Okay, my last post summarized Tom Athanasiou and Paul Baers' arguments in favor of drastic cuts in emissions. They place responsibility on the rich and to some extent the middle class rather than the poor. As you might expect, I agree with both these points. I disagree with their arguments that carbon trading and even offsets are the best way for the global north to subsidize the global south.
Tom and Paul's argument: the rich countries are responsible for cuts exceeding 100 percent. The only way to meet that obligation is by paying for cuts in the poor nations; Tom & Paul suggest buying offsets from them.
Why use offsets? Tom and Paul argue that the size of the cuts makes it essential to use the absolutely cheapest methods, and emissions trading tends to the produce the cheapest cuts.
I have argued in the past that emissions trading may be less expensive statically, but not dynamically. Compare rule-based regulation with stringency increases against a cap-and-trade with a cap that tightens.
Initially, in the rule-based system, at least some major polluters will have to buy leading-edge equipment. In contrast, in the cap-and-trade system, in the first stage, with a high cap, major polluters will buy inexpensive carbon credits and get the same reductions. So far, the cap-and-trade has cut costs.
But consider the next stage, when the stringency of the rules tightens or the cap is lowered and that leading-edge technology has to be deployed more widely. Under the rule-based system, because the technology was deployed early, it will have matured and become less expensive and more reliable. Someone may even have found a superior replacement. In contrast, under cap-and-trade, the leading-edge technology is still leading-edge. It has to be widely deployed while still an immature, expensive, and unreliable technology. All of the costs saved in the initial stage of a cap-and-trade system are spent many times over in the second.
I will add that even statically, emissions trading is only cheaper on a gross basis, not a net one: businesses which must operate within rules seek means of compliance with business benefits. For example, not so long ago, the U.K. passed major regulations requiring all businesses to reduce solid waste. Waterstones, a major U.K. bookseller, arranged with their biggest distributor to deliver books in permanent plastic crates. They return the empty crates to the distributor when the next shipment arrives. This has several benefits that are far more important to Waterstones and the distributor than any reduction in cardboard. The books suffer less damage shipping in plastic crates, reducing returns and saving labor for both. And crates with latches are easier to open and close, pack and unpack -- that saves labor. So Waterstones and their distributor profited handsomely from replacing cardboard boxes with plastic crates. But they would have never noticed the opportunity without the regulation. (I hope I don't have to explain to anyone here how a long-lasting plastic crate that replaces several thousand cardboard boxes over its lifetime reduces emissions.)
The way Amory Lovins puts it is that businesses leave $10,000 bills on the shop floor. There is a whole subsection of economic literature that studies why businesses tend to overlook profitable opportunities to save energy. While there is dispute over how large that gap is, there is no longer a serious argument that there is one of significant size. And people like Joe Romm, who have practical business experience in the area, tend to be the ones who argue for the high numbers of overlooked opportunities.
The second argument for trading is one made by the Simon Retallack article Tom linked to. It notes that the alternative to emissions trading -- aid and development funds -- has proven as unreliable as the current form of carbon trading. Rich nations simply don't honor their aid agreements; they break their promises. Retellack admits that carbon trading has not yet worked in practice, but insists that aid hasn't either. For some reason, he thinks that carbon trading is fixable and that aid is not.
If the global north won't honor aid treaties, what makes Retallack -- or Tom or Paul, for that matter -- think the global north will continue to buy offsets if they find a way to reduce the cheating that makes offsets cheap?
There are major political obstacles no matter how we try to solve the problems, once we limit ourselves to solutions that actually work. But offsets and trading have all the problems of every other solution, and their own set besides.
Retellack himself mentioned an example of aid that did work: the Marshall plan. What made it different from other aid programs is that the donor nation, the U.S., considered the plan's success essential to its own survival. No means will work with a half-hearted commitment. Get a full commitment and apply what will be least expensive and work best -- which is not a trading system but a combination of public investment, rule-based regulation, and a non-trade means of putting a price on carbon, such as a cap & auction or a carbon tax.
New nukes? A fair shot, not a free ride
To unlock wind power, put a price on carbon
Comments
View as Flat
naturescene Posted 9:36 am
11 Mar 2008
When was the last time the government picked the truly best technology? Your perspective is worthy, no doubt, but I think that some public choice analysis of it might reveal a good amount of rent seeking that occurs prior to the government establishing best available technology standards.
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Gar Lipow Posted 10:35 am
11 Mar 2008
Of course regulations can't tackle everything. I'm all for putting a price on carbon - but via carbon taxes or auctioned permits. (I'm perfectly happy to have caps as long as permits are auctioned. It is trade I object to.)
Also, you cannot get away from the need for public investment. Nobody who looks at the climate change series does not conclude we need some shift from cars and trucks to trains, though there is plenty of room for disagreement on the degree. OK, well train require lots of public infrastructure - even when "privatized". A smart grid won't happen without public investment. Utility lines that enable use of variable power sources with minimal storage requirements require public investment.
