Consumers voting with their wallets on voluntary carbon offsets

Posted by Hugh Whalan

When you buy a plane ticket, rent a car, pay an electricity bill or even use your credit card, you will often be presented with an option to ‘offset your greenhouse gas emissions’. If you do choose to offset your emissions this way, you are participating in the retail section of the voluntary carbon market. Despite accounting for slightly less than 5% of the billion-dollar voluntary carbon marketplace, the retail market represents one of the clearest ways that carbon-conscious individuals can vote with their wallets on the issue of climate change.

It is surprisingly given this, that so little research has been conducted on retail carbon offset products. As the retail market is the only place where individuals rather than companies are the majority of buyers, this small segment of the market presents researchers with a unique and important chance to understand how and why consumers actively offset their greenhouse gas emissions, as well as their views on climate policy and climate change.

Over the last 18 months I have been fortunate to be involved in the design and implementation of a survey of retail market participants conducted by researchers with Appalachian State University and the University of Alaska at Fairbanks and Environmental Credit Corp. It is the first industry-wide survey focusing on individuals in the carbon markets and yielded some interesting results.

The most important conclusion from the survey is that retail demand for voluntary carbon offsets will likely remain strong even if regulations place a national limit on greenhouse gas emissions. In simple terms, these consumers demand a solution to the climate problem and are willing to pay for it. Cost is a concern, but one which the impacts of climate change trumps more often than not.

Other interesting results are:

• 96% of participants placed a high priority on purchasing carbon offsets that come from projects which generate or utilize renewable energy.
  
• Participants were most likely to purchase carbon offsets as a result of car travel and electricity usage.
  
• 67% identified themselves as Democrats (slightly more than 1% as Republican) and 61.2% had a household with 3 or more people. The average household income for participants was $90,000.

The survey will be conducted on an annual basis. For questions on the survey please contact Jason Hoyle at hoylejw@appstate.edu.

Hugh Whalan is the CEO and co-founder of Energy in Common, a non-profit organization, which allows individuals to make green energy micro-loans to the poor in developing countries.

Read more!

The Catch-22 of Waxman-Markey: Is Offsetting Inevitable?

The Waxman-Markey American Clean Energy & Security Act (ACES) contains a provision that could allow U.S. global warming pollution to exceed the supposed emissions "cap" by 10 percent -- and "make up" for these additional emissions by purchasing several billion more tons of carbon offsets.

Every climate bill, in the U.S. and abroad, contains provisions limiting how high carbon prices established by the policy can rise. The Waxman-Markey American Clean Energy and Security Act (ACES) is no different. As the Breakthrough Institute previously reported, ACES would allow polluters to purchase up to 2 billion tons per year of relatively cheap carbon "offsets," which could allow emissions in supposedly "capped" U.S. sectors to rise by up to 9% between 2005 and 2030. The EPA predicts that, largely due to the extensive use of offsets, carbon prices will remain less than $20 per ton of CO2 for the next decade.

Many proponents of ACES have argued that U.S. polluters will not utilize the 2 billion tons of authorized carbon offsets each year. The supply of credible offsets is limited, they say, and demand will eventually push their price above the cost of most alternative emission reduction strategies. (For now, let's put aside the fact that those same price pressures -- and the industries and sectors that stand to profit from selling more offsets -- will also be a powerful force for establishing weaker offset certification standards.)

However, even in the case where affordable offsets are unavailable, and emission allowance prices rise, ACES contains an additional cost containment provision that could allow U.S. global warming pollution to exceed the supposed emissions "cap" -- and "make up" for these additional emissions by purchasing several billion more tons of carbon offsets.


If allowance prices rise too much in any given year, this provision, known as the "strategic allowance reserve pool," would allow polluters to delay their emission reductions by purchasing emission allowances from the reserve pool, which would then be "refilled" over time with additional international forestry offsets. Based on our analysis, this provision could allow U.S. emissions to rise 10% above the "cap" in any year after 2016 and introduce up to 9.3 billion additional offset allowances between 2012-2050.

