- Smart Highways and traffic avoidance, driving automation
These choices are not necessarily mutually exclusive yet policymakers, community and corporate leaders will need to choose priorities among these, often with partisans of one or another solution providing them with information and opinions. There are so many factors involved that it is impossible for individual decision-makers to command all the relevant facts, requiring the help of consultants and experts and I believe a best-practices decision-making process.
In the arguments around these issues that have until now mostly taken place in cyberspace or private forums, people are wont to create their own list of favorites with more or less supporting evidence. Some have sectioned themselves off into sub-communities to reinforce the choice of one device or source of energy or another.
Emotion-based vs. Reason-based Decision Making
Recently in popular and popularized psychology much has been made of the importance of emotions in thought and decision making. Most widely-known is the popular book by Malcolm Gladwell, “Blink”, which celebrates the precision of spontaneous decision making over the more archetypical thought-out, planful variety. Academic psychologists and brain scientists have observed that brain-damaged patients who don’t have access to their emotions are poor decision makers. In my own studies of psychology, I have every reason to believe that an integration of emotional life with rational thinking is healthy for us human beings.
However, one individual making decisions for themselves is in a different circumstance than leaders and representatives of groups making decisions that affect more than just their own welfare. Here, whatever the use participants make of their emotions, agreed-upon statements of fact or opinion, we call “reasons” are required for there to be discussion and mutual influence and eventual agreement between “deciders”. We have gone through a period of time where our President has called himself the “decider” which technically was true, but he also subscribed to a philosophy of decision-making “from the gut” that ended up leading to what many feel to be disastrous consequences for our country. We are almost assured that President-elect Obama will engage in a more transparent decision-making process that calls upon reasons to make decisions.
While I hope that people’s passions and interests will inform their rational processes, there is also a role for disciplining passions and putting them in perspective. Our emotional responses to the prospect of climate change and environmental degradation can be drivers of our engaging in a decision making process but should not “rule” our ability to think and communicate about the options. This will necessarily be a group and we hope democratic process that will enable us to come to effective and relatively durable solutions to the tasks at hand.
The Paradox of Choice
A brilliant idea and book by behavioral economist Barry Schwartz highlights some of the challenges facing decision makers in this complex arena. In “The Paradox of Choice”, Schwartz highlights how increased choice can put a strain on individuals and families in advanced consumer societies where we are supposed to be masters of our destinies through an expanding selection of choices in almost every area of our lives. Reviewing the options and ramifications of each choice available to us becomes a mind-bogglingly complex and time-consuming task. Schwartz suggests that targeting satisfactory or “good enough” solutions rather than “perfection” is one technique that people can use to simplify their lives as they face a mind-bogglingly large set of options.
It is here that the value of emotionality in decision-making comes to the fore. Emotional and “intuitive” responses to situations short circuit the lengthy intellectual processes of examining alternatives in great detail. A “gut” response to a situation or decision can lead to SOME decision rather than NO decision being made. Our emotions can line up the sense data and experience we collect into “good” and “bad” more quickly than a more reason-based approach. Obsessiveness is a personality characteristic that makes some people more prone to intellectuality and emotional disconnection in decision making, sometimes leading to tremendous indecisiveness as the details of each option are weighed ad infinitum. However with some important decisions, a level of obsessiveness is a desirable characteristic (some would dispute that this should be called “obsessive” if it is functional) as many factors and risks need to be weighed.
Our decision-makers faced with planning a post-carbon world or at least nudging us in that direction, don’t have the same luxury as consumers to consciously reduce their efforts and time in evaluating choices available to them for their own wellbeing. Additionally, we have come to a point in our political life when “gut” level decision making is now passing out of favor. More and more people now recognize that too much is at stake in the decisions that political leaders make for self-preservative cutting of corners or quick intuitive decisions. On the other hand, political and large corporate decision-makers have access to the resources which would allow them to paint a fuller picture than ordinary consumers.
In addition, the demand that decision-makers be accountable for their decisions to others forecloses the predominant use of “gut” level decision making. To communicate about and incorporate the insights of others in decision-making, one needs to have reasons for decisions based on shared facts. Emotions are by their nature private or at least ambiguous and subjective in their valuation. If the decision is about a personal or family matter these emotions are more important but in the domain of politics and macro-economics, the decision-maker’s personal idiosyncrasies are supposed to have less weight. The largest entities where personal idiosyncrasies are perhaps beneficial to decision-making are in corporations like Apple, through which the founder’s (Steve Jobs) vision and interests have co-designed their product line in tandem with engineering teams and their adoring market.
