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Monday, October 20, 2008

Cap and Trade Isn't the Only Game In Town - Continued Dialog with Eric Pooley

Our sometimes blinding focus on emissions caps and carbon prices can obscure the critical technology innovation challenge that lies at the heart of our quest for climate stability (and continued and expanded global prosperity). In the face of a rapidly shifting political climate, it would be a tragedy to hold any one solution to this core challenge hostage to any other.

Eric Pooley's recent piece in Slate, "Save the Economy, Save the Planet," sparked a lot of thought here. Pooley is right that climate advocates would be best served finding a "Trojan horse" to advance climate solutions within an economic recovery framework. But his recommendations that the next president advance a cap and trade program sparked my response, "Can Cap and Dividend Really Save the Economy or the Planet?"

I invited Pooley to respond to my post, which was highly critical of the political chances of a Cap and Dividend scheme in today's political and economic climate. Below the fold you'll find our continued dialog on the political challenges and opportunities facing climate advocates in the coming year.

Eric Pooley, a longtime financial editor and columnist and a current Shorenstein Fellow at Harvard's Kennedy School of Government, responded to my post with this comment:

Jesse, you and I have a basic disagreement. I think a mandatory declining cap on GHG emissions is essential, and you don't. That's fine, but then you go on to disagree with me on some points I never make. I don't advocate "a Cap and Dividend proposal designed to enact the highest carbon price possible and rebate nearly all of the revenue to consumers, leaving very little to spend on clean technology development and deployment." As a matter of fact, I don't think the carbon price needs to be sky-high to drive clean tech.(But unlike you, I do think a carbon price is a crucial accelerator.) Apparently, since I refer to Peter Barnes in my column, you assume I advocate for all of his policies; that's reading way too much into one name-check. I do agree with Barnes' basic argument that consumers must be cushioned from energy price increases that result from cap-and-trade -- and so do a good many Democrats and Republicans in the House and Senate, so we'll see how the politics play out. You argue that creating such a cushion wouldn't leave enough money for cleantech RD&D. I think you are wrong, and I think you create a false choice -- either a cap or a huge investment in clean technology. I'm in favor of both, and in favor of using the former to finance the latter. Having looked hard at the numbers, I'm convinced that a cap-and-trade bill can raise enough money for both RD&D and consumer relief, without resorting to a sky-high carbon price. By the way, how do you propose we raise the necessary cleantech RD&D money? What's your magical funding mechanism?

Here's my response. It's long, but this is perhaps the only place I've put all this down in writing. It's helped me collect and clarify my thoughts tremendously, so I hope its worthwhile to read...

Questions and Clarifications

Eric, thank you for responding to my post. I hope that, in fact, we do disagree about less than I had initially thought, and I apologize if I misrepresented or mistook your position. I hope our continued dialog can clear up where each of us stand and what we recommend and zero in on some critical questions about policy and politics in today's new political and economic climate.

I think we both agree that advocates of climate solutions (ourselves included) must re-assess our political strategy amidst today's era of heightened economic insecurity. We face an urgent moment, with both opportunities and challenges ahead. Only by developing the right strategy can we hope to advance policies that will drive key climate solutions in the coming year. Your column is a key part of that process and I want to re-iterate that I think your political analysis is dead-on: our biggest (if not only) opportunity lies in advancing solutions that simultaneously rejuvenate our ailing economy and drive us towards climate stability. So let's get into the details...

First, I'd like to apologize if I implied that you support the exact same Cap and Dividend proposal advocated by Peter Barnes (i.e. a mandatory declining cap with 100% of revenues sent out as dividends to consumers). In your column, you clearly recognize the critical role of investments in clean energy technology development and deployment and support funding those investments with revenues from the auction of emissions allowances. Barnes, by contrast, has consistently argued that any federal investment in clean energy and energy efficiency should come from other funding sources, if they are necessary at all (which he seems to question). That puts Barnes and his fellow "Sky Trust" advocates solidly in the camp of those who believe carbon pricing will be the predominant (if not only) driver of emissions reductions. Given your recognition of the critical role of investments in clean energy technology as well, I shouldn't assume that you share Barnes' view.

