Ecology and Economics

Bloomberg Blasts Carbon Trading at UN Bali Conference

Bloomberg: Carbon tax should replace carbon trading, CHARLES J. HANLEY, AP Special Correspondent, Newsday.com, Dec. 13: … "[Cap and trade is] a very inefficient way to accomplish the same thing that a carbon tax accomplishes," [NY Mayor Michael Bloomberg] said. "It leaves itself open to special interests, corruption, inefficiencies." …

Japan Set to Buy Carbon Credits on the Cheap

Folks at Globalization and the Environment provide evidence as to why I've been so skeptical about the Carbon Trading game. Japan is staging up to buy its way out of Koyoto commitments with no pain — buying from willing Eastern European sellers who find themselves with a surplus of credits. To their blog:

Nov 23: Today's FT reports that Japan is looking to hoover up shed loads of carbon credits on the cheap to meet its Kyoto agreements.

Such a move, whilst entirely legal is not entirely politically desirable. This article explains why.

This issue of course is that Japan promised to reduce its emissions 6% below its 1990 figure and it is now 8% above. The problem with buying carbon credits is that it does not necessarily reduce emissions by a single tonne of CO2. What then is the point exactly?

The collapse in eastern European heavy industry means they have an excess of credits to sell (and is one reason why Russia signed up in the first place despite dragging its heals for many years). …

US Congressional Budget Office Favors Carbon Tax

At a Nov. 16 Congressional Budget Office "Director's Conference on Climate Change", CBO Director Peter Orszag argued in favor of a carbon tax relative to an at-least-for-now inferior alternative of a cap-and-trade policy [Issues in Climate Change, Statement of CBO Director - PDF]. Here is a snip:

… Any effort to limit CO2 emissions would have two principal effects: It would produce long-term economic benefits by avoiding some future climate-related damage, and it would impose immediate economic costs by reducing the use of fossil fuels. Employing incentive-based policies to reduce emissions would help minimize the cost of reducing emissions by any given amount because they would use the power of markets to identify the least expensive sources of emission reductions. Thus, they can better accommodate technological advances, differences between industries or companies in their ability to make low-cost emission reductions, and changes in market conditions.

Two alternative incentive-based approaches for reducing CO2 emissions are to tax them or to establish a cap-and-trade system for them. Either a tax or a cap would be most efficient (that is, would best balance expected benefits and costs) if it was designed to gradually become more stringent over time—meaning the tax would gradually rise or the cap would become tighter. Such an approach would best reflect the present value of avoided future damage (the benefit of reducing a ton of emissions), which would take on greater weight as larger potential damage became closer in time. Further, such an approach would allow a smooth transition to a less carbon-intensive economy, allowing firms and households time to gradually replace capital equipment with alternatives that are more efficient, use less carbon intensive fossil fuels (such as natural gas rather than coal) or use renewable energy sources (such as wind or solar).

Efficiency Advantages of a Tax on CO2 Emissions
Although both types of incentive-based approaches are significantly more efficient than command-and-control policies, studies typically find that over the next several decades, a well-designed and appropriately set tax would yield higher net benefits than a corresponding cap-and-trade approach. A tax creates relative certainty about the cost of emission reductions each year, because firms will undertake such reductions until the cost of decreasing emissions by another ton just equals the tax on an additional ton of emissions. A cap-and-trade program, by contrast, creates relative certainty about the total quantity of emission reductions each year, because the cap limits total annual emissions. In terms of the impact on the climate, however, it does not matter greatly whether a given cut in emissions occurs in one year or the next.

From that perspective, a tax has an important advantage: It allows more emission reductions to take place in years when they are relatively cheap. Various factors can affect the cost of emission reductions from year to year, including the weather, the level of economic activity, and the availability of new low-carbon technologies (such as improvements in wind-power technology). By shifting emission reduction efforts into years when they are relatively less expensive, a tax can yield a given quantity of emission reductions at a lower cost than can a cap-and-trade program with specified annual emission levels. In addition, by avoiding the potential volatility of allowance prices that might result from a rigid annual cap, a tax could be less disruptive for affected companies. Provided that the tax was set at a level that reflected the expected benefit of reducing an additional ton of CO2 emissions, the tax would provide a motivation for firms and households to reduce emissions up to the point at which the cost of doing so was equal to the resulting expected benefits.

