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1. 

   Adam Stein Posted 6:41 am
   26 Mar 2008

   Looking forward to this

   A lot of the conversations I've heard over the optimal carbon policy (and I've heard many) seem increasingly and ever more strangely disjointed from policy as its actually going to be handed down. This might have made sense at one point, when environmentalists were putting together their wish lists. It makes a lot less sense now, when deals are getting hammered out in congressional offices.

   I've asked a fair number of environmental leaders and policy types, "What's absolutely essential in a climate change bill?" And I usually get some variation of the laundry list: economy-wide cap, no safety valve, 80% by 2050, auctioned allowances, etc. It's a fine list, but it feels increasingly airy as we get down to vote-counting time. What I really want to know is, "Given the inevitable compromises that will be made, what do you regard as the incredibly important stuff to get right if we want to see real carbon reductions and a real transition in our energy infrastructure?"

   Sean, looking forward to your thoughts on this stuff.

   www.terrapass.com/blog

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2. 

   Pangolin Posted 9:47 am
   26 Mar 2008

   "Market" is a bad word right now

   For the majority of the population what with the rise in gas prices, food prices, utility prices at the same time jobs are looking thin on the ground and many peoples mortgages are going underwater.

   So anyone who proposes a "market solution" to greenhouse gas emissions that adds a nickel to Joe Sixpack's gas bill without immediately putting that nickel back into his pocket can expect a midnight visit from the torches and pitchforks committee. Me, I'll be manning the mobile torches and pitchforks booth, I think between banks, real-estate agents and oil company executives it's a growth business.

   Sean- I don't have the slightest idea what the hell you're talking about. You want some sort of "market" that favors your business model with long-term contracts for a situation that is likely to face short-term radicalism if Global Warming starts imposing large costs on the populated East Coast.

   What I get is that you want to set up some sort of market that allows trading of packaged emissions reductions to coal burners. You seem to oppose slapping a big whopping tax at the pit, wellhead or dock for carbon and simply handing the cash to the people who will have to pay for said costs when they come down the pike. Then THEY can decide if insulation, an electric scooter or solar panels are their best option for keeping said cash in pocket.  

   So tell all the rest of us how your plan is going to affect our pocketbook. If something happens in anything that looks like a Wall Street "market" you can write off any chance grassroots political support right now. People are damned tired of playing poker against a man behind a curtain.

   From out here in farm country it looks like fraud to me.

   Put the Carbon Back

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3. 

   Sean Casten Posted 11:37 am
   26 Mar 2008

   Pangolin

   We are in complete agreement that carbon-emissions ought to have a cost associated with them.  And I suspect that we also agree that the cost ought to be high.  When I talk about markets, I am simply suggesting that the payment from the polluters ought to be paid to those who clean things up.  Otherwise, it is simply one hand clapping.

   I think we are probably also in agreement about the many places that our regulatory system screws up when it focuses on sticks without carrots.  Should we criminalize drug use and then not provide any money to rehab centers?  Should we spend money to fight the war on terror and then funnel money to the middle east to fund those same elements?  

   My point is simply that far too much of public policy is focused on sticks without carrots - or vice versa.  And this brings me to the one point where we may disagree: I know of no better way to bring carrots and sticks together than in a market, via buyers and sellers.  And too much of our carbon policy discussion presumes that you can have buyers without sellers or vice versa.  

   But stay tuned - and I look forward to your thoughts on the chain of posts soon-to-follow.

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4. 

   Pangolin Posted 4:15 pm
   26 Mar 2008

   Short paths are needed.

   I see our options as:

   Incentives (carrots): Tax credits, subsidies, favorable credit terms for presumably..... wind turbines, solar thermal, solar PV, geoexchange, geothermal, OTEC, and low-impact hydropower. Would the incentives really be needed if costs for fossil fuel power were high enough?

   Restraints (sticks): Emissions caps (and presumably fines), carbon taxes, regulation (licenses) and other GHG taxes. The distrust of restraint systems (caps) is that they are frequently gamed by political players and/or tax revenues become a reason to continue negative behavior. The problem with restraints is that the costs of say coal burning may be passed on to people who have no means of modifying behavior like renters. A carbon tax is an understandable restraint whereas an auctioned cap system is opaque to virtually everybody.

   Markets: As anybody not living in a cave knows by now "markets" in seemingly straightforward items like mortgages can be gamed by politically connected insiders to the detriment of absolutely everybody else. The concern about markets is that lots of fancy paper can change hands at a profit to the trading concerns without actually achieving any actual emissions reductions. Market dynamics are frequently opaque to outsiders and may impose costs (profits to elites) without providing benefits. Health insurance is a perfect example of an opaque market. The California energy fiasco foisted on us by Enron bribery is another.

   The way I see it carbon and greenhouse gas emissions could be taxed on a simple rising slope formula with slope intersections appearing every six months. With a sufficiently high tax 25% of revenues could fund incentives including carbon sequestration and the other 75% issued to the owners of the atmosphere on a per-capita basis.(see Alaska Fund) Due to the extremely progressive nature of such a tax those with the most incentive to reduce emissions would have the best resource base to make those reductions with.  Everybody would know fuel costs would be going up and offset distributions will go down as more people cease to burn fuels.

