February 2010

Climate policy, in Congress, has become synonymous with cap-and-trade proposals, spawning an endless and only occasionally illuminating debate. Is cap-and-trade the only affordable, market-friendly way to introduce a carbon price and harness the efficiency of the market? Or is it a sham that promotes bogus offsets in place of real emission reductions, and gives away valuable allowances to influential industries?

Here’s a different idea about what’s wrong with cap-and-trade in practice: The caps on emissions have frequently been set too high to make any difference. Both the claims of low costs for cap-and-trade policies and the complaints of their ineffectiveness could result from non-binding caps – that is, legal “limits” on emissions that are higher than the amount industry plans to emit. No change in behavior is required, and it’s no surprise that this lowers costs; it’s cheaper to do nothing than something.

In a careful analysis of existing programs, University of San Diego law professor Lesley McAllister found that some, such as Phase I of the EU’s carbon trading scheme, had caps that exceeded emission levels throughout the life of the program. In other cases, such as sulfur trading under the U.S. acid rain program, the caps were set much higher than emissions in the early years, so that banking of unused allowances postponed the effect of later, somewhat lower caps. The current recession has lowered production and emissions so much that some well-intentioned plans, such as the EU’s reduced cap for Phase II of carbon trading, may also turn out to be non-binding in practice.

The solution is to set emission caps low enough to actually require major investments in new, emission-reducing technologies (wasn’t that always the plan?); to limit banking of unused allowances; and to periodically revisit the caps, adjusting them downward whenever feasible. Or, of course, give up on cap-and-trade and try something different.

Lesley McAllister and I are both member scholars of the Center for Progressive Reform, a great source for analysis and commentary on a wide range of issues about public policy, law, and the environment.

I hate to bring this up for fear of adding, in whatever small way, to the hype, but … the 2007 IPCC report has not, I repeat, has not been discredited as riddled with errors. Not even a little bit. Not even close.

Yes, two small errors have been found, one about the rate at which Himalayan glaciers are melting and the other about the share of the Netherlands that is currently below sea level. Allowing these errors into the final text of the report certainly represents a failure in the IPCC’s reviewing and proofreading process.

Here’s what’s getting missed when Fox News and even NPR talk about the errors: The IPCC report is thousands of pages long. The results of each volume are summarized, and those summaries are again summarized ad nauseam until the whole thing is distilled into a 20-page policymaker summary report. That summary report is further digested into the one or two numbers that make it into the media, usually the expected average annual temperature change and sea-level rise by 2100.

Some of the information in the full IPCC reports is fundamental, an enormous set of facts and modeling assumptions that come together in these final media-friendly results. But most of the information in the IPCC report is not fundamental, and changing any part of it would have no effect on those final results.

The errors about Himalayan glaciers and Netherlands geography are problems of this latter type: They are not fundamental, and they do not affect the policymaker summary report or the few facts that reach a wider public audience.

For a clear and detailed accounting of errors, real and imagined, in the IPCC report, see this post on RealClimate. For a lighter explanation, try Tom Toles.

My colleague Frank Ackerman, head of the Climate Economics Group here at SEI-U.S., has an excellent guest post today on TripleCrisis about how important it is that the EPA not under-price carbon. (Check out my posting from yesterday on the same topic: The lower their chosen price on carbon, the less pollution control seems justified.)

Here’s an excerpt of his argument:

Every $1 per ton of CO2 is about a penny per gallon of gasoline, so $5 per ton would be a trivial price incentive of 5 cents a gallon. At $50 per ton, or 50 cents a gallon, you’d start to notice. An increase of $500 per ton, or $5 per gallon, would put us in the realm of gas prices in many European countries where people buy smaller cars and use public transportation a lot more than we do.

$500, though, isn’t in the running. In the September proposal, EPA offered a range of values from $5 to $56. It sounds to me like the high end was included to mollify critics, while the low end is what EPA’s economists prefer.

Read the full post here. To learn more about the “social cost of carbon,” what’s wrong with the EPA’s approach, and how it’s likely to shape EPA motor vehicle regulations, read Frank’s critique of proposed EPA regulation here.

