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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Eight hurdles: Too Many?

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

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

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

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

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

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

The Deepwater Oil Spill Exposes a Persistent Failure to Plan and Failure to Lead May 16, 2010

Posted by Michael Hoexter in Climate Policy, Efficiency/Conservation, Energy Policy, Green Transport, Renewable Energy.
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The 1969 Santa Barbara Oil Spill catalyzed the environmental movement in the US and inspired some important legislation but did not lead policymakers to take the next step and start the long process of weaning the US from its oil dependency (Photo: Unknown)

President Obama is facing with the explosion of the Deepwater Horizon,  a “local” disaster that exposes a deeper, endemic crisis in US energy policy and the US economy as a whole.  As he has been in office for still just 16 months, Obama does not bear primary responsibility for this ongoing crisis but he has only recently, a couple weeks after the accident, publicly hinted at the “elephant in the room”:  the obvious connection between the undersea oil volcano and our equally obvious need to transition from using oil as our primary transport fuel.  Simple reference to the Kerry-Lieberman climate bill that encourages more offshore drilling does not constitute an answer to our oil dependence.

Unfortunately public rhetoric and policy discussions that hinge on the notion of a dependence on “foreign” oil play the role of a “shortstop” in keeping the discussion from going to the heart of the problem.  The idea that oil produced on American shores will somehow differentially serve American consumers overlooks the international nature of the oil business with total offshore oil reserves destined never to make much of a difference in the overall price and availability of oil.  Estimates put the total reserves of offshore oil in US waters at 18 billion barrels conventionally recoverable and an additional 58 billion barrels “technically recoverable”.   While this oil, if extracted, would just be sold on the world market, it equals the equivalent of 11 years of consumption for the US at our current oil consumption rate of 8 billion barrels/year.   Subtracting the huge costs of oil spill cleanups and damage, most of the economic benefit of offshore drilling would accrue to oil companies and secondarily to state and federal governments in harvesting royalties, however the latter are going to be left “holding the bag” for the really, really big costs.

To ground this discussion in reality for just a moment, the 2009 US DOE Transportation Energy Data Book attributes to the US 2% of the world’s oil reserves, 8% of production, and 24% of consumption while the rest of the non-OPEC world comes out just a little better at 29%, 48% and 67% respectively.  Conventional natural gas is not a much more promising energy source for the future with the US having 3% of the reserves, 18% of the production, and 21 % of the consumption.  In the US, transportation accounts for 70% of all petroleum use and 24% for industrial uses.  Consumption of petroleum for transportation in the US is 84% for road transportation with around 65% for cars and light trucks and 18% for medium and heavy trucks.  Airplanes use 9%, shipping 4.2%, and rail 2.0%.  Even if we consumed petroleum and natural gas in proportion to worldwide production, there are credible predictions that we are somewhere in the neighborhood of the worldwide peak in production whether today or in a decade’s time.  Even if there were two more decades until the peak and we looked away from oil’s climate and local pollution impacts, would it be justified for our generation to run through this exhaustible resource?

The ballooning US trade deficits are attributable in the last decade approximately 55-60% to outgoing payments for petroleum imports but with the 2008 price spike, oil’s proportion climbed to 65%.  With oil prices once again ascending the petroleum related component of the US trade deficit will continue to climb.  With the last US trade surplus in 1973, the total US trade deficit has since 2003 stayed in the range $500B to 800B per year.

Turning back to politics, the President, whether by his own inclination or badly counseled by his advisors, has since taking office had a tendency to let the issues be defined for him rather than shaping policy with original view of his own.  He has approached health care, financial reform, and climate and energy as though there was some pre-formed wisdom which he simply needs to allude to or tap into in order for the American people and Congress to understand.  Erring on the side of being too laid back, perhaps partaking of the Spirit of Aloha, has not always served him well:  to get health care across the line he had to shed the “cool customer” image to actually win the votes in Congress.

The apparent rationale for his laid-back approach to issues, so commentators say, comes from overlearning what is considered to be a mistake of the early Clinton White House.  Clinton’s hands-on approach to policy is supposed to have alienated Congress and doomed Clinton’s health care efforts.  Obama has taken the opposite tack and can claim at least passage of a health care bill, though it is not clear yet how positive an achievement this will be considered when it actually takes effect.

What is missing so far in the Obama Presidency is the President taking the role of educating and perhaps changing the public’s views on important issues, which have been heavily colored by a very strong and organized counter-reform messaging machine.  The President has shied away from using the “bully pulpit” and allows Congress, which is considered by the public at the moment to be corrupt and untrustworthy, to shape the terms of the debate.

With the approach to a climate and energy bill this year, post-health care, the President opened up with a tactic rather than with a strategic plan for energy.  His announcement in March that he would lift the ban on offshore drilling in parts of the Gulf and the East Coast was a means of gaining support from Republicans for the ever more amorphous climate and energy package which is currently in the Senate.  Meanwhile, with so many issues and concerns, it is safe to say that energy is not top-most on most people’s minds in the Great Recession.

But the President has so far treated this as a case of another industrial accident for which liability can be assigned to the owner or commissioner of the oil rig, BP.   President Obama has not even advanced to the rhetorical level of George Bush’s 2006 State of Union where Bush declared America “Addicted to Oil”, despite Bush, in action, being responsible for gutting the regulatory agencies that may have prevented the spill.  While nominally a more “liberal” President and not from the oil patch, Obama has not presented a tangible vision of a post-oil society and, in combination with his preferred policies and speeches, the public is left mired in the oil-dependent present.

Discussions about who is to blame, who will pay, and what can be done in the Gulf to recover from the spill are important but are ultimately distractions from the most important question:

What will the US do to wean itself from its oil dependency?

In media accounts, the effort to make this a conventional tale of corporate or regulatory malfeasance is becoming the favorite of supposedly hard-hitting television journalists.  Yet these interviewers avoid looking into the frightening “maw” of our economy’s fatal dependence on oil.  The President is also looking away, focused as he is on technical and regulatory “fixes” for the offshore drilling disaster.

The upcoming climate bill in the Senate is being sold as an effort to reduce our dependency on oil and other dirty fuels but it contains few aggressive provisions to get us there.  The just released details of the bill, indicate that it’s mild cap and dividend provisions may slightly raise oil prices (starting in the area of $.10-$.20/gallon and increasing by 3-5% over inflation per year).  And offshore drilling provisions are in the current draft, offered now as an opt-out for states that wish to keep the ban in place.   As a whole, the bill postpones until the 2020’s any serious moves to cut emissions and focuses on the implementation of coal carbon capture and storage rather than more promising renewable technologies and grid enhancements.  Ironically, Senator Kerry has mentioned on TV, as if this were a sign of his seriousness, that he had been working with the oil industry on this bill.

