Andy Revkin at the NY Times has given a lot of ink to the Cap & Dividend plan (see here and here) by Peter Barnes a founder of Working Assets. Revkin says Barnes, “has long studied various bills and proposals for cutting emissions of carbon dioxide to limit global warming. He sees fatal flaws in every one.”
I don’t see any fatal flaws in either Obama’s plan or Mrs. Clinton’s — they are both terrific and comprehensive, unlike Barnes’. His goal is the same as theirs — to reduce emissions 80 percent by 2050. But his solution is fatally incomplete:
He proposes a “cap and dividend” system that charges a rising fee on sources of greenhouse-gas emissions (to propel a long-term shift away from such pollution) and returns the revenue to citizens, rich or poor, through a direct payment not unlike the checks that Alaska residents get every year from fees paid to the state by oil companies.
That’s pretty much it. What caught my attention in Revkin’s piece is Barnes’ answer to the last question posed:
What about laws such as better efficiency standards? (Nancy Anderson)
N.Y. Times columnist Tom Friedman has made a crucial distinction between incremental policies and transformative ones. Cap-and-dividend is transformative. It will get us to 80% emission reductions and create a clean energy infrastructure in the process. Raising efficiency standards for autos, appliances and buildings is a good thing to do, but it won’t transform our economy or cut emissions 80%.
That is, ironically, almost exactly backwards. Barnes apparently thinks plans like Obama’s and Clinton’s are loaded up with things like much tougher fuel economy standards and utility decoupling and federal clean-clean tech programs because the senators just love regulations and government spending (I know many of you conservatives out there think that). In fact, trying to stabilize at 450 ppm only using a price for carbon, as Barnes proposes, is wildly impractical and a political non-starter.
That’s because, at its most basic level, a price for carbon most directly encourages fuel-switching (especially from coal), but does not particularly encourage efficiency. That’s why most traditional economic models require a very high (read “unduly brutal” and “politically unacceptable”) price for carbon to get deep reductions.
Indeed, in the months and years to come, you are going to see an unending stream of such models, some funded by fossil fuel companies, and some from credible-seeming places like the U.S. Energy Information Administration (EIA), all designed to scare the public into opposing serious action on climate. How bad will it be? In 1998, EIA concluded that merely meeting the Kyoto target, a 7% reduction below 1990 levels of GHGs by 2008-2012 would — if such a reduction were achieved strictly through domestic reductions in energy-related emissions through a price mechanism — require the price of carbon to reach $348 per metric ton, which, in their analysis, doubles the price for electricity! I kid you not.
The EIA analysis is dumb for many reasons, as I have testified [sadly I can't find the hearing, "Kyoto and the Internet: the Energy Implications of the Digital Economy" online -- I'll probably blog on this when EIA does their hit job on whatever comes out of the Senate]. But it contains one essential truth: Price alone is a lousy way to cut emissions. Probably the best way to see this is by looking at the (meager) impact of carbon prices on gasoline prices.
The key facts to remember are that:
That means a price of $400 a metric ton of carbon (whether achieved through a tax or a cap & trade system) would increase the price of gasoline a mere $1 a gallon. How much efficiency would that drive? Not bloody much! How do we know? How much efficiency did going from $2 a gallon to $3 a gallon drive? [Hint: Not bloody much.] Second, I was just in England, and they’re paying over $8 a gallon — how much more efficient are their cars than ours? [Hint: As of 2002, the average fuel economy of European Union vehicles was 37 miles per gallon, just a tad more than what the new energy bill requires, and their taxes are typically some $2 a gallon above ours.]
Note that $400 a metric ton of carbon would add over 10 cents per kwh for traditional coal. So obviously the electricity sector has the most straightforward emissions reductions opportunities — and gets whacked first and hardest if you only use price. But even if that were politically possible, and even if you go to near zero in the utility sector in four decades (no mean feat!), you still need to cut absolute transportation sector emissions at least 60% — and we’ll have some 50% more people in 2050 — so per car emissions will probably need to drop more than 70% (and that’s assuming we can get the same percentage reductions in air travel and big trucks). So I think you understand why I say that we aren’t going to meet a 450 ppm target by just raising carbon prices alone.