Therein lies a Catch-22 of ACES: if the annual use of up to 2 billion tons of offsets permitted by the bill is limited due to a restricted supply of affordable offsets, the government will pick up the slack by selling reserve allowances, and "refill" the reserve pool with international forestry offset allowances later. Here's how it would work (defined in section 726 of the bill).

The strategic allowance reserve would be established by taking a certain percentage of allowances originally reserved for the future -- 1% of 2012-2019 allowances, 2% of 2020-2029 allowances, and 3% of 2030-2050 allowances -- for a total size of 2.7 billion allowances. Every year throughout the cap and trade program, a certain portion of this reserve account would be available for purchase by polluters as a "safety valve" in case the price of emission allowances rises too high.

How much of the reserve account would be available for purchase, and for what price? The bill defines the reserve auction limit as 5 percent of total emissions allowances allocated for any given year between 2012-2016, and 10 percent thereafter, for a total of 12 billion cumulative allowances. For example, the bill specifies that 5.38 billion allowances are to be allocated in 2017 for "capped" sectors of the economy, which means 538 million reserve allowances could be auctioned in that year (10% of 5.38 billion). In other words, the emissions "cap" could be raised by 10% in any year after 2016.

As for the price, the reserve allowance auction price would have a floor of twice the EPA price estimate for the average allowance in 2012, rising by 5% plus inflation in 2013 and 2014. Afterward, the price floor would be 1.6 times the average allowance price for the previous three years. The reserve allowances not purchased each year would be put back in the reserve account. EPA predicts an initial allowance price of just $12-20 per ton in 2015, which would set the initial strategic reserve safety valve price at as low as $24 per ton. According to EPA, allowance prices will remain below $20 per ton until after 2020, meaning the safety valve price that triggers the reserve auction could ensure pollution allowance prices stay below $32 per ton for the first decade or more of the cap and trade program ($24*1.6=$32).

The public proceeds from the reserve auction each year would go toward purchasing international offsets from reduced deforestation. These offsets would be converted back into emission allowances and placed in the strategic reserve account (at a 5 offsets to 4 allowances conversion ratio after 2017, as with other international offsets). Interestingly, the legislation specifies that if the reserve account is filled to its original size, any additional allowances from international offsets would be allocated and auctioned as part of the normal allowance auction in a future year, adding even more offsets into the mix.

This first graph represents the impact the strategic allowance reserve could have on emissions in capped U.S. sectors during any year between 2012-2050. It also shows the additional impact on capped sectors if up to 2 billion tons of offset provisions were used in any given year (we aren't predicting this will occur, but showing the real maximum extent of emissions the bill authorizes, in contrast to the "hard emissions cap" it supposedly establishes). BAU is based on a projection by the World Resources Institute:



This second graph represents the impact the strategic allowance reserve could have on total, economy-wide U.S. emissions during any year between 2012-2050. It also shows the additional impact on U.S. emissions if 1.5 billion tons of foreign offsets potentially permitted by the bill are used in any given year:



Finally, these two graphs show the impact of the strategic reserve and full offsets on total U.S. emissions in 2020 and 2030 compared to other levels:





Since there is no limit on how many foreign offsets could be purchased and used to replenish the strategic reserve -- and since the original size of the allowance reserve is 9.3 billion less than the total number of allowances authorized for reserve auction (12 billion minus 2.7 billion) -- this provision could introduce up to 9.3 billion offset allowances to the cap and trade system, in addition to the 2 billion in annual offsets already authorized by the bill. At an average price of $15 per allowance, this would add up to $139 billion in international forest offsets. (Click here to download full spreadsheet analysis.)