If we assume the best intentions of the President and the Congressional leadership, one single legislative session or bill cannot undo 30 years of negligence and foolish disregard in the area of energy.  Whatever his ultimate goals and political commitments as President, Obama, if he endeavored to “do the right thing”, would have a number of hurdles (described below) to overcome.  However right now, he, his Administration and his Congressional allies are managing just a few cosmetic moves in the direction of change. On the issue of oil use and oil dependence, the bill and the Administration’s efforts are weak.

I am proposing here a stronger response that deals directly with America’s oil dependency.

A Strategic Energy Plan for Oil-Independence and Carbon Mitigation

A serious effort to get off oil will involve an equal emphasis on battery electric and grid-tied or grid-optional large vehicles like this trolleybus. The de-electrification of public transportation, while greeted by some as progress, now appears to have been a big mistake. (Photo: Adrian Corcoran)

The only solution to our oil dependency and the inevitable disasters that come from a mad rush to extract as much oil as possible from the earth is to create a strategic national energy plan that addresses both our oil dependence and our climate concerns.  A plan is required because changes in the transportation and energy system involve the coordination and arrangement in a sequence of certain key activities and infrastructure changes, for which market mechanisms, the current “default” preference for policymakers of both Left and Right, are ill-equipped.  Such a plan would also be the occasion for leaders of government to show and exercise leadership rather than look around for a lucky break or well-meaning private actors and companies to step into the breach.  Turning to planning is unfortunately now in America a politically fraught move but there is simply no alternative, if we want to have a sustainable economy, whether in the narrow economic sense or the broader ecological sense.

A growing chorus of corporate leaders and former government officials is calling for an electrified, oil-independent transportation system for national defense reasons as well as environmental ones.  Recently Bill Ford, chairman of Ford Motor Company made the connection between national security and oil, indicating that Ford’s product roadmap will focus on electric drive vehicles in the future.  James Woolsey, former CIA chief under Clinton, has been a long-time advocate of electrification for reasons of national defense.

Other nations are rapidly moving away from oil through plan-based efforts by governments in coordination with the private sector, even as almost every other country is starting from a position of less oil-dependence than the US.  The Chinese leadership, as is well-known, is very concerned about the effects of oil shortages and prices on China’s economic development.  China is in the process of building an extensive high-speed rail network (to Europe too)and is as well working on developing a lead in the area of battery powered vehicles.  President Obama mentioned in a recent speech China’s ambitious rail program as an analogue to his efforts in the US but I believe he knows that there is no comparison between the scale of their efforts and our much modest ones.  Japan and Switzerland have almost entirely electrified rail networks and France has the goal of electrifying its entire rail network by 2025.  Russia, despite its plentiful oil reserves, has electrified the Trans-Siberian and Murmansk lines of its railways in the last 10 years.  Denmark, Japan, France, and Israel all are executing plans to build widespread electric vehicle charge and battery-swap infrastructure.  By contrast, US freight and passenger transportation in all modes is almost totally dependent upon oil, leaving the US vulnerable to political and geological disruptions of supply and price spikes (see Alan Drake’s proposal for a comprehensive electrified train system for the US).

Two Pronged Strategy:  Efficient Use and Oil-Independent Infrastructure

There are two prongs to getting off oil which also share a common path.  One prong is increasing the efficiency of oil use in the US via increasing the person or freight miles traveled per unit petroleum consumed.  The other prong is building an oil-independent transport infrastructure and oil-independent vehicles.  Investment in routes on the path common to both should be favored over those that commit us interminably to oil.

The dream of a quick-fix, a “drop-in” technological solution that will simply replace oil has proved to be elusive and has so far found little basis in the science of energy.  So the proposed solution has a number of parts and involves tradeoffs and some large initial costs.  However, the invitation is there to any readers to find a better, presently available solution and publicize it.

Efficient Use:

  1. Levying a gas tax or price stabilization tax that insures that drivers can plan on a minimum gas price going forward on an ascending schedule.  Instead or in addition, a carbon tax or fee would disincentivize coal use as well, though might be supplemented by a gas tax to reduce gas use. (the Kerry Lieberman bill’s cap and dividend provisions will raise gasoline prices imperceptibly in the first few years).
  2. Enable full use of existing passenger rail and bus transportation infrastructure via adequate funding to increase schedules, keep current fare levels.  Determine via market surveys and statistics optimal service levels for each route.
  3. Encourage shared ride and shared vehicle programs and services using Internet and mobile phone resources to coordinate and develop ride-sharing social networks
  4. Mandating idle-stop systems (a.k.a. “mild hybrid”) on all new trucks and cars as of 2013.  Comprehensive idling reduction program at all truck stops, including incentivizing “shore power” electric hookups and retrofit kits. Mandate Cold ironing facilities at all shipping berths by 2015.
  5. Incentivize Transit Oriented Development via federal incentives for zoning changes at the local government level and developer and homeowner tax incentives.

While focusing on efficient use alone seems “pragmatic”, it actually does not have nearly the appeal and long-term economic stimulative effect of building an infrastructure that moves passenger/driver miles and freight ton-miles off of oil permanently.  To focus on efficient use without building for the long-term is an incomplete strategy.

Oil-Independent, Carbon-Independent Infrastructure:

See Drake et. al. for a slightly different more detailed proposal

  1. Double or multi-tracking the US rail system on all but low traffic lines enabling consistent speeds of 110 mph on non-high speed lines for freight and passenger trains.
  2. Stepwise electrification of rail infrastructure to 100% electric traction.
  3. Building on an accelerated basis dedicated high speed rail lines per the US HSR Association’s recommendation: http://www.ushsr.com/hsrnetwork.html
  4. Electrification of 80% of government vehicle fleets using a variety of battery charging technologies including trickle charge, rapid-charge and battery exchange technologies.
  5. Extended tax incentives for corporate vehicle  fleet conversion to battery power or for plug-in hybrids.
  6. Rapid build-out of a super-grid supportive of renewable energy development throughout the US.
  7. A robust regime of incentives for renewable energy development (advanced feed in tariffs based on cost recovery plus reasonable profit with descending incentives for projects in later years).
  8. Electrification of high traffic bus routes via either trolleybuses or streetcars.
  9. Build out of light rail and regional rail networks to interconnect high and medium density cities and suburbs.
  10. Corporate tax credits for build-out of tele-presence (e.g. Cisco’s product here) technologies and to encourage tele-commuting and tele-meeting

While technologies could evolve in the future that might alter the relative proportions in the above plan, these policy proposals and programs rely on technologies that are available today, some of them with a track-record of over a century.  However, the goal of getting off oil, let alone fossil fuels has not been a priority of US industrial development and government policy, so our rail and transport networks have remained dependent on the happenstance of oil extraction and the oil markets.