If you want efficiency, you need government standards and smart utility regulations. And absent efficiency policies, you need an absurdly high price for carbon that is politically untenable. [Note also that no country has ever successfully switched to an alternative fuel for consumer vehicles without a government mandate -- Europe certainly hasn't done it with even very, very high prices.]
Barnes, however, is a price-only guy:
How do you ensure that dividends get used towards carbon-reducing products and services, not more gas-guzzling SUVs? (Marguerite Manteau-Rao)
It is higher prices for carbon, not restrictions on how dividends can be used, that will induce consumers to conserve.
But that raises the logical question, won’t high prices be politically untenable? Barnes’ answer is remarkable to say the least:
… under a tax, politicians set the prices, whereas under a cap, the market does. Politicians shouldn’t be in the business of setting prices. They’ll never get it right, and they have better things to do. If we want to cut emissions 80% through taxes, politicians will have to keep raising carbon taxes ever higher for half a century. This supposes unimaginable acts of political courage, year after year.
With cap-and-dividend, there’s no need for sustained political courage. Once the system is created, politicians are off the hook. If voters complain about higher fuel prices, politicians can truthfully say, “The market sets prices, and you determine by your own energy use whether you gain or lose. If you conserve, you come out ahead.”
As if! Just try doubling electricity prices for consumers and businesses by voting for Barnes’ plan — then not bothering to embrace a bunch of efforts to overcome the many barriers to energy efficiency — and finally saying “hey, it wasn’t me, blame that pesky market — and your own failure to conserve.” Two words: conservative landslide.
Honestly, we are way past the time when we can risk the climate on such politically naïve thinking. California has shown that amazing amounts of efficiency can be achieved with aggressive government programs, utility decoupling, and moderately higher electricity prices (but not higher electricity bills). That strategy makes much, much more economic sense — and is far more consumer- and business-friendly, hence much more politically sustainable — than trying to do everything with price, a strategy that is doomed to fail.
That’s what Obama and Clinton understand. In this political season, it’s good to know we can learn some things from the contending politicians.
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There are two other quick reasons I can see this as not working politically.
Texas is going to know that they are going to be hit hard with this tax because it has the highest carbon consumption per person usage. They’ll be in love with a system that sends money to California, a low carbon consumption per person state. They’ll also be hit on the supply end with so many companies in energy. Same with Wyoming and all the other high carbon use, high carbon production states.
The state I live in is one of the states that gets the least back from the federal government in spending than the income taxes it pays, but only probably on 5 percent know that. And if they did, they really don’t have one program to point at and say that’s why we got screwed. This program would be so obvious and open who wouldn’t know what the figures were.
If you’re going to tax carbon use what would be less political opposed would be the states carbon taxes would be money that would stay in the state. Not that that’s going to celebrated either.
The other thing is a brand new program that would have to track all kinds of people to get them their checks. Oh, yah, that’ll be easy. Years ago, I knew people who worked in a circus and were moving all the time or those that follow the food harvests. What about the homeless or those without bank accounts. And there is no chance for fraud.
I would like to see somebody include passage of HR 1009 in their plans, the hemp farming bill introduced by Ron Paul.
I gather you dont much like Libertarians on this blog, but he has 11 cosponsors who are all Democrats except one. The bill makes perfect sense for many reasons including global warming.
his cosponsors are Dennis Kucinich, Tammy Baldwin, Fortney Stark, Lynn Woolsey, Barney Frank, Raul Grijalva, Maurice Hinchey, James McDermott, George Miller, Janice Schakowsky, and Dana Rohrabacher.
The Committee on Energy and Commerce referred it to the Subcommittee on Crime, Terrorism, and Homeland Security back on 4/20/07.
