Sunday, June 7, 2009

The Waxman-Markey Disaster: Offsets for Every Purse and Purpose

Willem Buiter has noticed another flaw with Waxman-Markey: its carbon reduction targets are purely hypothetical, since virtually all of them, from now to 2050, can be “met” with offsets. Buiter mentions my favorite argument against the offset trade: it relies on an epistemological impossibility, comparing the emissions reductions purchased by offsets against a hypothetical universe in which no such purchases take place. He doesn’t bring up the incentive nightmare, on the other hand: the inducement for every party along the offset value chain to deceive the others and any agency set up to supervise the process. All in all, it seems beside the point to describe carbon offsets as a loophole; they exist precisely because they generate profits for a wide swath of businesses.

As horrible as the offset giveaway is, and the permit giveaway as well, they are not the worst. In theory, both could be fixed if the political system were suddenly to become more responsive to the public interest. Future amendments could require permit auctions and shut down the offsets. What can’t be fixed without overhauling the entire system is the absurdity of issuing permits on a sector-by-sector basis for actual carbon emitted, as if that could actually be monitored and enforced. Environmentalists may think this is a grand idea because, well, those who emit carbon into the atmosphere are bad people and must be kept on some sort of leash. Never mind that it will take an incorruptible army of inspectors to determine just who is behaving how badly, that most small emissions will have to be left outside of such a system altogether, and that parceling out emission budgets this way is an open invitation to rent-seeking.

The simple, effective, non-moralistic solution is to cap the extraction of fossil fuels from the earth, or their importation from other countries. That will make these fuels scarce and expensive, and we can all decide how much we are willing to pay for them according to any reason, noble or base, that moves us. Why is this not on the table?


Gar Lipow said...

Hi Peter. A few points.

1) Don't see how the other problems are "more fixable" than sectorial caps. At a certain level of abstraction, they are all easy fixes: change the laws. Auction the permits, and replace sectorial caps with an overall cap. At a more realistic level you face the same obstacle to repeal. Once you put this architecture in place you increase the already large constituencies invested in the flaws and thus have a harder time fixing it than doing it right in the first place.

2) Upstream vs. downstream. You are right that permits should be auctioned upstream in the majority of cases where this possible. However, there are cases not driven day to day extractions of fossil fuel: industrial emission from heating limestone to make portland cement and other products, F gases emitted in the production of electronics, referigerant and plastics. Methane emissions from landfills and mines. (The latter continue for decades even after the mines are closes, so even if they are coal mines, permits per ton of coal don't stop them.) Also black carbon - soot and smoke that produces much greater forcing than plain old CO2. Can be a result of either fossil or biofuels, but regardless is a result of how fuel is burned rather than what fuel is burned.

So a substantial minority of permits do need to be issued downstream, because that is as far upstream as a substantial minority of emissions occurs.

3) Another point - forestry and agriculture are not valid candidates for inclusion in cap-and-trade at all. Combine errors in accuracy and precision of measurement is greater than real changes from year to year. Forestry and agricultural emissions can be measure over the long run and very roughly (large emissions, small emissions, around no emissions, small sequestration, large sequestration). You can set up an incentive system based on that level of measurements - regulations, subsidies, penalities or some combination of the three. But you can divide into nice homogeous units to sell permits for or tax or generate offsets. The one third or so of emissions generated by agriculture and forestry have to tackle through something other than cap-and-trade or comparable methods.

4)I'm going to try to explain the affect o giveways on volatility again. Last time, because I used an oversimplified example you concluded that I thought 100% of giveaways were kept. Nope, that was a result of trying to boil down the discussion to a few sentences. Even if only a tiny percent of the permits given away are kept by the recipients rather than resold, giveaways increase volatility. Because permits kept mostly represent what would be steady demand in a 100% auction system. By removing even a small percent of steady demand from a market we increase price volatility.

