Economics of GHG reduction, part bazillion 5

Two troubling things I heard last week:

1. The on-going question about what our next president will sacrifice in the name of the economy. If the financial crisis has taught us nothing else, it is that federal coffers are not infinite, and something will inevitably give.


2. At a panel on GHG policy in Washington, congressional staffers for Sen. Byron Dorgan (D-N.D.) and Rep. Jay Inslee (D-Wash.) conceded that the RGGI auction -- and specifically, the $40 million raised for the northeastern states -- will create some need for the feds to "give," once the feds pass auctions of their own.

These are closely related and direct results of an environmental policy that continues to remain hostile to economic responsibility.

We must get over the idea that minimizing the cost per ton of GHG reduction somehow cheapens our environmental credentials. Financial resources are finite, and any decision not to minimize the cost per ton reduced is algebraically equivalent to a decision not to maximize the total tons of GHG reduction.

The responsible end of the environmental spectrum knows this, but the policy environment still doesn't. Both RGGI and Lieberman-Warner have been set up to focus resources only on the most expensive means of GHG reduction, and while their exclusion of more cost-effective sources from participation wasn't intentional, it wasn't responsible either.

(Note: RGGI only allows participation by generators 25 MW and over, with any other CO2 source or sink participating only through offset auctions with the rules of offset engagement left up to the individual states. Lieberman-Warner died, thankfully, but its central precept that GHG reduction will be economically painful remains the dominant policy framework in Washington.)

As a result, we find ourselves in a situation where well-intentioned, but fiscally responsible politicians are going to be under pressure to put off the passage of GHG policy, based on the bogus idea that it will deepen our financial malaise.

But the bigger impact is that we lower our expectations, and write regulations that become self-fulfilling prophesies. This vicious cycle is often overlooked, but needs to be better understood. Let's start with a simple analogy, and then see how this relates to GHG policy.

Dumb analogy

You are the King of Broccoli-land, a nation where everyone eats nothing but broccoli. For years, none of your subjects knew any better, and could not contemplate a world where any other foodstuff was available. However, in recent years, your soils have become depleted in various nutrients from your monoculture plantations. You send your Learned Scientists abroad to study possible solutions, and they come back with fabulous stories of trips to exotic lands far away -- - in particular, Ice Cream Land, a world where no one eats anything but Ice Cream. In this land, they have cattle for milk, chickens for eggs, cocoa, sugar, and vanilla bean plantations. As their land becomes depleted, they rotate in crops of pistachios, strawberries, and chocolate chip cookie dough. Better still, it tastes awesome.

So you decree that your nation will commence a 20-year shift away from Broccoli toward Ice Cream. You will impose a tax on broccoli growth to dissuade broccoli harvest. You will use the proceeds of this tax to provide job re-training to broccoli farmers, to fund Ice Cream research and deployment programs, and to buy fertilizer to replace diminished soils. Just to be (personally) safe you will distribute massive amounts of government wealth to the Broccoli Land Broccoli Company, Ltd., to ease their transition into your low-broccoli future.

Dumb reality

If only the above example had nothing to do with the current situation. Our broccoli king assumed that de-broccolification would be painful, and that all likely solutions to the broccoli problem were known by the Learned Scientists. Having concluded thus, the policy was written to ensure that it would be painful, and that money would flow only to those ideas favored by the Learned Scientists. Years later, history will agree with the King. It really was expensive to shift an economy from broccoli to ice cream -- not because it really was expensive, nor because ice cream is the only solution to the broccoli problem, but because if the regulations are set up to demand expensive ice cream, that's what they will get. Reality was constrained so severely that the public comes to conclude that there were no alternatives. We know better right?

Not really. Because this is exactly what we are doing in our GHG debate. We assume it will be painful, so we take money and throw it at adaptation, R&D, and other public goods. We assume we must buy off the existing polluters, confusing GDP reductions with wealth transfers. And we are writing policies that get what we expect.

The proof? First, because politicians are already talking about making sacrifices due to the financial crisis, and GHG policy is on the list of potential things to be delayed.

But the RGGI issue is more problematic. The RGGI auction took in $40 million for the states, and the feds now see this as $40 million that they can't take, lest they lose the state's support for federal policy. But here's the rub: if the state is collecting money that it counts as revenue, it's not a cap-and-trade! It's a tax by another name. And taxes on carbon provide no more incentive for carbon reduction than taxes on income provide incentives for poverty. (Or, if you prefer, than broccoli taxes and ice cream R&D credits provide incentives for boulangerie construction.)

So where does this leave us?

One, with a policy debate that is increasingly tempting to put off until we put this fiscal crisis behind us. Two, with a set of policy ideas that ensure that GHG reduction will be expensive.

Both of these outcomes are environmentally dangerous. And the environmental community deserves some of the blame, which I will address in my next post.

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