Substantial and Insubstantial Hurdles that Delay Us

If our country does not first slide into a state of permanent second or third-class status, it is inevitable that we in the US will move to a post-oil, post-carbon transport system incorporating most of the largely electric-drive technologies listed above.  However this should not lull our current leadership into complacency or half-measures, because sliding into a state of decay and dependency is a distinct possibility.  Will Obama be the President to lead us there, as Eisenhower was the President who built the Interstates?  Or will he be the President who excited hope, talked a good game but gave too much discretion to fossil fuel interests? We can be the last nation in the world to wean ourselves off oil, massively in debt, and always be in the position of borrowing know-how from others or we can start to move “on our own power” towards a position of leadership in this area.

The current Senate climate bill sees most of what is proposed above as distant pipe dreams rather than near future realities.  Most of the electric vehicle provisions in it are termed “pilot programs” with greater favor shown to natural gas vehicles and mild oversight for unconventional natural gas extraction.  Public transportation and rails are given little or no mention.

Leadership will be required to push ahead to the solutions based on what is already known about the physics and technology of transport and energy, instead of stopping at the half-way measures or the dead-end technologies that depend on fossil fuels.  True leadership involves anticipating and overcoming hurdles.  I have listed below the main hurdles which present themselves to whomever, I hope President Obama, decides to place the American economy on a sustainable energy basis.

Hurdle #1:  Market Idealization (Market Fundamentalism) Vs. Planning

One of the greatest hurdles is the ongoing influence of market idealization (or “market fundamentalism“) in Washington in general, on both sides of the aisle in Congress and in the White House.  In the era of market idealization over the last 30 years, planning, especially government planning, got a bad name as markets were supposed to constitute all of economic life as well as being perfect and complete economic institutions.  Through his sojourn at the University of Chicago, one of the centers of market idealization, President Obama was exposed to an environment that celebrated a view of markets as self-sufficient, self-regulating institutions which perhaps continues to color his view of planning and government’s role.

The use of “cap” legislation, carbon pricing, or emissions targets does not substitute for planning because such unspecified “plans” to achieve quantities of emissions reductions cannot substitute for the sequence of timed and specified actions that constitute a plan.  Emissions caps or targets suggest that the market will find its way without planning.  In some areas this works better than planning but in transportation and energy infrastructure, not so much.

Some major problems with markets are that they don’t price in future risks or distant future rewards very well in many sectors, including energy and transport, and, when unregulated, tend to focus market participants on their most immediate concerns.  Markets also do not produce all the conditions for their own survival and continued profitability.  Governments have historically stepped in to provide people and markets with structure for transactions that threaten to undermine trust between market actors.  Additionally, governments of most nations with complex economies provide public goods like infrastructure that enable longer term social and economic goals of both private and public actors to be achieved.  While market-like institutions can be imposed upon the “natural” monopolies of the electricity and the rail businesses, these market reforms do not generally orient these businesses to rapidly change their infrastructure but rather focus them on squeezing value out of existing assets.

Planning can originate from private and non-profit actors as well as from government though this does not release governments from the duty to initiate or help structure plans that effect diverse sets of stakeholders.  The Desertec Initiative is an example of a large-scale international energy plan that has originated in the private and non-profit sectors.  The Desertec Foundation and the Desertec Industrial Initiative (DII) are working on building a renewable energy supergrid that spans Europe, North Africa and the Middle East in order to provide renewable electrical power to the area, balancing wind and solar resources across the region.  Munich Re, a large re-insurance company based in Germany, concerned about environmental and climate risk in the future and along with a consortium of electrical utilities and technology companies, including Siemens, ABB, Abengoa, MAN Solar Millennium has created the DII.  Whether the impulse to plan has come from the private sector or from government, government needs to be involved in making sure that large scale energy and transportation plans serve national interests and are executed and financed in a transparent and fair manner.

As market idealization has been also a particularly fervent form of anti-Communism, government involvement in planning has been associated in the minds of US politicians and sections of the public over the past 30 years with centrally-planned Communist economies.  Due to these still largely unchallenged views of market idealists, politicians making the argument for planning will need to run the political gauntlet of being accused of being a Communist (or, as is common in the precincts of the Tea Party and Fox News, a fascist).  Unfortunately, academic economists too have also been lax in making the case for government planning beyond Left-Right ideology.  Republicans and Democratic Presidents and other government officials between 1940 and 1980 did not generally have to justify their use of planning but since 1980, planners and planning advocates have needed to keep a low profile.

So presenting a full-on Oil-Independence Plan from the side of government would present the President with either having to make a two-stage argument (first for a role for planning and then for the plan) or to compress the two together in one artful package.  The latter is not inconceivable but, our President, so far, has shown more interest in pointing out how much he has in common with the Republican Party that has been almost completely captured by market idealists.

On the other hand, almost everybody in contemporary American politics is for energy independence and national defense.  It is not a stretch to imagine our centrist to right-leaning Democratic President reaching across the aisle to push for a “Oil Independence Transportation Plan”.  This would require preparation, research and political leadership by the President, the Administration and Congress but is eminently do-able.  Thus a brilliant and principled politician, maybe even our current President, could present this plan as a combined act of patriotism and long-term economic good sense.

Hurdle #2:  Deficit Worries and Hysteria

Given that we are in an economic downturn and tax revenues will not be able to be boosted substantially, a post-oil transport infrastructure built in a timely manner will probably involve deficit spending.  Some parts of this system can be built and financed privately and paid back via user fees while others will have the status of public goods, like roads, that will need to paid for via taxes and or potentially inflationary deficit spending, i.e. printing money.

We have been facing a rise in public debt and budget deficits over the course of the Bush administration and the first part of the Obama Administration.  The current level of the public debt stands at approximately 60% of its maximum in relationship to GDP at the end of WWII (108%).  Misinformed politicians, pundits, and financiers take this as an occasion to stir hysteria that is stoked by a combination of fabrications and partial truths about the potential impact of budget deficits on the American economy.   Economists, such as Paul Krugman, Dean Baker and Joe Stiglitz, who have studied economic history and effects of deficit spending on jumpstarting the economy, have attempted to correct these misguided views of deficit spending in the context of a severe economic downturn.

This graph of the "gross" and not the usually cited public debt (now at 67%) indicates that excluding the first year of the Obama Administration the last four Democratic Presidents reduced the gross federal debt while the last four Republican Presidents increased it relative to GDP. In general, economic depressions and wars tend to increase the federal budget deficit.

Deficit hysteria seems to have a strong political component to it, as these fears remained largely dormant in the Republican Administrations that have run up large debts in the past.  As a preventative, those who are opposed to a strong government role in the domestic economy (though generally not to military adventures) have attempted to intimidate the President and others by warning of runaway budget deficits.  There are now some more severe budget problems in other countries (Greece for instance) and the differences between the US situation and these countries are played down to intimidate those who would want to spend deficits on building US domestic economic growth.