In order for these offsets not to be utilized -- and for the emissions "cap" not to exist in name only -- two things must hold true. First, international offsets must be more expensive than emissions reduction opportunities in capped domestic sectors, and second, the cost of these domestic reduction opportunities must not trigger the widespread purchase of the reserve allowances. Otherwise, either private investors or the government will purchase large quantities of international offsets and the total allowable emissions in the supposedly "capped" sectors will be permitted to exceed the emissions "cap."

Whether or not this potentially high demand level for foreign offsets -- and the trading mechanisms inherent to the cap and trade system -- is comparable to the conditions that produced the global financial crisis, is up for debate (Friends of the Earth, at least, is worried). The financial crisis was caused by many factors, but a critical one was the massive global "savings glut" that resulted in extraordinary levels of demand for mortgage-related assets in the US. In this environment, there was little incentive to stop the sale of subprime mortgages.

The design of Waxman-Markey may create a set of conditions around carbon offsets all too similar to the conditions leading up to the financial crisis: an extraordinary level of demand, and very little incentive to stop the production and sale of "subprime" offsets. Remember, as conditions stand now, a well-known Stanford University study on international offsets concluded: "between a third and two thirds of emission offsets under the Clean Development Mechanism (CDM) -- set up under the Kyoto treaty to encourage emissions reductions in developing nations -- do not represent actual emission cuts."

If ACES is established and the U.S. suddenly enters the international offsets markets with an appetite for billions of tons each year, the pressures and motivations at play are arguably stacked in favor of weakened -- not stronger -- standards of integrity for carbon offsets. If and when carbon prices rise, the pressure will be on to mitigate price impacts on consumers, industry and the U.S. economy. At the same time, potential offset providers will see a new multi-billion dollar opportunity to expand their supply of offsets through weaker standards. Standing against these powerful interests will be the environmental community, fighting to convince policymakers to put longer-term environmental interests ahead of short-term energy price pressures and political backlash. Who do we think elected officials will listen to in that scenario?

And finally, what happened to the "hard cap" and "emissions reduction certainty" that cap and trade advocates have long promised?

Read more!

Cap and Trade Going Under Down Undah

Originally posted at the Breakthrough Institute

It was with much fanfare and bravado that then-newly-elected Prime Minister Kevin Rudd of Australia announced at the 2007 Bali climate talks that his nation would abandon opposition to climate action and ratify the Kyoto Protocol. Better late than never, Rudd said and bravely declared, "I can unite the world on climate."

To deliver on that bold promise, Rudd directed his ministers to put together a cap and trade program to limit greenhouse gas emissions and put a price on CO2. The outline of an Australian "Emissions Trading Scheme" was rolled out last week with plans to implement a cap and trade program in June 2010 aimed at cutting emissions 5 to 15 percent below 2000 levels by 2020.

Now, the Australian Prime Minister's efforts to put a price on carbon and cap emissions are under fire from both Right and Left, and cap and trade is going under Down Undah.

The pro-climate action blog SolveClimate has an honest report on the political opposition to Prime Minister Kevin Rudd's carbon pricing plans. [Editor's note: keep in mind as you read this that the Australian "Liberal" Party is the nation's major conservative, center-right party and the "Labor" Party is the real liberal, center-left party.]

The battle offers a window into the complexity of making climate laws in a coal-fired country.

Federal opposition leader Malcolm Turnbull is leading the charge on behalf of his center-right Liberal party, stepping up attacks on a scheme he once favored. He wants to delay ETS until at least 2012, and pile on extra industry hand outs. And he's employing a familiar weapon to win over Australians, the threat of job loss.

It's a particularly cynical ploy on Turnbull's part in a drowning economy. Said Turnbull to Rudd this week:

"Why are you putting people out of work?"

There is no evidence that the ETS will "put people out of work," even in mining towns. But the story caught fire in the Australian media.

And now it's clear that a majority of senators will vote against the ruling government's ETS, complicating all prospects for legislation that has yet to be introduced into Parliament.