The relative advantages of a tax and a cap-and-trade program could change over time as new information became available. For example, because a cap creates relative certainty about the level of emissions, it could become more efficient than a tax if scientists determined that additional emissions were likely to trigger a sharp increase in damage, or if new technologies offered the opportunity to make extremely large cuts in emissions at a low and fairly constant cost. Analysts who have tried to define more precisely the conditions under which a cap would be more efficient than a tax have found those conditions to be quite narrow and not likely to be relevant in the near term. Specifically, scientists would need to have fairly precise knowledge about the level of an emissions threshold—beyond which additional emissions would trigger a sharp increase in total global damage—and such a threshold would have to be sufficiently close that policymakers would want to make very large cuts in emissions each year to avoid crossing it. In the absence of those conditions, a tax offers a more efficient approach for reaching a multiyear emission-reduction target.

Although a tax is generally a more efficient policy, the efficiency of a cap-and-trade approach can be enhanced by various design features. In addition, some participants in the policy discussion believe that analytical comparisons of a tax and a cap-and-trade system ignore the idea that policymakers may be more inclined to set a tight cap than a correspondingly high tax. … [footnotes omitted]

HT: Greg Mankiw

US Forest Service and Carbon Offsets: Perspective

Writing in High Country News, Rick Craig suggests that the US Forest Service's entry into the carbon offsets game is ill-advised. Here's a snip:

Salvaging the Atmosphere: The Forest Service Joins the Carbon Offsets Game, Rick Craig, High Country News, Oct 15: … On July 25, Forest Service Chief Gail Kimbell announced the launch of the Carbon Capital Fund, which will sell carbon offsets to fund tree planting on national forests. … The idea sounds logical enough. In fact, the theory that forests can suck up excess carbon and cool the planet helps drive a market that doubled its revenues last year to $110 million. But the Forest Service's entry into the carbon offsets game comes as doubts about tree planting mount. Scientists are skeptical about its benefits, and the honesty of the unregulated market has been questioned in congressional hearings. Worst of all, critics feel, is the tacit permission offsets give buyers to continue their carbon-emitting lifestyles.

Visit the Web site of the National Forest Foundation, the Forest Service's nonprofit arm, and its Carbon Footprint Calculator can tell you how many metric tons of CO2 emissions you are responsible for. If the result leaves you feeling guilty, don't worry. For just $6, the fund lets you offset 1 ton of carbon by supporting tree-planting projects on the national forests. The transaction is based on the theory that forests act as "carbon sinks," soaking up the greenhouse gas from the atmosphere.

But in temperate forests, the concept has not held up well to scientific analysis. Forests do take carbon out of the atmosphere temporarily, but they don’t remove it from the active carbon pool, because their carbon is released when they rot or burn. Cambridge botanist Oliver Rackham, author of a history of Britain's forests, has said that telling people to plant trees to stop global warming is like telling them to drink more water to keep down rising sea levels. …

For an agency with increasingly stretched budgets, however, selling that commodity makes a difference. … And with the agency's million-acre reforestation backlog, there's no shortage of places for consumers to relieve their carbon guilt. [NFF hypertlink added]

See also:

Privatization by Many Means: Carbon Offsets Edition, Forest Policy …, Aug 27
Carbon Offsets: Modern Day 'Indulgences'?, Ecological Economics, Feb 20

Cross-posted from Forest Policy …

Tom Friedman Jumps on the Gas Tax Bandwagon

In the NY Times, Tom Friedman wonders aloud why politicans are so afraid of the "T-word" when it comes to what he considers very good rationales for imposing a gas tax sooner rather than later — with sooner being sometime, say, prior to 9/11/01.

Monboit: Biofuels as 'Crime Against Humanity'

Be sure not to miss George Monboit's latest, thought-provoking rant against biofuels. Here's bit of it as posted on his blog:

An Agricultural Crime Against Humanity, George Monbiot, from the Guardian Nov 6: Biofuels could kill more people than the Iraq war. … In principle, burning biofuels merely releases the carbon they accumulated when they were growing. Even when you take into account the energy costs of harvesting, refining and transporting the fuel, they produce less net carbon than petroleum products. The law the British government passed a fortnight ago - by 2010, 5% of our road transport fuel must come from crops - will, it claims, save between 700,000 and 800,000 tonnes of carbon a year. It derives this figure by framing the question carefully. If you count only the immediate carbon costs of planting and processing biofuels, they appear to reduce greenhouse gases. When you look at the total impacts, you find that they cause more warming than petroleum.

