Comments Ken Johnson has made

Dan, thank you for the response. I am encouraged that NRDC is cognizant of this issue and is working on a legislative remedy.

I take issue with your suggestion that "one option that is always open is to simply buy and retire allowances." Individuals can do that, but they would then be double-paying for their additional emission reductions.

Case in point: A homeowner participating in the Berkeley FIRST program, which provides bond financing for residential PV, could purchase allowances to ensure additionality of their electricity emission reductions. But they would be paying twice for those emissions, first for the GHG-reduction technology cost, and then to acquire the emission allowances for their (now non-existent) electricity emissions. The utility or regulated entity that is required to hold allowances for the homeowner's electricity emissions would now have surplus allowances resulting from the PV installation. They could, in effect, sell those allowances to the homeowner so that the PV system's environmental benefit is not nullified by increased emissions elsewhere. So even though the homeowner has the option of buying and retiring allowances, the House bill would still effectively convert Berkeley FIRST into a subsidy program for fossil fuel industries.

A practical remedy would be a mechanism whereby the city of Berkeley (or the CA state government acting on Berkeley's behalf) could petition EPA to establish an allowance set-aside to cover surplus allowances resulting from Berkeley FIRST. (The allowance set-aside could be taken from the regulated entity that would otherwise accrue the surplus allowances, or if that entity does not receive free allowances, the set-aside could be taken from the auction pool.)

OK, Mr. Ignoramus, you may choose to remain ignorant but other Grist readers might like to be informed:

Game changer, Part 2: Why unconventional natural gas makes the 2020 Waxman-Markey target so damn easy and cheap to meet
"... the key point for now is that the U.S. has so many domestic low-cost clean energy solutions that we can easily meet the Waxman-Markey 2020 target at a low cost, without relying on much more expensive offsets."

McKinsey must-read: U.S. can meet entire 2020 emissions target with efficiency and cogeneration while lowering the nation’s energy bill $700 billion!
"... And what is even more stunning about this analysis is that it didn’t even look at the transportation sector, where we know huge savings opportunities are possible ..."

EIA stunner: By year’s end, we’ll be 8.5% below 2005 levels of CO2 — halfway to climate bill’s 2020 target.
"Projected carbon dioxide (CO2) emissions from fossil fuels fall by 6.0 percent in 2009 because of the weak economic conditions and declines in the consumption of most fossil fuels ... This 6% drop in CO2 emissions from fossil fuels in 2009 is double the drop EIA had projected just 5 months ago ... that is halfway to the 2020 Waxman-Markey target!  And EIA doesn’t project a dramatic recovery in emissions in 2010 — just a 0.9% rise."

Regarding the Clean Air Act, here is a puzzle and riddle that has relevance to GHG regulation:

The CAA was passed in 1990 with the expectation that SO2 allowances would be selling in the $650-$850 range. Had industry been offered the option of a fixed-price allowance sale at the lower limit ($650) -- no cap -- they would have logically preferred this to the volatility and uncertainty of cap and trade. As it turned out, the market price was in the range of $100-$200 over most of the program, so a fixed $650 price could have motivated significantly greater SO2 reductions. Seems like a win-win scenario -- a stable, predictable allowance market, and greater environmental benefits. So why was a fixed-price option not considered, and could/should EPA consider such an approach for GHG regulation?

Ohiopapa - Re "We would love to use convenient public transport, or drive electric cars powered by renewable energy, but right now those things don't exist for most of us.": Can you cite any evidence that giving consumers carbon tax revenue would be a more effective way of making those things available than using the revenue to subsidize clean energy technologies?

Billhook - Can you make a case that giving the money to other countries (based on per-capita emission rights) would be more protective of those contries' interests than investing the revenue to further reduce our own GHG emissions?

Colin: On your second point, would there be "a place for individual and community-based action" to curb global warming if an economy-wide cap-and-trade system is enacted? (I raised this issue recently on David Roberts' blog and some time ago on Romm's blog.)

Re "Space sunshade"

Dumb Question: How much would it cost to put a 1 km^2 sunshade in space?

2nd Dumb Question: How much would it cost to make 1 km^2 of white ping-pong balls and dump them in the ocean?

Under cap-and-trade, you are not individually a "regulated entity". You are not required to hold allowances for your emissions, and you do not own the allowance rights for your emissions.

So who is required to hold and surrender allowances for emissions resulting from your energy demand, and what would they do with those allowances if you were to stop using fossil-fuel energy?

Dave - Have you heard of "cap-and-trade"?

"Do you believe there’s a threat or don’t you?" No? The follow-up question should be "How would you know if there was a threat? What would evidence of manmade climate change look like?

Aviation could become carbon-neutral (or even carbon-negative) with biofuels. It would probably be infeasible to produce biofuel in sufficient quantities to sustain the world's 13,000 commercial planes, but the high demand for air transport could be leveraged to jump-start biofuel industries.

A high carbon price is not required to support biofuels. In fact, a very small per-ton carbon fee could give biofuel a comparatively huge per-ton price advantage if the fee revenue is used to subsidize biofuels (and is not used for other purposes such as "tax shifting" or consumer dividends). A simple fee/subsidy system could create incentives for biofuel commercialization far beyond anything comtemplated by ACES or alternative tax-and-dividend proposals. A similar approach could be used to stimulate commercialization of air-transport substitutes such as high-speed rail and teleconferencing.

There's one thing I don't understand about Mankiw's theory of "Pigovian taxation". Take the electricity sector, for example. If you are going to impose a carbon tax for the purpose of reducing carbon emissions from electricity generation, would it not make sense to apply the tax revenue to reduce carbon emissions from electricity generation? For example, revenue could be used to subsidize new low-carbon energy sources. This would help ratepayers by ensuring an adequate supply of price-competitive, clean energy. How competitive? If new low-carbon energy sources make up ten percent of the electricity market, for example, then a $10-per-ton carbon fee, with revenue used to subsidize new low-carbon energy, could give the latter a $100-per-ton price advantage over fossil fuel. $10 is Waxman-Markey's initial price floor. The $100 price incentive, ten times the carbon fee, would apply immediately -- not ten or twenty or thirty years in the future. Renewable energy would get a large initial stimulus, which would quickly stimulate capacity expansion, economies of scale, and attainment of grid parity.

I don't care whether you call this kind of subsidization "carbon pricing" or a "complementary policy", but can anyone explain how giving the money to consumers would be more effective at decarbonizing electricity and maintaining affordable electricity rates?

George Monbiot did a good article on offsets recently, which hits the nail on the head: Using international offsets in lieu of domestic emission reductions is not a viable global climate-change strategy because climate stabilization cannot be achieved without both.

"The key problem is, costs have to come down, or oil prices have to shoot up, ..." Or the gov't has to institute effective regulatory incentives. California's "aggressive" vehicle emission reg's (which will be matched by new federal rules) were designed to have a maximum compliance cost of 84 cents per gallon (in 2004 dollars -- 96 cents/gal today), based on lifecycle fuel savings. A simple system of long-term, low-interest loans for low-GHG vehicles, capitalized by refundable fees on high-GHG vehicles, could fully internalize lifecycle fuel costs in vehicle price differences. At current fuel prices ($2.90/gal in CA) the incentive would be 3X that of existing regulatory standards. No caps, no standards, no gov't subsidy or tax or "wealth transfer" between vehicle owners or manufacturers; just a financing incentive.

David -

Re "the entire 2020 target in the Waxman-Markey climate bill could be met with energy efficiency at a net savings to U.S. consumers and businesses of $700 billion.": So does that mean we can keep burning coal? Why bother with renewable energy if we can meet the target with efficiency alone?

Re "Energy efficiency investments can provide up to one-half of the needed greenhouse-gas emissions reductions most scientists say are needed between now and the year 2050.": But if those investments are made in the context of cap-and-trade, they won't impact total emissions; the resulting emission reduction will just be traded for more emissions elsewhere (e.g. from coal).

Another point, re transportation: If the "maximally aggressive policy portfolio" can reduce emissions almost 25% by 2050 with a 200% return on investment, why don't we pursue more "maximally aggressive" policies that could yield even more emission reductions and greater cost savings? I don't get it.

Do you get it?

David - I think so, for the reasons outlined in the link.

A question for Grist editorial management:

I see Romm's portrait appearing six times on today's Grist.org front page -- all cross-posts from climateprogress.org. Shouldn't Grist be inviting a broader diversity of perspectives?

Cap-and-trade could vitiate incentives for these types of state initiatives, by allowing industry to trade off emission reductions resulting from such programs for equivalent emission increases elsewhere. (See here and here.)

Dave,

There is no provision that would stop anyone from reducing their emissions. But for every ton that you reduce your emissions (in capped sectors, e.g., electricity or transportation fuel), industry gets to emit one more ton. So there is no net environmental benefit.