Rudd's in trouble. His center-left Labor party doesn't have a majority in the upper-house Senate. If the opposition blocks the bill, then he will need the support of Australia's swing-vote Greens.

But the Greens now say they won't endorse the ETS, unless it is substantially "greened up."

Specifically, they want the industry-friendly legislation to auction 100 percent of the emission permits -- a vital aspect of any effective cap and trade scheme -- rather than giving polluters a free ride, as the bill now does. They also want a strong reduction goal of 40 percent by 2020, not the current 5 percent target, or up to 15 percent in the event of a new global climate pact.

SolveClimate's reporter chocks the failure of the Australian ETS plan up to "lobbying, partisan politics and the usual suspects (i.e., big coal)." The implication being, "Those darned knuckle-dragging champions of the status quo got the best of us again." Of there's truth to that. But it's also all to easy to dismiss the challenges facing Rudd's plans and conclude, "We've just got to battle harder and overcome the industry opposition next time."

But that kind of response dismisses this story without grappling with the real lesson behind it. After all, this is the exact same situation facing cap and trade or carbon pricing plans in Canada, the EU and of course, the good old USofA.

The story is fundamentally the same everywhere carbon pricing programs have been attempted. Carbon pricing plans run smack dab into an unshakable reality of the political economy of climate and energy: the public and policymakers (not to mention industry) are resistant to efforts to significantly increasing the price of dirty energy. That resistance is clearly even stronger in the midst of the worst global economic crisis in decades.

The result: even when shot through with loopholes and industry giveaways, cap and trade and carbon pricing schemes are still not able to pass political muster, especially in coal-heavy economies like Australia (or much of the United States... or Eastern Europe... or China or India... or just about everywhere we need to reduce emissions most!).

Kevin Rudd is thus stuck in a political dilemma that should be familiar by now to champions of carbon pricing proposals everywhere (a dilemma we call the Gordian Knot of climate policy): he must either further weaken the proposal (as the Liberal Party opposition calls for) in order to win passage while ensuring that the carbon price is insufficient to drive the major emissions reductions needed; or he can strengthen the proposal (as Australia's Green Party is calling for) and guarantee the bill's political failure.

SolveClimate's reporter worries, "Any way you slice it, there will be a disappointing end to this cantankerous process," and concludes, "Let's just hope it's not a preview of what's to come in America, in the nation's own congressional battle over global warming legislation." But of course, this is exactly what will happen in the United States if President Obama and his green allies continue to push cap and trade and carbon pricing as the centerpiece of climate action. The Gordian Knot is most certainly not a uniquely Australian phenomenon, and it will inevitably ensnare U.S. carbon pricing plans as well.

But there's a way out of this dilemma, a way to cut free of the Gordian Knot.

If only at least one world leader (*cough*Obama*cough*) was willing to break from the carbon pricing orthodoxy and start leading a new emerging climate consensus, a strategy centered on the critical effort to make clean energy cheap, a strategy driven by innovation and investment, one finally able to overcome the fundamental constraints of the political economy of climate and energy and the powerful resistance to efforts to price our way to a clean energy future... If only...

Read more!

UK Auctions First Carbon Permits; Government Hoarding Revenue

Cross-posted from the Breakthrough Institute

The UK Government auctioned the first four million allowances to emit greenhouse gases under their portion of the European Union's Emissions Trading System this week, raising £54m ($80.9m). However, the government is drawing fire for failing to earmark the auction revenues to investments in clean energy and energy efficiency that could further cut emissions and help reduce the costs of compliance with the cap and trade program. Instead of reinvesting the revenues in clean energy ventures, the government is reportedly planning to add revenues to the general budget.

The Financial Times has details on the auction:

"The first auction of carbon dioxide permits netted the government £54m ($80.9m) on Wednesday as bidders fought for the right to emit greenhouse gases.

Almost 4m permits were sold in an auction that was four times over-subscribed. Previously, all of the emissions permits allocated to UK businesses under the European Union's trading scheme were given out free.