Joe: What is your opinion of H.R. 1009?
To emphasize Joe’s point: even with California’s higher electricity prices, it still takes utility programs to get electricity consumers to reduce their usage (and save money) with efficiency improvements. You might think that the monetary savings would be sufficient to motivate companies and individuals to do this without utility prodding, but it isn’t. My guess is that our electric bills are just not one of our top 10 cost items, and so they don’t get much mind share without outside help.
There is another reason that incentives, policies, and regulations make a difference: they create sufficient demand for efficiency to motivate companies to deliver products. Lots of consumers would like to buy more efficient products, but if they aren’t available (e.g. along with other attributes that are also important), they purchase less efficient ones that are available. The willingness of consumers to substitute allows manufacturers to get away with having less efficient products. When you begin to mandate efficiency, everyone benefits.
Ronald says Texas is the worst in the nation per capita, but I think it is Wyoming. See Figures 6 and 7 of
http://www.energy.ca.gov/ 2006publications/ CEC-600-2006-013/ CEC-600-2006-013-SF.PDF
Of course it might be a difference in exactly what is measured, but Texas is also below North Dakota and others. In absolute terms (Figure 5) it is the worst.
Possibly. However, a reasonable estimate for the delivered price of biocoal is about the same as the current (delivered) spot price for anthracite, metallugical coal, say US$100–130 per tonne. At those prices, biocoal competes direcctly with coal and is, anyway, carbon-neutral.
So my estimate is that a rather modest tax on fossil coal will cause coal-burners to switch to biocoal. (Or other forms of burnable biomass).
This might not promote overall energy-efficiency, but the current goal is to stop adding fossil carbon to the active carbon cycle.
Joe Romm misunderstands cap-and-dividend and my overall approach as well. First, cap-and-dividend is not a ‘price only’ solution. Its most important feature is a descending economy-wide (upstream) cap on carbon as it enters the economy in the form of fossil fuels. This is a physical (and simple-to-administer) limit on the total amount of burnable carbon that can eventually enter the atmosphere. A rising carbon price follows from the descending carbon cap, but it is the cap that transforms the economy and makes sure we reach 80% reductions by mid-century. The market then sorts out who burns the declining supply of carbon, and which technologies (including efficiency improvements) replace carbon.
Cap-and-dividend will transform our economy and ensure that we meet our emission reduction goals on time. It should be the keystone of US climate policy, but it does not eliminate the need for other measures that Romm cites and that are included in Obama’s and Clinton’s programs. Those are important too, and as Romm suggests, they will keep carbon prices from rising as high as they otherwise would. But without that declining upstream carbon cap, there’s no assurance that they will get us to our goals on time, and markets won’t transform our energy infrastructure as quickly as they will with an inexorably declining cap.
Romm also misses my point about ‘taking politicians off the hook.’ They’re not off the hook because they can blame markets for higher prices (though that shrinks the hook compared to voting for taxes). Mainly, they’re off the hook because of the dividends. As prices rise, so will the dividends. A majority of Americans will come out ahead because of the dividends, and everyone will have the chance to come out ahead by conserving. Absent dividends that automatically rise with prices, the middle class will eventually rebel against carbon reductions.
The policies Romm (and Obama and Clinton) recommend are good, and I support them. They will stimulate emission reductions and keep the price of carbon from rising too high too fast. But they are not sufficient. They require both an upstream cap and dividends to (a) make sure we meet our goals on time, and (b) protect the middle class.
Obama and Clinton have caps. They just don’t use all the revenues the way you do. I think their choices are better.
Joe,
I think you jumped on Mr. Barnes’ proposals in a way that suggests that nothing can improved in current proposals. Obama and Clinton’s plans are miles better than what we have now but have lagged Edwards who has led on this issue. They are by no means finished masterworks. Some of Mr. Barnes proposals might be valuable to help ameliorate the impact of stringent carbon pricing on ordinary people. Efficiency standards themselves are also not nearly as effective as energy pricing in encouraging efficiency. There are so many ways that they have been finessed in the past.