Re "ACES should be improved," one way to at least partially remedy this problem would be to give EPA authority to establish allowance set-asides for complementary state and local GHG-reduction policies. (See Dan Galpern's comments in Legal Planet on this topic.) But I don't think any of the big-name ACES supporters -- EDF, NRDC, etc -- are pushing for this remedy.

No, their failure to hit the 35% target were not predicted. If they had employed cap-and-trade, they would have achieved the 35% target -- no more, no less: "Environmental certainty." As a consequence of price controls, they overshot the emission reduction target by a wide margin.

If a similar approach had been used with the U.S. SO2 program, market forces could have been harnessed to achieve dramatic, unanticipated reductions in emissions similar to the unanticipated cost reductions that resulted from emission trading.

Sean -

Here's another example of "unintended consequences": Sweden enacted legislation in 1990 to reduce stationary-source NOx emissions, with the intent of reducing emissions by 35% within five years. There were no caps, no standards, no timetables -- just price controls. Consequently, they missed their target. By 1995 specific emissions had dropped by 60% (and total emissions, with demand growth, had dropped by 50%). Oops.

Sean -

Re "lets talk about tightening the cap": How tight? What policy criteria determine the cap? If the scientists can tell you what the sustainable emission level is, and you are willing to impose a cap at that level even at $1000/ton, then just set the cap at that level and let the market figure out the cheapest way to achieve it. That's the ivory-tower theory behind cap-and-trade, but the real world doesn't work that way. We either don't know what the sustainable emission level, or are unwilling to pay what we think it will cost to achieve that level. So the cap is set through a political horse-trading process that is driven more by cost expectations than by science-based sustainability requirements. Costs turn out to be much lower than expected, but the cap does not automatically adjust to lower costs, so the result is that cap-and-trade does not even motivate us to spend what we are ready and willing to spend on emission reduction, much less what science says we need.

Re "if we raised the price of sulfur through some mechanism, but kept the cap unchanged and kept the grandfathering in place, do any of your objections go away?" That "mechanism" could be a price floor, e.g. $650/ton-SO2, which is so far above the $200/ton unconstrained market price that the cap would become irrelevant. Emissions would be reduced far below the cap.

W-M imposes a price floor of $10/ton-CO2, increasing 5% annually. What do you think the policy rationale for the price floor is, and how do you think they determined the floor level?

Kate - You make light of a serious issue, and a legitimate question: What is the point of combining all this stuff into the monolithic monstrosity that W-M has become? Why not have a set of individual sectoral regulations that have strictly limited scope -- and therefore limited political opposition? Consolidating all of these measures into a monolithic, economy-wide cap-and-trade framework has the effect of consolidating the political opposition. It also doesn't make much sense from a policy perspective.

For example, what is the point of putting transportation under cap-and-trade while also imposing new EPA emission standards for vehicles? The cap-and-trade system will create a marginal incentive to spend up to about 20 cents to reduce fuel consumption by one gallon, e.g. by driving less or improving vehicle efficiency. That's minuscule compared to the incentive that people already have from fuel costs. The emission standards will create a much greater incentive -- closer to $1/gal. But since transportation is within the cap-and-trade system, the emission standard will have no impact on national emissions. Any emission reductions in transportation will result in surplus allowances (e.g. at refineries), which will be sold to the coal industry, allowing more coal combustion. Emission trading will similarly nullify potential environmental benefits of other complementary GHG-reduction measures. So what's the point of putting everything under cap-and-trade? (Or if we're going to do economy-wide cap-and-trade, why bother with complementary measures that won't reduce total emissions below the cap level?)

(That last link is broke - try this.)

Absolutely! If the U.S. is prepared to reduce its annual per-capita CO2 emissions to something like 16 or 17 tons -- at the cost of "a postage stamp per day" -- then why shouldn't China and India make the same "sacrifice"?

Sean - Re "minor market reforms allowed non-traditional entities to participate in power markets, and ... the rate at which those entities engaged vastly exceeded any historical precedent." Extrapolating to "major" market reforms, this bodes well for renewables. (You might be interested in a short essay I've submitted to Energy Policy on this topic -- "A Decarbonization Strategy for the Electricity Sector: New-Source Subsidies".)

Do you have any thoughts on how any of this might apply to China?

Of related interest:

Air-fueled Battery Could Last Up To 10 Times Longer: Ground-breaking Technology For Electric Cars

"... The new component is made of porous carbon, which is far less expensive than the lithium cobalt oxide it replaces."

Why should cost overestimation be a problem for climate policy? If our policy objective were to spend whatever we think it will cost to achieve an emission reduction target, then as a result of cost overestimation we would overshoot our reduction target. Even if we're not willing to pay what we think it will cost, we might nevertheless meet or surpass our target if costs turn out to be lower than expected.

On the other hand, if the policy objective is to achieve a predetermined emission cap no matter what the cost, then the cap is what it is whether or not you've overestimated costs. So why does cost overestimation matter?

That's great -- offset credits from no-till farming, avoided deforestation, etc. so that industry can burn more coal. Doesn't that seem a little insane?

So if I try to do something to reduce my individual carbon footprint -- like buy a hybrid car or put solar PV on my house -- will my action actually have any effect on total emissions? Or will my reduced emissions just free up surplus allowances that someone else can sell, allowing yet another someone else to generate the emissions that I am not generating? Will there any incentive for individuals and corporations to take voluntary action to reduce their GHG emissions, or for states and local jurisdictions to provide regulatory incentives for emission reduction, under Waxman-Markey's cap-and-trade system?

"Free allowances to coal plants don’t get you there ..." But free (output-based) allowances to coal and NG would (at a $32/ton carbon price).

Sean,

Here's the algebra:

Carbon pricing:
E = aggregate emissions (tons-CO2e)
p = carbon price ($/ton)
T = aggregate tax or auction revenue ($)
T = p*E

Output-based subsidy:
Q = aggregate output (MWh)
c = subsidy rate ($/MWh)
R = aggregate refund ($)
R = c*Q

Revenue neutrality:
T = R  -->  c = p*(E/Q)

Individual firm:
e = emissions (tons)
t = tax ($)
t = p*e
q = output (MWh)
r = refund ($)
r = c*q = p*(E/Q) q
net carbon cost ($/MWh): (t-r)/q = p*(e/q-E/Q)

The last line is basically what you described. E/Q is the average emission rate (0.68 ton/MWh); p is the carbon price ($20/ton); and the firm effectively pays the carbon price only on its emissions in excess of the average rate (or gets a net subsidy if it does better than average). But most of the net revenue flow would go to legacy hydro and nuclear.

Regarding dispatch order, it would seem to me that the marginal economics would always favor renewables because there is not fuel cost. Any carbon price attached to fuel would make renewables even more favorable. I believe the problem with renewables is the high capital investment, not the high operating costs. But a very modest carbon price could adequately fund capital costs for renewables if the revenue is used exclusively for that purpose. The concept that I was suggesting in my reply was not to fund renewables' capacity expansion directly, but rather to provide a high output subsidy for a period of time after they go online. This would ensure a high enough investment rate of return so that renewables would not have to depend on government subsidies (e.g. tax credits). The subsidy could alternatively be applied directly to finance capacity expansion, but subsidizing output would be lower risk.

But photovoltaic power produces something like 1000% more vehicle kilometers per acre than bioelectricity.

Here's a puzzle: Cap-and-trade and carbon taxes both put a price on carbon. In the case of a tax, you know up front what the price will be. With cap-and-trade you haven't a clue; prices can fluctuate wildly from day to day. So why is cap-and-trade more politically acceptable than a tax? Do industry lobbyists like price volatility?

Romm says "A climate bill must have binding targets and timetables if it is to achieve any desired emissions or concentration goal." But targets aren't "binding" unless you are able and willing to enforce them at $1000/ton. But you aren't. So how do you both guarantee the targets and ensure that prices stay well below $1000/ton? Well, you make the targets so meager and anemic that allowances will be sufficiently cheap under worst-case economic scenarios. But the worst-case scenarios don't materialize, so prices collapse to a level that is not only far below climate sustainability requirements, but also far below your willingness to pay. So how is it that cap-and-trade is more environmentally effective than a tax?

Romm perpetuates misunderstanding and ignorance by presenting cap-and-trade and carbon taxes as mutually exclusive alternatives. He doesn't recognize the possibility of a policy that guarantees at least a fixed minimum price while also guaranteeing an emission cap.

If cap-and-trade is an 'energy tax', is that supposed to be good or bad? Dingell supports a carbon tax, so it must be good.

