Monday, December 7, 2009

The Attack on Carbon Caps

I am not going to beat around the bush: my side on the issue of climate change is getting hammered. At first, it looked as though there might be a real chance to set up a system of carbon permits—just for fossil fuels, no offsets, all permits auctioned, the money redistributed back to the public. This is approximately what Obama proposed when he ran for president, and back in those days, whenever I would give a talk about climate change mitigation and outline the program, nodding heads could be seen everywhere. (And not falling asleep either.)

But that was then. Once the proposals started getting hashed out in Congress, it was one disaster after another. Permits were pushed downstream, with bickering over which activities should be under the cap. They were given away rather than sold. Nearly all of them could be offset. What little permit revenue remained was dangled in front of special interests to get them to sign on. Our simple, clean efficient carbon cap was in ruins.

And now I am being clobbered by the Left. Without a question, those who denounce “carbon trading” have won the debate among activists, as illustrated by today’s New York Times op-ed from Jim Hansen, the climate science guru. A carbon cap means cap-and-trade, and this means trade, which means market ideology and financial legerdemain, says Hansen, repeating the now-dominant line. What we need, he says, is a tax, which is pure, unsullied by grubby politics, and sure to be handed back to the people the way we (me and my ilk) wanted permit revenues to be.

So what will it be? Stick with my old beliefs and watch them fade into irrelevance, or join the new activist army that opposes mandatory carbon caps?

I’ve decided to keep on fading. They say it is a sign of mental illness to continue repeating behavior that doesn’t do any good, but once again I will make the arguments that have failed to persuade in the past.

1. A comparison between a nasty, highly compromised carbon cap and a pure, hypothetical carbon tax is meaningless. Once the carbon lobby gets its hands on a tax, the picture will be just as ugly. You can bet that whole industries will be exempted from the tax. You will be able to dodge the tax by making contributions to tree-planting or some other activity across the globe (offsets). The tax revenues will go into the same special interest trough that permit revenues have trickled into. And of course the tax will be much, much too low.

2. How on earth did activists come to believe that adopting a tax approach to environmental problems instead of a mandatory permit system was “resisting the market”? Think about this for a moment. What does it mean to rigorously enforce a tax? It means that people really have to pay it; the tax can’t be evaded. How that translates into carbon reduction, however, depends on the market. Maybe the price effects of the tax will be enough to get the reduction we need, maybe not. It is a big experiment, and favoring a tax means you are willing to take the chance that price adjustments alone will not be enough to decarbonize industrial economies after centuries of increasing carbon density. A rigorously enforced cap, however, is exactly that: it guarantees that no more than that amount of carbon will be allowed to enter the marine-terrestrial-atmospheric carbon cycle. The experiment, in that case, is on the side of prices—we will find out, through trial and error, how much prices have to rise for this to happen. So which approach places more trust in markets? And which puts a priority on meeting ecological goals rather than economic ones?

3. Offsets, under either caps or taxes, vitiate the whole effort. A ton of carbon temporarily diverted from the atmosphere (and lodged in a sink like a forest) is not the same as a ton sequestered from the carbon cycle in geological time (hydrocarbons under the earth). Determining additionality (that projects wouldn’t be undertaken without the offset) is a practical and metaphysical impossibility. Incentives to deceive and cut corners are rife. Many offset projects have other, detrimental effects, like driving traditional peoples from their forest homes or creating local pollution hotspots. The cap vs tax debate, in this context, is a distraction, since either mechanism can be undermined by offset loopholes.

4. Upstream controls are simplest, fairest and most effective in forestalling catastrophic climate change. Policy should target the sources, not the uses, of carbon inputs. This means controlling the extraction of fossil fuels and, in a national context, their importation as well. There are few companies in this business, and hardly any sophisticated technology is needed for monitoring. Doing this avoids the pork barrel debate over who should or shouldn’t be covered under the system, and it offers the most comprehensive option, with the greatest impact on mitigation. Once again, the cap vs tax debate is a distraction, since either approach has to deal with how upstream or downstream the implementation will be.