A severe increases in price volatility DO increase emissions, especially with a cap that is supposed to tighten. (The RECLAIM system is an example where this happened in real life.) You don't get long term reductions in emissions without capital investment. Price volatility undermines capital investment. So if nobody makes the right capital investments, when the cap tightens the ability to meet those caps with severe curtailment of production is not there. Given political reality, it is the cap that gives, not production.

Anonymous said...

«That will make these fuels scarce and expensive, and we can all decide how much we are willing to pay for them according to any reason, noble or base, that moves us. Why is this not on the table?»

Because the last moron to put this proposition to the voters was Jimmy Carter, and he suffered one of the worst election defeats ever against a guy who was saying exactly the opposite.

USA voters don't care about the earth, their own future, their legacy to their children: they want cheap fuel now and higher stock prices now, and f*ck everything else.

As Norquist said:
«The 1930s rhetoric was bash business -- only a handful of bankers thought that meant them. Now if you say we're going to smash the big corporations, 60-plus percent of voters say "That's my retirement you're messing with. I don't appreciate that". And the Democrats have spent 50 years explaining that Republicans will pollute the earth and kill baby seals to get market caps higher. And in 2002, voters said, "We're sorry about the seals and everything but we really got to get the stock market up.»

TheTrucker said...

The post concerning the outcome of elections was a misinterpretation of the history. The plain and simple fact is that Carter lost to Reagan for a great number of reasons and the very, very least of those reasons was the "windfall profits tax" or the drive for energy independence.

As to the 2002 elections, it was fear, fear, fear, and paint them Democrats as unpatriotic wimps that held the Congress for the Repukes. It had ZERO to do with economics or rationality. It was a fascist move all the way. Guns, God, and Gays. The three legged stool of Republicanism.

Paul Rothstein said...

The point is to begin the process of reduction. Political reality means giving permits to incumbents at the start, just as was done with the sulfur-dioxide cap-and-trade system, which works very well. The point about inspections and corruption is a good one and this is something to watch out for, but agents looking unload permits have some incentive to watch for entities that would emit without permits. The only really bad cap-and-trade idea was for lead and that was a very, very special case.

Anonymous said...

As Paul Rothstein says, the "cap & trade" proposal is a way to begin the process of reduction by attempting to placate the "market uber alles" ideologues.

Myrtle Blackwood said...

The forestry and agricultural sector are riddled with corruption. It won't work to allow that industry to provide carbon offsets. In Australia, there is ongoing exclamations in the blogosphere about the widespread corruption of forestry 'Managed Investment Schemes' (MIS). Search at

the work of Barry Commoner should be helpful in any discussion about program design to eliminate pollution. See:
'Making Peace with the Planet' ISBN 0394-56598-3

Page 54 - Environmental degradation is built into the technical design of the modern instruments of production. (With globalisation it is now built into the 'trading' sector).

Page 46: The change has been in the WAY goods are produced over time. There are very few 'new' kinds of goods. (except for electronics). "environmental pollution is an incurable disease and can only be prevented."

Page 170: the reason why we haven't prevented and eliminated damage to the environment. "We fail because we are convinced that the decisions as to what is being produced and what is being produced must remain in private hands."

Myrtle Blackwood said...


What and how things are produced.

Andrew Gibbons said...

You can have gasoline taxes palatable to voters by making them revenue-neutral -- which is not a term I seem to hear in US debate. Would someone like to start that ball rolling?

ees said...

Say the "worldwide we" decided that the 20% of emissions related to land use - deforestation, especially - should really be pared down or, heck, even put into the sink category, since natural sinks are chock full of juicy cobenefits for pretty much every living thing around. Is there a way to do that - a politically feasible way to do that - without offsets?

Effective REDD MRV measures are terribly elusive. Nevertheless - and I may be naïve - I think that your incorruptible army of regulators (and mediators, and experts, etc.) is not absolutely impossible. With appropriate training, firm scientific guidance, and a change from an adversarial to a cooperative mindset, we could make offsets work - at least domestically.