Yes gasoline has a lower carbon content than coal and getting people off gas is going to be tough if we use carbon pricing alone. As you have already observed a gas tax is one way to drive efficiency…not popular but maybe necessary…Mr. Barnes dividends would help ameliorate the impact of that tax on small business and the middle class.
Michael- I agree the dividend idea is a good one. Would help sell the idea to voters.
I think one of the first things that should be done is rationing for gasoline and energy use. We had gas rationing during the 1970s and also during world war 2. People can adapt. And rationing does not increase anybody’s bills. They just cant use any more than is allowed. Simple. We could get immediate reductions of emissions through rationing. We start there, and then implement a comprehensive plan like Obama’s – or whoevers.
Another effect of rationing would be to encourage more people to buy electric and hybrid vehicles, or at least more efficient ones. It helps to encourage those markets.
Doesnt matter who writes the plan, as long as it gets us to the point we need to be. And as long as it has enough teeth to work.
I would also like to see a temporary national sales tax, it might take only 2%. It would be pretty much painless for consumers, but would quickly raise some rreal money and that money could be put directly into programs to develop greener technologies and to create jobs.
Earl,
Thanks for the link to the report. It is interesting.
I was wrong in the per capita co2 emissions, I think I got it mixed up with something I heard about total emissions and how New York and California
used less total carbon fuels even though they had greater populations. Thanks for correcting me.
How much in revenue are CO2 auctions expected to raise? A dividend of $10 per month would cost $30 billion a year, $25/month = $75B. Is there really that much money in these auctions? I’d be happy to learn that the answer is yes.
Joe,
You seem to miss the point entirely, the descending economy-wide cap on carbon is what gets us to 450 ppm. How could you miss this?
Efficiency standards, CAFE, etc. all are fine to- but without a real hard cap we’ll never do it.
The auction & dividend parts simply help us decide what to do with this newly monetized asset (namely the right to dump carbon into our atmosphere). Lieberman-Warner gives most of this new asset away to polluters– supporters of auction think the polluters should pay. 100% auction is what Obama, Clinton & Edwards all have come out in support of.
Now, the only real decision is who should get the money. Barnes is saying give it back to the people. Good idea to look into this, but maybe you should review again and provide a more thoughtful critique.
Sam — I don’t miss the point, but Peter, and perhaps you, do. Everybody with a serious plan has the cap — yet Peter criticizes all those other plans as flawed.
The cap does NOT get us to 450 ppm. The cap drives a carbon price that gets us to 450 ppm — if the thing is enforceable and has enough political viability to endure. But if your design makes the price politically unacceptable, then you never get close to 450 ppm.
The cap is a given. It is all that other stuff that makes it workable.
I’m not interested in a chicken & the egg argument…
So we agree that a cap is a given.
And that cap will increase energy costs, drive up carbon costs & create billions of dollars in new assets (right to dump carbon).
What do you propose doing with that asset?
And why would it be more politically viable than giving it back to people?
Of course, I agree that higher CAFE & efficiency standards are helpful– they just aren’t the transformational solutions needed to tackle the climate crisis. I mean 35 mph by 2020 is not the answer.
Joe,
Your critique of Barnes still seems to be based on the idea that it is not the Obama or Clinton plan, therefore it is not good. It may be that aspects of it can improve the Obama or Clinton plan. Barnes’s plan, for instance shows ordinary people in a way that is traceable that they will not be unduly penalized by increases in energy costs caused by carbon pricing. Efficiency gains, while they can also have this effect, may help some but not everybody.
A “Cap & Dividend plan” is the same as a carbon tax, which I have panned here: http://local-warming.blogspot.com/ 2007/ 08/ gas-price-demand-and-carbon-taxes.html. The dividend element makes it basically a socialist wealth redistribution plan.