A recent study by the Nobel laureate Paul Crutzen shows that the official estimates have ignored the contribution of nitrogen fertilisers. They generate a greenhouse gas - nitrous oxide - which is 296 times as powerful as CO2. These emissions alone ensure that ethanol from maize causes between 0.9 and 1.5 times as much warming as petrol, while rapeseed oil (the source of over 80% of the world's biodiesel) generates 1-1.7 times the impact of diesel. This is before you account for the changes in land use.

A paper published in Science three months ago suggests that protecting uncultivated land saves, over 30 years, between two and nine times the carbon emissions you might avoid by ploughing it and planting biofuels. Last year the research group LMC International estimated that if the British and European target of a 5% contribution from biofuels were to be adopted by the rest of the world, the global acreage of cultivated land would expand by 15%. That means the end of most tropical forests. It might also cause runaway climate change. … (footnotes omitted here)

Greg Mankiw: Several Billion plus One Favor Carbon Taxes

For more than a year, Greg Mankiw has formally/strongly advocated for Carbon Taxes. Mankiw also keeps tabs on who else supports such. Lately he adds, by reference, several billion new members to his Pigou Club:

Several Billion Join the Pigou Club, Greg Mankiw, Nov 5: The BBC World Service [PDF] reports that a majority of people in most countries favor higher energy taxes if the tax revenue is either rebated by lowering other taxes or used to finance energy-related government programs….

Another Member, Greg Mankiw, Nov 2: New York Mayor Michael Bloomberg joins the Pigou Club.

Go Green! Without "Corporate Giveaways"

Pro Football's Philadelphia Eagles are not only green in color but "green" in commitment and action, voluntarily reducing their environmental footprint and providing a much-needed precedent in the sports arena. This is the right way to go: no big government inducements, no notions that somehow government and industry are "partners" in regulation. Instead we have an enterprise doing things because people involved think it right and necessary.

Big banks and big timber companies, on the other hand, seem to be fishing for big payoffs from cap-and-trade carbon legislation, to allow them to profit from both their extant ventures and from the very "market-based" regulatory schemes they are petitioning for — the type that are currently being debated as cap-and-trade on Capital Hill in Washington DC. This seems to me to be the wrong way to go.

Environmentally aware cap-and-trade advocates continually stress moving, through time, away from corporate giveaways, else starting without corporate giveaways from the beginning. Still, most legislative proposals allow for some carbon credits to be given to polluter firms as does this week's spotlight bill, the Liberman/Warner sponsored America's Climate Security Act. (S.2191)

Cap-and-trade v. carbon tax was debated in two important forums this week. On Oct 30, The Brookings Institution's Hamilton Project hosted a very lively and informative debate of carbon tax v. cap-and-trade. Policy papers included:

• An Equitable Tax Reform to Address Global Climate Change, Gilbert E. Metcalf
• A U.S. Cap-and-Trade System to Address Global Climate Change, Robert N. Stavins

It isn't clear where any of this is headed in the US: even if a legislative proposal emerges in either form, there is a big question of whether it gets past a G.W. Bush Presidential Veto. Still it is worth the effort to read the policy papers, and even the transcript (pp 1-62 or 103 [PDF]).

Since I advocate for carbon taxes over cap-and-trade, I'll post up this one comment from the transcript, from panel moderator Sebastian Mallaby (Council of Foreign Relations):

… [I]f people focus in on [the debate over "carbon tax" and "cap and trade"] more and they perceive the cap and trade mechanism as being partly a way to distribute free vouchers to industry, as consumers wake up to that, they may prefer the tax system with a rebate that Gib [Metcalf] is talking about. So the political dynamic could flip when consciousness goes up.

On Nov 1, Amy Goodman, Democracy Now hosted Carbon Trading: Practical Solution to Global Warming or Corporate Greenwash? A Debate. Goodman engaged Annie Petsonk (International counsel with Environmental Defense) and Daphne Wysham (Fellow at the Institute for Policy Studies). The debate gives us some insight into why both sides strongly support their positions. Supporters, like Petsonk believe that carbon taxes and cap-and-trade leglislation without some "give" to corporate pollutors are non-starters.

Dissenters, like Wysham (and me) believe that cap-and-trade while well-intentioned will never get to desired results due to the overly-complex nature of the proposals and the inability to ratchet up the "caps" through time, and ratchet down the "corporate giveaways" through time. Here are Snips from the "debate":

… ANNIE PETSONK: We've had great experience with cap-and-trade for controlling air pollution in this country since 1990, when Congress passed the Clean Air Act amendments. We put a cap on acid rain pollution and adopted this kind of system to cut acid rain pollution from coal-fired power plants. So, in that program, we essentially put the training wheels on the bicycle and learned how to ride the bicycle. That program has cut acid rain pollution far faster than industry and many environmentalists predicted could be done. And it's done so at a fraction of the cost that people projected.