Just about every climate policy has something to do with the price of carbon dioxide emissions. A carbon tax is just a price the emitter pays for each ton of carbon dioxide released into the atmosphere. Under cap-and-trade or cap-and-dividend allowance systems, a limit is placed on carbon emissions, and a market forms to buy and sell the right to emit; this market sets a price on carbon. Similarly, the EPA’s regulation of greenhouse gases under the Clean Air Act rests on a type of carbon price known as the social cost of carbon (SCC).

It sounds obscure and technical, I know, but with climate legislation stalled in Congress, the EPA regulatory actions could be the only U.S. climate policy that we see for a long time. So it’s worth a little of our time and brain cells to figure out just what the SCC means and why we should care.

The dollar figure put on the SCC will determine just how much regulation actually takes place. The EPA will look, in traditional cost-benefit-analysis style, at the cost of complying with a regulation in comparison to the SCC. If complying with the regulation costs more per ton than the SCC, the EPA won’t require it. If it costs less, it will. A high SCC means lots of regulations to reduce carbon dioxide emissions (think: higher fuel-efficiency requirements on cars, tighter emissions requirements for power plants). A low SCC means little or no regulation.

The EPA’s method of calculating the SCC is troubling and, perhaps, the subject of another blog posting. Suffice it to say, the figure is fairly arbitrary, based on a bunch of value judgments that need a lot closer examination by a wider public. The first EPA regulations that will depend on the SCC are part of a “rulemaking” regarding cars and light trucks – a process that has been more or less invisible to the general public. Once an SCC becomes part of an established regulation, it will become that much easier for the value set to be propagated to further regulations, citing precedent.

The EPA has the power to greatly reduce greenhouse gas emissions, and I’m hoping that they’ll use this power for good by setting a high SCC. Unfortunately, their proposed rulemaking does not support this hope – its SCC is small, and the justification given for this value is weak.

If you’re interested in the more technical details, check out Frank Ackerman of SEI-U.S.’s critique of the EPA rulemaking.

With the Waxman-Markey cap-and-trade bill faltering, the lesser-known Cantwell-Collins cap-and-dividend bill is gaining traction as a more politically viable approach to climate protection legislation.

Sponsored by U.S. Senators Maria Cantwell (D-Wash.) and Susan Collins (R-Maine), the measure brings a concept into the mainstream that economists have discussed for a few years now. The main provisions:

•  It would place an absolute annual cap on carbon emissions for the United States as a whole. This cap could and should be a lot lower, but it’s a start.

•  It would require aspiring polluters to bid for a limited number of auctioned “carbon permits.” (In many of the previous climate bills kicked around Congress, these permits were simply given away to the biggest historical polluters.)

•  It would return three-quarters of the auction revenue, on an equal per capita basis, to all U.S. residents in the form of an annual dividend check. These dividends have been estimated on the order of $1,000 per person every year.

•  It would invest the remaining one-quarter of revenues in clean energy research, assistance to workers put at a special disadvantage by emissions reductions, and the like.

Research from the Political Economy Research Institute at the University of Massachusetts-Amherst shows that for all but the richest U.S. families, these benefit checks would more than compensate for increased energy costs (see a series of studies by Boyce and Riddle: a state-by-state analysis, “keeping the government whole,” and impacts by income level).

Even The Economist gives Cantwell-Collins a rave review. Yes, it’s the “free market” solution, or at least the solution some free-market types like to hype that way. But even for economists who find the “free” market to be tiresomely overrated (I’ll take a domesticated market over a feral one any day), Cantwell-Collins looks like a great first step towards an adequate U.S. climate policy. While I’m not at all convinced that dividends are the only way to use carbon revenues well, this is light-years ahead of the “giveaways” in cap-and-trade policies that are essentially a handout to big business.

Is it too optimistic to hope that the populist sensibility of cap and dividend (checks for everyone!) will create a badly needed bridge across the chasm between center (often mistakenly called “left”) and right in Congress?

For more on cap and dividend in general and Cantwell-Collins in particular, see this terrific series of theREALnews interviews with Jim Boyce.

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