5. It is essential that all revenues collected from the system be recycled back to the public. It is now clear beyond dispute that there will never be sufficient political support for effective carbon policy as long as it is believed that household budgets will pay the price. No politician has the courage to risk the electoral backlash from high energy prices, not only in the US, but also in Europe, where programs have been gamed to keep impacts minimal. There is only one way out: promise to return to the public all the money sucked in by higher energy prices, and build that promise into the architecture of the system, so it is truly credible. Hansen is right that a simple per capita distribution of the revenues captured by carbon levies would do the trick, but, one more time, this is not simply about caps vs taxes. True, taxes at least avoid the problem that carbon permits may not be auctioned (and this is in their favor), but there is nothing intrinsic to tax collection that guarantees that the money will go where Hansen and I both want it to.

6. The biggest drawback to taxes compared to caps is political, however. If we have learned anything in the last few years, it is that there is immense inertia that stands in the way of serious climate policy. This is due above all to the power of the carbon lobby, but also to the complexity of the issue and genuine nervousness on the part of the public over the potential economic effects of so sweeping a change. It is essential, then, to pay attention to how the debate is framed. I think Bill McKibben is exactly right about this: we must put the scientific evidence at the center of the argument and demand policies that meet physical targets for climate mitigation. We may lose that battle, but it’s our best chance. If we go for a tax system, however, the debate centers around how big a tax we should impose. This pushes science into the background and foregrounds economic effects. I am surprised that Hansen prefers to wage that battle; I think it’s a loser.

One minor quibble about Hansen’s article, although it illuminates the rush-to-judgment taking place among climate activists. He writes:

"Consider the perverse effect cap and trade has on altruistic actions. Say you decide to buy a small, high-efficiency car. That reduces your emissions, but not your country’s. Instead it allows somebody else to buy a bigger S.U.V. — because the total emissions are set by the cap.

"In a fee-and-dividend system, every action to reduce emissions — and to keep reducing emissions — would be rewarded. Indeed, knowing that you were saving money by buying a small car might inspire your neighbor to follow suit. Popular demand for efficient vehicles could drive gas guzzlers off the market. Such snowballing effects could speed us toward a pollution-free world."

Hansen is a very smart guy, but here he makes several elementary mistakes. (1) His definition of altruism is weird. Most of us would think that if you voluntarily take on an extra share of a collective burden, allowing others to take on less, you were being altruistic. (2) There is an implicit and irrational moralism just below the surface: driving an SUV is wrong and the people who do it are bad. But SUV’s are a problem only because of their environmental effects; if the rest of us, by cutting way back on fossil fuel use, make it possible for a few to continue to drive these dinosaurs, so what? You know, maybe there are people who really need a big, heavy vehicle for the kind of work they do or where they live. Driving a big car is not intrinsically sinful, but only if it comes at the expense of the common good. (3) So let’s redefine altruism in Hansen’s way, as curbing climate impacts even beyond the targets set by policy. This is not difficult in a system of carbon permits. Put some money into a mutual fund whose purpose is to buy permits and retire them unused. (4) If there is a demonstration effect from switching to more energy-efficient technologies, this will work under a permit system exactly as it would under a tax. In either case, energy will become more expensive, and people will be looking to save. Hansen is right that herd effects could be extremely powerful, and this is why we need some system, whether caps or taxes, to get a critical mass of new technology adopters.

None of these arguments is very complicated, and I’m sure with a little reflection Hansen would have seen them too. But there was no reflection. What we have is an ideological stampede, with powerful framing and peer effects. Rational discussion has been overwhelmed, and within a few months we have seen virtually the entire activist climate community converting to a new party line: the solution is to abandon “carbon trading” and pledge allegiance to a carbon tax.

