World Energy Monthly Review: May 2008	Download a PDF file of this article

Dunce Cap

by Richard R. Loomis and Susan Salter

Voices from the Fray "Opponents of the use of [market-based initiatives] tend to attack the assumption that the environmental performance is equal. … Their argument is that, while the economic performance may be better, the environmental performance is worse, and that the increased environmental damages outweigh the savings in abatement cost." - Danny Ellerman et al., in a 2003 paper, "Are Cap-and-Trade Programs More Effective in Meeting Environmental Goals Than Command-and-Control Alternatives?" "We Americans invented the 'cap-and-trade' system, in which a government sets a cap on total pollution and allows businesses to trade allowances under the cap. Now it is time to take back that original American concept from Europe." - Rep. Jay Inslee (D-Wash.), News Tribune (Tacoma, Wash.) "We live in the real world and we know you can't flip a switch and achieve the reductions tomorrow. We're recommending a realistic, step by step approach. That's one of the reasons we have to start almost immediately. The longer we wait, the harder this is going to be. A clear, unambiguous signal, i.e. a cap and trade system, will give the essential green light to the investors and the innovators eager to make money and deliver the best answers." - Fred Krupp, president, Environmental Defense Fund, in a February 2007 statement to the Subcommittee on Energy and Air Quality, Committee on Energy and Commerce "In the current neo-liberal economic environment, trading rules inevitably succumb to the pressure of corporate lobbying and deregulation in order to ensure that governments do not 'interfere' with the smooth running of the market. We have already seen this corrosive influence in the European Union's Emission Trading Scheme, when under corporate pressure, governments massively over-allocated emissions permits to the heaviest pollution industries in the initial round. This caused the price of carbon to drop by more than 60 percent, creating even more disincentive for industries to lower their emissions at source." - Kevin Smith of Carbon Trade Watch, for BBC News (Nov. 9, 2006) "What the snappy name 'cap and trade' means is that the market will put a price on something that's always been free: the right of a factory to emit carbon gases. That could affect the cost of everything from windowpanes to airline tickets to electricity." - Steven Mufson, Washington Post staff writer (Apr. 9, 2007)

Highlights of S.280 The bill S.280 began life as S.139, coauthored by Sen. John McCain (R-Ariz.) and Sen. Joe Lieberman (I-Conn.) and introduced in 2003. S.280 was introduced by Lieberman in January 2007 and listed as cosponsors the three senators who now happen to be the presidential frontrunners. The following is from S.280, Sec. 1245, "Establishment of Tradeable Allowances." For calendar years beginning after 2011, the number of tradeable allowances shall be equal to 6,130 million metric tons, measured in units of carbon dioxide equivalents, reduced by the amount of emissions of greenhouse gases in calendar year 2012 from non-covered entities. For calendar years beginning after 2019, the number of tradeable allowances shall be equal to 5,239 million metric tons, measured in units of carbon dioxide equivalents, reduced by the amount of emissions of greenhouse gases in calendar year 2020 from non-covered entities.

CTC's Choice The Carbon Tax Center listed six reasons to choose carbon taxes over cap-and-trade systems: Carbon taxes will lend predictability to energy prices, whereas cap-and-trade systems will aggravate the price volatility that historically has discouraged investments in less-carbon-intensive electricity generation, carbon-reducing energy efficiency and carbon-replacing renewable energy. Carbon taxes can be implemented much sooner than complex cap-and-trade systems. Because of the urgency of the climate crisis, we do not have the luxury of waiting while the myriad details of a cap-and-trade system are resolved through lengthy negotiations. Carbon taxes are transparent and easily understandable, making them more likely to elicit the necessary public support than an opaque and difficult-to-understand cap-and-trade system. Carbon taxes can be implemented with far less opportunity for manipulation by special interests, while a cap-and-trade system's complexity opens it to exploitation by special interests and perverse incentives that can undermine public confidence and undercut its effectiveness. Carbon taxes address emissions of carbon from every sector, whereas cap-and-trade systems discussed to date have targeted only the electricity industry, which accounts for less than 40 percent of emissions. Carbon tax revenues can be returned to the public through progressive tax-shifting, while the costs of cap-and-trade systems are likely to become a hidden tax as dollars flow to market participants, lawyers and consultants.

