climate change


Wait a second, the free carbon permits aren’t going to be given away on an equal per capita basis? Let me get this straight: The plan is to give free permits to pollute to the largest historical polluters? Why? Because otherwise, these most polluting industries will fight to block the climate legislation. Is this how all policy is made? We can’t pass a health bill that doesn’t include a giveaway to insurers? Would an anti-smoking measure have a little something in it for tobacco companies? A gun law with a present for the gun manufacturers? Well, probably this is how all policy is made.

Still, the purpose of climate legislation isn’t to make power companies happy, nor is it to guarantee them a continued stream of profits. Capitalism creates and destroys: There’s no guarantee that what made a profit today will make a profit tomorrow, and there is no obligation on the part of the voting public to shore up business models that are damaging to the public good. The purpose of climate legislation should be twofold, 1) to reduce greenhouse gas emissions, and 2) to do so in a way that promotes equity.

Yes, assuming a particular overall cap on carbon, giving the permits away instead of selling them should end up with the same reduction in emissions. (To get this result, the permits would have to be fungible – that is, after they are given away or bought from the government, they can then be sold again to the highest bidder; this leads to the efficient market solution that neo-classical economists are always yammering about. The companies that can reduce their carbon emissions most cheaply will do so and sell the permits they do not need to companies for whom it would cost more to reduce emissions.)

But here’s what would be different: If the government sells the permits, that revenue can go to reduce taxes, or support green jobs, or send a dividend check to every citizen. If the government gives away the permits to private companies, the value of the right to pollute the atmosphere (which, as I’ve mentioned, belongs to every global citizen on an equal per capita basis) ends up going to the same malefactors that have been getting this windfall for decades.

Personally, I don’t think that having made a profit in the past gives you some sort of “God-given” right to make a profit in the future, whether the public likes your product (or your way of doing business) or not. And I don’t think that U.S. environmental regulations need to be business-friendly in order to be the right thing for our society to do.

The value of a clean, low-carbon-dioxide atmosphere is enormous, and it belongs to all of us, equally. I’d like to think that my Senators (this means you, John Kerry and Scott Brown) won’t be intimidated into giving it away.

This is very exciting news: The Senate’s new climate bill calls for the allocation of free carbon permits!

Now I realize this is controversial, but, personally, I can’t wait to receive mine. I couldn’t be more thrilled to have – in such a tangible form – control over my per capita right to pollute or not to pollute the atmosphere. I know it won’t be much – just one 300 millionth of the U.S. cap on emissions, but it still means a lot to me.

I’ll have to think carefully about how to use it. Naturally, I have a strong inclination to retire the permit (take it out of circulation); maybe I could make it into a nice papier maché art object to hand down to my grandchildren and great-grandchildren. A small souvenir of a good and important choice. I can only imagine that they’ll be grateful.

I suppose that power companies and other big greenhouse gas polluters will soon be knocking on my door wanting to buy my permit. Well, they better be willing to pay top dollar, because it’s going to take a lot (the true social cost of carbon?) to get me to part with it.

* Warning: This blog posting contains sarcasm. The Senate’s free carbon permits are not really for you and me; they’re for power companies. Stay tuned for more on this topic.

The public debate over the possible economic implications of addressing climate change has generated a lot of heat, but not much light. One area of confusion is the difference between the price of a tradable permit under a cap-and-trade system and the overall economic impact of the program. It is true that a cap-and-trade program is one way to put a price on greenhouse gas emissions (call these carbon emissions for shorthand); a carbon tax would be a different approach to achieve the same objective. However, most would agree that ending free pollution by pricing carbon is a necessary part of a comprehensive climate and energy program. Let’s dig into the issue of compliance costs and overall societal costs and benefits.

There are two main aspects of compliance cost under cap-and-trade: the cost of reducing emissions, and the cost of acquiring tradable permits (typically called allowances). To simplify, we’ll leave aside the cost of offsets, another option under cap-and-trade. Also to simplify, assume all allowances are auctioned.

Even if they are working to reduce emissions, most businesses are likely to continue to produce emissions and need allowances to cover them for many years. But the cost of acquiring allowances isn’t a real economic cost; the money spent to pay for them does not disappear. It accumulates as government revenue. The question is what to do with that revenue: It could be returned to regulated firms, but one of the principal insights in climate policy in recent years is that regulated businesses will be able to pass along much of these costs to consumers. For this reason, there is significant momentum to return the revenue from allowances to the people or to make investments that speed and smooth the transition to a low-carbon economy.