However, when I read your column, you referred to a cap and trade program raising between $100-600 billion per year. You wrote, "Some of that money would be spent on energy R&D," referencing $15 billion per year here, and then continued, "but the next president will have to give most of [the auction revenues] back to the people if he wants to pass a climate bill during a recession." I assumed, based on that passage, that you would advocate $15 billion per year for clean energy RD&D with the rest of the auction revenues sent back to consumers as dividends or rebates. From your response, it sounds like I may be mistaken in that assumption, and I'd welcome clarification on where you stand. What portion of the auction revenues from the cap do you believe we should invest in clean energy technology development and deployment (including energy efficiency) and what portion should be returned directly to consumers? What other uses of auction revenues would you advocate?

To clarify, I definitely agree that it's critical to shield low-income folks from any increased energy costs due to a cap and trade program. A certain amount of direct cash rebates may be a critical part of those efforts, but according to the Center on Budget and Policy Priorities, only 14 percent of auction revenues from a cap and trade bill would be necessary to fully offset the impacts of higher energy costs on the bottom fifth of US household by income.

Furthermore, cash rebates are not the only (or even the best) way to shield consumers from energy price increases. Other options include constraining the price increase in the first place, either through explicit cost containment provisions or (much preferred) through investments to help drive down the ultimate cost of compliance (i.e. efforts to make clean energy technologies cheaper or reduce energy consumption). Perhaps the option with the greatest direct benefit for low income families, and the one supported by Green For All in their Vision for National Climate Policy communications document, is to provide low-income energy assistance that includes "not only economic assistance to offset impacts from energy rate increases, but direct energy-efficiency investments to drive down energy bills overall." Alan Durning of the Sightline Institute similarly argues at Worldchanging that efforts to "Cap-and-Caulk" - i.e. use auction revenues to fund weatherization assistance, consumer energy efficiency rebates, and other energy efficiency measures for low-income energy users - is a critical component of protecting low-income families from the impacts of carbon pricing.

So while I do agree that rebates or dividends and investment are not a zero sum game, I would argue that rebates or dividends should be a relatively minor use of auction revenue, and warrant significantly less than investments in clean energy and energy efficiency.

Equity issues aside, you also seemed to argue that the dividends would be a political winner as well, helping secure passage of a cap and trade bill. You wrote, "receiving an annual check from the climate bill's allowance auctions might persuade some to support it." This is the assumption that drew most of my criticism. As I wrote in my post, there's very little evidence that adding more dividends to the mix (i.e. more than is necessary to satisfy important equity concerns) will do much to boost either public support or win over members of the Senate's "Technology Sixteen." It will however mean there would be less revenue for the direct investments that will help drive clean tech deployment and increased efficiency.

Where I Stand on Caps and Carbon Prices

So, with all that said, let me state as clearly as I can where I stand on emissions caps and carbon prices in general: I in fact do agree that a carbon price would be an effective and desirable accelerator of clean technology development and deployment. The Breakthrough Institute supports the highest politically sustainable price on carbon possible, both to set a new price signal that will accelerate innovation, and (perhaps more importantly) to raise revenues for critical public investments in clean energy research, development and deployment.

However, given today's political climate, we are increasingly concerned that the highest politically sustainable price on carbon is getting pretty close to $0 per ton, at least for the foreseeable future. I hope that I'm wrong, but news this week from Canada and the EU doesn't offer much inspiration. And whatever that price is, it is highly unlikely that it will be high enough for price signals alone to drive the necessary emissions reductions.

Perhaps this gets at what you characterize as our "basic disagreement" about the need for a mandatory cap on emissions. A mandatory cap would imply that emissions reductions would be required, no matter what the price of compliance is. That's the whole idea of a mandatory cap: in theory, emissions reductions are guaranteed and the price of carbon will rise to whatever level is necessary to drive those reductions.

But let's be clear: this theoretically mandatory cap and the guaranteed emissions reductions it will achieve are just that - theoretical. In reality, every single cap and trade policy proposed in the United States and elsewhere has included various forms of cost containment, from safety valves and off-ramps to borrowing from future allowances, and from "carbon allocation boards" that can issue extra allowances if necessary to international offset programs that simply outsource emissions reductions overseas to offset projects of a dubious quality. This is critical to note, because any provision that constrains the price of carbon without directly lowering the cost of actually reducing emissions under the cap (as investments in clean energy or energy efficiency would) will mean the cap is not in fact mandatory, nor does it guarantee emissions reductions targets are achieved.

