As we discuss "cap-and-steal" (aka "cap-and-trade"), "cap-and-sell" (aka "cap-and-auction"), and carbon taxes -- three ways of putting prices on carbon -- it is worth remembering that putting a price on greenhouse-gas emissions is not enough to bring them under control. Gristmill is full of posts showing ways to save carbon at a profit. David posted an interview on Recycled Energy today that points to something that has been known, but mostly ignored, for over thirty years.
I can, and have in the past, posted extensive theoretical musings on this. But the bottom line is that if we are ignoring available savings at current prices, it seems likely that we would continue to ignore savings at artificially higher prices.
This sometimes makes people jump to the opposite extreme; if (as I insist) we can cut emissions by 90 percent or more, at prices comparable to fossil fuel, why do we need to put a price on carbon alone?
The answer is while we can cut emissions at a total cost comparable to what we currently pay for fossil fuels, that does not mean that every component is individually cheaper. The existence of market imperfections does not mean that markets don't have a role to play in solving the problem.
Let's take green buildings as a concrete example. There are a fair number of green commercial buildings that consume 30 percent of the energy of the typical U.S. building, and pay back the costs of those savings in four years or less.
Let's break down where paybacks from such green buildings come from. Typically, actual energy savings are the smallest part. Reduced maintenance costs (from changing light bulbs less often) and reduced capital costs (from things like smaller chillers) typically exceed energy savings. But both these savings are dwarfed by productivity as workers receive more sunlight, breathe more fresh air, and have better control over lighting level and temperature. Usually such increases in productivity are worth five or six times the value of energy, capital, and maintenance savings alone.
So why don't all green buildings do this? Because the health and productivity benefits (which account for 80 percent of the return) can be gained just as well with a 30-percent energy savings, and sometimes with a 15-percent energy savings. In other words, a building that pushes all the way to a 70-percent savings in energy will save a great deal, but will get less of a return on its investment than a building that saves 15 or 30 percent. So if you really want green builders to save 70 percent of typical commercial consumption, you need to raise carbon prices to the point where it makes short-term economic sense to push the design past that 15- to 30-percent mark.
However, it is also worth noting that split incentives between builders, owners, and tenants often prevent most of these savings from being taken into consideration in the first place -- energy savings, maintenance savings, or productivity increases. Builders routinely constructing commercial office buildings to a standard 70 percent more efficient than the current U.S. standard would require a combination of regulation and carbon pricing.
Okay. Why not simply regulate commercial office buildings, and put in a per-square-foot and per-employee standard?
Generally the success of laws and regulations depends on mostly voluntary compliance. If most people obey the rule or law, then enforcement can focus on the exceptions and not end up being overly intrusive; if the law is widely disobeyed, then it either becomes a dead letter or spawns a massive, horrible enforcement bureaucracy, as with our current war on [some] drugs. Put a price on carbon, in addition to reasonable quantity-based regulation, and compliance will actually save money -- even if you don't get caught breaking the rule. Yet you still need the rule in the first place, even with higher carbon prices, if you want actual savings anywhere close to the profitable private savings available.
To get real savings close to the 70 percent possible in commercial office buildings, you need both quantity-based regulation and a price on emissions.
New nukes? A fair shot, not a free ride
To unlock wind power, put a price on carbon
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naturescene Posted 11:07 pm
13 Aug 2007
It seems you're arguing that since a price on carbon won't encourage every actor to conserve the maximum amount possible, that carbon prices can't do the job alone.
While I might agree with the general sentiment, I think your example and argument are pretty bunk. A carbon price works precisely because actors have different marginal cost structures. The thing is, we don't need every actor to reduce emissions to the max. Instead we need to set an emissions reduction goal and try to reach it at the lowest possible costs - hence the carbon price. I know you know this, but I'm trying to figure out where your departure comes from.
Your info on green buildings is far too general. Unfortunately, not all green buildings operate on the same cost structures you envision, and not all upgrades pay for themselves in just a few years. Specifics, not generalizations, are much more useful in this case, and also show why carbon pricing, rather than standards are a more versatile tool.
Finally, there's no inherent shortcoming in a pricing system. A cap on carbon emissions can be set as low as we want. The problem is not with the mechanism, it's the political will to use it. That's holds just as much for traditional regulations.
