August is a time to catch up on reading. A good place to start is "National Climate Policy: Choosing the Right Architecture" [PDF], by Yale's Robert Repetto, one of the country's leading experts on environmental and resource economics. He argues for an upstream cap-and-trade system, and against a safety valve. Other views can be found here, here, and here. This is Repetto's conclusion:
It is extremely important that the U.S. adopt a good policy architecture for greenhouse gas control. The costs of not doing so will be very large and will persist for decades, adding up to many trillions of dollars, because any policy architecture put in place will be very hard to change later.
An upstream cap-and-trade system along the lines outlined above is a good policy architecture. It will be effective, ensuring comprehensive control of carbon emissions. It will be cost-effective, allowing maximum flexibility for market responses and providing continuing incentives for development of alternative energy and energy efficiency technologies. It will be relatively easy to administer and enforce. It will provide ample opportunities to ensure fairness. It is politically viable. It links readily to domestic and international offset programs. It deals effectively with the problem of energy subsidies.
The advantages of an upstream system have been recognized by public and private policy research groups, including the Congressional Budget Office, Resources for the Future, and the Climate Policy Center.
The National Commission on Energy Policy has also endorsed a comprehensive nation-wide cap-and-trade program, implying an upstream approach. However, all these envisage price caps and other features that would make the architecture less effective and less cost-effective.
Illustrating the policy risks, few of the legislative proposals that have been introduced so far into the Congress have been based on a comprehensive upstream approach. The exception is the bill proposed by Senator Bingaman, which is based on an upstream cap-and-trade system. Also, the proposal sponsored by Senators McCain and Lieberman embodies a mixed cap-and-trade, located partly upstream and partly midstream. Much would be gained if supporters of mandatory emission limits, whether in government, the private sector, or in policy research bodies, could coalesce around an upstream cap-and-trade system similar to that outlined in this paper.
This post was created for ClimateProgress.org, a project of the Center for American Progress Action Fund.
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naturescene Posted 2:42 am
07 Aug 2007
Safety valve = bad
Permit banking = good
I also like his point about how an upstream scheme would basically negate energy subsidies. This is good!
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Gar Lipow Posted 4:25 am
07 Aug 2007
My one question - is why give away permits? Oh I know the intention; buy off the fossil fuel companies with permits to get the new system through. But I see no sign it will work. Exxon and Peabody are not going to support a system that phases out their main products. Politically you are better off auctioning all the permits and distributing the revenue in a way that appeals to the largest number of people. (And the only reason for giving away permits is political; there is no economic advantage.)
What if I'm wrong and giving away some permits would buy political support from some of the bad guys? I would still argue that the popular support you lose is may make what you gain not worth it.
However there is another political point here. (And again, when you talk about giving away permits, we are talking pure politics.) Right now, when the bad guys are completely opposed to and real reductions is not the time to push rewards for bad behavior. Make the initial proposal a pure cap & auction with no giveaways. Let the bad guys come forward and say they will oppose the proposal in its current form, but will support it if there is some grandfathering of permits. If you really think that is the kind of deal to make, let the other side be ones to propose the compromise. Don't make the mistake the EU made with the Kyoto proposal - agreeing to CDM in hopes the U.S. would sign on, and then seeing the U.S. legislature overwhelmingly refuse ratification.
I don't believe that the U.S. fossil fuel industry will ever agree to a meaningful (as opposed to trivially small) cap. I think ultimately any victory will be won at the grassroots level, and that therefore politically we should try and (within the limits of good policy) aim at pleasing the largest number of people rather than pleasing a few powerful groups on the other side.
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naturescene Posted 8:04 am
07 Aug 2007
What do you think of the Carbon Share program advocated by some people in California?
As far as I know, this isn't really on the table anywhere, but the idea is interesting: allocate the rights to citizens, for free, on a per capita basis. Then allow those citizens to sell the permits on the open market.
I really haven't run across this idea until this afternoon, but after a quick readthrough it makes a lot of sense to me. If the transaction costs were manageable (i.e. an online permit exchange), then this seems like the best option, especially coming from my libertarian-leaning viewpoint.
Carbon Share would essentially give citizens property rights over carbon, rather than giving them to companies for free or to the government (on behalf of citizens). Each and every citizen would then be free to sell his permits to companies, or keep the permits if he so desired.
Companies don't get any welfare, the government doesn't get any unneeded revenue, and the carbon exchange would be closer to a true market than any other scheme. Everyone would be able to participate, meaning that conservation groups could purchase credits and set them aside -- essentially tightening the cap.
Giving the rights directly to the people sounds pretty grassroots to me. Your thoughts?
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Gar Lipow Posted 11:07 am
07 Aug 2007
Seems just as grassroots, without the added transaction costs. And the transaction costs worry me. Not just the transaction cost of citizens selling their permits, but all the different competing markets and brokers that really are not adding value over just auctioning the permits in the first place. When you add a market just for the sake of adding a market, when you add middlemen you really don't need you are asking for trouble. I know Monbiot likes this, and I might accept it if the politics turned out such that it was the leading proposal, but I sure would not advocate it. More and more I'm leaning towards the Sky Trust as a good second best proposal with political chops. (The Repetto proposal is essentially the Sky Trust, with giving away some permits rather auctioning them all.)
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naturescene Posted 11:34 am
07 Aug 2007
I could be wrong, please correct me if I am, but the Sky Trust with dividends essentially forces people to accept compensation for giving up their "sky rights." Under the Carbon Share, individuals have the choice to sell or keep those rights.
I consider this an important distinction. Sky Trust is compatible with the polluter pays principle, but it removes any individual choice in the matter.
It seems to me, that if the goal here is reducing carbon, the transaction costs of the Carbon Share might actually turn out to be a good thing. Some people might decide that it's too much effort to sell their permits, so they just hang on to them instead. Without consciously meaning to, they will be ratcheting down the cap.
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Gar Lipow Posted 1:31 pm
07 Aug 2007
The problem with having it happen involuntarily through inability to handle the transactional difficulties is that this will impact the really poor disproportionately -- elderly people, the non-institutionalized seriously mentally ill, the homeless and so on. A lot of these are people who will really need sky trust income. Or they are the most likely to be cheated out of their permits at bargain prices if you have to sell to a middleperson rather than getting them auctioned. Maybe a compromise. Have the Sky Trust, but give people a choice; you can get a dividend from standard government auctions, retire your permits, or, personally receive your permits if you think direct sale or waiting will get you a better deal.
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GreyFlcn Posted 5:01 pm
07 Aug 2007
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naturescene Posted 12:14 am
08 Aug 2007
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Gar Lipow Posted 12:18 am
08 Aug 2007
If 100% of the permits were auctioned very little - mainly in that since permits would be auctioned the size of the tax would vary. In other words, more volatility on price. If some of the permits were given away (and some of those in turn resold) then you have a carbon market, with middlemen, and massive red tape.
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