While those who stir deficit hysteria tend to be closed-lipped about their large-scale political and economic agenda, they generally are opponents of all government-provided social services and government-led economic initiatives preferring to reserve these functions for private enterprise.  Deficit hysteria implies the idealization of markets, though is a more sophisticated variety that acknowledges that there is “some” role for government, only to minimize that role in every proposal, due to fear of budget deficits.  Unfortunately President Obama has some vulnerability to deficit hysteria, in that he has not come out vigorously in defense of government’s role in the domestic economy, preferring instead to adopt an attitude of compromise and conciliation with people who talk as if there is no legitimate role for government social programs or in the domestic economy.

While budget deficits need to be monitored closely, the US has luckily somewhat more flexibility than many other countries to engage in deficit spending.  A very strong case can be made that deficit spending to help finance a post-oil transportation infrastructure is a very good use of public funds and also shows nations that hold our debt that we are spending in ways that will improve our overall competitiveness and resilience as a nation.  Deficit spending in this way actually works to reduce our trade deficit which is in most years larger than our budget deficit and largely attributable to oil imports.

Hurdle #3:  Balancing the Interests of Stakeholders, Mix of Private and Public Enterprise

The French SNCF is a public benefit corporation that runs and owns the French trains and stations. In order to open up the rails to competition the rails and rights of way are owned by another government-owned company, the RFF, enabling, theoretically, private train companies to compete with SNCF on the same tracks. (Photo: Wikimedia Commons)

An Oil- and Carbon-Independence Plan will require the participation of a number of stakeholders some of whom will be less than enthusiastic participants in this ambitious effort.  The railways in the US are ambivalent about the ambitious plans of advocates for either high-speed rail or electrification.  Like other large infrastructure-dependent businesses, these usually risk-averse corporations make money by squeezing value out of their existing infrastructure and sticking to decades-long incremental capital investment strategies.  Additionally, and ironically, railways, our cleanest and most efficient means of transporting freight even with diesel traction, haul the dirtiest fuel, coal, to power plants of the large coal-burning utilities; the largest source of revenue for railways is coal transport accounting for 21% of 2007 revenue with intermodal (container) being the fastest growing segment.

Left to themselves, the US freight railways would not be able to undertake nor necessarily see it in their short or medium-term interest to electrify their railroads nor embark on a massive program of track build-out.  The railways are in favor of tax incentives to help them continue capital improvements but these alone will probably be not enough to double and triple track mileage. The railways own their own rights of way and are currently entirely self-funding and compete largely on price and capacity with other freight modalities.  In order for massive public investment to be possible, the railways would have to develop an entirely different relationship with the federal government.

If they were intent on executing a Post-Oil transport plan, policymakers would need to lead the railways into a new relationship or perhaps buy some of them out, in part or in full. The massive level of public investment required to enable the railways to carry triple the freight plus 20 to 30 times the passenger volume would transform their capital base with largely public funds or public guarantees to be able to undertake the risk.  Such action would require a combination of vision, leadership and negotiation skills from the side of government.

As diesel locomotion (actually diesel-electric) is still a very efficient method of hauling freight and passengers relative to other modes of transportation, the transition to an Oil-Independent infrastructure could be achieved in two stages:  first railway track build-outs that are electricity-ready and then the electrification of those railroads as a separate project.

An alternate route towards oil-independent transport is possible that “deals in” the trucking industry but requires the adaptation of several existing technologies and an alteration to the interstate system: Using hybrid dual-mode trolley long-distance trucks on dedicated lanes of the interstate that also have a backup generator or battery pack that enable easy on and off and grid-detached travel.  There are no technological breakthroughs required to do this but it needs the backing of a government or government-funded research program that seriously studies electrification of lanes of interstates and the high speed attachment and detachment of trolley poles or pantographs to overhead lines.

Designing and executing an Oil- and Carbon-Independence Transport and Energy Plan would also not necessarily inspire the other large conservative infrastructure-based companies, the power utilities, to join in the spirit of the enterprise.  Similarly to the freight railways, utilities wring value from a decades-old infrastructure and generally adopt change very slowly.  Particularly challenging for many US utilities is a transition away from coal which accounts for approximately 50% of electricity generated in the US.  Selling electricity to railways may be an additional source of revenue but also would involve new infrastructure and might require new generation, which would need to be low- or zero-carbon.  A portion of the electricity demand from railways may be supplied by federal power generation facilities, perhaps by a newly founded Railways Power Administration, modeled on the Western Area Power Administration or similar.  Passenger railway power demand would require daytime generation which would coincide with solar but freight would add to baseload demand as it would operate around the clock.

A clear expression of purpose and demonstration of intent by government leaders to reduce oil demand in the US is a prerequisite for successful negotiation with stakeholders in shaping the post-oil future.  So far the President and Congressional leaders haven’t shown the guts and independence of mind to work this out with industry stakeholders.

Hurdle #4:  Many Americans’ Love of Expansive Resource Use (and Disregarding the Consequences)

Different cultures tend to have differing attitudes towards the material world and what is considered attractive or desirable in the use of resources.  In Japan, with one of the world’s highest population densities, cultural preferences include a focus on small, sometimes intricate objects.  Traditional agriculture in China is highly space- and resource-efficient.  In Europe, culture has emerged from similar resource constraints, for which it is much admired throughout the world.  In the US, we have through a large portion of our early history, not had to deal with as many resource constraints, including a belief that more abundance is always around the next bend.  Europeans came here in search of “El Dorado” and we have had the tendency to believe in “Virgin Land”, either physically or virtually, into which we could move if we “messed up” or wanted to leave our original physical context.

President Jimmy Carter wore a cardigan in some TV addresses to show that he was practicing energy conservation during the winter at the White House. Even though he was presenting Americans with a prudent message, in hindsight with the triumph of Reaganism and reactive resource- and energy-profligacy, our image-obsessed culture has held onto Carter's slight awkwardness, school-teacherly manner and absence of swaggering machismo rather than the content of his message.

The electoral defeat of Jimmy Carter in 1980 by Ronald Reagan and the subsequent growth of a culture of reactive anti-environmentalism has impressed politicians with the dangers of appearing to “wear the cardigan” rather than use resources “like you just don’t care”, yielding a culture of reactive or revived profligacy.  Contrarian anti-environmentalism both on the Right and in the apolitical Center has meant a return for many to the energy and material use patterns with which Americans grew up until the 1973 OPEC Oil embargo.  Because of the political defeat of Carter (for a number of reasons), the 1985-2001 return of cheap oil, and the 2001-2009 Bush Presidency, few politicians have attempted to experiment with what is possible in the way of communicating a stance that counsels wise use of resources while retaining a sense of American identity.