Sean - You said "a 'pure' wind-and-solar-only RPS means a wealth transfer from Eastern to Western U.S., and no political party is inclined to vote against their state’s economic interests.":

Why does it necessarily involve a wealth transfer? If revenue allocation from a carbon tax or auction is revenue-neutral within the Eastern states (and within the energy industry), there would be a "wealth transfer" from coal to renewables (although the revenue transfer would not become significant until renewables start to gain significant market share). But I don't see why there should need to be any net revenue transfer from East to West.

Also, you may be aware that California is planning to unilaterally adopt a 33% RPS as part of its AB 32 implementation plan, with a projected incremental cost (relative to the existing 20% RPS) of $133 per metric ton. If they follow through, this would seem to counter your statement that "no political party is inclined to vote against their state’s economic interests". (On the other hand, if renewables achieve grid parity within a decade, as expected, then the Eastern states may be saying "Damn! Why didn't we do that?")

Peter Barnes equates "free allocation" with "grandfathering," which is essentially allocation in proportion to emissions. Given the political inevitability of free allocation, consideration should also be given to output-based allocation (i.e. in proportion to energy generation). In any case, auctioning is fully compatible with any kind of free allocation method -- output-based, grandfathered, whatever -- because distributing free allowances would be no different from distributing the allowances' cash value from auction revenue.

To illustrate the benefit of output-based allocation, suppose that you have 10 power plants, all with the same generation output, with 9 plants being coal-fired and one using renewable sources. If the auction cost amounts to 1 cent/kWhr for the coal plants, it will create a 1 cent/kWhr marginal incentive to substitute renewables for coal. With output-based allocation, the coal plants would get a 0.9 cent/kWhr refund, reducing their net costs to 0.1 cent/kWhr, while the renewable plant would get a 0.9 cent/kWhr subsidy. Regulatory costs for the coal plants are reduced by a factor of 10 without reducing the 1 cent/kWhr cost differential between coal and renewables. Furthermore, any attempt to pass regulatory costs on to consumers would make renewables even more cost-competitive and would just hasten the demise of coal power.

A primary limitation of output-based allocation is that with our current generation mix, most of the net revenue transfer would go to legacy renewables (mainly large hydro and nuclear) and to natural gas, not to new renewable sources that are most in need of investment capital. However, grandfathering could be employed to limit the transfer of "windfall profits" to legacy renewables, making it politically feasible to adequately subsidize new renewables expansion. For example, the allocation between new renewables and all other energy sources could be output-based, while the allocation between other sources is based on a grandfathering formula (which would gradually phase out).

Regarding disproportionate impacts on coal-dependent states, such inequities can be avoided by making the allocation formula revenue-neutral within those states. A system that creates large revenue transfers from the east coast to California would not make good policy sense unless you are trying to induce California energy utilities to supply east-coast service districts, or are trying to induce everyone back east to move to California.

Bottom line, I think the quickest and most politically expedient way to achieve carbon neutrality at minimum cost to consumers is to invest revenue from GHG regulation in expansion of renewable energy sources, and not squander it on free handouts (aka "tax shifting").

Re "A safe quantity of carbon is the goal."

KC - Specifically what quantity of carbon (or carbon emissions) would be "safe" according to current climate science? Are there any GHG regulatory systems in effect, or under consideration by legislators, that are compatible with "a safe quantity of carbon"?

Re "getting a handle on demand is the cheapest and fastest way to reign in greenhouse gas emissions," that is true if energy demand reduction is achieved through efficiency; otherwise it is arguably the most expensive way. Consider how much economic incentive it would take to motivate the average U.S. driver to reduce their driving by 5,000 miles per year for the next ten years. Conversely, how much incentive would be needed to induce the driver to achieve similar GHG reductions by driving a smaller car or buying a hybrid? How much incentive would be needed to motivate a 50% reduction in lighting use or air conditioning, versus the cost of buying renewable power?

Energy efficiency is the "low hanging fruit," but GHG reduction sufficient for climate stabilization (25-40% reduction from 1990 by 2020, 80-95% reduction by 2050) will clearly be "primarily about finding cleaner sources of energy ".

David argues that a carbon tax is not inherently simpler or less susceptible to political gaming, etc. than is cap-and-trade, but unless a tax is inherently more complex or manipulable, this is not an argument in favor of cap-and-trade.

Regarding "the lack of any real empirical evidence that taxes can be rendered popular ..." David (and everyone else in this business) fails to ask the simplest question:

Why?

Taxes and cap-and-trade both put a price on carbon. With cap-and-trade, you have no idea in advance what the price will be. It might spike to $1000/ton or collapse to $1/ton. (Banking? Allowances must be over-allocated to provide a significant pool of bankable allowances, which will eventually get used whether or not they are needed. Safety valves? Price floors? That's starting to look a lot like a tax.) With a tax, you just set the price at whatever level you are able and willing to pay, no guesswork.

So why is it then, that carbon taxes are less politically palatable than cap-and-trade? The question is not rhetorical.

The objectives lack clarity and are incomplete

First objective:

Establish Science-Based Pollution Reduction Targets. Cut total, economy-wide global warming emissions by at least 25 percent below 1990 levels by 2020 and by at least 80 percent below 1990 levels by 2050. ...

To avoid the worst effects of global warming, there is broad scientific agreement that we must limit additional warming to no more than 2 degrees Celsius over pre-industrial levels. According to the IPCC, we have a reasonable chance of meeting this objective if developed countries as a whole cut their emissions by 25-40 percent below 1990 levels by 2020 and by 80-95 percent below 1990 levels by 2050; within this time frame, major developing countries also must act.

More recent findings since the publication of the latest IPCC assessment suggest that even more urgent action may be needed. ...

The objective may suffice as a minimal target, but should be supplemented by an additional objective of achieving maximum emission reductions within limitations of feasibility and cost effectiveness. Cap-and-trade, as conventionally practiced, does the exact opposite: Its "market incentives" deter emission reductions beyond the cap limit even if costs are far below initial expectations. This defect could be remedied by imposing a meaningful price floor on allowance sales, which would incentivize further emission reductions if trading prices are low (as has been the case with the EU-ETS).

A pragmatic legislative policy is represented by California's global warming law, AB 32, which imposes a statewide emission limit in 2020 equivalent to the 1990 level, and which further directs the California Air Resources Board to "adopt rules and regulations ... to achieve the maximum technologically feasible and cost-effective greenhouse gas emission reductions ...". However, CARB has not, to date, made any effort to effectuate the latter requirement. It's planned cap-and-trade program is conversely designed to achieve the minimum feasible and cost-effective reductions sufficient to achieve the cap. (With the exception of Earthjustice, I am not aware that any of the 50 signatory groups have supported action to secure CARB's compliance with the maximum-reduction requirement.)

I don't see any chance of our being able to avoid the worst effects of global warming unless and until we liberate ourselves from the nonsensical doctrine, which underlies every major climate policy initiative today, that caps are sufficient to achieve "environmental certainty" and that no effort or expense should therefore be expended to surpass mandated cap limits. We need policies and regulations that motivate a best effort to reduce emissions, based on defined feasibility and cost-effectiveness criteria -- not the minimal effort defined by an artificially constructed "green line in the sand".
 On 50 green and civic groups roll out tough climate principles posted 8 months, 3 weeks ago 10 Responses

Sean and David --

One problem with vehicle feebates is how to quantify "output" (i.e. emission-related economic utility) for the purpose of refund allocation. With electricity, there is no such complication: "Output" is just MWh; refunds are allocated in proportion to MWh output. The "canonical" output-based refunded tax for electricity generation is the Swedish NOx program -- see my last note to Gar. But I should again caution that this "ain't no silver bullet" -- pure output-based refunding would send most of the subsidy to large hydro and nuclear, not to new renewables, so the Tool needs to be applied judiciously.On Some perspective on tax-and-dividend and a better alternative posted 8 months, 4 weeks ago 26 Responses

Gar - Re Scalability

Subsidies can be simply implemented as a refunded tax. For example, Take the $2000 tax on the gas guzzler and the $1000 tax on the hybrid and return the tax at a uniform dollar-per-vehicle rate ($1500 each). The result is a net $500 tax ("fee") on the guzzler and a net $500 subsidy ("rebate") for the hybrid, same difference.

The general principle is that the tax is applied to emissions (at a uniform dollar-per ton rate) and is refunded in proportion to emissions-related economic utility (e.g., per vehicle, if they are in the same utility class). There should be no "abrupt drops" or discontinuities in the tax/refund formulas. Marginal incentives for emission reduction are determined by the tax rate (aka. "emission price"), but with the refund a high tax rate does not imply high net taxes. Initially, net taxes are low and net subsidies are high, but as clean tech displaces fossil fuels the revenue-neutral allocation formula automatically shifts to high net taxes and low net subsidies.