Does anyone else get the impression that Congress needs to be sent to the corner for a time-out? Our policymakers seem to be willing to look into any issue that makes real media headlines, especially if it involves characters like Roger Clemens and Al Gore. Our federal government busies itself with topics like steroid use in baseball and whether or not football hand signals have been stolen. Then all action comes to a halt when Al Gore pays a visit with his mantra of global warming.

If we lived in a country where food and shelter were birthrights, terrorism was unheard of, crime was nonexistent, health care was a given, jobs were plentiful and gasoline sold for a buck a gallon, such issues as juiced-up sports stars may well have a place on the congressional agenda.

But while the American people suffer under escalating economic stress, Capitol Hill dutifully begins to address the very critical issue of steroids and global warming. Talk about fiddling while Rome burns!

The headlines of all the major news sources tell of encroaching recession in the United States. Energy prices are at an all-time high, gasoline is heading toward $4.00 a gallon in the United States and demand is still increasing. At a time when we need a plan to reduce energy costs, here are two bills that Congress is currently pushing:

S.280: To provide for a program to accelerate the reduction of greenhouse gas emissions in the United States by establishing a market-driven system of greenhouse gas tradeable allowances, to support the deployment of new climate change-related technologies, and to ensure benefits to consumers from the trading in such allowances, and for other purposes.

S.2191: To direct the Administrator of the Environmental Protection Agency to establish a program to decrease emissions of greenhouse gases, and for other purposes.

If these two Senate bills don't fill you with a certain sense of foreboding, then you likely haven't had the opportunity to thumb through the 120-plus pages of each bill. Well placed within their text is advocacy of a "market-driven system,"as S.280 puts it, that is economically ineffective at best and potentially harmful at worst.

We are talking, of course, about carbon-trading programs, or "cap and trade."

S.2191, for example, seeks to reduce total U.S. greenhouse gas (GHG) emissions to 63 percent below their 2005 levels by 2050. Specifically, the bill calls for a cap-and-trade system.

This sounds well and good. Who couldn't applaud a system in which markets get the incentive to clean up their act by buying and selling emissions credits? After all, isn't "let the market take care of itself"part of our capitalistic credo?

The truth, however, casts a different light on cap and trade. In March the National Association of Manufacturers (NAM) and the American Council for Capital Formation (ACCF) unveiled a jointly commissioned study assessing the potential national and state economic impacts resulting from S.2191, authored by Sen. Joseph Lieberman (I-Conn.) and Sen. John Warner (R-Va.).

NAM spokesperson Laura Narvaiz released the findings of the study, which concluded that if S.2191 were passed into law, the result "would have a profound economic impact on U.S. businesses, consumers and governments."Specifically:

• Gross domestic product losses of $151 billion to $210 billion in 2020 and $631 billion to $669 billion per year in 2030.
• Employment losses of 1.2 million to 1.8 million jobs in 2020 and 3 million to 4 million jobs in 2030.
• Household income losses of $739 to $2,927 per year in 2020 and up to $6,700 in 2030.
• Electricity price increases of 28 to 33 percent by 2020 and 101 to 129 percent by 2030.
• Gasoline per-gallon price increases of 20 percent by 2020 and a whopping 77 to 145 percent by 2030.

Off the Kyoto Track

Even if the economy takes a hit from these kinds of emission controls, at least the environment is benefiting, right? Not according to the Little Green Data Book 2007, published by the World Bank. This report, released last May, shows that the carbon dioxide levels of current Kyoto Protocol countries are actually up. In the European Union, for instance, emissions have grown 3 percent. "As a group, rich countries are largely off-track with respect to the Kyoto commitments,"notes the World Bank. The exception is countries where emissions have dropped due to the recession of the 1990s. Are we willing to send our country further into economic stress in the quest to reduce emissions?