Setting up a carbon trading system for the world and for the United States is more complicated. There are more polluters. I agree with Daphne that companies should not be allowed to get credit in a developing country which has no caps on emissions for doing what they were supposed to do anyway. … [O]ne of the reasons why we're looking forward to the markup [of the Liberman/Warner "America's Climate Security Act"] in the Senate Environment and Public Works Committee today is that the bill now being considered there doesn't create that system. It's better than that. …

DAPHNE WYSHAM: I tend to disagree with that perception, as do quite a few number of groups. Friends of the Earth has recently produced an analysis on the windfall profits in the Lieberman-Warner global warming bill [FOE Press Release], and according to their calculations, 38% of the giveaways, the free giveaways in this bill, would benefit the fossil fuel industry over the lifetime of the program. That's — and roughly $268 billion of that would go directly to the coal industry alone. …

[O]ne of the failures of the EU emissions trading system is that they essentially — the governments essentially gave the right to pollute to certain industries. They set the tap high, and as a result industry was able to emit as much as they had been emitting in the past and make a profit buying and selling these emissions rights. Similarly, in this — and there was no auctioning.

Now, in the current Lieberman-Warner bill, there is some auctioning, but about 50% of all of the permits are just being given away for free. Now, these permits are valuable. They are basically being turned into a commodity. So now what we have is essentially the most carbon-intensive of the fossil fuels, the coal industry, is one of the largest beneficiaries of the Lieberman-Warner bill. And an additional $522 billion will potentially go to what they call zero and low carbon energy technologies. Now, if we are optimistic, we would say, "Wonderful! That's going to go to renewables." However, the legislation is vague. It could go to either the fossil fuel industry for carbon capture and storage, which is a very expensive and unproven technology, or it could go to the nuclear energy. And that is not specifically ruled out in this legislation.

So we have problems with this also because it essentially is a tax on the working poor. It's not a tax on the very corporations that are causing the problem.

AMY GOODMAN: How is it a tax on the working poor?

DAPHNE WYSHAM: Well, because we will see the windfall gains. Instead of having those go to, say, subsidize an increase in the price of power or to public transportation or to other incredibly important solutions to the climate problem, we will see billions and billions of dollars worth of profits going back to the very industries that are causing the problem.

AMY GOODMAN: Annie Petsonk?

ANNIE PETSONK: We believe that the Americas Climate Security Act that's going to be voted on this morning in the Environment and Public Works Committee is a very good first step. Is it perfect? No. Are senators moving to improve it? Yes. Senator Lautenberg announced yesterday he wants to broaden the coverage of the bill so that more parts of the economy come under that cap on fossil fuel emissions. …

DAPHNE WYSHAM: … I think it's important to take some specific examples. I think it’s instructive to look at, for example, the World Bank, which I have been monitoring for over ten years now. Now, they have invested over fifteen times as much in fossil fuels as renewable since 1992. Originally, it was a hundred to one. Now, they are getting into the carbon trading market. The US Treasury back in 1997 said this is a clear conflict of interest for a financial institution to both profit from financing fossil fuels and profit from carbon trading. They're actually charging somewhere on the order of 13% commission on all carbon trading transactions. Now, what the World Bank could have done and should have done instead of getting into the carbon trading market is they should have set a higher energy efficiency standard, they should have stopped subsidizing fossil fuels, they should at the very least be calculating their climate footprint, which they are not doing. So they're calculating the carbon credits, but they're not calculating the carbon debits.

Now, if you globalize that particular model and look at how that would play out with bank after bank, whether it's Citibank or the European Bank for Reconstruction and Development or other public or private banks, you see how these banks are going to be gaming the system. They will be profiting from selling — from giving loans to the likes of Chevron, and then they'll be profiting again from charging a commission on the CO2 that is captured from those operations in developing countries or potentially in the US.

So, you know, what I think people need to understand is, yes, the time is urgent. We need to take action very soon on this issue. However, we need to learn the lessons from the failures of the EU emissions trading system. And the bill that's on the Senate floor this morning is not the best way to move forward. It's a corporate giveaway, and we need to do better. Boxer needs to hear from people on this

AMY GOODMAN: Last word, Annie Petsonk, on this. Is this just a corporate gift, a subsidy, a giveaway?

