Peter Barnes sprints through cap-and-dividend 11

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1. 

   Sean Casten Posted 11:24 am
   21 Apr 2008

   My 2 centsFile this under "posts I haven't gotten around to writing".  Gar's post that you linked to - and much of the cap'n something discussion - leaves out the best options.  
   Yes, cap & allocate is bad.  Yes, cap & auction where the gov't decides who gets to win is also flawed (albeit better).  But cap & dividend as far as I can tell is simply the inverse of winner-picking.  Instead of deciding who ought to win, government decides who is likely to lose and gives money to them.  Both approaches are only optimal to the degree that government officials are omnipotent and incorruptible.  In other words, they're pretty flawed.
   The vastly better approach is to have polluters pay cleaners.  In other words, if you lower CO2, you have something to sell.  If you raise it, you have to pay.  That cuts the gov't out of the picture and puts the economic emphasis where it belongs.  (It also removes much of the theory of economic losers, since it is simply a wealth transfer from high-carbon energy sources to low-carbon energy sources, and can be structured to have little/no effect on overall energy costs.)  
   Food for thought if you have a chance to follow up with Peter.

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2. 

   David Roberts Posted 12:09 pm
   21 Apr 2008

   Sean,No, the idea is precisely that the government picks nothing -- auction revenues are simply split up evenly among every citizen.
   Funding of cleaners then becomes the purview of energy policy. There are trade-offs, but I think the simplicity is a big, big mark in its favor.
   
   grist.org

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3. 

   ce1907 Posted 9:19 pm
   21 Apr 2008

   not a test in schoolCap and Trade with allocations in the early years is to assuage fears of economic pain.  It is either that or "safety valve" (shut-off swithch)
   Lot of people with worries out there.
   Much nervousness especially in coal and auto states.  That's a lot of states.  Dem votes there (and elsewhere) are no sure thing, and you will NEVER (not next year) get their votes without a talking point that there is a way to escape economic collapse.
   Some sort of cosmic truth to the contrary is no use.  There has to be an argument that is compelling to the public immediately.
   the only question is do you want action now (within 3 years) or in 10-15 years (maybe never).

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4. 

   Sean Casten Posted 11:28 pm
   21 Apr 2008

   David,A welcome clarification - thanks.  And I am perhaps being a bit to perjorative in labelling it as picking losers, but I still stand by my earlier point.  Maximally reducing GHG emissions requires both carrots and sticks.  Unless I'm still misunderstanding, this model is one of many variants of policies that are sticks without carrots.  They therefore suffer from the same problem as carbon taxes, in the sense that they don't provide any direct incentive for positive action - just a slap for negative action.  (And as I pointed out here, the link between raising the prices for other energy sources and the creation of incentives for clean ones is tenuous, at best.)
   At a larger level though, I think that the approach suffers from a certain level of liberal idealism.  First, because it implicitly makes the assumption that GHG pricing will raise energy costs and therefore Joe Q. Public needs to be protected.  By not providing carrots, this may well be a self-fulfilling prophesy, but that doesn't mean it has to be true.  Second, because it tries to ameliorate all sorts of other social woes within the same model, muddying effective policy.  Taking money from GHG emitters and paying it to citizens (of any stripe) is no less efficient a way to allocate capital than taking money from taxpayers and using it to subsidize petroleum prices.  Good policy connects costs and prices, and I just don't see how this does it.

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5. 

   Gar Lipow Posted 4:35 am
   22 Apr 2008

   picking losers and winnersSean I think you are really really wrong on this. For reasons that have nothing to do with you I don't know when I'll have time to explain why. But as soon as I can.

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6. 

   Sean Casten Posted 8:38 am
   22 Apr 2008

   GarThe real key for me is that policy makers vastly understate the need for carrots, confusing incentives with political pork.  Meanwhile, the (well intentioned, but often overly theoretical) liberal end of the political spectrum sees $ from GHG programs as a chance for social engineering, and has an innate distrust of profits.  Both conspire to make most GHG policy focused too much on how hard we ought to smack the polluters (and then, perversely, how much we need to insulate those who lobby hardest from that smack), and too little on how we make sure that we encourage the right thing.
   So I go back to my very simple test for good GHG policy: Does it encourage investments that will lower GHG emissions?  
   If it doesn't, it isn't good GHG policy.  It might be good welfare policy, or good R&D policy, but it's not a good GHG policy.  And I feel pretty strongly that a cap & dividend doesn't pass that test.  Look forward to seeing your follow up when you have the time.

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7. 

   setb Posted 12:00 am
   23 Apr 2008

   The MarketSean,
   Increasing the cost of carbon will encourage investment in new technologies & encourage behavior change amongst us all-- both of which occur in Cap & Dividend.  So, it passes your "very simple test".  