The government has pledged to auction another 80m permits in the next four years, which is likely to bring in revenues of more than £1bn. The identities of bidders were not disclosed, but electricity producers were expected to be the main buyers as they had their free allocation of permits cut by 30 per cent.

...

The free allocation of permits in the first phase of the scheme, from 2005 to 2008, enabled power companies in the UK and other countries to make windfall profits by raising electricity prices to cover the notional cost of having to buy permits, despite receiving them free. The government said on Wednesday the auctions should not result in further electricity price increases, as the cost of permits had already been factored in.

The UK is pushing for power generators to have to pay for all of their carbon permits in the third phase of the EU scheme, from 2013, arguing that electricity producers tend to be well-insulated from international competition."

However, the UK government apparently isn't planning to spend the money raised by the auction on clean energy investments and is instead putting the funds into the general coffer, the UK Guardian reports:

"The UK government was under fire today for "undermining" the European Union's fight against climate change by auctioning off carbon allowances for the first time and not earmarking the cash for "green" projects.

Around four million permits are being distributed today under a new phase of the European Union's (EU) emissions trading scheme (ETS) with expected receipts of up to £60m going to the Treasury for general spending purposes.

"The policy of the UK government on this issue undermines the very purpose of the EU ETS... Auctioning undermines this flexible mechanism as it takes money away from those who can do something about climate change, the emitters, and it gives it to those who can't, the politicians," said James Emanuel at emissions trading broker, CantorCO2e.

The Institute for Public Policy Research (IPPR) said ministers should change their mind and use the cash specifically for projects such as improving energy efficiency of homes, investing in low-carbon technologies and helping poorer countries cope with climate change.

"This is a great opportunity to help poorer households make their homes both cheaper to heat and warmer, and create jobs through investment in new green technologies," said Lisa Harker, IPPR co-director.

Keith Allott, head of climate change at WWF-UK, agreed saying the review by Lord Stern into the economics of climate change had shown that tackling the problem made sense financially. "This battle can't be won if we don't find the money to invest in solutions and kick-start new green industries," explained Allott."

More on the EU ETS price and auction format later in the article:

"The price of emission allowances have plunged by nearly 30% since September to around €16.50, partly because there are fears that the auction will flood the market and partly because a recession will cut industrial output and reduce pollution worldwide.

The ETS scheme implements an overall cap on the amount of emissions countries can produce, allocates carbon allowances to companies and then allows them to buy or sell the permits to cover shortfalls or profit from cutting their emissions.

Phase II of the scheme, which covers energy generators and heavy industry and aims to cut emissions by encouraging the market to produce carbon reductions at least cost, allows for up to 10% of permits to be auctioned.

In the UK, 7%, or 85 million, permits are being auctioned over five years of the scheme to 2012. The main target of the auction is energy companies which have lost 30% of their free allowances."

Read more!

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.

Sincerely,

Jesse Jenkins
The Breakthrough Institute
WattHead - Energy News and Commentary

[Originally posted at the Breakthrough Blog]

Read more!

Can Cap and Dividend Really Save the Economy or the Planet?

A clean energy economic stimulus plan could truly be climate advocates' "Trojan horse," as columnist Eric Pooley writes. But NOT if they follow Pooley's advice about how to formulate that plan and advance a full-on, economy-wide Cap and Dividend program next year.

The economy is all that matters now, and climate advocates - and the next President - would be wise to develop a strategic "Trojan horse" to advance their ecological goals within the framework of economic recovery. That's the thesis of "Save the Economy, Save the Planet," an article appearing in Slate last week by Eric Pooley.

Pooley gets the political analysis right, accurately diagnosing the potentially incurable political malady that dooms the chances of expansive carbon regulation in today's economic climate. But when it comes time to prescribe the remedy, Pooley is off-the-mark, arguing that a Cap and Dividend proposal is just what the doctor ordered.