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Delay And Deny Posted 12:18 pm
11 Mar 2008
How about this, for every point they cut their birth rate, we make a corresponding cut in CO2?
So, if instead of having a replacement rate of 6, they go down to 5...then we do the equivalent for CO2.
It's like Alcoholics Anonymous, where we police each others vices...
The Manhattan Declaration
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BrianSchmidt Posted 2:24 pm
11 Mar 2008
That doesn't fix the issue naturescene identified. A result-based regulation that says, "emit no more than X tons of carbon" doesn't reward innovation that would cost a little more but significantly reduce emissions below the minimum required to get to X.
A carbon tax does help in this regard, but trading rewards innovation even more.
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Gar Lipow Posted 2:54 pm
11 Mar 2008
I hear the assertion, but I don't see the evidence. In fact empirical evidence shows the opposite. The following link, which was in the main post shows that empirically emission trading produces fewer innovations than regulations, and reduces emissions more slowly.
The role of a price on carbon is not to spur innovation, but to "mop up" the cases that regulations simply cannot deal with. The post I linked not only documents that empirically trading actually supresses innovation, but even gives reasons why it makes sense that it happens.
Bottom line, emission trading rewards short term gross cost savings. It ends up costing more in the long run - both because it discourages whole system thinking and because it delays deployment of leading edge technology. Emissions trading spurs innovation only in models. And not all models either; more advanced models that oversimply less than Coases's did predict exactly what happens in the real world: emissions trading performs worse than a carbon tax, and (as far as innovation go) both perform worse than regulations.
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amazingdrx Posted 4:26 pm
11 Mar 2008
Sound impossible? Well...
It's not. By cutting subsidies for carbon emmision intense energy, the cost of that energy will rise. The corporate right will call it a tax. We will call it cutting corrupt corporate welfare voted in by bribed politicians.
A direct subsidy for each carbon free kwh and each conserved kwh is not carbon trading. But it does have an effect on currently skewed, manipulated markets. It has the effect of shorting carbon intense energy across the markets. Oil, gas, coal, ethanol. By putting money into carbon free energy.
Going to cash, in the form of diverting carbon energy subsidy, is in effect, shorting carbon based energy.
How so? Well that subsidy diverted from carbon energy is cash withdrawn, cash that impelled oil and gas exploration, for example. Betting that the value of carbon energy, and investment in it,will go down compared to cash. Instead that cash would be going long on renewables and conservation.
As carbon energy is abandoned, the value of that cash withdrawn and reinvested in renewables and conservation goes up. When do we cover the short position? Never. The lower cost of carbon free energy covers it for us. In the form of a stronger currency, bolstered by dropping energy prices and dropping inflation.
This is a different kind of trading, it invests in solar panels on people's homes and smart grids and plugin hybrids. That's where regulation comes in, determining clean kwh generated and saved. Rating different systems for acomplishing this. The better the system the more the kwh generated or saved, the bigger the investment.
Determining which solutions are actually GHG free and actually save kwh would be part of the regulation process. So it's government examining and verifying specific solutions, but not really choosing which ones to endorse.
http://amazngdrx.blogharbor.com/blog
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bookerly Posted 8:36 pm
11 Mar 2008
I tend to agree with Gar. The trading system in Europe showed that large corporations quickly "gamed" the system. Businesses are good at this.
Can we create a cap and trade system that can't be gamed? This is one of the big questions that I never feel is sufficiently answered.
When we look at corporate behavior in the United States, we see a number of examples of companies "gaming" the system.
The large companies will use the cap and trade system to crush small companies. How? Well, they can afford to pay more for their emission "rights", so they will drive the price up until the smaller companies are out of business (we should note that the crushed smaller companies are frequently the sources of innovation).
Then once there is a semi-monopoly established, the gaming begins. Company American Best Crapola located in the city of Poredukayshun goes to the city, and says "we need an exemption from the cap for just five years, or we will have to close down, and 7,000 jobs will be lost." Mayor Nohclew calls Congressfolk and Senators together, explains the situation, there are a few fundraisers, a Spritzer or two, and presto, a small rider ends up in the 2010 budget offering a one time (ha!!) exemption to this vital industry.
When people howl, the ABC company explains that foreign companies have managed to accumulate more cap room, and this is needed to protect American jobs from unfair competition.
It just seems to me that regulations can be fairly straight forward (they don't have to be, I admit), but that cap and trade is inviting gamers to join the fun.
If anyone is able to (and cares to) explain why I'm wrong, I do have an open mind on this. I am just skeptical and cynical.
patrick in Beijing
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naturescene Posted 2:37 am
12 Mar 2008
http://www.rff.org/Documents/RFF-DP-00-38.pdf
The 1990 U.S. Clean Air Act Amendments (CAAA) instituted a national program in tradable sulfur dioxide (SO2) emission permits, referred to as "emission allowances," in the U.S. electricity sector.