Everywhere I go I hear echoes of this line. Nothing I say makes any difference, because the debate is already over. My activist friends smile at me tolerantly, knowing that they don’t have to come up with answers because everything I say is irrelevant.

So here I am, wallowing in my dysfunctionality, making the same arguments that have failed to convince time after time. Can you think of a Plan B?


gordon said...

"...there is immense inertia that stands in the way of serious climate policy".

I think the "inertia" is really about the belief that everybody should bear a fair share of the burden. There is an increasing feeling that cap-and-trade is riddled with loopholes and will simply put all the burden on households without any compensation. This feeling militates against cap-and-trade and is a big contributor to what you call "inertia". Increasingly, cap-and-trade is seen as inequitable and unfair.

Your counter to Hansen illustrates this point. You admit that the SUV driver can get away with it because he/she is rich. Most people - including me - don't like that.

Frankly, I don't see much progress being made in emissions reduction unless we embrace wartime-style rationing and price controls. said...

What looks most disturbing about cap and trade at the global level is the large number of credits Russia is sitting on due to the deal the EU gave them to ratify the Kyoto Protocol and make it legal.

Those pushing taxes always compare an idealized textbook version with an ungainly actual cap and trade as the Europeans have in place (and are not about to give up for some promise by the US to go for a tax, which will never, and I repeat, never, pass the Congress in any form whatsoever). If a tax were pushed, the same interests who are getting breaks under Waxman-Markey and so on would pull the political strings to get ones under a tax.

Also, internationally, taxes would need to be harmonized at borders. Several years ago the Scandinavian countries agreed to do this and tax carbon. They have still been unable to agree on the border harmonization. If they cannot do it, do you think the US and China will be able to do it? This is fantasyland stuff, and makes me think that Pat Michaels's denunciations of Hansen have some merit. The guy is in way over his head and making an utter fool of himself.

kevin quinn said...

The Hansen op-ed was stuck on stupid: ignorant and harmful.

Anonymous said...

in over his head? And you're quoting Pat "this email scandal is the real scandal" Michaels? Please.

Nobody is comparing a pristine tax against an ugly cap and trade system. That's just patronizing bullshit. The comparison is between which systems are more likely to be more effectively gamed, and the answer falls pretty clear on cap and trade far as I'm concerned. Your arguments here just aren't all that convincing, because they don't address the core issue -- which one gets gamed worse?

Credits seem much more likely to be part of a cap and trade system than a tax system, btw. And enough with US politics can't take a tax stuff, that's probably not true, though it could be made to be, but if it is true then US politics won't able to take a cap and trade system worth a good goddamn either.

And it's not entirely crazy to think the herd effect is more powerful when social justice issues will allow the rich to use carbon emissions conspicuously. That could be true for trade rather than tax, though I'm not convinced.

Then again, I think you're all fruitcakes, and command and control + industrial policy is the way to go. Too bad we didn't nationalize those banks and set up one big government bank that could have helped make it happen. Shock doctrine can work both ways. said...

Anonymous (note: I have contempt upfront for people who post here as "Anonymous"),

Hansen is not an economist. He is a climatologist. What the hell does he think he is doing commenting on the economics of this, especially when he makes it clear he does not know what he is talking about? Gag.

Michaels attack on Hansen was overdone and unfair, but the attack back on him was also overdone and unfair. I am willing to take you on with regard to that one if you want. That Michaels shoots off his mouth and is very ideological should be a distinct matter from what these guys say about the climate (and I would lay odds that you do not know what Michaels's position actually is).

In the end your argument is made simply by assertion, without any support. Do you live in the US or have any knowledge whatsoever about US politics? If either is true, then where on earth did you come up with this assinine "enough with US politics can't take a tax stuff, that's probably not true"? Heck, even the watered-down and full of goodies cap and trade bill may not be able to get through the US Senate. Any tax proposal would be as dead as it was when Al Gore sent the idea up the flagpole back in the early 90s.

