1. A Slow, Ineffective “Monstrous Hybrid” of a Climate and Energy Policy
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:
- 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.
- 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.
- 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.
- “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:
- a (derived) carbon price,
- permit regulation,
- a competitive bidding and trading market for permits with accompanying profits and losses
- 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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.