Sorry, but that's the wrong answer. Unfortunately, Pooley is not alone in his prescribed solution, and it's time we took a close look at the obstacles to climate action and see just how far Cap and Dividend gets us (hint: it's not very far...)

Pooley, a longtime financial editor and columnist and a current Shorenstein Fellow at Harvard's Kennedy School of Government, starts his column with an accurate analysis of the political situation:

"[A]t this moment of deep economic distress, warnings about future climate impacts aren't going to [be politically popular]. That much has been clear since June, when $4-a-gallon gasoline helped snuff the Lieberman-Warner Climate Security Act and the nation's hopes and dreams began shifting from save the planet to "drill, baby, drill." Opponents of Lieberman-Warner claimed it would jack up energy costs, throw people out of work, and kill the U.S. economy; supporters responded that its impact wouldn't be that bad. Not that bad is not that good a strategy, and green leaders realized then that if they were ever going to break the political logjam, they had to drive home a more optimistic economic message."

With the economy dominating the political arena, arguing within an economic revitalization framework is a huge opportunity - perhaps the only opportunity - to advance policies that will drive the key solutions to the climate crisis: the massive deployment of clean energy technologies and a dramatic increase in end-use energy efficiency. A clean energy economic stimulus plan could truly be climate and clean energy advocates' "Trojan horse," as Pooley puts it.

But not if they follow Pooley's advice about how to formulate that plan: continue to advance a full-on, economy-wide cap and trade program raising "$100-600 billion annually" (which translates into a CO2 price of $15-100 per metric ton at today's emissions levels). Pooley recommends that $15 billion or so per year would go to clean energy R&D, but he argues that the vast bulk of the funds should be sent right back to energy consumers in the form of dividend checks "to make sure the fix doesn't cost too much."

These dividend payments, designed to cover the increased costs of energy under the carbon pricing scheme, will some how make this bill magically possible, Pooley claims. Sorry, but this strategy, known as Cap and Dividend, is the wrong answer.

In order to succeed, any strategy to advance climate policy must overcome several very real obstacles. Unfortunately, adding dividends to the mix while advancing the same old cap and trade scheme doesn't help overcome any of them. Let's look at the facts...

Obstacle One: Public Opinion

Support for action on climate change is considered wide but notoriously shallow, and that's where Cap and Dividend is supposed to excel.

As Pooley writes:

"Yes, putting a price on carbon, whether through a tax or cap-and-trade, will drive up household energy costs in the short and medium term before reducing them in the long term, as alternative energy comes on line. Still, receiving an annual check from the climate bill's allowance auctions might persuade some to support it."

So how many people need persuading?

Sadly, only eighteen percent of the American public expressed strong belief that global warming is real, that it is caused by humans, and that it is harmful, according to a poll released last week and commissioned by the Alliance for Climate Protection (Al Gore's folks) and a coalition of environmental groups. Eighteen percent!

The poll found a stark partisan divide among respondents as well, with just 54% of Republicans polled even confirming that global warming is happening, let alone that it is human-caused and requires action.

That's a long way from the strong public support needed to make high carbon prices politically sustainable, and that means there's a lot of heavy lifting for those dividend checks to do.

Surprisingly, Cap and Dividend advocates are hard-pressed to find any concrete evidence - beyond anecdotes about Alaska's popular oil royalty-funded annual rebate checks - to support the assertion that the proposal is popular with the public. If anyone has hard numbers on Cap and Dividend's public appeal, I'd love to see them, especially since this is the crux of the argument for a dividend scheme.

Unfortunately, the only public opinion numbers I've seen don't look good for Cap and Dividend.

Those numbers come from a 2007 study [PDF] the Breakthrough Institute commissioned with the Nathan Cummings Foundation to test the public appeal of several approaches to the climate crisis, including a Cap and Dividend proposal. Barely 51 percent of respondents supported Cap and Dividend when it was tested. Furthermore, that support dropped to just 31 percent after respondents heard likely arguments against Cap and Dividend (respondents were told that the proposal would likely raise energy prices and result in a new government entitlement program).