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naturescene Posted 11:10 pm
13 Aug 2007
If we, for some reason, decide that we want emissions reductions to come from the construction industry, then we will have to impose standards, but will also have to understand that our opportunity costs may be cheaper reductions elsewhere.
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trock Posted 11:58 pm
13 Aug 2007
In heavy concentrated areas like cities, still need the property tax because of the need to have high property value usage, but in less dense areas the need for Property taxes is less.
What has been done in my state and others, are building code improvements, amount of insulation, etc.. surely that has helped. But to really get more efficient, carbon tax is the way to go.
True about the marginal rate.
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odograph Posted 12:47 am
14 Aug 2007
It seems obvious to me that if GHGs were taxed (or capped and traded) at effective levels, that would be sufficient to reduce emissions to any arbitrary target level.
There must be, somewhere in that essay, an appeal outside that simple system.
But then, if you are saying something like "politically we well not get effective levels of taxation" or "politicians will not set an appropriate target level" ... well, those are true under any regime.
And for that reason I would not fault a mechanism (tax) for a more general problem (society's commitment to GHG reductions).
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mkayser Posted 2:16 am
14 Aug 2007
It is, however, worth considering the idea that people are irrational, which may support the use of "well designed" command-and-control regulations.
Take an example: it at least seems irrational that CFL's haven't totally taken over the residential lighting market-- they give off the same light and are cheaper over their lifetime. People have a clear economic incentive to use these bulbs. Nonetheless, they are "different" and, in fact, don't give out exactly the same spectrum of light, and they cost more up-front. So some people will not get them, even though it seems only rational to do so. Some have proposed mandating the switch to CFL's, and it's not a crazy idea.
Now it is always tricky territory to "prescribe rationality" by assuming you know what people really want even when they don't do it and mandating them to do it. So we should tread carefully. But, even though the economics behind market-based approaches assuming rational actors is impeccable, there may be psychological quirks that argue in favor of the "command-and-control nudge" in selected cases.
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Gar Lipow Posted 3:37 am
14 Aug 2007
No. This is handwaving - the assumption that there are unlimited opportunities for carbon reductions available and if we don't get them one place, we will get them another. This was behind the failure of the famous RECLAIM program in Los Angeles which is only now being recovered from. All the participants assumed someone else would reduce emissions, and they could simply buy credits. So the project ended up failing, and they had to extend the cap deadline and put in direct command & control regulations to get that cap met.
In the U.S. it is generally assume that we need to reduce emissions by somewhere between 80% and 95% per capita, to meet our reasonable share of emission reductions. To some extent we can meet this at the supply end, renewable electricity and such. But if it is not to be extremely expensive we need, as Roberts say to meld renewables and efficiency. And that means we really can't afford to skip any efficiency measures that can be put in place at a lower price than continuing to burn fossil fuels.
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odograph Posted 4:15 am
14 Aug 2007
Obviously an incomplete system would be ineffective, but is that the fault of the system or its incompleteness? ;-)
(I think everyone agrees that the perfect theoretical tax or cap and trade system would be global and uniform. And sadly it might be arguable how far any one player should go in "unilateral" taxation or caps. Certainly, a system that aggressively taxed US natural fossil fuels but still allowed import of finished goods from (say) China would be by its nature incomplete.)
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naturescene Posted 4:26 am
14 Aug 2007
Here's a paper by Danny Ellerman of MIT explaining cap-and-trade with specific references to the So2 market and the RECLAIM program. Below I've included what he writes on the RECLAIM programs apparent failure.
This exceedence of the NOx cap is unfortunate, but it must be placed in context.
The events of 2000-01 in California's electricity market led to an extraordinary call on old generating plants in the Los Angeles Basin that were not equipped with NOx emission control devices because heretofore they have been dispatched for only a few hours a year to meet peak demand (Joskow, 2001). The unanticipated call on these units to meet electricity demand increased the demand for RTC credits to cover the resulting NOx emissions beyond what could be provided within the temporally constrained time period within which RTC credits are valid (one year with some banking and borrowing possible because of overlapping compliance cycles). The result was 1) unprecedented high prices (up to $90,000/ton), 2) the establishment of the $15,000/ton mitigation fee, 3) the temporary removal of electric utility units from the cap-and-trade system, and 4) the imposition of mandates on those units to retrofit NOx emission control devices. These units are now proposed for re-entry into the NOx cap effective January 1, 2004.