Regarding the claim that a tax cannot be "gamed" as easily as a cap and trade, I note that there is little evidence of gaming for the US SO2 program, although I think gaming is more likely for CO2. But then, you have no comeback at all to the argument that powerful industries would get themselves out from a tax, just as they have gotten free credits given to them under Waxman-Markey. The same political forces would be at work through the same channels, quite aside from a tax proposal being DOA anyway.

Well, maybe we are "all fruitcakes," although I think some here agree with you on C&C and ind. policy, but those will have even less chance of getting through the US political system than even a tax proposal. For better or worse, it will be cap and trade or it will be not a damned thing.

Gar Lipow said...

The debate over cap-and-trade vs. carbon tax is sterile because both assume putting a price on carbon is the primary driver of reductions.

We need massive public investment (whether from taxes on rich, reductions in war spending or revenue from permit auctions or whatever). We need all fashioned so-called command & control regulation where this can be done simply (in buildings emission rules per square foot or per inhabitant/full time employee equivalent, in transport per passenger mile or per ton mile, in electricity generation per kWh. Plus a few other specialized types of C&C where they make sense such Japanese style "front-runner" standards for appliances, standards for industrial electric motors and pumping, and requirements that boats when docked and airplanes when grounded, and diesels when parked run off the electric grid rather than their internal engines)

Carbon fees or cap-and-trade is the supplematry source. By making carbon pricing the center of the policy debate, the environmental community has made both a policy and a political mistake. Policy because carbon pricing is the least important part of controlling global emissions. Political because both carbon taxes and cap-and-trade are the least popular means of lowering emission. Every single poll that compares them shows that public investment is the most popular policy (people love the idea of public money for solar and wind and efficiency). Regulation is the second most popular. (CAFE much more popular than gas taxes, to take an easy example.)

Carbon pricing in any form, even cap-and-dividend is less popular than either. Of course whether this is accidental depends on who is doing the proposing. EDF, for example has always been about getting elite buy-in rather than building a popular movement. So it makes sense for them to take this approach. I'm not so sure it is smart for environmentalist who think building a grass-roots movement is important.

gordon said...

Gar Lipow: "By making carbon pricing the center of the policy debate, the environmental community has made both a policy and a political mistake".

Once upon a time, the "environmental community" certainly didn't make carbon pricing the centre of the policy debate, in fact the "environmental community" was in general opposed to it. Cap-and-trade was visited upon the global warming policy debate in the context of Kyoto, and was the brainchild of US representatives. It bacame part of mainstream policy debates only because the US insisted on it and since the US was at that time the biggest emitter, everybody wanted to get the US involved with Kyoto and were prepared to make big concessions to do so. Cap-and-trade was one of the concessions.

I wish I could quote chapter and verse offhand, but that is my memory of the course of the debate. Maybe Mr Lipow or others who have followed it in detail and have better notes than I have can fill in the details.

Gar Lipow said...

I hate to feed possible wingnut lurkers with this, but Gore parachuted in and pushed cap-and-trade. Worse he pushed offsets. If you search my stuff on Grist you can find a slightly longer narrative with links to sources.

BTW, while I think the debate over cap-and-trade vs. carbon tax is sterile as the main thrust, I will say that there is one point people who support more or less decent forms of cap-and-trade overlook. Yes, Cap-and-Dividend and other forms of cap-and-trade along those lines are not horrible. But the whole reason for favoring cap-and-trade over a carbon tax is because it is easier to slip game playing in. Note, not impossible. Offsets and the equivalent of permit giveways in particular are much easier to to do, and much harder to summarize the problem with in sound byte. The ability to give away permits was initially cited as the main advantage of cap and trade by early supporters. Offsets are newer, but again a big reason for supporting. The equivalent of giveaways would have to be refundable credits given to large polluters or straight out cash grants. A lot easier to call out. I'm sure there is a way to do offsets in a tax system too, but I'm damned if I could figure out one that would not be really obvious. In general if carbon pricing is seen as reinforcement rather than the main driver of change, then the simplicity of a carbon tax really is an advantage. Simple not in the sense of modeling purity (though even in a pure model a carbon tax is slightly simpler and more transparetn) but in the politics of slipping stuff in people can't follow.