Obviously, we will need leaders to set an example and attempt once again to join the American spirit with an awareness of the earth’s limits and wise use of resources.  Expansive plans to create a post-oil infrastructure can be combined with measures that suggest that the America of the future will not lay waste to the earth.  The ability to break up the cultural “forced choice” between abstemiousness versus expansiveness will involve creativity on the part of political and cultural leaders. Whether the Obama Administration is up to the task and has the will to engage in this vital transition to a new kind of American identity remains to be seen.

Hurdle #5:  The Biofuels Distraction

A few years ago, using biofuels as an oil substitute were treated seriously by some environmentalists and became a big favorite of politically powerful agricultural lobbies.  Since then, it has dawned on most of the environmental movement plus more and more policymakers that biofuels are a poor source of fuel and environmentally may be under many conditions worse than using oil.  The net energy yield, plus land use, plus water use put into making ethanol or biodiesel from dedicated crops rather than waste products turns out to be a net negative for the environment and economically disruptive for food production.  To produce mechanical energy from sunlight it is far more advantageous to erect solar panels or use wind turbines in agriculturally marginal areas, which would occupy far less space, have far lower environmental impact, and produce far more energy.

Unfortunately, in the American heartland, it is difficult, in the absence of renewable electricity policy that is attractive to farmers and higher prices for food crops, to turn away from support for biofuels and the overproduction of corn for that purpose.  While perhaps research may turn up a more sustainable biofuel, a strategy based on biomass production for biofuels other than as a subsidy to farmers is unjustified.  There may in the future be niche uses for some future biofuel process but these will not serve the vast energy demand currently served by oil. A gradual shift to a sustainable agriculture policy that addresses the economic concerns of farmers without continuing our unsustainable corn policy would be the long-term solution.

As an immediate strategy, the policymakers would need simply to slowly back away from biofuel subsidies, while a compelling and well-explained alternative for farmers and farm-belt politicians is developed.

Hurdle #6:  Corporate Funding of and Influence in American Politics

A recurrent theme throughout the last year and half of reform attempts has been the notable influence of incumbent industries and their lobbyists in influencing politicians in Washington of both parties.  While there are many corporations that stand to benefit from an Oil- and Carbon-Independence Plan, these have not yet made common cause and many see their short-term interest in the energy and transport status quo.

The likelihood of formulation and implementation of a plan with the longer term interests of the US in mind, would be greater with corporate money taken out of politics to a very large degree, as then lobbyists would more likely to be seen as advisors and industry representatives rather than represent the co-“employers” of legislators.  This is not to say that there aren’t politicians who bravely stand up now for the long-term view of what is best for the overall American economy.  It can only be hoped that more politicians show this type of courage on a number of policy fronts and, as well, in the service of campaign finance reform.

Are There Any Other Options?

Those who read these recommendations with a jaundiced eye may say:  “You expect too much from government” or “this will never happen”.

My response:  Short of the United States slumping into further energy dependency, accelerated trade deficits, inflation due to spiraling oil prices and accelerated climate change worldwide, what are the other options?

If you have another workable option please share it with me or, better yet, the Administration and the world.

Standing on the side of the fishermen and the wildlife of the Gulf is not an act of excessive and unrealistic belief in human goodness, an underestimation of our energy demand, or an exaggeration of the sensitivity of natural systems.  It is simply the recognition of the unwinding of a model of economic and energy development that has run its course.

Just Published on Grist: Piece on “Bill Gates and Our Innovation Addiction” March 3, 2010

Posted by Michael Hoexter in Climate Policy, Energy Policy, Renewable Energy, Sustainable Thinking, Uncategorized.
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The environmental news site Grist, has just published a piece I wrote that is a response to Bill Gates’ recent entry into the climate and energy discussion.

Check it out at:

http://www.grist.org/article/2010-03-02-bill-gates-and-our-innovation-addiction-a-recipe-for-climate/

Enjoy and comment if you like!

Michael

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

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

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

http://greenthoughts.us/policy/post-copenhagen/

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

Please read and comment!

Michael

Cap and Trade: An Unserious Policy Framework for Humanity’s Most Serious Challenge – Part 1 December 12, 2009

Posted by Michael Hoexter in Energy Policy, Sustainable Thinking.
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In a few days in Copenhagen, world leaders will debate and, we hope, agree upon aggressive targets for humanity’s greatest challenge to date:  to avert devastating man-made climate change by transforming our economies’ use of energy and of land while maintaining and improving social welfare for the world’s peoples.  We have in the past 250 years proceeded on a course of development which has used fossil energy to replace human and animal muscle power with mechanical energy.  Economic development has almost become defined by application of this “exosomatic” energy, 85% of which comes from fossil sources worldwide.  Emissions from fossil energy as well as changes in land use, have dramatically increased the concentration of warming gases in the atmosphere, leading to increases in average annual temperature.  Furthermore, preferences for eating meat, in particular beef and bovine products like milk, have contributed massive amounts of warming potential to the atmosphere.  Finally, combustion of biomass and many fossil fuels has produced black carbon which has contributed substantially to warming.  Balancing the living standards of human beings with the health of the planet has become an unenviably massive set of tasks.

The potential economic and ecological catastrophes from a warmer planet are starting to become clear to us.  The retreat and eventual disappearance of glaciers seems now highly likely, reducing fresh water supplies for billions of earth’s people.  Rising sea levels from the melting of polar ice caps will swamp hundreds of millions more who live in low-lying coastal areas.  Changes in temperature are already disrupting fragile ecosystems with, for instance in North America, the pine beetle now surviving what once were frigid winters and devastating the forests of the Western US and Canada.  Many of the species with which our species has co-evolved will die off in a warmer world.

However, when compared to the magnitude of the threat and the measures needed to meet or exceed intended targets, the instrument chosen during the 1990’s to transform our economies, cap and trade (also known as emissions trading), has proved to be marginally effective to ineffective and extremely cumbersome to implement.  It is as if you, with great fanfare and concern, pointed out that there was a drowning swimmer 100 feet away from you but chose to throw a rubber duck instead of a lifebuoy to save them.  With time running low, it would be a disaster if government ministers and world leaders lock themselves into the cap and trade instrument as the main means to achieve emissions reductions targets.  Cap and trade or emissions trading, has had unimpressive results when compared with more traditional “command and control” regulation in the area of acid-rain forming pollution (SOx) and seems to have been selected as a means to control greenhouse gases largely because it appeared at the time politically expedient to the then-Clinton Administration.  This was humanity’s “first go” at a climate policy and the instrument has shown more weakness than strength.