Shannon,
Be careful how you link “socialist” and “redistribution”… Not all redistributive plans are “socialist”. It is tendency of libertarians to talk that way…are you a libertarian?
I read your piece and it is not a “pan”. A “panning” something means that you locate a fatal flaw in something or give it a terrible review. Your piece doesn’t say that…it just finds some problems with carbon taxes but sees some benefits.
I’m wondering whether Mr. Barnes will distinguish his plan from a carbon tax here.
I am not a libertarian in the slightest. I am an independent leaning towards Democrat. I do see a few benefits from carbon taxes for revenue generation and fuel switching but gasoline consumption is otherwise not very sensitive to price, which is the point Joe was making. We must actually reduce carbon emissions, and traditional command-and-control taxation systems don’t work for pollution limits with “relatively inelastic” demand for the polluting energy source.
I threw in the socialist comment to be funny but I also want people to realize the unintended consequences of legislation, especially ones that specifically deal with finances. Especially this particular proposal. I think most of the Democratic Presidential candidates understand that wealth redistribution would hit serious acceptability snags with Republicans, who still have filibuster ability in Congress. Better to use revenue generated to develop more energy efficient/ non-polluting technologies, assist poor with weatherization, and, frankly, subsidize renewable energy to level costs until economies of scale reduce prices.
Michael & Shannon- Theres nothing wrong with a ’socialist’ redistribution plan. ’socialist’ as in ’society’ whats best for the most people.
The problem is with getting the solution bogged down in politics when what we need is serious action now.
What WILL reduce emissions right now is rationing of gasoline and energy use. Nothing les will do. Comments?
I was confused about what cap-and-dividend was, even after reading Andy Revkin’s posts, so I looked up the original paper by Boyce and Riddle. The main weakness with cap-and-dividend isn’t the lack of efficiency standards. It’s the weakness of the market aspect.
Here are the basic ideas behind cap-and-dividend:
- Cap carbon where it enters the economy – i.e., cap only mine heads, oil refineries, natural gas pipelines, and ports where fossil fuels enter. This would be about 2000 “collection points” – not even close to an economy-wide cap.
- Limit the lifespan of permits so they can’t be banked, thus making the secondary market for permits relatively small and trivial.
- Auction off 100% of permits, and return 100% of the revenue to citizens in equal shares for every man, woman and child.
The problem with this scenario isn’t so much that it lacks efficiency standards (though efficiency standards are good), but that it lacks much of a market. The cap would apply to only a tiny sector of the economy, and the limited lifespan for permits curtails banking of permits.
Markets are powerful because they include carrots as well as sticks. With an economy-wide carbon market, conservation isn’t just about avoiding higher fuel prices. A market creates an opportunity for selling permits to others. Without an economy-wide market, the cap becomes no different from a tax in terms of motivation – it’s just a price increase.
Since manufacturers would not be capped and would not participate in whatever limited secondary market there might be, their only motivation to conserve would come from higher fuel prices. And as you say, price alone is not enough. But the big missing piece is not efficiency standards, desirable as they may be. It’s a market.
Sheryl Canter
Environmental Defense
Climate 411 blog – http://climate411.org
Sheryl,
Seeing that your from Environmental Defense makes me want to double check your assumptions as you folks have an ideological commitment to the market.
Forgetting cap and dividend for the moment, you’re saying that cap and trade or some other scheme that has tradeable permits gives both incentives and disincentives. And you dismiss carbon taxes as only offer disincentives. But we’ve established that carbon dioxide emissions are a negative and we don’t yet have a ready technological fix for them. Cap and trade in SOx and NOx incentivized the use of existing scrubber technology.
So why is it that most economists prefer the carbon tax? Does it just go against your religion?
)))> So why is it that most economists prefer the carbon tax?
I don’t know that they do. The only survey I know of that asked economists if they’d favor a carbon tax (Wall Street Journal, Feb 07) had a serious flaw – it failed to include cap-and-trade as one of the alternatives. Oops. Here’s the link:
http://online.wsj.com/ public/ resources/ documents/ info-fore-0207_frameset.html
You can see the actual question if you download the spreadsheet.
