California’s Doomed-to-Fail Experiment in Carbon Regulation

The New York Times has a piece this morning on California’s new law to regulate carbon emissions, the corporately named Global Warming Solutions Act.  (Here is our new 2012 lineup of global warming solutions; pick the one that’s best for you.)  It is utterly uninformative about what is at stake in this new program and the damage it is likely to cause.

The author of the piece makes what must have been a pleasant journey to a redwood forest in order to talk with the folks who measure tree diameters: tree growth means carbon storage and provides a physical audit of carbon credits for forestry.  Journalists love this visual stuff, but accurate tape readings are almost irrelevant to the true problems predictable under the California law.

There are two huge issues, either one sufficient to sink the entire experiment.  The first is that carbon permits are given away to businesses based on historic emissions.  The second is the gaping loophole of offsets.

Giving away permits is very attractive to politicians.  Overnight they are in a position to grant or withhold vast sums of monetary equivalents, and this is sure to induce correspondingly large campaign contributions.  In other words, the logic of carbon giveaways is the same as the logic of our tax laws: they are convoluted and larded with special exemptions because otherwise there would be nothing to sell.

But worse, giving away carbon permits creates an unsolvable contradiction for policy.  On the one hand, freebie permits transfer money from consumers to businesses to the extent that the permits are scarce.  Issue fewer permits and prices go up, but costs to producers stay the same because the permits are free.  From an economic point of view it is a lot like the supply restriction enforced by cartels, except that here the government is in charge of squeezing the market.

Of course, what these handouts giveth to businesses they taketh away from the rest of us.  Voters don’t like to see the prices they pay go up, especially for highly visible items like gas and home heating.  They are even less likely to appreciate their contribution to the windfall profits of industry.  So here is the conundrum: permit giveaways are justified as the price that has to be paid to get business to go along with a climate plan, but the same system alienates voters and guarantees that serious limitations on carbon emissions will never occur.  You can see the outcome in the European Trading System, which ended up authorizing so many permits that they now have no value at all and no longer trade: the system “restricts” carbon emissions to the level that would occur in its absence.  My fearless forecast is that California will go the same route.

As for the problem of offsets, if accurate tree measurements is the main hurdle, we are in heaven.  Much more likely are two other glitches.  First, the criterion of additionality, that the green investments being subsidized would not have been made without the sweetener of an offset, is impossible to enforce.  How can anyone prove that a forest would or would not have been harvested in a parallel universe, exactly the same as our own, except for not having a Global Warming Solutions Act?  The history of the Clean Development Mechanism, set up under Kyoto to funnel carbon offset money to green investments in less developed countries, demonstrates that to a fault; independent audits have found that improper subsidies are the rule, not the exception.  On top of that, the criteria for offset eligibility are easily gamed, and many “green” projects are anything but, except in one narrow sense that allows the money to flow.  (Imagine how easy it would be to game any formal criteria for forestry offsets—cutting one forest more while collecting money by cutting another less, turning forests into tree plantations that trade sustainability for more rapid short-run growth, permitting practices that release more carbon from forest soils, etc.)

The offset game gets support from those whose noses are buried in the minutiae of carbon accounting.  Trees capture x amount of CO2 equivalent, equal to the combustion of so many barrels of oil or tons of coal, so why not trade one for the other?  Alas, this ignores the underlying logic of climate change.  The last century has seen a dangerous trend toward global warming not because of deforestation (which has been going on since the beginning of settled agriculture), but because of the release of large quantities of carbon that had been sealed away underground for hundreds of millions of years.  The bottom line of forestalling catastrophic climate change is leaving as much of that stuff in the earth as possible.

Specifically, there is enormous, and enormously complex, exchange between atmospheric, terrestrial and marine stores of carbon.  No one can say today how much of the carbon fixed in tree growth will be released over the next century, particularly since environmental conditions are certain to change radically.  For instance, those wonderful redwoods described in the Times article may turn out to be in the wrong latitude as temperatures rise.  This would be reflected in an increase in the frequency and severity of fires, which would send the carbon back up into the atmosphere.  Or people may not wait for fire to do the job; they could change the laws and start cutting the trees themselves.  What happens to carbon after it is extracted from the earth’s mantle is complex, fragile and reversible; it is the rate of extraction that has to change.

The good news is that this is just about California.  Governments in other places can try to do a better job.  Unfortunately, as the leading experiment in the US, the California system will be viewed as casting a verdict on all attempts to forestall climate change by pricing carbon, and its predictable failure will set back policies good and bad.  Those who care about this issue shouldn’t wait until the moment when failure becomes visible.  There is still a limited opportunity to construct an alternative narrative: this plan is so compromised that can’t work and isn’t a test of climate sanity.