The relevant question in assessing this performance is how the command-and-control program that RECLAIM supplanted would have fared under the same circumstances. For one thing, the exceedences would not have been recognized, much less compensated. The only argument for better environmental performance by the alternative system is that it would have succeeded in having NOx abatement equipment installed, prior to the summer of 2000, on the generating units that were the source of the problem, thereby avoiding the large spike in emissions. The prior low utilization of these units and the high cost of capital-intensive retrofits make such an assumption debatable at best. Also, given the high price of NOx allowances since the summer of 2000, it is hard to imagine that owners of these units would have resisted retrofitting these units, unless they expected the units to return to the earlier level of low utilization. Accordingly, mandating the retrofit of these generating units will have the effect either of prescribing what would have been done anyway in response to the higher prices and expected higher utilization, or of providing very high cost protection against future allowance price spikes.
The real handwaving here is that you haven't explained why a price mechanism can't work alone, though you may think that you have. Like I said before (as well as odograph) we can set the cap as low as we like - the problem isn't the mechanism, it's political will.
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Gar Lipow Posted 4:35 am
14 Aug 2007
Look at the RECLAIM example
1)A cap n' trade system - no loopholes, phased in over time.
In a cap n' trade system, you have two ways to meet a cap - reducing your emissions or buying emissions from someone else.
In the first phase there was enough low hanging fruit from a few sources to provide cheap credits for everyone else.
To meet the second phase required capital investments.
Not enough capital investments were made, because polluters anticipated credits continuing to be made available. Remember in not making the capital investments, polluters were not violating any cap; during the first phase credits really were available.
When the second phase came along, suddenly it went from everybody complying with the cap to nobody being able to comply with it without
shutting down. Since a lot of the plants out of compliance were electricity generators - in California where there is no excess capacity-you couldn't just shut the plants down and black out much of Los Angeles for two years until needed equipment was installed.
7) So the solution left was to add two years to the deadline to meet phase two, and put into place command and control regulations so that major polluters would install needed equipment and not count on someone else to do it.
What could have been done differently? Instead of relying on Cap & Trade as a complete replacement for quantity based regulations, they could have used them as a way to simply them, to reduce specificity, and record keeping, and red-tape, while still having some sort of basic requirements in place, and not completely replying on markets to produce reductions unassisted.
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odograph Posted 5:33 am
14 Aug 2007
When you describe a very limited and asymmetrical and badly designed system as "complete" that distorts the discussion.
What you are saying is "bad programs don't work, film at 11"
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naturescene Posted 6:22 am
14 Aug 2007
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NonprofitWatch Posted 7:00 am
14 Aug 2007
Forty years from now the reduction targets may have been met in some fashion or other, but the climate and earth may be destroyed because these were insufficient in the face of the problem.
By the way "naturescene", I'm thinking of changing my handle to "CorporateView". What do you think?
bernardo issel - http://www.NonprofitWatch.org -
bernardo (at) NonprofitWatch.org
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NonprofitWatch Posted 7:35 am
14 Aug 2007
http://web.mit.edu/globalchange/www/structure.html#fundin ...
It's interesting for people, groups, and sockpuppets to state that, "the problem is not with the mechanism, it's the political will to use it" while engaging, complementing, and taking money from the very corporations that ensure lack of strong political will to strongly apply various mechanisms, be they voluntary market oriented or regulatory.
Naturescene, how about "FriendOfED" for a handle?
bernardo issel - http://www.NonprofitWatch.org -
bernardo (at) NonprofitWatch.org
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naturescene Posted 7:54 am
14 Aug 2007
good one.
Call market mechanisms "corporate" all you want, but until you can provide substance instead of name calling, realize this -- you represent the reactionary environmental movement that is on its way out. Progressive environmentalism embodies the reality that we don't have to pit the environment vs. economics, and we can in fact use economic thinking and mechanisms to improve environmental policy.
You showed me a funding list that includes a variety of privately funded and government funded grants. The government grants are used to fund specific projects while most of the private grants do not go to specific projects. So, what exactly is your point? Or better yet, where do you expect funding to come from if not government and industry?
Maybe I'll change my name to sockpuppet.