So is Cap and Dividend the heavy lifter with the public we need? It doesn't look like it.

In contrast, polls have found consistent and deep support for actions to address economic insecurity, foreign energy dependency and increasing energy prices. The same 2007 study found that 85% of those polled supported a $300 billion, ten year investment to develop low-cost clean energy technologies and industries. Support stayed at 54% even after arguments were made against the Apollo-project style clean energy investment plan (respondents were told that there was no plan to pay for the proposal, increasing either taxes or deficit spending, and that despite spending hundreds of billions, the proposal wouldn't require polluting industries to reduce emissions).

At a time of economic recession, wouldn't public investment programs designed to directly stimulate the economy with investments in clean energy technology draw significantly greater public support than an effort to sugar-coat a carbon pricing program with dividend checks?

Obstacle Two: Elite Opinion (aka the "Technology Sixteen")

As we reported last week, sixteen Democratic senators we've dubbed the "Technology Sixteen" are aligning themselves to take control of the climate debate. These sixteen Democrats have all voiced substantive concerns with the cap and trade approach advanced by climate advocates this summer and indicated that they would have voted No on the failed Lieberman-Warner bill. Given the fact that this new gang of senators represents almost one third of the Democratic caucus in the Senate, the concerns of the Tech Sixteen must be addressed if climate policy has any hope in the United States Senate.

That presents a big problem for Cap and Dividend advocates.

To start with, the Tech Sixteen are far more concerned about the impacts of carbon pricing on their business, industry, labor and ag constituencies than they are with the cost to end-use energy consumers. That's why the Tech Sixteen are primarily concerned with cost-containment, technology development and deployment, and perks for the special interests in their districts (i.e. eligibility for ag sector offsets, incentives for utilities and manufacturing, etc.) - not on securing dividends for consumers.

The "Tech Sixteen" want to see a low carbon price and more spending on efforts to make clean energy cheap. So tell me how we get this critical block of senators to support 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 (let alone their special interest constituencies)?

In short: it's hard to see how Cap and Dividend will sweeten the pot at all with the critical Tech Sixteen.

Obstacle Three: Effectiveness (aka the Market Fundamentalist Myth)

Finally, all this talk about Cap and Dividend is premised on the argument that we simply need a high price on carbon to correct market failures, driving the deployment of clean energy technologies and increased end-use efficiency that is the end goal.

Unfortunately, this is simply a market fundamentalist myth.

The "carbon pricing will save us" myth ignores the critical role government frequently plays in deploying enabling infrastructure (just consider for a moment the effects of rural electrification and the interstate highway system on the economy we take for granted today); driving technology innovation (while the Apple I may have been soldered together in Steve Wozniak's garage, the technologies that enabled the personal computer and the internet revolution were all developed in government labs); and supporting strategic emerging industries (e.g. incentives for emerging biomed and nanotechnology industries).

And just how high a price would you need to drive major increases in end-use efficiency or conservation?

Well, you'd need to have a CO2 price of $113 per ton to increase gasoline prices by just $1 per gallon. In the past two years, we've seen prices skyrocket by $2 dollars per gallon and yet have seen just a tiny dent in gasoline consumption (and emissions). So you have to ask yourself, what price will be sufficient to drive deep emissions reductions in the transportation sector?

Again, wouldn't it be smarter to focus directly on incentives to electrify transportation and get Americans and their stuff out of cars, planes and long-haul trucks? We could make investments to help Detroit retool to produce the most advanced vehicles in the world, support the mass development and deployment of plug-in hybrid electric vehicles, and build new high-speed electric rail and functional mass transit systems, and reinvest in efficient freight rail. And that's a strategy with direct economic benefits.