Keeping revenue neutrality within an industry, or even within sub-sectors within an industry, can in some cases avoid massive and economically destabilizing revenue flows that would make a high tax rate impracticable without providing any real emission benefit. For example, if pure output-based refunding were applied to electricity generation, most of the revenue flow would go to legacy renewables (large hydro, nuclear). That may be fine if those sectors have capacity for expansion to displace fossil fuels. But if they don't, the subsidy diverts resources from new renewables, which could be scaled up much quicker and cheaper if the subsidy shift were focused on new renewables.

Economy-wide policies (tax or otherwise) are intended to reduce the cost of achieving near-term targets and mandates, but can increase long-term costs of climate stabilization. The economic theory behind such policies essentially rationalizes procrastination. For example, investing in weather stripping might be able to achieve a marginal 1 percent reduction in coal use more cheaply than installing wind turbines, but to achieve 100 percent reduction in coal we will have to make a heavy investment in renewables sooner or later -- better sooner if there is to be any hope of attaining climate stabilization. Don't pick the "low-hanging fruit" first if the best, ripest fruit is up high.On Some perspective on tax-and-dividend and a better alternative posted 8 months, 4 weeks ago 26 Responses

Cost effectiveness vs efficiency

If a cost-effective policy instrument is used to achieve an inefficient environmental target -- one that does not make the world better off, that is, one which fails a benefit-cost test -- then we have succeeded only in "designing a fast train to the wrong station."

Case in point: The EU-ETS is currently achieving its caps at about $10/ton. Never mind that the caps are not significantly different from business-as-usual; the "environmental certainty" of the cap is being achieved at low cost. From a cost-effectiveness perspective, the low prices are a good thing and the program is a triumph of success. From the standpoint of economic efficiency, the EU-ETS is a joke, a dismal failure.

Another case in point: The U.S. SO2 trading program continues to focus regulatory incentives on further cost reduction, not further emission reduction, even though trading prices have been a fraction of original expectations, and even though SO2 emissions remain about a factor of five higher than the threshold of sustainability and additional SO2 reductions would yield a societal return-on-investment of well over 1000% -- mainly from human health benefits.

Yet another case in point: The California Air Resources Board's plan for AB 32 implementation projects that passenger vehicle emissions could be further reduced at a incremental net savings of $262/ton. But why bother? Under CARB's planned cap-and-trade system any such further reductions would not translate into statewide emission reductions -- they would be offset by higher emission allowances in other sectors, reducing the trading price below the currently-projected $10/ton. Never mind that receding coasts and expanding deserts may lay waste to California's economic infrastructure; CARB currently has no intention of going beyond the bare minimum statutory requirements of AB 32.

Fast train. Wrong station.
On No particular policy instrument is appropriate for all environmental problems posted 9 months ago 11 Responses

Re Question 2, follow-up:

Q. You [Obama] have embraced an emissions reduction target of 1990 levels by 2020, leading to 80% cuts below those levels by 2050. Your long-term target may be laudable, but your short-term target -- the one your administration will have the most say in achieving -- falls short of what the experts say is necessary to put us on track to reaching the 2050 goal. Presumably, "1990 by 2020" is a reflection of what you consider politically and economically achievable now and in the next decade, so please explain how you arrived at it, and under what circumstances, if any, you would seek tougher cuts.

This may be based on precedent, as it is exactly the objective that California has adopted. The Governor's June 1, 2005 Executive Order S-3-05 stated the following:

NOW, THEREFORE, I, ARNOLD SCHWARZENEGGER, Governor of the State of California, by virtue of the power invested in me by the Constitution and statutes of the State of California, do hereby order effective immediately:

1. That the following greenhouse gas emission reduction targets are hereby established for California: by 2010, reduce GHG emissions to 2000 levels; by 2020, reduce GHG emissions to 1990 levels; by 2050, reduce GHG emissions to 80 percent below 1990 levels ...

The 2020 target, unlike the 2050 goal, had no basis in climate science and was based only on considerations of economic feasibility. As stated in the March/April 2006 report of the Governor-appointed Climate Action Team (p. 18),

The 2010 and 2020 targets are based on an ambitious estimate of how much the state can reduce emissions with strong top-down leadership and a coordinated effort amongst various state agencies. ... The 2050 target is based on emission reductions the science indicates will be necessary from all developed nations to ensure protection of the planet in the 100-year time frame.

(The science underlying the 2050 goal may be obsolete, but there is at least a pretense that the goal is science-based.)

California's AB 32 legislation, enacted on Sept. 27, 2006, does not mandate the 2050 goal, but it establishes the Governor's 2020 target as a minimal statutory requirement:

38550.  By January 1, 2008, the state board shall, ... determine what the statewide greenhouse gas emissions level was in 1990, and approve in a public hearing, a statewide greenhouse gas emissions limit that is equivalent to that level, to be achieved by 2020.
...
38551.  (a) The statewide greenhouse gas emissions limit shall ... remain in effect unless otherwise amended or repealed.

Note that the 2020 level is characterized in AB 32 as a "limit" - not as a "target". The word "target" does not appear explicitly anywhere in AB 32, but in addition to imposing the 2020 limit the statute also clearly establishes a target based on feasibility and cost effectiveness:

38560.  The state board shall adopt rules and regulations in an open public process to achieve the maximum technologically feasible and cost-effective greenhouse gas emission reductions ...

In view of the AB 32 maximum-reduction requirement, a follow-up question for Obama (and for Eric Pooley and everyone else advising Obama) is this:

Should federal climate legislation create market incentives that deter emission reductions beyond the mandated cap limit, even if the cap has no basis in climate science, and even if costs are far below initial expectations; or should they operate to incentivize the maximum technologically feasible and cost-effective greenhouse gas emission reductions?

Markey malarkey

They've already reached a consensus in Europe, that 400-million-person continent, that that's the way to go ...

But they haven't actually reduced their emissions, which have increased faster in the EU than in the U.S. So much for "environmental certainty".

As you look back the 1990 Clean Air Act resulted in a technological solution that largely solved the acid rain problem.

If the problem was "largely solved", then why was the EPA trying so hard to get CAIR enacted? Actually, acid rain would need to be reduced by another factor of five to achieve biological recovery in sensitive areas of North America. The SO2 cap-and-trade system continues to focus incentives on cost reduction, even when human health benefits alone would pay for additional emission reductions many times over. So much for "economic efficiency".

Whatever approach Congress takes - tax or cap-and-trade - it will have to be something very different from the EU-ETS and the Clean Air Act to have any significant and meaningful impact.
On Markey on cap v. tax and ways to properly regulate carbon markets posted 9 months, 2 weeks ago 9 Responses

"a nuclear plant will last 60 years ..."

... more like 60,000 yearsOn Biggest California utility contracts for world's biggest solar power deal posted 9 months, 2 weeks ago 23 Responses

Question

I ask Peter Barnes -- or anyone else who wants to respond -- the same question that I addressed to James Hansen about tax-and-dividend:

Would it not be advantageous to use dividends to give consumers an equity stake and interest in decarbonization?

This could be achieved by investing carbon tax revenue [or allowance auction revenue] in renewable energy and clean technologies in exchange for equity, and distributing equity shares to the public on an equitable per-capita basis. The shares would yield dividends that increase -- not decrease -- as carbon is phased out.

How aggressive?

Re "... laying the groundwork for an aggressive, comprehensive federal cap-and-trade bill in the very near future," what do you mean by "aggressive"? Please quantify. Be specific.

Is the RGGI's $3/ton trading price aggressive? How about the projected $10/ton for California's planned cap-and-trade program? Or the WCI's projected $20/ton? (Getting warm? cold?) What about the $55/ton projected net cost for California's existing 20% RPS, or $133/ton for its planned extension to 33% RPS?

Regarding fuel economy standards, would the projected -$361/ton net cost for California vehicle emission standards qualify as "aggressive"? (Note the minus sign.)  On The Clean Air Act is President Obama's key to triggering cap-and-trade posted 9 months, 4 weeks ago 1 Response

OK, no tax

How about a "fixed-price sale of emission allowances"? Call it cap-and-whatever. (It caps prices.)On There's a reason Republicans stump for a carbon tax, and it ain't to reduce emissions posted 10 months ago 37 Responses

Effective incentives

"if you want to use taxes to reduce consumption, you probably shouldn't spend the revenue to promote consumption"

The primary purpose of a carbon tax is to reduce carbon, not to reduce consumption. Using tax revenue to promote consumption of low-carbon fuel (including renewable, grid-connected electricity) could be much more effective than trying to reduce vehicle miles traveled. For example, if biofuel has 10% market share, then a $0.10/gal gas tax could effectively subsidize a $0.90/gal subsidy on biofuel, which would create the same fuel-switching incentive as a $1.00/gal gas tax.