ANNIE PETSONK: If America doesn't take the lead, beginning to tackle our global warming pollution — excuse me — other nations won't either. I strongly support getting rid of fossil fuel subsidies for big coal-fired power plants in China and India and in the US. We've got to start. We cannot afford to delay. This bill is not a corporate subsidy or giveaway. It's a first step in getting America on a track to a cleaner energy future and a safer climate.

AMY GOODMAN: Fifteen seconds, Daphne Wysham, then what's your alternative, since you are so critical of this?

DAPHNE WYSHAM: Well, I think, you know, what we have is a political opportunity here. We know that the President is going to veto any kind of legislation that comes from the Senate. He has made clear his opposition to any kind of legislation —

AMY GOODMAN: Even Lieberman and Warner?

DAPHNE WYSHAM: Even Lieberman and Warner. So why aren't the Democrats — why are they just — why are they kowtowing to Bush? Why aren't they pushing forward the most aggressive piece of legislation that they can get as a benchmark and say this is what we're going to be pushing for in the next administration? And, you know, we can do better. We should be debating these issues. We should be setting much more stringent targets, at least 80% below 1990 levels by 2050. This bill gets us nowhere near that. And so, that's my concerns with it.

Christian Science Monitor Endorses Carbon Tax

Yet-another vote for carbon taxes over cap-and-trade:

A tax on carbon to cool the planet, Christian Science Monitor, Oct 26: Forcing higher prices for fossil fuels would be simple, fair, and effective. Why do politicians fear to do it?

Conservative and liberal economists like it. James Connaughton, President Bush's top environmental adviser, backs it. Al Gore says he's always preached it. So why isn't a carbon tax on the table in Congress as it weighs measures to curb climate change? A three-letter reason: T-A-X.

From the start of Capitol Hill's debate on global warming, the notion of taxing all uses of oil, coal, and natural gas has made lawmakers look for less direct ways to wean the nation off fossil fuels and onto alternative energies. They'd rather set caps on greenhouse-gas emissions (with allowances to trade emission permits) and tighten up regulations, such as fuel- efficiency standards.

Indeed, caps may put the US on a knowable track to, say, an 80 percent reduction in carbon emissions by 2050. But as the previous Monitor's View pointed out, the flaws in cap-and-trade plans as experienced in other nations – their complexity and vulnerability to fraud and special-interest lobbyists – would reduce the intended effect. They also take a long time to set up and get working right. …

[P]olls indicate strong opposition to higher taxes on gasoline or electricity. But wait: What if the carbon-tax revenues were returned to most taxpayers, canceling out the effect on pocketbooks but retaining the market incentives?

Under one plan, every worker would receive a tax rebate of about $560, cutting the tax bill by 18 percent for those earning $20,000, or by 4 percent for those earning $90,000. The burden on consumers would shrink, but the US would achieve greater conservation and a shift to energy alternatives. And the tax could be fine-tuned to meet rising targets for reducing carbon dioxide.

With Europe's cap-and-trade system faltering, the US should be a leader in using a carbon tax, even if big polluters such as China don't follow. As a last resort, the US could tax goods from countries that fail to cut their carbon emissions.

A carbon tax is not the whole solution. Regulations will still be needed, such as stiffer fuel-economy standards for cars and trucks. And the US should fund research into alternative fuels, too. All it takes is the political will to act.

Carbon Trading Schemes Backed by Big Banks

If the big banks are pushing for cap-and-trade carbon trading schemes ought we not to be a bit skeptical? Aren't they the ones who have led us down a primrose path with "subpime" and other messes? Big banks are pushing cap-and-trade, reports the NY Times. And yet, many big environmental groups support cap-and-trade legislation over carbon taxes. Why?

I'm still on the carbon tax bandwagon. But what do I know, relative to these economists who, as members of the Union of Concerned Scientists are on record in favor of cap-and-trade systems. Questions linger: Do economists like Joseph Stiglitz favor cap-and–trade over carbon taxes, or do they endorse cap-and-trade as a second-best resolution to the carbon problem relative to extant institutional arrangements? Of course we all know—or should—that it is difficult to know, at least in the Theory of the Second Best what really constitute a "second best". Then again, said "theory" doesn't apply here. What does? To the NY Times:

Banks Urging U.S. to Adopt the Trading of Emissions, JAMES KANTER, Sept. 26: PARIS, Sept. 25 — A group representing some of the world’s leading banks will urge the United States and other industrial nations this week to move quickly to introduce a lightly regulated system for trading carbon emissions permits.…

See also: World Betting the Farm on Carbon Trading?, Youth Climate Movement,Sept 4