There was within the Clinton Administration, which has had an outsized influence upon the shape of our first climate policy framework, an openness and vulnerability to the anti-regulatory and anti-tax rhetoric issuing from the Republican Party post-Ronald Reagan, so cap and trade seemed like an elegant domestic political solution.  Clinton, with apparent enthusiasm, declared in 1996 that “the era of Big Government is over,” yet government action and government regulation of markets, as it turns out, are going to be the pivotal institutions in transforming our economies to radically cut emissions (and managing our way out of the Great Recession).  Furthermore the Clinton Administration had more generally a fascination with financial innovation via expanding the influence and reach of financial trading markets and loosening regulations upon them.

However, in its capacity of creating a politically acceptable alternative to direct government action in the economy or to the levying of Pigovian (“sin”) taxation on carbon emissions, the proposal to use cap and trade to regulate greenhouse gas emissions has been, in the United States, a miserable political failure.  Opponents of action on climate change have seen through or willfully misinterpreted cap and trade’s “soft” regulatory image.  They are reinforced in their belief that “government is bad” by the effort by their political opponents to hide or make indirect government’s role via cap and trade.  “Fancy footwork” was unfortunately a hallmark of the Clinton Administration’s major policy efforts and cap and trade’s application to global warming is no exception.

I have elsewhere outlined two policy frameworks that with greater certainty would cut emissions more rapidly, based on more robust, reality-based economic and social scientific principles.  Firstly, a carbon tax or fee will function as a much clearer, more consistent incentive to invest in mitigation because of its predictability and clearer price signal to investors and consumers.  If paired with a series of targeted incentives for clean energy (feed in tariffs or other performance-based clean energy incentives) and investment in energy and transport infrastructure (electric transmission, electrified rail, electric vehicle infrastructure), we will see measurable emissions reductions and the emergence of real market choices upon which carbon prices will act.  The combination of incentives, disincentives and public investment might be called a “Comprehensive Climate and Energy Policy”.  Alternatively, a series of 20 to 50 large scale regional and global emissions cutting projects can form the basis for determining what would be the unifying national and international policy instruments, most likely including a carbon tax of some form.  Projects would need to represent certain emissions reductions using existing or emerging technologies within a timeframe or directly enable emissions reductions (transmission to renewable energy zones, electrified rail).

An alternate “meta-economic” framework for effective climate policy is Keynesianism, which after 3 decades of disregard has once again been recognized as the vital guide to economic policy at times of crisis.  What I call “Climate Keynesianism” recognizes the key role of government in leading an economy in crisis, in this case one with both a traditional worldwide economic slump in combination with an ecological crisis of unprecedented proportions.  Most commentators calling for a WWII style mobilization to catalyze economic growth and a greening of our society (a “Green New Deal”) are working with assumptions based on the work of John Maynard Keynes, though not all acknowledge his contribution.  Within a Keynesian framework government planning can supplement and support markets rather than remain invisible in our guiding economic theory or remain foolishly dismissed, as it has been over the past 30 years.  I have recently ventured the hypothesis that most intentional emissions reductions or increases in the efficient use of polluting resources that have occurred in our history have been the product of the implementation of government programs inclusive of the design of tax policy.

Furthermore, as I have argued here, cap and trade shields polluters and government from the ethical pressure of concerned citizens and concerned scientists, which are, in the end, the prime motive forces of climate action.   The new property rights to pollute that are the basis of emissions trading are fairly non-transparent and insulate polluters from the need to maximize emissions cuts sooner rather than later.  Cap and trade, in its implementation rather than in the ideal terms in which some advocates discuss it, sends out “go slow” or inconsistent signals via its complexity, reliance on offsets of often poor quality, soft targets, introduction of non-essential players into the domain of emissions reductions, and the contract not to cut emissions to zero contained within a pollution permit.

Seriousness and Unseriousness

I have above sketched out in broad terms why cap and trade is ineffective and incommensurate to the task of carbon mitigation (elsewhere I have gone into more detail with supporting documentation about why cap and trade is ineffective and resists strengthening).  However these criticisms that I have made are not particularly arcane or difficult to arrive at…why is it that these views are not shared more widely?  If we leave aside self-interested calculation for the time being, I believe there is what might be described as a “reality-orientation” among policymakers and important economic actors, within which cap and trade appears to be a quite acceptable solution despite its “Rube Goldberg” nature and inappropriateness to the task.  This reality orientation shapes perceptions of what is the nature of the challenges facing us and what are acceptable solutions to those challenges.  I would contend that it is possible to judge with some accuracy that some solutions are “serious” and others “unserious”.

On its simplest level, seriousness is an orientation of mind, either temporary or longer term, where we clear away irrelevant facts, irrelevant emotional states, and irrelevant impulses from consideration because of the need to take action.  Seriousness means focusing on only the relevant information for a particular moment or challenge and allowing in new information that is also relevant.  Seriousness means being able to screen information based on its appropriateness to what needs to be done now or very soon; it means understanding the links between an action and its ultimate purpose.

Despite the immediacy-of-action requirement in serious situations, seriousness however might also involve engaging in long-term planning, considering many factors and facts, but nesting and ranking them as to their relative importance, even though first actions are very important.  The observation from the study of complex systems called “sensitivity to initial conditions” a.k.a.  “the Butterfly Effect” explains to some degree why first steps are important even though the road may be long.  The planning and building of large physical structures requires seriousness from the outset to the end of the building process and beyond.  Seriousness most often involves the use of rational thought processes to come to solutions based on the relevant information, though intuitive, “Blink” type, reactions in extremis may yield good results as well.

Another way to look at seriousness from a more biological perspective, is that it is the “fight or flight response” brought under the control of the prefrontal cortex, the center of our brains that is associated with impulse control, deliberation and planning.  The fight or flight response is our basic physical and emotional response to threats, which has analogues across multiple species and has evolved over hundreds of millions of years.  In serious states of mind, the anxieties and dangers that trigger that response are anticipated, and planning is initiated that will reduce the likelihood of our encountering those threatening situations.

Unseriousness by contrast is allowing extraneous concerns and facts into that emergency or near-emergency situation or relying largely on non-rational decision-making processes when time would allow for rational ones.  As seriousness is judged by context and we all have multiple commitments in our lives, some people argue over whether people are “truly” committed to the issue at hand or are using it to further their “other agenda” to which it is assumed they are more committed.   As an example, deniers of climate change or action on climate change are in effect accusing those who are concerned about climate change of unseriousness because they believe them to have invented climate change science  as part of a pre-existing political agenda.  For these people, the pre-existing political conflict (between Left and Right) is the serious part while the science, to them, is unserious.  In this dispute there is a disagreement about which here is the fundamental context upon which to establish true “seriousness”:  the physical world as observed by science or the political and subjective world of human beings.