Furthermore, to the extent that you want to reduce consumption, that can be done much more effectively with vehicle efficiency improvement rather than reducing VMT. Incentives applied directly to the vehicle purchase, rather than through a gas tax, could induce technology change much more effective than fuel economy standards.
On What gas taxes don't do posted 10 months ago 5 Responses

Banking

Max- I don't think free versus auctioned allocation is an issue. If the EU ETS Phase 1 allowances had been auctioned, they would still have been basically worthless because the cap was no more stringent than business-as-usual.

Regarding your qualification about the cap being "sufficiently stringent" it should be recognized that stringency is generally defined by limits of cost acceptability, not by sustainability requirements or by climate science. For example, California's 2020 limit (unlike the governor's longer-term 2050 goal) has no basis in climate science. According to a cost-based stringency criterion, $3 per ton is not "sufficiently stringent", and at that price excess allowances should not be banked - they should be taken off the market. They are "unneeded" in the sense of not being necessary to keep costs within acceptable bounds. If speculative expectations of high future prices materialize, then the unsold allowances can be released at a predetermined price ceiling level.

If a meaningful price floor is imposed, I don't see any problem with banking, although the incentive for banking would be diminished. [Note: The RGGI's $1.86 per ton price floor is not "meaningful"; it is a joke.]On Carbon price volatility is a real issue posted 10 months ago 15 Responses

Max -

If firms are "buying more than they need" then that indicates overallocation (unless the cap is actually sufficient to achieve climate stabilization).

Suppose that the market price without banking would be $3/ton, and that banking raises the price to $10/ton. The stimulative effect of the higher price would be similar to a price floor of $10/ton. But a price floor would not release unneeded allowances, whereas banked allowances would eventually be used whether or not they are needed. And those excess allowances would probably be coming onto the market right around 2020, just when we would need to be accelerating emission reductions.

Example: The price collapse in the EU ETS phase 1 could have been avoided with either a price floor or banking, but banking would have effectively extended the overallocation into phase 2.

Banking employed in conjunction with a price floor isn't necessarily a bad thing; it's just redundant.On Carbon price volatility is a real issue posted 10 months ago 15 Responses

Same true for subsidies?

By the same rationale I would expect that subsidies applied downstream would be no more effective than those applied upstream - particularly if the downstream subsidy is essentially a cash hand-out with no strings attached. For example, compare the efficacy of a subsidy on renewable electricity expansion or biofuel production with a retail-level price incentive for low-carbon consumption - or alternatively, a direct cash handout (aka "dividend").On More evidence that burden sharing is the same up and down stream posted 10 months, 2 weeks ago 2 Responses

Gar -

Re "So in either a Cap & Refund or a Carbon Tax system, you need an automatic escalation clause" --

With a Carbon Tax, you don't need an escalation clause because the marginal incentive is maintained at the tax rate, even as technology costs come down and new technologies become economical at the set tax rate.

With Cap-and-Whatever the simplest "escalation clause" is a price floor. Once prices fall to the floor level, further cost reductions translate into fewer allowance allocations, not lower prices.
On Question of the day posted 10 months, 3 weeks ago 15 Responses

Questions

"...retrofitting 100 m2 (1000 ft2) of roof offsets 10 tonnes of CO2 emission." Is that 10 tonnes annually or over the life of the building? And is the offset primarily due to albedo-related cooling, or is it mainly from reduced CO2 emissions associated with air conditioning?
On White roofs are the trillion-dollar solution posted 10 months, 3 weeks ago 7 Responses

PRICE and CO2 studies

Re PRICE: "The exemption would save that worker $1240 in social security taxes ... and at even 15 miles to the gallon in that old used car, that would over 18,600 miles of driving if the tax were $1/gallon!" So the worker gets $1240, which they apply to offset the $1240 extra fuel cost. So how is the gas tax going to reduce fuel consumption?

Re CO2 studies:
Here's one reference:
Svante Arrhenius (1896). "On the Influence of Carbonic Acid in the Air upon the Temperature of the Ground". Philosophical Magazine and Journal of Science (fifth series) 41: 237-275.
I think the implication of paleoclimate studies is not simply that "CO2 drives climate", but rather that CO2 and climate are strongly coupled - changes in either will affect the other. Recent empirical evidence of the correlation includes the 40% reduction in areal summer extent of the Arctic ice cap over the last two decades.On Another attempt to dispute the disproportionate attention paid to gas taxes posted 10 months, 4 weeks ago 21 Responses

Timeframe

For California, 33% RPS by 2020. The RPS employs free allocation of emission rights, so there would be no dividend. Furthermore, other states and Congress might not be willing to commit to a 33% RPS with a projected marginal net cost of $133/MT. However, they might accept incentive policies (e.g. a price floor on allowance auctions) that could achieve a similar result in the 2020 timeframe if costs turn out to be much less than $133/MT, and if auction revenue is reinvested in dividend-generating renewable energy.On Where will we find infrastructure funding under cap-and-dividend? posted 11 months, 1 week ago 13 Responses

Hapa

The biggest transitional cost will be capital investment for new renewable energy and shutting down coal. If you don't spend that money there will be no transition.On Where will we find infrastructure funding under cap-and-dividend? posted 11 months, 1 week ago 13 Responses

Hapa

If you're serious about phasing out carbon, then spend the money on phasing out carbon. The idea that you need to compensate consumers for high energy costs will become a self-fulfilling prophesy if you don't invest sufficiently in renewable energy.

Case in point: California expects to spend $133/MT in net costs to upgrade from its 20% RPS to 33% by 2020. Would that $133/MT be better spend on consumer dividends? Get real.
On Where will we find infrastructure funding under cap-and-dividend? posted 11 months, 1 week ago 13 Responses

What dividend?

At $3 per ton there just won't be that much money to go around, no matter how you slice the pie.

What we really need is something more like $100/ton - actually, $133 per metric ton according to CARB - that's the projected incremental cost of California's 33% RPS. That's just the technology cost, not the regulatory cost. If you want to also fund dividends to consumers, you're going to have to suck more money out of the industry in addition to the $133/MT.
On Where will the money for public investment come from? posted 11 months, 1 week ago 10 Responses

What are the red and blue bars?

On They all crush 'clean coal': Stanford study, part 1 posted 11 months, 2 weeks ago 8 Responses

Recipe for Carrot Stew

(1) Start with a cap-and-trade system, one of the traditional kind, with free allocation.

(2) Replace the free allocation with 100% auction, with revenue being rebated according to the same proportionate allocation formula. So a regulated entity that would have gotten a free allowance allocation having a market value of X dollars will instead get a cash distribution of X dollars from auction revenue.

(3) Replace the auction with a fixed-price sale of allowances (aka "tax"). The revenue distribution formula is unchanged. There is no upper limit on the quantity of allowance sales, but there is also no lower limit.

Cap-and-trade systems are characteristically susceptible to price erosion or collapse, whereas the tax system will be susceptible to emission erosion or collapse. Case in point: Sweden enacted a refunded tax system in 1990 to regulate NOx emissions from power plants. (Refunding was based on "useful energy" output, e.g. MWh for electricity.) The intention was to achieve a 35% reduction in emissions within 5 years, but by 1995 emissions had come down by 50%. Cap-and-trade, by contrast, would have only achieved the 35% target, but at lower-than-expected cost.

There is one missing ingredient in the above recipe. Why not combine a tax with cap-and-trade? In step (3), do not replace the auction with a fixed-price sale; instead impose a price floor. The upper limit on the quantity of allowances is maintained, but there is no lower limit. As long as the number of allowances is sufficient to meet market demand at the floor price, the system would be equivalent to a carbon tax. If it is not sufficient, the market price would rise in response to the supply constraint.On A carbon tax has efficient sticks, but what about carrots? posted 11 months, 2 weeks ago 19 Responses

$1,000 per ton? Please do your homework, Joe.

The California Air Resources Board projects $133 per metric ton for going from the state's existing 20% Renewable Portfolio Standard to a 33% RPS by 2020, as planned. If $133/MT buys 33% at current price projections, how much renewable penetration would a stable price incentive of $133/MT induce when PV attains grid parity?

As for legacy coal plants, most U.S. plants are very old and will be ready to be phased out as renewables are phased in. In China, health benefits would probably more than offset the cost of shutting down coal as renewables come online.

Regarding transportation fuel, CARB projects a net savings of $262/MT for incremental vehicle improvements beyond its existing Pavley regulations. The most advanced vehicle efficiency technologies, including PHEV's and ultra-lightweighting, would probably be commercially viable with stable price incentives commensurate with zero net cost. (Do the math: 100 gallons of gasoline equates approximately to 1 ton of CO2.)

Another point: Costs should not be confused with marginal incentives. $1,000 per ton doesn't necessarily imply you spend $1,000 for every ton you emit - it could mean a regulatory cost of $1,000 only for every incremental ton in excess of some benchmark performance level, or a $1,000/ton gain for emission reductions below the benchmark. If pricing regulations are revenue-neutral, the benchmark would go to zero as the economy approaches carbon neutrality.
On The real truth about stabilizing at 350 ppm posted 1 year ago 16 Responses

Why 33%?