This paper provides a survey and assessment of the SO2 allowance trading program with a focus on the role of innovation. Over the last decade the cost of compliance has fallen dramatically compared with most expectations, and today the total cost of the program is 40- 140% lower than projections (depending on the timing of those projections and the counter-factual baseline considered). Marginal costs of reductions are less than one-half the cost considered in most analyses at the time the program was introduced.
Innovation accounts for a large portion of these cost savings, but not as typically formulated in economic models of research and development (R&D) efforts to obtain patent discoveries. Innovation under the SO2 allowance trading program involves organizational innovation at the firm, market and regulatory level and process innovation by electricity generators and upstream fuel suppliers. An important portion of the cost reductions that are evident was already in the works prior to and independent of the program. Nonetheless, the allowance trading program deserves significant credit for providing the incentive and flexibility to accelerate and to fully realize exogenous technical changes that were occurring in the industry. This marks a significant departure from conventional approaches to environmental regulation, which would not be expected to capture these savings. The ongoing transition to restructuring of electricity markets and expanding competition in electricity generation complements the design of the SO2 allowance trading program by providing firms with full incentives to reduce costs of pollution
control.
Impact of emission trading on innovation
This article seeks to appraise the potential innovation impacts that may be triggered by the European emission trading system starting on 1 January 2005. To this end, our paper provides a review of the theoretical and empirical literature on the potential innovation effects triggered by the pioneering US emission trading schemes (ETS). Our review's basic empirical results are that the innovation effects were initially limited, partially because of lenient or even non-constraining targets in the first years, but there is empirical evidence on a vast range of low-cost compliance strategies. Yet, the substantial body of theoretical literature provides no consensus on the issue of whether or not emission trading generally triggers more innovation than other policy instruments, such as regulation standards.
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PeaceOut Posted 2:38 am
12 Mar 2008
I used to think Carbon trading might be a start on the right path, but now I realize it will only make the situation worse.
The book is available for free when one writes to (JavaScript must be enabled to view this email address)
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Tom Athanasiou Posted 5:57 am
13 Mar 2008
Thanks for all the attention, Gar, and I feel that I should weigh in, but this innovation debate is getting a bit specialized for me.
Let me just make two points.
First, as I said in response to your last posting, we see a role for trading, but
We do not dismiss fund based system, or taxes. Indeed we think they're going to be essential, and that the most viable mix of financial institutions will almost certainly include both, as well as taxes, regulation in great heaping gobs, mandated civil-society participation, and much else.
Second, I do want to say that there are lots of reasons to oppose trading that have quite vanished from this conversation. One of them is that trading is typically (but not necessarily) something that happens between private actors. Which is, of course, code for "corporations." And particularly with regard to activities that involve weak local communities -- eg forest communities -- this can be a very bad idea.
Anyway, there's a lot going on here, and I don't really have much to add. Except the belief that we have got to find a fair, efficient, institutionally and politically viable means of moving lots of money around the planet. My sense is that there is not going to be one such solution, but rather a kind of mixed economy that involves cap and auction, trading, levies on trading, development funds, tech transfer deals, a layered system of regulations, carbon taxes and so on. And my interest is in making sure the whole mess, taken together, is capable of supporting an emergency transition.
So, sure, trading is a problem. But we are running out of time folks. And it's not the only problem.
As a friend of mine just said, "The politics of emergency are the politics of solidarity." In that context, we can solve these problems. At least that's what I choose to believe.
-- toma
Tom Athanasiou
(JavaScript must be enabled to view this email address)
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Gar Lipow Posted 6:04 am
13 Mar 2008
In terms of Sulfur trading and innovation, no one denies that innovation took place under trading. The question is whether trading encourages innovation compared to rule based regulation. Well we have innovation in two time periods in the U.S. - before trading, under sulfur rules, and after trading. We also have reductions taking place in Europe under rule based regulation at the same time as trading in the U.S. In both cases, you have more innovation under regulation than under trading. And, contrary to the studies you linked, everyone doing the comparison already counts things like the use of lower sulfur coal as an innovation, and mixing fuels in boilers that previously were not mixed. Changes in business practices are part of the standard economic definition of innovation, and it would be very rare for economists to ignore them.
So the empirical data still supports rule base regulation as producing more innovation than trading. And I have not noted any modeling that rebutted the standard hypotheses as to why this happens either.
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Jon Rynn Posted 6:14 am
13 Mar 2008
Second, the economies that received the aid really just needed a leg up for a while, they were perfectly capable of rebuilding their very dynamic economies, which is not the case for much of the developing world. Therefore, large grants would have to help these regions build the necessary industrial infrastructure.
Third, the US did all of this partly, or maybe more than partly, because they were afraid that the Soviets might take over western Europe. I don't know if the developed world can be convinced that they better do this or their ass will be on the line.
Finally, the European countries played the US to a certain extent, but that turned out OK, in the long-run, in other words, if some aid is unwisely used, that shouldn't kill the deal (much of this comes from an excellent book, "The reconstruction of western Europe" by Alan Milward)
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