   When the projected cost of a solar thermal plant's electric power is fixed and coal, oil and natural gas will go up as far as the eye can see people will change behavior. Late adaptors will suffer but since conservation is done on a retail basis and the offset cash is in their hands they have plenty of market incentive to conserve. With favorable lending terms for solar panels, or geoexchange conversions the problem will be a shortage of service providers.

   The real question is what exactly could be traded in a market system that would reduce emissions more than making solar power cheaper than coal? If a company reduces it's GHG emissions it saves a bundle and is more competitive than a company that doesn't. Presumably it sells product cheaper or keeps more profit or both. It doesn't have to "trade" anything, pay a trading fee or broker as it's easy to understand; burn fossil fuels/lose money.

   What is this "market" you speak of? If you say "carbon offsets" I'm pretty sure you're selling an Enron-styled trading game.

   Put the Carbon Back

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5. 

   Sean Casten Posted 11:29 pm
   26 Mar 2008

   Pangolin,

   This is the market of which I speak.

   A competitive one.  And they do exist, contrary to conventional wisdom.  (Just ask Bear Stearns.  They'd much rather be in a regulated, non-market system than the public market that just slapped them to the tune of $10 billion.)  The reason I rant about electric utilities so much is because they have the luxury of being utterly protected from those market forces.  No matter how they screw up, they still get to pass it along to rate payers.  Compare: when regulated PG&E declared bankruptcy in 2001, the California tax payers bailed them out to the tune of $16 billion, essentially on the logic that society would be worse off if PG&E's shareholders were held responsible for their managerial mistakes.  When unregulated Calpine went bankrupt the same year, their shareholders lost $16 billion in wealth, and no one argued that a public bailout of their shareholders would have been in the national interest.  

   One of those companies was subject market forces.  One of those companies made decisions under an appropriate set of sticks (the potential to go bankrupt) and carrots (the potential to make a lot of money) in front of their owners.  And while both companies made bad bets, only one of them faced the consequences.  Sadly, both were held up as poster children for "why deregulation doesn't work".  Those are precisely the incentives we need to create.

   One other point - you posed the question "what exactly could be traded in a market system that would reduce emissions more than making solar power cheaper than coal?".  I'd argue this is the wrong question.  Whether or not we deploy more solar panels is irrelevant.  Whether we reduce carbon emissions and reap all the other benefits of solar panels is not.  If someone has a better, cheaper way of delivering those benefits than with a solar panel, we ought to do it.  So put a price on the thing that we want (CO2 reductions, less fossil fuel use per MWh, etc.) and then get out of the way to let markets figure out how to allocate capital.  More on that here.

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6. 

   John Dewey Posted 11:53 pm
   26 Mar 2008

   Hooray for markets!

   "So put a price on the thing that we want (CO2 reductions, less fossil fuel use per MWh, etc.) and then get out of the way to let markets figure out how to allocate capital."

   Oh, I am so glad I found someone who believes in the power of markets!  The failure of socialism in the 20th century should be proof that central planners cannot assimilate enough information to make choices for six billion consumers or 300 million consumers or even 10,000 consumers..

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7. 

   amazingdrx Posted 12:46 am
   27 Mar 2008

   Adam

   Read the summary of your projects, excellent!  Any ideas on combining wind and solar with the biogas stored to provide backup?  Any work with local utilities on smart grid integration with other wind and solar projects in the area?

   Smart grid techology could be subsidized as conservation, the elimination of fossil fuel kwh and GHG.

   Have you considered increasing gas production with the addition of biomass?  

   Has any calculation of the GHG benefit of replacing chemical fertilizer with organic fertilizer from the biogas digestors been done?

   There is the saving of fossil fuel GHG for fertilizer production and transportation, the savings from soil rejuvenation, it stores more carbon as organic soil.

   Is analysis of the percentage of GHG saved per unit of GHG offset sold to the public available?

   This is very complicated, all the financial and GHG relationships.  Offsetters would do well to develop simple explanations of the bottomline GHG savings versus cash input from the public.

   Would your business work better if a 10 cent per kwh subsidy from government directly to the power producer were applied?  Or 10 cents per kwh saved with geo heat exchange heating/cooling or smart grid techology?

   Would this be better from your POV than a complex cap and trade system?

   http://amazngdrx.blogharbor.com/blog

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8. 

   Pangolin Posted 6:35 am
   27 Mar 2008

   You're joking.

   You're joking right? Actually I believe that you are serious but either misinformed or have an incentive to promote a false perception of power markets.

   You litmus tests from here:

   
   
   1. No barriers to entry
   
   
   2. No barriers to exit
   
   
   3. Price transparency (e.g., prices reflect costs)
   
   
   4. No participants can independently affect price
   
   

   
   Simply cannot apply to utility scale power arrangements. Testing each point individually.....
   