Here's the problem:

Schwarzenegger has been promoting a California cap-and-trade system, whose fundamental policy objective is to achieve least-cost emission reductions. The California Air Resources Board has estimated that the incremental cost of going to a 33% RPS (from the existing 20% mandate) would be $133/MT. The trading price for the cap-and-trade portion of California's AB 32 legislation is projected to be $10/MT, which means that utilities will (according to economic projections) be compelled to incur marginal costs of $133/MT while alternative, GHG-equivalent compliance options are available for around $10/MT. (SEE CARB's Proposed Scoping Plan for AB 32.) How can the cost be justified?

CARB asserts that there are "energy diversity" benefits that justify the $133/MT cost. But while petroleum dependence in the transportation sector is also an issue of energy diversity, CARB is not imposing similar costs on transportation. (In fact, the proposed AB 32 regulations for passenger vehicles would yield projected net savings of $262/MT.) So how can you justify $133/MT when the trading system is yielding emission reductions for $10/MT and transportation is getting $262/MT savings?

There's another even more fundamental problem:

If if the benefits of a 33% RPS (including "energy diversity") would justify the $133/MT cost, then those benefits would justify an even higher RPS if costs turn out to be much lower, as will very likely be the case. (Conversely, the 33% target would probably not be justified if costs turn out to be $1000/MT.) So a fixed target, like 33%, only makes sense if we don't care about costs. But we evidently do care about costs; otherwise the target would be 100%.

I'm totally confused. Can someone please explain this to me?On Schwarzenegger mandates 33 percent renewables by 2030 posted 1 year ago 7 Responses

Adam -

I think the point of the WSJ article is that lower carbon prices will deter and delay investment in low-carbon technologies, with the likely result that prices will skyrocket when the economy recovers (or when more stringent caps are imposed). Regulatory policy should induce industry to invest in the future, which it will if stable prices are maintained.

The cap is not, as you stated "the policy goal"; it is a means, a policy instrument. The goal is climate stabilization; but considering that emissions are not capped at sustainable levels it is evident that cost acceptability supersedes environmental goals. Unless and until emissions approach sustainable levels, the policy goal should be to motivate maximum emission reductions within limits of cost acceptability. Cap-and-trade, with no price floor, does not achieve that objective.On A useful rule of thumb: Lower emissions are better for the environment posted 1 year, 1 month ago 5 Responses

John: Actually ...

... my "idea to tax vehicles" was a little more nuanced. I am only proposing a carbon fee on gas guzzlers, complemented by a subsidy or rebate on low-emission vehicles. Also, I'm going one step further: None of the existing vehicle GHG or fuel economy regulations, or feebate proposals, come anywhere near to motivating emission reductions that would be justifiable based on fuel savings alone (never mind environmental externalities) because they are either excessively biased toward cost conservatism or involve large revenue transfers from or between consumers. If regulations are constructed to simply internalize relative life-cycle fuel costs or savings in vehicle prices, it would be possible to create much higher technology-forcing incentives because there would be no such revenue transfer. (The vehicle price incentive could be complemented with fuel price incentives, which would motivate lower VMT and low-carbon fuels.)

Before getting too wrapped up in regulatory "philosophy", you should look at some real numbers for how much marginal technology investment would be cost-effective based on current fuel prices (taking no account of externalities), and compare that to the incentive (e.g. trading price) of any current or proposed transportation policy for GHG regulation.
On 'What is a carbon cap and how will it cure our oil addiction?' posted 1 year, 1 month ago 13 Responses

But we've already got a carbon tax ...

... of about $400/tonne on transportation fuels. That is effectively what the gasoline price is. The problem is not lack of a tax; it's that consumers don't see the tax until they fill up the tank, after they've already purchased the gas guzzler that will commit them to 100 tonnes of CO2 and more than $40,000 in fuel costs over the vehicle lifetime.On 'What is a carbon cap and how will it cure our oil addiction?' posted 1 year, 1 month ago 13 Responses

This is the real difference btw tax & C&T

Suppose the trading price is $3.07/ton (as it currently is with RGGI). How much reduction in transportation emissions do you think you'd get at $3.07/ton? The advantage of a tax is that you can set the price directly. Unless cap-and-trade results in a higher emission price it won't do any better than a tax; all the cap does is lock in low prices and low emission reductions.

Another point: Taxes need not increase government revenue. You can allocate tax revenue in the same way that allowances or auction revenue would otherwise be allocated. For example, use tax revenue from high-GHG fuels to subsidize low-GHG fuels (including renewable electricity for PHEV's).On A price on carbon will not tackle transportation pollution posted 1 year, 1 month ago 10 Responses

Do the math ...

"... 300 times more corn on the same amount of land ..." (??)On How commodity grain farmers have sown the seeds of their demise posted 1 year, 1 month ago 2 Responses

If it walks like a tax and quacks like a tax ...

"Obama would auction off pollution permits, raising more than $100 billion a year ...". So how is that fundamentally different from a carbon tax (with uncontrolled price volatility)? Why not cut to the chase and impose a tax - which could be five times more cost-efficient than cap-and-trade?On Obama would make cap-and-trade program a top economic priority posted 1 year, 3 months ago 3 Responses

Jon -

I think what sets coal apart is the growth trend. The point would have been clearer if he had plotted coal on top.

Re "oil use has to be attacked", it will be - by peak oil.On Hansen's trip report finds 'sobering degree of self-deception' in Germany, U.K., Japan posted 1 year, 3 months ago 13 Responses

What schedule?

If you think existing GHG caps are even remotely close to "achieving the environmental goal" then you must be living on a different planet. Caps are not based on climate stabilization requirements; they are based on what we are willing to pay. That may, in fact, be sufficient, but C&T cannot motivate us to pay even what we are willing to pay for emission reductions because caps are based on over-inflated, cost-conservative expectations of what we think costs will be, not actual costs.

Re SO2, EDF boasts that "The expected market price for SO2 allowances was in the range of $579-$1,935 per ton of SO2; the actual market price as of January 2003 was $150 per ton" - as though the over-allocation of SO2 allowances were a good thing. The SO2 cap is about five times higher than the threshold for ecosystem sustainability, and there are still (in 2004) 22,000 premature deaths associated with SO2 emissions.

A price floor, which EDF opposes, would at least maintain a minimal incentive for emission reductions at a predetermined price level. Why should regulatory policy not create incentives for over-compliance when the added cost would be minuscule compared to the additional health and environmental benefits?On EDF prez says we can't afford to wait for the ideal first step posted 1 year, 4 months ago 17 Responses

"no guilt required"

"With a carbon cap, you get guaranteed carbon reductions on a set schedule ... no guilt required." But what is required is a willingness to pay $10,000/ton - otherwise there is no "guarantee".

Of course, in practice you won't ever see allowance prices reach $10,000/ton because you will always set caps high enough to make sure of that. Like with the Acid Rain program. Never mind that the SO2 cap is five times higher than the threshold for ecosystem recovery, and that there are still about 20,000 premature deaths per year associated with SO2 emissions. We're within the cap; we've achieved "environmental certainty" - and done so at least cost. No need to spend one cent more on emission reduction. What a marvel of elegance and efficiency this cap-and-trade thing is.

When is someone going to pull the plug on this blithering nonsense?On Forget a carbon cap; try guilt instead! posted 1 year, 4 months ago 7 Responses

Regulatory incentives

With gas prices currently in the vicinity of $500 per ton-CO2, there should be more than enough market incentive for efficient vehicle technologies and alternative fuels, if only life-cycle fuel costs and savings were adequately reflected in vehicle prices. Maybe what we need more than a massive infusion of government investment is effective regulation to overcome market failures.On Transportation sector lies at the root of U.S. energy problem posted 1 year, 4 months ago 26 Responses

David

If the politicians could have predicted the future (not just lower-than-expected costs, but also vastly higher benefits), they would have surely tightened the SO2 cap. But they couldn't. A declining cap would give more regulatory flexibility, but it doesn't solve the problem that you can't predict the future. Trying to tighten the cap based on retrospective cost trends doesn't work, because the technology innovation and economies of scale that drive cost reductions are incentivized by regulations, and the market is waiting to see what the regulators will do before putting big bucks into sustainable technologies. Also, if tightening the cap requires another Act of Congress (like with CAIR), your regulatory policy will be forever hung up in political deadlock.

It's hard enough to get GHG caps or regulations of any kind, so whatever regulations are adopted should, within reason, be flexible and provide market incentives for continued emission reductions. A GHG policy that is premised on predictions of future costs and benefits is unworkable because you cannot know in advance, for example, how soon PV will attain grid parity or how much the polar ice caps and coastal cities are worth. But what you can do is provide price incentives for society to spend as much as it is willing to spend on GHG reduction.