If you want a real world comparsion, look at the Gore/Clinton proposal for a BTU tax and compare that to cap-and-trade under Kytoto or Waxman-Markek/Boxer-Kerry. Horrible as the Clinton/Gore proposal was, it is not nearly as bad as W/M. (Basically it would have slightly favored coal/over natural gas, but favored non-fossil fuel power sources like wind and solar over both.

gordon said...

Mr Lipow, "wingnut lurkers" don't write English as good as mine.

There are a couple of posts up at Naked Capitalism on cap-and-trade, including one which predicts the onset of carbon derivatives trading! Sheesh!

gordon said...

I have found this useful old post through following Gar Lipow's links:

Thanks, Mr Lipow, but I'm still looking for a more complete version of how cap-and-trade took over the debate.

Gar Lipow said...

Just to clarify Gordon "Wingnut Lurkers" was not aimed at you. You post in comments, by definition not a lurker.

Gar Lipow said...

And no evidence of being a wingnut either. Don't know if you have encountered some the major lunatic Al Gore obsessions out there.

Barkley Rosser said...


Long time no see. I do support public investment in alternative energy sources. I also support at least some direct C&C regulatory approaches, such as tighter building regs, which have been used with some results in Germany and other countries. But, these will probably not suffice. Is it not the case that the S02 cap and trade has worked pretty well?

Gar, I think you meant to say that the BTU tax would have favored natural gas over coal, right?


Your account of Gore's role at Kyoto was precisely because that effort was such a political flop in the US, whereas, for better or worse, cap and trade is sellable, at least somewhat (still not clear that even the messy proposal up now can get through). The important history that cannot be undone is that Europe and Japan did go along with cap and trade to try to please us (and failed, thank you Byrd-Hagel resolution), with Europe having now adopted cap and trade under Kyoto, not about to be undone. Again, public investment and regs can be done, but will probably not suffice without some sort of cap and trade. Taxes will not happen, not in the US, not no how, not no way.

Gar Lipow said...

Barkley, no BTU tax favored coal over natural gas. Tax was per BTU (unit of energy) not amount of carbon. Since natural has has more BTUs per carbon molecule (because a lot of the energy in natural gas is hydrogen) Natural gas would end up taxed more heavily per amount of greenhouse gas emissions than coal. Thus the BTU tax actually favored coal over natural gas, or at least provided not much advantage. (Still a little advantage because natural gas can provide more electricity per BTU than coal, but not much.)

And I agree that a tax is not happening right now. But neither is a cap-and-trade that will significantly cut emissions. The only reason cap-and-trade is on the table is because you can pass a cap-and-trade the is much weaker than it appears. And you might not even get that. Build a new coalition over green infrastructure/green stimulus. Pass that and build on it to get some C&C regulations. (There is even one bill out there to do both.) Then move on to the carbon price. If grassroots political energy that has gone into pushing for cap-and-trade had gone into pushing for green infrastructure, especially the energy that went into pushing for Waxman-Markey when people were not yet used to fucking 10% unemployment as something to grin and bear we could have won something by now. said...


Ah yes, of course you are right about the BTU tax. Forgot the details. Coal favored. Presumably a tax now would be on carbon, thus favoring nat. gas over coal.

Regarding how tight or strong either one is, it is all a matter of the rates set. Remember, in priinciple they are equivalent, or can be. A lower tax rate might be easier than a tighter cap on a cap and trade system, quite aside from all the bells and whistles and exemptions either one can have.

david said...

Oh dear I've made Barkley angry and had his contempt visited upon me. Yikes. Haven't seen that since the the halcyon days of being condescended to about comparative advantage.