As “unseriousness” carries with it a pejorative tone, it is not the same thing as “lack of seriousness” in most domains of life where humor and levity is highly valued.   To break up the repetition in this piece I will use “lack of seriousness” to mean “unseriousness” because of the context.  However “to fiddle while Rome burns” can rightfully be called unserious, with all pejorative meanings intended.

To judge someone or something as “serious” or “unserious” appears at first to be a subjective task.  What are extraneous or irrelevant concerns and impulses?  What are rational thought processes?  For instance, I could be deciding at this moment for personal reasons of my own to declare cap and trade to be “unserious” and carbon taxation, a Comprehensive Climate and Energy Policy, and Climate Keynesianism to be “serious”.  Or seriousness could just be a state of mind that comes and goes; I might have a personal preference for serious people or a mood of seriousness (as it turns out this is the not the case).  If one looks or sounds a certain way, one might think, one is or is not taken as “serious”.

However I believe that most readers will be able to agree that certain facts and events in the world are “serious” without reference to the accompanying facial expressions or tones of voice.  What do we mean by “serious” or when something “gets serious”?  When something is “serious” we realize that we have either very little or no choice in an important matter; when something “gets serious” options have been removed and, yet action on our part is required that will have substantial repercussions for us and/or for others.  What most people would consider “necessities of life” are almost by definition “serious” while wants are not necessarily “serious”.  Government is often though not always involved in “serious” life and death situations: fire departments, police departments, courts, national defense etc.  Climate change is one of those serious issues:  we cannot escape the world en masse and we are degrading the biosphere irreversibly through our activity.  I am not making up its seriousness nor am I exaggerating it:  it is matter of humanity being able to live decently or the potential for a much reduced existence for humans and coevolved species in the future.

Also, many people, though perhaps a lesser number, will be able to identify unseriousness in the response to a serious situation.  You might become impatient if you recognize a serious predicament but are being offered information or solutions that are in some way irrelevant to its resolution.  If we are led to believe that we are in an emergency, yet are then offered a solution that is not effective or seems to be an answer to a different question, we need some very strong reasons to pair “Question and Answer A” with “Question and Answer B”.  However, as noted above, in some serious matters there are disputes about what is the “ultimate ground” or context against which acts are judged as more or less relevant: are politics and human relations or is the biophysical world “the ultimate ground”?

Seriousness or unseriousness is also an orientation with regard to the representation of facts and ideas.  In science, only “seriousness” is appropriate in the actual communication of data and their interpretation; there is supposed to be no ambiguity with regard to what something means.  In business or culture, “unseriousness” has its place, as ambiguity is allowed or encouraged.  Given the science-dependent nature of climate and energy policy and the very late hour we are facing these issues, “seriousness” is the only appropriate means to deal with the basic outlines of policies that are supposed to “save the world”.

Unseriousness at the wrong time or in the wrong people can have very real and serious consequences.   Unserious leaders of governments and large corporations can do enormous damage to their organizations or the parts of society that are affected by their actions.

Cap and Trade for Greenhouse Gas Emissions is Unserious Policy

Cap and trade via its adoption in the Kyoto Protocol and elsewhere has morphed into a sizeable set of institutions and worldwide: there are tens of thousands whose work is fed or feeds into its framework; it already has had serious real impacts on some people’s lives.  However despite its institutional massiveness and the grave nature of the climate change challenge it remains at its heart an “unserious” policy.  The frivolousness at the heart of the policy is a frightening irony and potential tragedy given the consequences of failure involved, the seriousness of the work done by many workers in the field as well as the fact of their employ in instituting such a policy.  But unfortunately, we and they have been saddled with a policy that is at odds with its fundamental task as well as the personal intents of many though not all of its supporters and functionaries.

The lack of seriousness of cap and trade can, in part, be traced back to its overreliance on trading and market mechanisms.  Markets, while they have serious consequences in the world, function in part via the lack of commitment of actors within markets to each other or to the goals of society as a whole.  Markets, to function, have to represent a degree of non-compulsion; they are never entirely “free” as some ideologues would like us to believe, but they attempt to be non-deterministic in terms of the outcome of the “play” of relationships and transactions within the market space.

The non-deterministic bent of markets leaves room for participants, in particular participants with sufficient financial resources, to have multiple choices with regard to the satisfaction of their wants.  For some this area of choice becomes a type of game, where players attempt to receive more benefits for less sacrifice of resources.  Offers can be played off against other offers so the costs for items will become more affordable for the buyers, though not necessarily advantageous for the sellers.  In playing one offer off against another there often will be an element of unseriousness or deception, as false commitments or false show of disinterest may lead sellers to increase the favorability of their offer.  To approach markets with total seriousness is often to lose out on opportunities or to be taken advantage of.  Playing games well in markets then becomes for each individual actor a competitive advantage in claiming more of the overall benefit for themselves.

There has been a certain hagiography of markets that has emerged in the last 30 years which has portrayed this scenario of market actors moving fluidly between offers on a market as the sole paradigm of economic activity.  All economic activity has been supposed to strive to emulate markets with the idea being promoted that individual buyers choosing between multiple offers is the almost exclusive foundation of economic progress and efficiency.  However this view of markets is focused on the internals of market functioning and ignores the supporting institutions for the smooth functioning of markets as well as the externalities (the damages and benefits to those not involved in the transaction) they create.  A well-functioning market is a product of (a lot of) work by non-market actors like government officials as well as those who work in economic roles and sectors which do not necessarily function well in the ideal market format.  Furthermore there are a number of economic functions that do not lend themselves well to market functioning, many of which are “natural monopolies” or oligopolies like electricity and transportation infrastructure.

Markets tend to work better the more “discretionary” or flexible a given type of human wish is, as well as where buyers can accurately evaluate the value and likely results of a transaction with their own knowledge base.  We tend to see “ideal” market behavior in areas of life where we are dealing more with luxuries than necessities:  in health care, cosmetic surgeons and dentists can sell their services to a (wealthier) consumer market on an out of pocket basis while in the area of basic medical care there is more likely to be subsidies or public and private insurance schemes.  Thus the “playfulness” of markets fits with things we can literally “do without” or hold out for, i.e. demand is “elastic”.  In those areas of life where demand is high but relatively “inelastic” we tend to see more regulation and/or subsidies by government or the direct provision of goods and services by government.

In the era of the idealization of markets we were supposed to trim all economic activity to the Procrustean bed of a competitive, unregulated market.  As Adam Brandenburger and Barry Nalebuff pointed out in their book Coopetition, cooperative interaction in the business world has been under-theorized while competition has been over-theorized and over-celebrated.  Economic planning, both within firms and in society as a whole, became taboo, as competition through the market was supposed to do almost everything for everybody.  In practice this has meant that certain economic activities that we are now recognizing are crucial (energy and transport) were neglected or subject to a series of exercises in deregulation or “marketization” with mixed but sometimes disastrous outcomes.  This has left, especially in the United States which has been the epicenter of the idealization of markets, energy infrastructure and transportation projects at the margins of high-level economic policy discussions.

