Friday, May 30, 2014

The New York Times on Carbon Cap-and-Trade: How Many Errors Can You Fit into a Single News Article?

As I sit down to write this, I am daunted by the prospect of identifying and explaining every misconception, omission and distortion in this morning’s background piece, “A Price Tag on Carbon as a Climate Rescue Plan”.  The sad, but liberating, truth is that I can’t take on most of them.  Too much work, too little time.  So let me pull out a few choice morsels.

First a quick summary of the article itself.  According to the Times, California has created the world’s best system for halting the steady increase in greenhouse gases in the atmosphere.  They are giving away carbon permits to firms that produce carbon emissions, and firms can either use them, trade them to other firms, or emit without a permit if they pay for an approved project somewhere else (“offsets”).  The long term plan is to switch to a system under which the permits would be sold, and controls are in place to ensure that carbon prices do not fluctuate too much.  They currently go for $11 per ton of carbon equivalent, higher than the price of permits issued in Europe.  Revenue from permit sales will go into alternative energy projects.  The article quotes several economists extolling the California model, along with several natural scientists and environmental activists who think it is flawed but do not give any specific reasons.

Here are just a few problems with the article out of many I could jump on.

1. $11 per ton is truly paltry.  The implications should be spelled out.  For instance, for simplicity let’s take the price of a gallon of gas in the US to be $4. According to the Congressional Budget Office, a carbon tax of $11/ton would translate to an 11 cent increase in gas prices, about 2.8%, and this is somewhat higher than the corresponding increase in other energy costs.  A reasonable estimate of the long run price elasticity of demand for fossil fuels across the US economy is .5.  So, being generous, we would get a decline in energy demand of a bit under 1.5% if the whole country were on the California plan.  And this would be a one-time decline to a new, slightly lower level.  (And one that doesn’t take into account population growth, economic growth or any other factor working in the opposite direction.)  If you want to go lower you have to raise the tax.  If by chance the US wanted to do its part to reach the IPCC’s carbon budget target, on the other hand, our demand would need to fall by about 5% per year, every year.  In other words, there’s a gaping scale mismatch that a conscientious reporter would want to point out.

2. Handing out free permits is giving away money.  Permits are valuable.  If you give them to a firm and the firm sells them, that is a pure transfer.  And who pays for it?  Everyone who has to pay higher prices because they have permit costs built into them.  OK, it’s not very much money because the system is so timid, but it’s the principle of the thing.

3. In fact, even if the permits are sold, the ultimate cost is paid by consumers.  A carbon tax is simply a kind of value added tax (VAT).  In itself it is highly regressive.  If you used ordinary tax dollars from a neutral or slightly progressive tax system to pay for renewable energy, energy efficiency and other nice stuff, you would do much better.  It is well known, on the other hand, that rebating carbon revenues on a per capita basis is highly progressive.

4. The biggest problem with the article is its celebration of offsets.  It begins with a heart-warming story about a dairy farmer in Wisconsin who installed a methane digester with subsidies from California.  Extra carbon, over and above the “cap” was allowed to be emitted because money was funneled to this biogas operation.  The article was entirely credulous about all aspects of this transaction, but the story actually illustrates two of the key problems with carbon offsets.

First, the offsets are supposed to adhere to the criterion of additionality, meaning that the project would not have occurred without the funding from the offset program.  The article does in fact quote the farmer as saying he has long wanted to install a digester but the net cost was too high.  However, without impugning anyone’s honesty, as a reporter I would have wanted to take a look at the economics myself—after all, many farmers have installed these systems without added subsidies.  To be blunt, it is in the interest of the farmer to say that the offset money is needed in order to buy the digester; that’s how you get the money.  More than that, even if subsidies are needed to jumpstart biogas operations, surely a lot of this has to do with the fact that natural gas prices are unnaturally low because they do not incorporate the externalities associated with fracking.  (Or with climate change, for that matter.)  Thus the subsidies achieve additionality only if other responsible environmental policies are not implemented.  Go figure.