Anyway, what Gar said. Credits are easier to work in in cap and trade, trading off volatility is more of a risk, and it's easier to diffuse the reputed carbon reductions across too many sources (just wait until the real estate folks have their full say...)

Command and control and public investment are the best bets, at this point most likely politically too, not just US but globally, I'd be willing to bet. And no, Barkley, I don't think you know much more about US politics than I do, and I see nothing in what you say that isn't the same level of assertion. No way no how uh-uh isn't much of an argument.

My original complaint stands. People who go on about cap and trade and its problems aren't comparing a pristine carbon tax to it, and the idea that there's an "economics" that nobody else but economists should talk about on the issue is about as strong as Gary Becker asking to have the minimum wage reduced.

Whatever on Michaels, he sure does seem like a prick to me, his recent comments on the emails being confirmation.

The fruitcake comment was meant to have a smily face after it....

I hate signing in. I post as david on the rare occasions I do, and see that I misunderstood your sign-in system. Sorry to be contemptible.

Peter Dorman said...

To all:

1. I hope my more recent post makes the economic reasoning about taxes vs caps as clear as possible. It is interesting that no one has responded to it.

2. What's this about taxes being more resistant to offsets than permits? The name for offset in the tax world is "tax credit", and, last time I looked, the US tax code was thick with them. said...


Actually, cap and trade is the more flexible (and thus politically sellable) version of command and control, which traditionally involved quantity controls, that is, the cap.

Regarding the politics here, in case you have not been following it, there might actually be some Republicans who will vote for a cap and trade in the Senate, after they get some goodies, such as more offshore drilling and more nuclear power (I am not opposed to the latter all that much). No GOPster will vote for any tax, period. If you think that is not true, name one, just one, anywhere in the Congress. said...


Do also keep in mind that it is quite possible for Michaels to be a prick, while also having not unreasonable views on the climate, just as it is possible for Phil Jones and Michael Mann to be in violation of proper professional conduct, even as they may also be mostly right about their scientific views. A great irony is that when the original hockey stick controversy blew up, Michaels and Mann were in the same department, Environmental Science at the University of Virginia. Neither is there now.

david said...

My old school, UVA.

I don't think there's a Republican who will vote for much of anything that is worth a damn, and we'll see about a vote for cap and trade. The health care debate has been instructive if dispiriting. I'm so old I remember when McCain was going to stand up on this issue, etc.....

Shifting tax burdens onto carbon and off of employment seems a more likely path. Not as good as a green bank! And of course I'll take a cap -- hard cap - if I can get one.

Peter, I don't think it's impossible to game the tax by any means, just that I think it'll be gamed less. I also think the tax shift possibilities could mitigate against carbon credits, and that the credits themselves are more likely to be pernicious when put into a trading system, because there's even more incentive for them, and for toying with them.

I'll read your piece tonight, I swear. said...

david (and everybody else),

There is something else that really needs to be kept in mind here. For better or worse, the Kyoto Protocol is now international law, and has been since Russia ratified it (unlike the US), which was partly pulled off thanks to the deal that gave them all those credits. We did not ratify given the unanimously passed Byrd-Hagel Resolution, still officially in place, that says we are not going to limit ourselves unless China and India do so.

The Copenhagen meeting is formally to develop the successor to the Kyoto Protocol. The rest of the world views it as international law and the US as scofflaw rogues for not being a part of it. Especially given that the cap and trade part of it, now in place in Europe, was put in at our insistence, it is completely unacceptable that people from the US should be at this point going and saying "no, no, no, you must completely change how things are done under the international law that we refuse to be a part of." This is the real context of this discussion.

BTW, of course cap and trade evolved out of a command and control system, strict quantity controls. It was eventually realized that cap and trade was the way to do those controls with the minimum of economic damage, and in a recessionary period of high unemployment, that is something that must be kept seriously in mind. As it is, passing anything through the US Senate is going to be a miracle.