Decision Matrices and Decision Space
One technique used in group decision making that requires the weighing of multiple factors is called the decision matrix or Pugh method. Named after the Scottish product engineer Stuart Pugh, the Pugh method also known as a “multi-criteria decision analysis” is used in engineering and quality teams in industry. In a decision matrix, each decision-relevant factor is given a weighting and then individual prototypes or situations are rated on each factor yielding a score. That prototype with the highest score is deemed to be the best according to this decision making model. The ratings could be based on objective measurements and/or numerical ratings of people’s subjective opinions. Decision matrices allow a simple “go or no go” decision to be made from a welter of factors that may be objective or subjective numerical ratings.
The LEED green building rating system is a version of a decision matrix but instead of a single winner or a ranking, buildings are rated according to 4 distinct scoring levels which lead to the awards LEED Certified, LEED Silver, LEED Gold, and LEED Platinum. The rating system weights different factors more or less depending upon the USGBC’s assessment of what constitutes a more sustainable building or building practice.
What I am calling the decision space is the social and scientific terrain of which a given decision matrix is one possible map. A decision space is a multidimensional (n-dimensional) virtual construct within which decision-makers move to make reality-based and reason-based decisions. To structure and call attention to the decision space means to alert people involved to the different factors and the “meta” decision making process of how to decide. For buying a pack of gum, one doesn’t need a decision-space or a decision-matrix though health conscious or obsessive buyers might make their own impromptu ones. By distinguishing between the decision matrix and the decision space, I am calling attention to the process by which individual decision matrices may be generated through a scientific and political process. Without the notion of a decision space, I’m afraid that a given matrix, with its selection of factors and weightings, would become treated as a given rather than an object or work and potential revision.
A Provisional Post-Carbon Decision Space
While experts and leaders may think they already know what the solutions are, one individual probably does not know enough to choose among ALL the solutions in building the infrastructure we need for the post-carbon economy. A post-carbon decision space is one way of requiring an attitude of Socratic wisdom, of knowing what you don’t know, of decision-makers. If a post-carbon decision space were available, decision makers would need to justify the choice and weighting of factors in designing a decision matrix and require that sufficient data be collected to rate available choices. Gut level and charisma-influenced decisions would be highly unlikely as choices would get rankings that we hope would be informative and influential. While, I wouldn’t go so far as to insert the requirement that the resulting rankings be binding upon decision-makers and decision-making bodies, the data output would seem to indicate which choices are better and which choices are worse for a given application.
In this provisional post-carbon decision space, I came up with the following factor structure. As to reasonably address all of these facets requires consultation and study, I would think that an attitude of Socratic wisdom would be helpful.
Prerequisites (Is this a post-carbon technology at all?
- Reduces GHG emissions 90% as compared to replaced technology
- Available for deployment by 2018
- Current Cost of Deployment (per unit useful product and per unit GHG avoided)
- Projected Future Cost of Deployment (5 year, 10 year, 15 year horizons) (per unit useful product and per unit GHG avoided)
- Potential for Profit (margin between true cost and perceived market value or prescribed price)
- Potential for Workforce Development and Employment (project-oriented and long-term)
- Percentage discount from expectable carbon price ($50/tonne carbon dioxide)
- Capitalizes on sunk costs/existing infrastructure
- Losses from abandoned GHG-emitting assets
- Available incentives to recover economic losses from abandoned GHG-emitting assets.
- Requirements for new ancillary infrastructure
- Dependence upon government subsidy
- Allows investment in small monetary and time increments/rapidly recursive development depending upon results
Efficacy as Climate Protection
- Availability for deployment in 2009/2010 or soon thereafter/Technological maturity
- Scalability to energy demand and GHG emissions reduction targets
- Geographical range of application
- Coal replacement value (how closely matches energy output of coal-fired technologies)
- Petroleum replacement value
- Natural gas/propane replacement value
Efficacy as Energy Source
- Energy Return on Energy Invested (current and projected future)
- Reliability and Availability
- Primary energy is a stock or a flow
- If a flow, storage capability and cost for primary energy flow
- Dependence on exhaustible or rare resources/(narrow) sustainability
Continuity with Existing Social Institutions
- Convenience/Consumer acceptance of products and services
- Continuity with existing industry expertise.
- Continuity with existing employment structure.