All this argues not for higher carbon prices but for more investment ... and again, that's a function not very well served by Cap and Dividend.

Conclusion

This economic crisis does present a key opportunity to advance critical investments in clean energy and energy efficiency. But a Cap and Dividend scheme is still a non-starter in the halls of the U.S. Senate - not to mention with the US public.

Today, we face an urgent moment: a new political climate is unfolding, a new president will soon be elected, and a ticking clock of climate feedback loops is winding down. We simply cannot afford another run through the U.S. Senate with a climate bill doomed to failure from the start.

For those who feel the urgency of our climate crisis as I do, we now face a critical time to (re)assess the current political climate and seize on any opportunities to advance real solutions it may present.

Our best hope would seem to be to advance a package of strategic investments framed explicitly and primarily about economic recovery and job creation.

If a clear economic imperative exists, we are apparently willing to put $700 billion (and counting) of taxpayer dollars on the line. There simply does not exist, nor will there exist any similarly strong political imperative motivated by climate concerns at any point in the near future. So we have to look elsewhere if we want to advance solutions to our climate crisis and find a real Trojan horse.

What we need is a new clean energy-focused economic recovery bill, not the next incarnation of a climate bill. In today's political climate, that seems to be our best, if not only, option.

[Originally posted at the Breakthrough Blog]

Read more!

Carbon Cap-and-Trade Moves Forward

Cross-posted from SustainabilityLawBlog.com:

The Regional Greenhouse Gas Initiative (RGGI), made up of 10 eastern states, announced that the first auction of carbon dioxide emissions allowances will take place on September 10, 2008, with a second auction on December 17, 2008. Currently, the RGGI initiative applies only to power plants. Member states have agreed to implement an emissions allowances program to stabilize emissions by 2014 and then reduce emissions by 2.5% each of the next four years.

Concurrently, the U.S. Environmental Protection Agency issued an economic analysis of the Lieberman-Warmer Climate Security Act of 2008, which if passed would implement a national carbon cap-and-trade system. EPA concluded that the bill would reduce greenhouse gas emissions to 11% below 1990 levels by 2030 and to 56% below 1990 levels by 2050, while only reducing GDP growth during the same period by about 1%. The EPA also concluded that the bill would cause electricity prices to rise by 44% by 2030, but it notably did not evaluate the economic benefits of greenhouse gas reductions that would result in savings to consumers significantly offsetting the increased price of electricity.

Both these developments are promising steps toward meaningful control of carbon emissions. The practical progress being made by RGGI shows that a cooperative spirit can result in a workable carbon emissions reduction program, and the EPA study shows that the economic sky will not fall by doing so.

[Photo credit: www.cana.net.au]

Read more!

Vote Now on Global Warming Solutions

You’re thinking, “If only we could get Congress to actually pass some of these policies…” We won’t stop until they do! So far Focus the Nation teams have invited more than 150 members of Congress to participate in dialogs on global warming solutions. 30 Congressional offices have confirmed so far, and we’re getting more every day. Check out who’s coming to Focus the Nation and what’s happening around the country.

The Focus the Nation Choose Your Future Vote is now officially open. “Build Green: Carbon Neutral by 2030” is out to an early lead with “Create Green Jobs” and “Invest in Clean Energy” close behind. What solutions do you want to see? Vote on your top five solutions now!

In other exciting news, Edward Norton will make an appearance on the 2% Solution web-cast along with Senator Bill Nelson and Governor Crist of Florida, Governor Napolitano of Arizona, Van Jones, Hunter Lovins and Stephen Schneider. Check out the trailer with Ed Norton and if you haven’t already, sign up to host a screening in your community.

Wait, there’s more: Project Slingshot, a partnership between Clif Mojo and Focus the Nation, is offering $10,000 scholarships in three categories – Outdoor Fanatics protecting the places they love and play, Artists inspiring their communities, and Innovators challenging our expectations. You all fall in to one of these categories, so apply now!

Read more!