Many well-respected economists favor cap-and-trade to solve this problem.
Sheryl,
Please explain more why you think an upsteam cap would not be economy-wide. Barnes claims to cover 100% of the economy– and that an upstream cap is more efficient at doing this than a downstream cap.
First, a clarification. The cap-and-dividend plan didn’t originate with Barnes. Andy Revkin made that misstatement in his post, and it was picked up again on this blog. The Barnes post about cap-and-dividend is here:
http://onthecommons.org/node/1239
Barnes says in this post that he’s talking about a plan described in a paper by Boyce and Riddle. That’s where I got the link to the original paper.
But back to your question… Cap-and-dividend only caps 2000 upstream businesses, so only these 2000 businesses can participate in the carbon market. Under this scenario, manufacturers – to give one example – could not participate in a carbon market. They would be hit with higher fuel prices, period. And higher prices alone are not effective in solving the problem. There has to be the incentive for innovation that a market brings to the picture.
If there was a carbon market that manufacturers and farmers and everybody else could participate in, downstream businesses would have other options. An innovative factory that reduced emissions below its cap could sell its permits to a factory that needed more time to reduce emissions. A carbon market builds in the flexibility that encourages innovation.
Every entity that creates significant emissions should be able to participate in the carbon market.
Also, cap-and-dividend further limits the carbon market by the time-limit on permits. One of the lessons learned from the pilot carbon market in the EU is the importance of being able to bank permits. We posted about this in our blog:
http://environmentaldefenseblogs.org/ climate411/ 2007/ 06/ 27/ eu_carbon_market/
Sheryl Canter
Environmental Defense
Climate 411 blog – http://climate411.org
Sheryl,
Ahhhh. You think we need to allow everyone to trade carbon permits to use the market. I think you misunderstand markets- there already is a perfectly good market that all manufacturers, farmers, everyone participates in…. It’s called, well, THE MARKET. Even you and I are a part of it.
By creating a cap on all carbon emissions, and auctioning off the permits, you would be a) capping emissions & b) actually charging polluters for carbon dumping permits.
Auctioning permits instead of giving them away creates a real cost for carbon you’ll sending the correct MARKET signal (increased carbon pollution cost) to spur innovation within all industries– and with people to. And it is economy wide– in fact we all would participate in it (we just wouldn’t be trading carbon permits– instead we’d all be trying to emit less carbon because it would cost money instead of being free)
And by using cap & auction– instead of a carbon tax– you’re tying the cost to actual scientific numbers (cap reductions) rather than continually trying to pass/increase taxes.
In short you’re changing the actual real world market– instead of creating some sort of pseudo-carbon trading market that Cap & Trade creates– and incidentally has failed miserably in Europe.
Sheryl,
You are operating under a very questionable assumption about cap and trade, markets, prices and innovation. I’m not even sure as Sam above points out that it has to do with an ideological commitment to markets as I have observed Environmental Defense to operate with but maybe you are just anti-tax.
In the example you give, I see no difference in the spur to innovation between a business experiencing higher fuel costs and investing in more fuel efficient products or their own renewable energy supply OR having the cap and trade system where they get to sell or have to buy permits. Facing higher variable costs is going to send that business owner looking for alternatives.
Let me give you an ancient example from Europe where fuel prices have been artificially high for decades because of taxation. In Germany where I used to live, entrepreneurs founded Mitfahrzentralen (lift centres) where people were brought together to carpool on long and medium-distance drives. It ended up undercutting the prices of the expensive state supported (and very nice) German railroads.
Furthermore the same taxes have spurred consumers and automakers to produce more efficient vehicles than we have in the US.
The main advantage that cap and trade might have is the CDM mechanism which can involve China and India in reducing carbon emissions even though they are not part of the actual agreement.