- Favored by established economic interests and industry players
- Disruptiveness for existing industries and interest groups
- Physical Proximity or Accessibility to Decision-maker
Systemic Risks and Dependencies
- Dependence on government management of operations
- Non-Carbon Ecological footprint (land use, water use, air use, non-GHG emissions, volume of solid and liquid waste of fuel extraction/generation, manufacture and operation, toxicity of waste and emissions )
- Potential for catastrophic failure
- Vulnerability to changes in atmospheric or climatic conditions
- Vulnerability to attack or vandalism
Eventually, to be useful weightings would need to be assigned to these factors. Some may be “worth” 5 to 10 times more as a category than others but this evaluation will in many cases also be evaluator- and context-dependent.
Mark Jacobson’s Petroleum-Replacement Analysis
The most comprehensive example of a post-carbon decision matrix is, to my knowledge, Stanford professor Mark Jacobson’s recent rating of 12 post-carbon alternatives for replacing petroleum for all US on-road vehicles. His rating system considered 12 options that combined an energy carrier and an energy source that would substitute for our current on-road vehicle fleet and petroleum fueling infrastructure. Jacobson does not consider the complicating factors of changing modes of transportation (from road to rail, for instance) or reducing vehicle miles traveled through consolidating trips. The twelve options were battery electric vehicles powered by wind, concentrating solar power, solar photovoltaic (typical solar panels), geothermal, tidal, wave and hydroelectric among renewables and additionally by nuclear and coal with carbon capture and storage. In addition Jacobson considered wind power extracting hydrogen from water through electrolysis and powering fuel cell vehicles as well as corn ethanol and cellulosic ethanol powering internal combustion vehicles. Jacobson rated these options using the following factors: available energy resources (size of resource), effects on GHG emissions, effects on non-GHG air pollution and mortality, land and ocean use, water supply, effects on wildlife and the environment, energy supply disruption, and addressing the problem of intermittent renewable energy sources.
This pioneering analysis indicates that wind power powering battery electric vehicles would be the most favorable petroleum replacement followed by wind power powering hydrogen fuel cell vehicles and concentrating solar power powering battery electric vehicles (BEVs). Most of the recommended options suggest that the most favorable energy carrier to replace petroleum would be electricity stored in vehicle batteries, thus supporting the renewable electron economy concept. However, contrary to my and other analyses based largely on energy efficiency, Jacobson finds that hydrogen fuel cells paired with wind, using his analytic categories are superior to a number of renewable plus BEV options. Using the weightings he does, his analysis discounts the need to develop almost three times the clean electricity generation facilities to support the hydrogen option.
Jacobson’s is also yet another analysis that indicates that biofuels as we now know them or can conceive of them in the near future are a far inferior option as mass replacement for petroleum. Jacobson ranks corn ethanol last and cellulosic ethanol second to last in terms of their overall negative impacts as compared to their positive impacts. They are far inferior in his decision matrix to all the other options considered with a wide gap separating the biofuel options from the battery electric and single hydrogen fuel cell options, making the internal diversity of the latter seem fairly trivial. Another decision matrix with a higher weighting for a liquid fuel compatible with existing internal combustion technology might make biofuels appear more favorably. However, Jacobson’s analysis crucially gives weight to the costs of local air pollution, which biofuels will in some cases worsen, and land and water use, of which biofuel production requires massive amounts. Renewably fueled electric-drive transportation has no or very low impacts in these areas. While arguments can be made for re-jiggering the weightings and adding factors, Jacobson has established a precedent of a multi-dimensional analysis, which cannot be ignored.
Towards a Best Practices Post-Carbon Decision-Space Tool
Jacobson’s analysis points to the value of a multi-dimensional decision matrix designed for a given question, organization or locality. Even if the results of a such a decision matrix are eventually subjected to a more “rule of thumb” type of decision-making process, the process of considering and collecting data about the factors that relate to a given decision will provide discipline to decision-makers and encourage transparency. Even if a more private deliberation is desired, using a best practices model will allow for multiple factors to be taken into consideration and rationales discussed with the relevant team.
A post-carbon decision space tool can also interact with the various carbon pricing regimes being discussed at state, national and international levels. The macro-economic level at which these discussions have occurred could mesh with though not necessarily always “agree” with the results of a well-designed decision matrix. As I have indicated, in the previous post, the building of infrastructure lies in certain regards “orthogonal” to whether or not the builders of that infrastructure are emitting less carbon. The building of infrastructure in the next decade will involve large carbon emissions, so in some sense will be penalized by a carbon pricing regime.
Furthermore, knowing that there is a price on carbon will not necessarily deliver to the actors involved the information they need to make decisions about how to emit less, with the exception of increase efficiency or “do” less. The post-carbon decision space will allow for multiple factors to be taken into account and will also deliver a more qualitative selection of alternatives with both their expectable carbon benefit and a weighing of other factors key to long term viability.