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David Roberts Posted 7:56 am
14 Aug 2007
grist.org
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Sean Casten Posted 8:42 am
14 Aug 2007
But there are two specific points that the article and subsequent debate seem to miss:
The purpose of taxes, cap and trade or any other mechanism that puts a value on what was previously an externality subject to the tragedy of the commons is to price in the externality. To ask any mechanism to identify the optimum level of reduction - or even to agree on what that optimum level is - is absurd. So any price signal is a step in the right direction. From that point, the debate is simply - as others have pointed out - a question of whether the price signal is sufficiently high to shift behavior. But this is a matter of design, not of the mechanism per se.
The fact that people don't do things which are in their economic self-interest as stipulated by others is far too common in economics circles, and ultimately irrelevant, since it presumes that I know what is in your interests. Not all decisions are based on simple payback, contrary to what economic models tell us. Businesses have higher return requirements for non-core investments - and therefore don't do lots of high-return projects for good reasons. Businesses and individuals also have thresholds for total savings below which they won't act (e.g., you might spend a $1000 on a 3 year payback faster than you'd spend $100 on a 2 year payback, for the simple reason that you'd rather save $333 than $50.) Many of the small dollar energy efficiency investments like CFLs suffer from this problem, since people tend not to devote too much effort to understand things that only save them a few bucks a year - even if that is a big chunk of the capital outlay.
Both of these help explain the building example (although in that one you also need to throw in that the party who puts up the capital to build the building is not always the same as the guy who pays the energy bill, so there may truly be no economic incentive at all for the builder to invest in efficiency).
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Gar Lipow Posted 8:47 am
14 Aug 2007
As the LA Times said April 17, 2001
Manufacturers, power plants and refineries have reduced emissions by a scant 16%--much less than was anticipated by this time. Businesses were given 10 years to eliminate about 13,000 tons of pollution annually, but as the program nears its end they have eliminated just 4,144 tons, according to projections by the South Coast Air Quality Management District.
You can find this quote in a long analysis(RTF).
I don't know how you can attribute the failure to design of the cap n' trade rather than to the fact that it was cap n' trade. It wasn't universal? But the object was to reduce local pollution. A reduction in acid rain or sulfur in China would not have done the residents of LA any good. They granted an exception when the results would have been economically catastrophic? Do you honestly expect any system to allow catastrophic failures rather than extend deadlines? RECLAIM was as well designed as you can expect a Cap & Trade to be. The difference between it and more successful programs is that it tried to rely primarily on market creation, rather than use it as one strategy among many.
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NonprofitWatch Posted 9:26 am
14 Aug 2007
Attempting to get to Green Drinks NYC (perhaps I'll see some of you there) so I'll just paste something I posted in the past which I think has relevance to this discussion.
I'm reminded of a debate on NPR years ago where a group was trying to halt the sale of pollution credits from power plants in New York to ones in Ohio as the dirty facilities in Ohio would spew pollution that drifted back to New York and harmed the forests and lakes in the Adirondacks. It was surreal when the Environmental Defense (Fund) representative said something to the effect of it being critical to not hurt the emissions market.
I can dig up the transcript and citation if someone asks.
I'm all for uniting economics and environment, but it seems pretty wide open in terms of how you define market-environmentalism and apply the concept. The above case to me exemplifies that you can become so enamored of your approach that you may be disinclined to see problems that occur with it. The E.D. person seemed more concerned about the market mechanism than that the practice was adversely impacting the environment and specifically failing at its purpose in this case.
Later I'll post about Enron as a great example of corporatist environmentalism gone awry (I wouldn't label it "progressive environmentalism") and why I'm hesitant to entrust addressing climate chaos to the same folks that loved Enron and Ken Lay.
bernardo issel - http://www.NonprofitWatch.org -
bernardo (at) NonprofitWatch.org
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odograph Posted 9:57 am
14 Aug 2007
I think it matters more to get 70% or whatever to answer a poll that they are ready to make significant changes to their lifestyle. The rest will then follow, and at that point it matters little what mechanism is used. They will be tried until one is found that works.
On the other hand, trading favorite methods in absence of that majority is only a game for would-be wonks, for eco-geeks. No point in getting carried away ...
Don't call me a sock puppet though, because I'm really telling you to get out there and get that majority, in order to make things happen.
(Some few of you might thing the right policy will "sneak" lifestyle changes past the voter ... I say don't count on it.)
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