If the emissions market is functioning, the price of an allowance should be roughly equal to the cost of the most expensive ton reduced. That’s because if every ton of carbon has a cost, firms are likely to keep paying to reduce emissions, using every option open to them, until the options are so expensive that it is cheaper to buy allowances. But again, businesses will be able to pass along a large share of these costs. And many of the investments needed to reduce emissions will produce important benefits.

Greater reliance on clean, free domestic energy sources such as wind and solar power will mean greater energy security. Less fossil-fuel combustion will mean cleaner air, improved public health, lower health care costs, and improved worker productivity and performance by students in schools. A price on carbon will contribute to progress in clean technology by providing greater incentives for those who innovate, and this in turn will boost the prospects for American business in this rapidly growing global market. And of course, there is the enormous benefit of avoiding the damages, biophysical and economic, that would result from unabated planetary overheating.

Carbon prices do not reflect these broader socioeconomic effects, and they are almost invariably left out of economic modeling of climate policy that forecast future impacts, too. For more on that topic, see my report on economic modeling of California’s global warming law.

Chris Busch, Ph.D., is policy director of the Center for Resource Solutions, a nonprofit in San Francisco that creates policy and market solutions to advance sustainable energy.

A new study on the economic impacts of Cantwell-Collins’ proposed “CLEAR Act” – the cap-and-dividend climate regulation that I wrote about a few weeks ago – shows that, in every state, the average household will come out ahead. Their extra costs in energy bills will be more than made up for by an annual dividend check. Some states, however, would have a greater net benefit than others: Oregon and Vermont would receive the biggest net benefits; Indiana and Delaware, the smallest.

This is one of the key obstacles to making a cap-and-dividend bill palatable to majorities in Congress. Somehow it’s not enough that working- and middle-class families stand to benefit from this climate policy – the idea that some states would benefit more could turn out to be a deal breaker.

Authors Jim Boyce and Matt Riddle present an innovative solution to this disparity: state-specific dividends calculated to give the median household in each state the same net benefit. Under this plan, the per capita annual dividend check would be $262 in Oregon and $352 in Indiana, but the net benefit to the median household in each would be $65, due to differences in energy consumption between the two states. With any luck, that could be just enough sugar (for Congress) to make the medicine go down.

A policy of tailoring dividends to energy consumption, however, should probably stop there, or it risks sliding down a slippery slope. Some readers may wonder, why not a specific dividend for every income class in every state? How about for every household (so nobody loses out due to the new policy)? Making a dividend check that matches each household’s cost from climate legislation would entirely negate its effectiveness. The idea is supposed to be that households will choose to use less fuel and buy less energy-intensive products because these things will cost more under a carbon tax or tradable permit system. But if each household were given a check for exactly its added costs, nobody’s purchasing behavior would change at all.

In order for a “market-based” climate policy to work, we all have to respond to price signals that tell us it’s worthwhile to conserve energy. Too much tailoring of any climate regulation could weaken those signals.

I understand that UN Secretary General Ban Ki-moon is having some trouble finding appropriately illustrious women to sit on the newly formed High-Level Advisory Group on Mobilizing Climate Change Resources. (Here’s an open letter from 138 women’s organizations asking the Secretary General to reconsider his appointment of a panel consisting of 19 men and no women; since then, France has replaced its appointee with a woman, French Economy Minister Christine Lagarde).

Since the panel is drawn primarily from current and former heads of state (four members) and high-level economic policy-makers in national governments or international institutions (10 members), I thought I would help the Secretary General out by identifying their female counterparts. A very small amount of Googling on my part turned up nine current female heads of state and more than 50 current female finance ministers, as well as a host of other current and former high-level female dignitaries.

Here are a few suggestions of other women (looking a little further than government officials) who would be assets to the new climate-change finance group:

Sunita Narain is the director of the India-based Centre for Science and Environment. Her research and writing on climate change have found a wide international audience and made a major impact on the way that climate equity issues are framed. Her work with Anil Agarwal on an equal per capita right to the atmosphere for every global citizen is essential reading for policymakers and climate economics students alike.

Dessima Williams is Grenada’s ambassador to the United Nations and the chair of the Alliance of Small Island States. AOSIS has helped to bring to the public view the disproportionate burden faced by small low-lying countries, where climate change-related sea-level rise is already causing enormous damage.

Elinor Ostrom is a Nobel laureate in economics, best known for her work on the institutions that guide the use and misuse of common resources, including our shared atmosphere.

Any other suggestions? I’d love to hear them (you can post a comment using the link above), and I’m sure the Secretary General would, too.

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