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8. 

   Sean Casten Posted 1:29 am
   23 Apr 2008

   SetbThat is a theory at odds with reality, in that it assumes that prices perfectly reflect costs and markets instantly respond.  The energy market (which is, after all, the source of all of our GHG emissions) is probably the most subsidized business in the world, where we consciously set prices to be at odd with costs.  A rural farmer does not pay the full price of electricity distribution.  Much of the cost of gasoline is paid for in income taxes.  Why should we presume that costs associated with GHG fees will be treated any differently?  (Indeed, there are lots of well meaning enviros arguing that if a coal utility has to pay for their carbon emissions, that payment should come out of their profits rather than simply passing it along to customers in regulator-sanctioned rates.  Which might be good, but is certainly incompatible with prices reflecting costs).  Moreover, even if the carbon producer passes the price through, I don't know how they're going to do so.  Will they apply those costs equally to all customers - because if not, the incentive to conserve that carbon applies differentially to those customers based on rather arbitrary questions of how prices get set.  
   On this last point, note that it is quite typical that companies earn differential margins on differential customers, and not particularly nefarious.  But the reason it happens is that you have to work harder to keep the customers who have  the options to buy from others - and this means that to the extent that GHG costs are differentially priced by GHG producers, they will be priced more highly precisely to those customers who have the least possibility to do anything to conserve.
   This is the central problem with carbon taxes as I noted here, and more broadly the problem with any regulatory model that has sticks without carrots.
   The bottom line though is that as a guy with a pile of money to invest in GHG-reduction technology, I can assure you that a cap & dividend, carbon tax, or any other measure that doesn't include carrots does not provide me with any incentive to invest.  This is the practical truth - and it trumps theories about how markets theoretically work.

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9. 

   amazingdrx Posted 2:10 am
   23 Apr 2008

   5 min explanation.The government auctions off GHG emission permits.
   The money raised is distributed to everyone on the planet equally.  Consumer energy prices rise as industry passes on the cost of the permits.  
   Trading of the permits by hedge funds raises the cost of energy in a bubble.  Consumers pick up the bill, as they did in the Enron induced California energy trading bubble.
   The poorest use their payments to try and survive.  Middle income people use the cash to try to pay their rising energy bills.  The wealthy don't need the payments.
   It's a redistribution of wealth scheme.  Politically anathema to most of the planet's population.
   "If you assume the atmosphere belongs to government, then cap-and-auction is your choice. If you assume the atmosphere is a gift to everyone, then cap-and-recycle follows."
   Classic regifting.  
   No one owns earth, air, fire, or water.  That's a commercial/cultural fabrication.  Native americans tried to warn our culture that no one owns the land.  But we wouldn't listen.
   So now it comes down to making all the other features of planet earth commercial.
   Symbiosis is how life works.  Commercialism is how death works.  Living parts of the living planet are "killed" and vended for bottomline profit.  The atmosphere, natural reasources, water, soil, plants, animals, humans  are all assigned commercial values.
   Yes humans too, even without slavery.  Actuarial tables specify how much each human life is worth.
   
   
   
   http://amazngdrx.blogharbor.com/blog

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10. 

    Sean Casten Posted 2:27 am
    23 Apr 2008

    Dr. X - this is theoryWhen you write that:
    Consumer energy prices rise as industry passes on the cost of the permits.
    you are implicitly assuming that the energy pricing is fully rational, prices reflect costs and that energy is an unfettered perfect market.  As I noted above, this could not be further from the truth.  And if you cannot ensure that these carbon costs will actually show up in energy costs, then you have no way to ensure that the costs will encourage actions to lower GHG emissions.  They might simply give us expensive energy (but without the benefit of having that expense reflected in energy costs).  
    That is the crux of the problem.
    Whether or not there are other social benefits one could achieve with the proceeds from carbon payments is an entirely separate issue from whether or not cap & dividend is a good GHG mitigation policy.

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11. 

    setb Posted 5:49 am
    25 Apr 2008

    Really????Sean you avoid the key point that a cap, auction then dividend system creates an increased cost on carbon fuels driven by an actual hard supply cap (and science).  
    That will increase carbon costs--for both energy companies & consumers--that will drive private investment.  Maybe not yours, but not all investors will wait for public money to make investments since once we have a system that caps carbon emissions and prices carbon there will be a lot of money to be made for producing carbon-free energy & more efficient products.  Of course that will drive investment.  
    That's not to say the the Gov't shouldn't invest in green technology or stop subsidizing dirty energy (that's obvious).  But why in the world would we want need to use the auction revenue for that?  And why in the world would we think politicians are going to magically stop funding clean coal, nuclear and corn-based ethanol and start funding real green solutions?      

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