   
   
   1. No barriers to entry. Failed; renters, the impoverished, the retired or disabled have no means of producing their own power due to the physical restrictions of their residence or simple lack of access to financing for alternative energy sources. Too broke to afford solar panels in a phrase.

   2. No barriers to exit. Failed. Zoning laws frequently remove the option of a utility disconnect on occupied buildings. Burning junk mail in a wood-gas stove in a 12th floor apt. is a slightly illegal way to heat. Utilities have a captive "market" for their power.

   3. Price transparency (e.g., prices reflect costs) Failed. Coal's costs are so high that a price that reflected the environmental costs of burning coal would make it unusable. Let's not mention subsidies or favorable legislation that warps cost structures. There is zero price transparency to the end user of the power.

   4. No participants can independently affect price. Failed. Prices of power are controlled by public utilities commissions that are involved in insider relationships with the utilities themselves. Rarely do citizens concerns affect pricing policy.

   So now that we have dismissed the concept that anything remotely resembling a "market" by your definition applies to utility scale power lets look at your other example: Bear Stearns and the PG&E/Calpine comparison.

   Bear Stearns was looted by its CEO and executive team that collected hundreds of millions of dollars of income, bonus cash and preferential stock sales while the company took insane risks at the shareholders expense. Small shareholders of modern, US corporations have about as much chance of CEO oversight as they have of visiting the moon. The profits of Bear Stearns were collected by an insider coterie while the government in the form of the Fed has socialized the costs.

   PG&E and Calpine were participants in one of the greatest thefts in the history of mankind. Both companies were subject to a market regulatory scheme that was written by lobbyists who paid legislators to insert specific formulary into state law.

   Specifically, Enron bribed the entire legislature and then held the states power supply hostage in exactly the same fashion that Vladimar Putin plays games with the gas supply of the Ukraine. They turned off the power and told us to pay up or else. We paid, wash, rinse, repeat until the state was bankrupt. We were looted by a political cabal intimitely connected to President Bush. This was admitted, in court, by Enron employees.

   I would point out that the Sacramento Municipal Utility District(SMUD) and the Los Angeles Municipal Utility District were largely exempt from these power outages as they had secured the majority of their own power sources. Even today SMUD electricity is significantly cheaper than PG&E's. Score one for socialism.

   I still have no idea what kind of "market pricing" you're talking about. Do you have a flowchart or something? All I see are platitudes and cliches.

   Put the Carbon Back

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9. 

   Sean Casten Posted 12:06 pm
   30 Mar 2008

   Pangolin

   We clearly have different philosophies of what markets are capable of, and I do not expect we will bridge that gap over competing blog posts.  But we are in deep agreement on the goals.  

   First off, re: markets, you are right.  We do not have a market in the electric sector.  But that doesn't mean we cannot strive for one.  The financial barriers to building a new power plant for the poor, are, by definition, insoluble.  But that doesn't mean that we can't loosen up a lot of other barriers to entry to approach this ideal.  In more than a dozen states, it is illegal for anyone but a utility to sell kilowatt-hours.  That is an easily removable barrier.  Many states have allowed utilities to pass rates that provide special discounts to industrials in exchange for a promise on their part never to generate on-site power.  Again, an easily removable barrier.  Can we be ideal?  No - but we can certainly get a heck of a lot closer.

   Re: barriers to exit, I'd argue that the problems are more insiduous than you suggest.  When PG&E declared bankruptcy, Gray Davis decided that it was better for California tax payers to bail them out to the tune of $16 billion than to expose PG&E's shareholders to market forces.  That's a heck of a barrier to exit.  And we are in violent agreement that we can do better.  Again - my point is not to suggest that such markets presently exist in the power market, but rather that we do not presume that a pro-business policy is equivalent to a pro-market one.  For these reasons again, we're in complete agreement on points 3 and 4.  So let's fix the rules.

   Your final points are complex, and hard to respond to succintly, so I will try to be brief:

   1. Enron engaged in criminal activity.  For that they deserved (and got) prosecution.  But we should not lose sight of the fact that they also engaged in activities that were immoral, but not necessarily criminal, in the strict legal sense of the word (like withholding power from the California market).  This is not to exculpate Enron, but rather to suggest that we have, to date, done a really shoddy job of deregulating our electricity market, in the sense that we have not shifted from a regulatory model based on shareholder protection to one based on consumer protection.  Shame on us, and our regulators for not doing so - but we should not presume that the Enron fallout was solely due to the ethics of Enron's managers.

   2. Calpine and Bear Stearns are different stories.  Their owners lost billions of dollars, and are a good sign that markets worked, not the other way around.  In both cases, the companies took big bets that turned out to be wrong (the former on the relationship between gas and electric prices, the latter on subprime debt).  And they lost their shirts.  I believe the Bear Stearns CEO alone lost something north of $1 billion.  The fact that he had more than $1 billion to begin with should not blind us to the fact that a system that can cause you to lose that much money in a week is one heck of a disciplinary tool - and it doesn't exist anywhere but in a competitive marketplace.

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