Second, the offset racket is based everywhere on dubious carbon accounting.  Think of it this way: the point of climate change mitigation is to reduce the concentration of greenhouse gases.  The vast majority of the increase in these gases is due to the extraction and burning of fossil fuels—the portion of the carbon that was in the earth’s atmosphere (or soils or other sinks) in long ago times and was gradually sequestered and buried beneath the earth.  Since the dawn of the industrial revolution we have been on a crash program to undo hundreds of millions of years of earth history, and we have to stop.  This is the yardstick by which all “mitigation” programs have to be measured.

Does a methane digester, in itself, reduce fossil fuel extraction?  No.  It offers a renewable energy resource, but there is no reason to expect that the extra energy from cow poop will offset fossil fuels joule for joule.  The most likely scenario is that this type of energy subsidy will increase total energy use, from fossil and renewable sources combined.  Partial fuel substitution may be better than none, but the carbon accounting of the offset system assumes it’s complete.

It gets more complicated, however.  The cow poop that goes into the digester is derived, like all organic matter, indirectly from the photosynthesis of primary producers.  By turning it into methane, we are shifting it from one pathway along the carbon cycle into another.  That has ramifications for the whole cycle, however.  If grain is grown for cows to eat, and the cows don’t return their droppings to the soil, some other source of fertilization will be required.  A dairy operation that takes in feed on one end and turns out biogas on the other is just one piece of the larger cycle; applications needed to keep the soils devoted to grain productive is another linked piece.  And the use of land to grow the grain that feeds the cows rather than growing some other crop that might have different carbon cycling implications (including other biogas feedstocks) is still another.  Without turning this already too long blog post into an agroecology textbook, I can’t possibly disentangle all the carbon consequences of a feedlot-dairy-biogas operation.  The one point that should be clear, however, is that the bottom line, whatever it is, has almost nothing to do with the carbon accounting framework of the offset administrators—it would be as murky to them as it is to me if they actually cared about it.

Offsets are not about efficiency in climate change mitigation; they are a side payment to influential economic interests in order to buy their support for a cap-and-trade system.  As such, they are more loophole than not.

This is enough for one morning.  There’s so much more, but it will have to wait.


Sandwichman said...

Not to worry, Peter. If you did identify and explain every single misconception, omission and distortion in the background piece, serious pundits and most of the economics profession would trundle on as if you hadn't written a word. Oh, except maybe someone would cite your piece as supporting the claims that you debunked...

Sandwichman said...

Heck, you can even take comfort in the fact that you won't still be around when a posthumous "New Dormanian" school of economic thought erupts, founded on the "widely-recognized" principle that you had endorsed the California cap and trade model as the world' best system for halting greenhouse gas emissions.

Unknown said...

Peter, you consistently misspell 'bogus' as 'biogas'.

Peter Dorman said...

Nice, JK! Actually, I'm not against methane digesters, certainly not in any monolithic way, but the carbon accounting applied to them is a lot more bogus than biogas. I have colleagues at my institution who study farms as energy and nutrient systems, and I've learned to respect the complexity of their work.

Same goes for forestry, by the way. The accounting for forestry offsets is just as dubious.

john c. halasz said...

So why not a carbon tax-and-rebate scheme such as in British Columbia, rather than the cap-n-trade nonsense, (which, among other problems, is likely to afford entry to financial speculators)?

Peter Dorman said...

JCH, I've written a fair amount on this site over the years on what I would regard as a better carbon rationing system. As they say, you could look it up. (If you're interested.)

The one thing I'll add is that I've gravitated more recently toward incorporating an explicit intertemporal carbon budget in an ideal policy model. Interventions to manipulate flows, both taxes and annual caps, fail to capture the intertemporal dimension. GHG's are a stock, not a flow, externality.

Short of that, I think caps are somewhat better than taxes for reasons I've discussed in the past.

Rebates? Yes, definitely. And hold the offsets.