Finally, even if a cap and trade policy includes no explicit cost containment provisions, in any Democratic society, the electorate's sensitivity to energy price increases will act as a default cost containment provision. In the face of a public backlash, elected officials can simply be forced to cut back the emissions reduction program or be ousted from office. Since a cap and trade program is ostensibly designed to ensure emissions reductions over a many decades-long time period, there will be plenty of election cycles to act as a check on the ultimate price of compliance with any "mandatory" cap and trade program.

So, if we recognize that any real-world cap and trade policy will have either explicit or implicit factors constraining the price on carbon, we see that all the focus on the supposed certainty of mandatory caps really obscures a very uncertain technology innovation challenge: the only way a cap will really deliver it's promised emissions reductions is if technology solutions exist that can deliver those reductions at a cost that's lower than either the explicit cost containment provisions of the legislation or the public's ultimate tolerance for increased energy prices.

This technology innovation challenge - a challenge McKinsey Global Insitute describes as of the same scale as the industrial revolution but in one third the time! - is the real heart of our quest for climate stability (not to mention continued and expanded global prosperity). We are therefore ill-served by obscuring this critical innovation challenge behind the frequently blinding focus on emissions caps and carbon prices.

We must recognize that there are ultimately several tools at our disposal to focus the human and financial capital necessary to overcome this critical innovation challenge -- including carbon pricing/cap and trade, direct regulations, and strategic public investments (all of which are ultimately designed to drive significant quantities of private capital to tackle the challenge).

In an ideal world, we should be advancing all options simultaneously and using each where most appropriate. One could certainly design an omnibus climate action bill that includes a declining cap, auctioned allowances raising revenue for direct investments, and complementary direct regulations (new efficiency and building standards, for example). But when the rubber meets the road in the US Senate or at the ballot box, there sadly seems to be far too little elite or public support for that kind of proposal today.

Given the urgency of the situation, I think it would therefore be a tragedy to hold any one strategy hostage to any other. That is, if today's political climate offers an opportunity to advance new strategic public investments in clean energy technology, infrastructure and efficiency under the framework of economic recovery, we cannot afford to hold those investments hostage to a cap and trade policy that faces a very uphill battle in Congress in the foreseeable future (to say the least).

If we can advance critical clean energy investments now and a full-on cap and auction bill is politically impossible, then we should move investments now and pay for them with something else: a more modest carbon price, general budget funds, a subsidy shift, oil royalty funds, deficit spending, whatever. We're pretty agnostic from a climate perspective about where the funds come from, as long as the critical investments can move forward as soon as possible.

From a political standpoint, though, some funding sources are obviously better than others. And if we want to make the most credible argument about economic stimulus, Keynes would argue that deficit spending is in fact the best way to fund these investments. Taxing one sector to pay for another isn't a very effective way to spur any net economic stimulus, or so I'm told (I'm no economist, I'll readily admit).

However, it seems like we could make a powerful political case for strategic deficit spending that has multiple economic benefits. These investments would lay the groundwork for a major new growth sector (clean tech), a dramatic improvement in the energy efficiency (and therefore productivity) of our economy, and reign in our out-of-control trade deficit while shielding us from increasingly volatile commodity prices (by reducing oil dependency).

That is why, while I think cap and trade, or carbon pricing in general, could be a very powerful and effective tool to overcome this innovation challenge, I do not think it is the only game in town, nor do I think it is sufficient to overcome the technology innovation challenge alone.

I hope this elucidates what you characterized as our "basic disagreement" about the necessity of a cap and trade program. I'd definitely welcome and look forward to your response. Thanks for wading through all of this. I wanted to be as clear as possible about my reasoning and assumptions so we can avoid any misunderstanding and drill right down to the substance of this discussion. Few other discussions are more critical given the state of our economy and our climate, and the political opportunities marked by what will no doubt be an historic election in just a few weeks.


Jesse Jenkins
The Breakthrough Institute
WattHead - Energy News and Commentary

[Originally posted at the Breakthrough Blog]

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