Re "There is also political risk if the tax is set too low and not enough abatement occurs." That's not an issue with cap-and-trade employing a price floor.

Re "... the plan will have to be modified as we learn ..." Indeed it will, but with a stable (or at least minimal) price incentive the market can make the modifications based on predictive information that technologists and investors, but not regulators, have access to. I don't have much confidence in regulator's ability to forecast market trends because they get paid the same whether or they are right or wrong.

Back to the question I asked Sean, do you think there would be any harm in imposing a price floor in the context of cap-and-trade?On Smart ideas for post Lieberman-Warner climate policy posted 1 year, 4 months ago 71 Responses

Bottom line

Sean: Volatility is a secondary concern; the more important issue is whether we can establish environmental regulations that are gounded on a sane policy rationale. Case in point:

SO2 emissions from U.S. coal plants in the U.S. averaged about 9 lbs/MWh in 2006 (ranging as high as 40 lbs/MWh).

State-of-the-art scrubbers can reduce coal plant SO2 emissions to about 1 lb/MWh at a cost of $300/ton-SO2.

Quantifiable benefits of SO2 mitigation are estimated to be $7300/ton. This valuation is primarily reflective of 22,000 annual deaths associated with SO2 emissions. It does not account for evnironmental impacts of SO2 emissions, which are capped at a level about five times higher than the sustainability threshold.

In view of the relative costs and and benefits of SO2 reduction, should regulatory policy be constructed to (a) further reduce compliance costs, or (b) further reduce emissions? In either case, industry should be incentivized (and allowed) to employ least-cost compliance mehanisms, in the sense of minimizing dollars per ton-SO2; that is not the issue. The question is whether the benefits of technology advances and economies of scale should be applied to the benefit of industry or to the benefit of environmental sustainability.

The massive benefit/cost ratio notwithstanding, most cap-and-trade dogmatists are of the view that policy should focus incentives on further cost reduction, not further emissions reduction. For example, EDF's C&T tutorial boasts that "The expected market price for SO2 allowances was in the range of $579-$1,935 per ton of SO2; the actual market price as of January 2003 was $150 per ton"; as though the underinvestment in SO2 reduction were a good thing. What is your view?On Smart ideas for post Lieberman-Warner climate policy posted 1 year, 4 months ago 71 Responses

But what if industry WANTS taxes?

A conventional tax would indeed face stiff political opposition, to the extent that politicians cannot bring themselves to utter the t** word. But a tax with "free allocation" - like the Swedish NOx charge - is another matter. See "When Will Business Want Environmental Taxes?" - the last reference in my previous post.

From a regulated entity's perspective, a tax is essentially equivalent to cap-and-trade without any price volatility. ("Allowance giveaways" can be implemented equivalently with an auction or a tax, and are not a bad thing if they are given away preferentially to low-emission producers.) Unless industry likes price volatility, there is no good reason why it would prefer cap-and-trade over a tax.
On Smart ideas for post Lieberman-Warner climate policy posted 1 year, 4 months ago 71 Responses

Sean: taxes & markets

Everything you say about taxes applies equally well to auctions or allowance allocation in the context of C&T, e.g. "there is then the risk that they might decide to reduce the tax relax the cap".

A tax is basically a fixed-price sale of emission allowances, while C&T auctions a fixed quantity of allowances. Otherwise, there is no significant difference between taxes and C&T. (Free allocation under C&T is not significantly different than auctioning because any allocation method can be applied equivalently to auction revenue.) The exact same options for revenue distribution - and attendant political concerns - exist with both taxes and C&T. (In CA there is some protection against misappropriation of tax or auction revenue, because the funds could not be used for some purpose unrelated to climate regulation without a 2/3 vote of the legislature.)

Comparing carbon tax to C&T, both based on the same target emission level (or the same target price), it is more likely that the cap will be breached than the tax reduced because C&T provides no price control. For example, California's AB 32 legislation would not have passed if it had not given the governor explicit authority to suspend the caps (indefinitely) under the "threat of significant economic harm".

Next post: Re "This seems a very strange definition of markets to me." It's not a definition, just a characteristic. The basic idea is that the market is like a seesaw with emissions on one side and costs on the other. If one side goes down, the other side goes up. Trying to "create maximum value at minimum cost" is like trying to push both sides down at the same time. Which will it be - maximum value or minimum cost? Take your pick.

But you (and Max) are right - In many cases you can actually do both (e.g., the current price of gasoline in CA is > $500 per ton-CO2). All of the industry's whining about high regulatory costs mainly applies to short-term costs. After they've made the initial capital investment in low-carbon energy, it's basically free money. In the case of transportation vehicles, an effective regulatory incentive need not involve any revenue transfers from high- to low-emission vehicle owners; all that is required is that differences in lifecycle fuel consumption be at least partially internalized in vehicle purchase prices.On Smart ideas for post Lieberman-Warner climate policy posted 1 year, 4 months ago 71 Responses

Sean: Price floor or banking?

Re "the point of a price floor ...", I think what you are describing is banking, not a price floor. Banking functions to reduce costs; a price floor functions to further reduce emissions. In either case, regulated entities will be equally incentivized to seek out least-cost emission reductions, but a price floor could motivate more reductions.

A price floor is effectively a carbon tax as long as some allowances remain unsold, and it only increases emission reductions as long as the price remains below some predetermined "burdensome" level.

Using emission caps to manage costs is kind of like trying to drive a car with the accelerator floored and using the brake to control your speed. Price limits (floors and ceilings), which provide direct regulatory control over costs, can be employed to maintain some degree of sanity in the carbon market.

Re CAIR, there would have probably been no need for CAIR if a price floor had been employed.On Smart ideas for post Lieberman-Warner climate policy posted 1 year, 4 months ago 71 Responses

I still don't get it

Sean: This doesn't make any sense. Whether the $5/ton is set by imposing a price floor or by making the cap tighter, it's going to induce the same marginal investments up to $5/ton. If you think that a tax, unlike cap-and-trade, "imposes economic costs on society without creating any additional environmental value", then see this CBO report (and included references), which indicates that a carbon tax could be five times more cost-efficient than cap-and-trade.

Whether or not society has to pay $5/ton to achieve the mandated cap, it will have to pay that much - or probably much more - to avert catastrophic climate change. Nobody knows how much climate stabilization will cost, but a carbon tax - unlike cap-and-trade - can at least incentivize society to pay as much as it is willing to pay for GHG reduction.

If you think cap-and-trade is in any sense economically efficient, then look at the U.S. Acid Rain program, which is expected to cost $3 billion  and produce $122 billion in annual benefits in 2010. If SO2 emission prices had been maintained at their expected level when the program was introduced in 1990, then industry costs ($3 billion) might have been doubled, but the corresponding societal benefits ($122 billion) would have also increased commensurately.
On Smart ideas for post Lieberman-Warner climate policy posted 1 year, 4 months ago 71 Responses

What societal costs?

Re "a floor price ... imposes societal costs that may not be necessary", is there some minimal price level that would not be justified and necessary to "preserve a planet similar to that on which civilization developed and to which life on Earth is adapted"? (I'm not looking for a precise $/ton figure, but can you provide a ballpark estimate?)

How do you guard against the danger of not imposing societal costs that may be absolutely necessary?
On Smart ideas for post Lieberman-Warner climate policy posted 1 year, 4 months ago 71 Responses

Let's make a deal

If you want to consider a safety valve, how about a compromise? Industry gets a safety valve, based on political limits of cost acceptability. In exchange, they accept a price floor, also based on cost acceptability. No change in the allocation of allowances and/or revenue - the only difference is the price limits.On Smart ideas for post Lieberman-Warner climate policy posted 1 year, 4 months ago 71 Responses

Why cap-and-trade?

Sean: If "there is a price for GHG reduction that is unacceptable", then why do politicians favor cap-and-trade over a carbon tax, which guarantees price certainty? If you're not willing to accept $1000/ton, what's the point of cap-and-trade?
On Smart ideas for post Lieberman-Warner climate policy posted 1 year, 4 months ago 71 Responses

I beg to differ.

I think this author's perspective - the idea that completely new economic and political order is a prerequisite to progress on climate change - is itself one of the biggest impediments to such progress. We don't need a grand new "vision" like Parecon's; what is sorely needed is a basic understanding of the most fundamental economic principles of regulatory climate policy and how those principles can be applied in the context of existing economic and political institutions. Save the "new world order" for later.
On Economics, policy, and vision for fighting global warming posted 1 year, 4 months ago 12 Responses

Response to questions

Re setb: "What makes you think a tax would be set at a level that represented true sustainability and not biased toward cost conservatism?"