Formulated during a period of financial deregulation and a mushrooming of the financial services industry, cap and trade is an offspring of the idealization of markets, a baroque monument to a belief in the market mechanism and financial trading in particular as the self-sufficient and predominant function in economic life.  Cap and trade has a “double decker” market, with the carbon permit market, with its variable price outcomes, regulating the real market for global warming solutions.  It would have been easier and more effective to simply drive the, “lower” level of that stack of markets, the real market for global warming solutions, with a tax but the policy designers were swept up in their belief in competitive markets and feared the appearance of exercising governmental authority via either taxation or direct regulation.  That the Clinton Administration was unsuccessful in 1993 in instituting an non-greenhouse gas related energy tax has shaped international climate policy in measures far beyond the value of that historical moment.

Proponents of cap and trade tend to argue that emissions trading and taxation are equivalent in terms of their usefulness but these assertions are based on an inadequate confrontation with some basic weaknesses in the cap and trade system.  Beyond the problem of offsets and their quality, which is a very large problem, the two most problematic assertions about almost all configurations of cap and trade are:

Assertion #1 –  Cap and trade’s price signal is equivalent as that of a carbon tax” -  This is not true because auctioning and permit trading yield a variable price signal and investment uncertainty.  A variable price signal is much less useful to investors in emissions reducing measures because these investments will pay for themselves in most cases over a period of years.  The value of the investment is then in question with a variable signal.  The economic modeling of this issue ignores the multi-year perspective from the point of view of individual economic actors.  I call this cap and trade’s “faulty microeconomics”.  There are ways to patch this up with price floors and ceilings and a very narrow trading range but then the elaborate structure of cap and trade is no longer necessary.  Cap and trade then becomes a more cumbersome tax with permits and market games attached.

Assertion #2 – “Cap and trade delivers certainty about quantities of emissions reductions (while taxation gives you price certainty).” If “1” is false (which it is without losing many of its trading attributes) then this statement is unlikely to be the case because carbon reducing investments will be less likely under carbon price uncertainty.   The point of carbon pricing (cap and trade or tax) is to stimulate investment in carbon reducing technologies rather than issue fiat regulations that controls amounts of emissions.  However the uncertainty in the price signal will interfere with emissions reductions until the point where regulators will step in and “pull the plug” on either malevolent, ignorant or unlucky losers on the carbon permit markets.  So certainty will be achieved, with an ambitious cap, when regulators will step in with arbitrary-seeming harsh measures.  Neither instrument will give anyone total “certainty” of quantity without the use of direct regulation, though a carbon tax would be easier to calibrate to achieve approximate goals.  Advocates of cap and trade omit the simple fact that carbon price rates can be adjusted perhaps every 3 years to achieve an emissions goal (though not so frequently as to make price projections arbitrary and useless for businesses).  Even with these adjustments the carbon price signal will remain clearer than with cap and trade.

Besides these questionable assertions that are always treated as established fact, invisible in the discussions by cap and trade advocates is the introduction of what is essentially an extraneous element into the process of pricing carbon, the trading markets, which seems to serve no other purpose than to lay at the feet of the market abstraction that the last couple generations of economists have idealized, the most important policy instrument that the world has ever seen.

As individuals, the designers and advocates of cap and trade are sometimes believers in more general financial market reform yet refuse to see how carbon finance pulls financial markets away from reform and towards speculative excess once again, via the insertion of price variability and trading.  Other than personal corruption, which may be the case for some, I do not see how these otherwise smart people continue to exempt cap and trade from what they otherwise would apply to the trading, for instance, of bundled sub-prime mortgages or other shady securities.

If we turn to our definition of “serious” vs. “unserious”, we see in cap and trade the introduction of an extraneous institution (the permit markets), set of concerns (the profit motive via trading of paper and not via producing or financing emissions cuts), and stakeholders (powerful financial groups interested in expansion of derivatives).  These extraneous institutions do not simply remain “quiet” but end up co-steering the course of the policy and interfering with its purpose.  Political and economic favoritism as well as intellectual hobbyhorses are being served instead of the world’s most important set of tasks and investments.

If we accept that our relationship with the biophysical world is the “ultimate ground” of climate policy, introducing an over-elaborate set of political and economic ideas and interest groups that are inessential to the policy’s goals and divert energy and funds to their ends adds a lot of unnecessary risk to the carbon mitigation enterprise.  If we furthermore acknowledge that the state and rate of our degradation of the biophysical world is very serious and approaching dire, the risks are multiplied.

Therefore cap and trade is unserious policy.

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

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

3. Climate Keynesianism:  Already at Work Cutting Emissions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Is Climate Keynesianism Quietly Doing the Heavy Lifting?

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

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

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

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

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

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

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

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

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

Creating a Context for Carbon Pricing

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

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

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

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

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

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

Climate Ethics Is Not Optional

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

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

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

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

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

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

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

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

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

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

Cap and Trade’s Ethical Trap

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

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

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

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

The Pricing of Carbon as an Ethical Enterprise

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

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

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

Recognition and Respect for Carbon Investment Stakeholders

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“Make Only Big Mistakes”

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

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

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

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

Cap and Trade as a Monstrous Hybrid

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

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

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

Parts of the Hybrid

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

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

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

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

Dysfunctional Interactions between Cap and Trade’s Components

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

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

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

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

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

You can view the 23 minute show here:

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

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

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

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

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

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

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

Posted by Michael Hoexter in Efficiency/Conservation, Energy Policy, Green Building, Green Transport, Renewable Energy, Sustainable Thinking, Uncategorized.
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In the first part of this post I identified 10 features of cap and trade, the favored climate policy of many policy elites at this point in time, that make the policy ineffectual.  I outlined how cap and trade was sold to America and the world based on faulty assumptions as well as its superficial political appeal to the then Clinton Administration.  Contrary to the story told in climate activist and sympathetic policy circles, cap and trade has been comparatively ineffective as a means to reduce emissions of either SOx or GHGs.  I argue that this is a structural problem with cap and trade, not a mistake in implementation.

The Gulf Between Gutlessness and “All the Guts in the World”

fishgamewardens

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

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

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

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

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

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

True Belief in Markets vs. a Baroque Policy Mess

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

price_tag_pic

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

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

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

louis-xiv-furniture

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

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

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

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

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

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

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

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

The Fundamental Challenge of Climate Policy

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

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

Climate policy has the unenviable task of

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

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

Radar_gun

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

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

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

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

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

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

The Basic Elements of Climate and Energy Policy

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

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

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

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

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

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