I don't expect that it would. Probably nobody has a clue what tax rate - or what cap level - represents "true sustainability". But consider the following:

(1) The Swedish NOx program was intended to achieve a 35% reduction between 1990 and 1995, but in that time frame it actually achieved 60% reduction in specific emissions (and 50% reduction in the total - including demand growth). How much reduction do you think would have been achieved if cap-and-trade had been employed?

(2) The U.S. SO2 program is expected to achieve $122 billion in benefits in 2010, while annual costs are projected at just $3 billion - half of the estimated costs in 1990. What would you guess would have happened if SO2 emission prices had been maintained at their original expectation level?

(3) Whatever the merits of cap-and-trade, what would be preferable: cap-and-trade with or without a price floor?

Re bvenner: "For the electricity sector, how would the refund for wind/solar/hydro/nuclear be calculated in this system?"

Under a pure output-based system, the dollar-per-MWh refund would be the same for all energy sources, including renewables and fossil fuels. Renewables would benefit because they would pay little or no carbon tax, not because of any difference in the refund rate.
On A possible consensus perspective on the tax vs. cap debate posted 1 year, 4 months ago 6 Responses

Here's why not

Re "Here's why: A descending cap on carbon would allow the market to arrive at a carbon price based on the scientifically necessary carbon reductions."

Here's why not: Nobody is willing to mandate GHG caps remotely close to the "scientifically necessary carbon reductions" and to enforce such caps at any cost. A tax (or price floor) at least motivates you to spend as much as you are willing to spend on emission reductions - there will be no price erosion or collapse like what occurred with the US SO2 trading program and the EU-ETS. Regulatory price control would provide a stable investment climate that is more conducive to long-term investments in low-carbon technology and infrastructure.

We do not know what reductions are necessary or how much they will cost, but we should know how much we are willing to pay. Let the price incentive drive the reductions until such time as we are able to impose environmentally sustainable caps.On Hansen's message to the planet posted 1 year, 5 months ago 17 Responses

Keep these issues separate

The climate policy debate centers on two basic questions: (1) Should emissions be capped or taxed? (2) Who gets the money (or the allowances - which are equivalent to cash)? What Hansen and most people fail to recognize is that these are two completely separate issues. Any method for distributing tax revenue can be applied equivalently to cap-and-trade by auctioning allowances and spending the auction revenue in the same way. Conversely, any method for freely allocating allowances can be applied equally well to either auction or tax revenue.

It is important to keep these two issues separate, because taxes have significant advantages irrespective of what kind of revenue allocation is used. For example, if the U.S. Acid Rain program had been implemented as an emission tax, with tax revenue refunded according to the same allocation formula that is used for allowance distribution, then the achieved SO2 emission reductions might have been doubled with no increase in emission prices above original expectations. (See my June 23 post on this topic.)

Comparing cap-and-trade to an emission tax, both using the same allocation formula, industry would logically prefer the latter because of the price stability that a tax would provide. (For a good working example of an emission tax that employs "free allocation", see my June 2 CPUC comments, pages 4-6.)

Another important point that Hansen missed is that caps and taxes are not mutually exclusive alternatives. Cap-and-trade with auctioned allowances and a price floor would combine the environmental advantages of both. (See Alan Durning's May 16 post and the recent CBO analysis.)

EDF knows

EDF clearly understands the difference between a price floor and a safety valve - after all, they invented cap-and-trade. There are good reasons for using a price floor - both environmental and economic. (See, e.g., the CBO study presented at the May 28 Air Resources Board meeting.) But EDF's commitment to ideological cap-and-trade dogma apparently outweighs their commitment to "environmental defense".
On Will California's climate change regulations mandate maximum emission reductions? posted 1 year, 5 months ago 2 Responses

Refunded taxes

free download: http://kjinnovation.com/RefundedTaxes.pdf
for mor ...
On Why carbon taxes trump cap-and-trade posted 2 years, 9 months ago 18 Responses

No wonder Kyoto is falling apart

It should be no wonder that the Kyoto Protocol is falling short of people's expectations. Its primary regulatory mechanism, cap-and-trade, has as its primary precedent the U. S. Acid Rain program for SO2. The program has cost about five times less than expected, but has only succeeded in reducing SO2 emissions to a level about five times higher than the environmentally sustainable limit. If that same level of success were extrapolated to the greater challenge of global climate stabilization, then we might expect that by mid-century industrial countries will have come within about a factor of five of their 80% GHG reduction goals.

The conventional dogma parroted by proponents of cap-and-trade is that it provides "environmental certainty", but no one seems to believe - or even pretends to believe - that such policies will achieve the goal of environmental sustainability with any certainty (or even with any significant probability). What cap-and-trade does guarantee (in theory) is that "some level" of emissions performance will be attained - whatever level the politicians, environmentalists, and industry lobbyists can agree to based on overestimated or exaggerated projections of future costs and undervalued benefits. But the tradeoff to this "certainty" is that it is also highly improbable that aggregate emissions will be significantly reduced below mandated cap levels, even emissions can be further reduced at very low cost, because the policy provides no incentive to do so.

The implicit rationale underlying cap-and-trade is that there is no need to reduce emissions below the cap, no matter how low the cost, because the cap is presumably set at a level sufficient to achieve environmental sustainability. But this kind of "certainty" can only be achieved if environmental goals are prioritized over cost acceptability. Cap-and-trade functions to minimize costs (via emissions trading), but if that cost minimum turns out to be $1000 per ton, so be it. That's the theory.

In the real world, course, emission targets do not take precedence over cost acceptability, and caps are not set at sustainable levels. They don't even come close. Not even in the ballpark. Not only does cap-and-trade have the perverse effect of locking in emission levels at environmentally unsustainable levels, but as evidenced by the Acid Rain program, it doesn't even come close to the cost acceptability limit. The reason it doesn't is that a "quantity-constrained" policy instrument like cap-and-trade is fundamentally inconsistent with "cost-constrained" policy objectives. Politics is inherently cost-constrained, but cap-and-trade controls emissions - it doesn't directly control costs - so caps have to be based on crystal-ball forecasts of what emission level will match the cost target years or decades in the future. Climate policy becomes an exercise in fortune telling. Cost projections are always highly uncertain, and in keeping with the policy priority, are always biased in favor of cost conservatism and against environmental interests. So the cap only approaches the cost acceptability threshold under worst-case predictive assumptions.

Politicians seem to be waking up to the reality that "the caps, targets and timetables approach is flawed", although it seems they can't quite yet articulate just how or why they are flawed or what a good alternative would be. Fundamentally, a cost-constrained policy calls for a cost-constrained regulatory instrument, i.e., one that is based on a mandated cost acceptability limit and seeks to minimize emissions within that limit, rather than trying to minimize costs within the constraint of a mandated emissions limit.

One sort of "half-way" alternative between these two approaches is a cap-and-trade system with a "safety valve", which allows industry to buy emission allowances in excess of the cap limit at a fixed, predetermined price, although it still provides no incentive to reduce emissions below the cap level. (The safety valve is "safe" with respect to costs - not with respect to emissions.)

A better example of good regulatory policy is Sweden's program for controlling NOx emissions from stationary combustion sources. (A similar approach could be used for power-sector GHG emissions.) The program is revenue-neutral and does not rely on mandated emission caps or standards. Basically, it is structured as a refunded emissions tax, which is levied on NOx emissions and is refunded in proportion to energy output, so that utilities that generate greater-than-average emissions per unit energy incur a net loss while those that do better than average accrue a net profit. As a result of the tax/refund incentive, regulated plants' NOx emissions intensity dropped by 60% in the first five years after the program was enacted in 1990, and Swedish utilities typically outperform the U. S. and other industrialized countries by a wide margin.

The "emissions price" (i.e. tax rate) for the Swedish program is set by mandate at about $2.50 per lb-NOx. This contrasts with Southern California's "RECLAIM" program, which uses cap-and-trade to regulate NOx, and which saw emission prices jump from about $1/lb to over $60/lb over a one-year period between 2000 and 2001. This illustrates one of the main problems with cap-and-trade: It's not just costs that are a concern, but also the cost uncertainty and the disruptive economic effect of price volatility. By contrast, cost-constrained policy instruments can provide both the economic incentives and the stable investment climate that are required to support sustained, long-term investments in low-emission technologies.

Ken Johnson
Santa Clara, CA

Related links:
http://cta.policy.net/relatives/18480.pdf
http://www.environmentalintegrity.org/pubs/Dirty%20Kilowatts.pdf
http://www.acidrain.org/pages/publications/acidnews/2000/AN2-00.pdf
http://www.evomarkets.com/assets/evobriefs/nw_1093900761.pdf
http://www.cleanairtrust.org/pdf/reclaim.pdfOn Voluntarily cutting growth or consumption seems unlikely; what is the alternative? posted 4 years ago 2 Responses