Despite such evidence against a cap-and-trade system, policymakers seem to have embraced the idea with the same enthusiasm (deluded as it may be) they displayed for expensive, inefficient ethanol. Just listen to our presidential candidates:

• From one frontrunner: "I support a cap-and-trade system that will require all pollution credits to be auctioned. A 100 percent auction ensures that all polluters pay for every ton of emissions they release, rather than giving these emission rights away to coal and oil companies."
• From another: "I endorse a cap-and-trade program that auctions 100 percent of permits alongside investments to move us on the path towards energy independence."
• And the third: "We and the other nations of the world must get serious about substantially reducing greenhouse gas emissions in the coming years or we will hand off a much-diminished world to our grandchildren. We need a successor to the Kyoto Treaty, a cap-and-trade system that delivers the necessary environmental impact in an economically responsible manner."

Can you guess which candidate said what? Not that it matters; they are the same statement. But if you must know, Barack Obama authored the first statement, Hillary Clinton the second. The third comes from John McCain, during his speech to the Los Angeles World Affairs Council on March 26, 2008.

NAM is not the only source for the counter-economic effects of this type of system. In a prepared statement, Anne E. Smith, Ph.D., vice president at CRA International, broke the news last November at the Legislative Hearing on America's Climate Security Act of 2007 (S.2191). Referring to the "leakage"of economic activity - opportunities literally trickling away from the United States to other countries - in the face of crippling permit pricing of domestic caps, Smith noted:

The potential for leakage provides an important reason for directly ensuring that the price of permits that may occur under a domestic [greenhouse gas] cap-and-trade program will remain relatively low. The only way to design a domestic cap-and-trade program to address this international competitiveness risk is simply to keep the carbon price low enough that such losses remain within acceptable bounds. This, naturally, limits the amount of domestic emissions reductions that will be achieved as well.

Her point is that a strong cap-and-trade system will make us uncompetitive. We could create a system of tariffs to offset that problem, but this would create its own problem by reducing international trade and making some of our trading partners pretty upset.

Smith's statement took into account the experiences in the European Union Emission Trading Scheme (EU ETS), the world's largest cap-and-trade setup. According to Europa news service, the ETS currently covers more than 10,000 installations in the energy and industrial sectors, which are collectively responsible for close to half of the EU's emissions of CO2 and 40 percent of its total GHG emissions.

"Variation of CO2 prices such as that observed in the EU ETS market over the past two years (approximately $0/ton to $35/ton) would cause all coal-fired units to see additional costs varying between about 10 percent and 175 percent of their base operating costs,"Smith noted.

"Clearly,"she concluded, "the effect on the economy could be disruptive."

Out-of-pocket Costs

Smith was quick to add that her numbers were "not just theoretical calculations. The EU's statistics bureau, Eurostat, reports that electricity prices rose significantly throughout the EU in 2005. Household rates rose by 5 percent on average over all 25 EU countries, and industrial rates rose by 16 percent on average. The high prices of GHG permits under the EU ETS during that period is widely viewed as having contributed to this price increase, and indeed, wholesale electricity prices have fluctuated in step with the wide swings in ETS permit prices."

Her point: It is not clear yet how or whether the wide variations in permit prices may begin to contribute to the variation in economic activity. However, she also notes that the "EU ETS does not cover all sources of GHGs, or even a majority of sources of CO2 emissions in the EU. (This may dampen the impacts of CO2 permit price volatility on the EU economy, but is also a widely observed flaw in the cap-and-trade system's potential to produce sufficient cuts in GHG emissions necessary for the EU to meet its GHG targets.)"

So it really takes some very creative math to see the benefits of the current cap-and-trade system as implemented in the Kyoto Protocol countries. Others, too, have pointed out its ineffectiveness.

"One of the hardest tasks in creating a mandatory cap-and-trade market will be determining where to set the initial caps - and how tough to reinforce them,"said MSNBC business writer John Schoen. "The first round of a system set up by the European Union was only a partial success because caps were set so high that there was little demand for credits, undercutting their value."

Kevin Smith of Carbon Trade Watch (carbontradewatch.org) echoed this concern. In the March/April 2008 issue of Resurgence, he wrote:

The concept that underpins the whole system of carbon trading and offsetting is that a ton of carbon here is exactly the same as a ton of carbon there. That is, if it's cheaper to reduce emissions in India than it is in the UK, then you can achieve the same climate benefit in a more cost-effective manner by making the reduction in India.

But the seductive simplicity of this concept is based on collapsing a whole series of important considerations, such as land rights, North-South inequalities, local struggles, corporate power and colonial history, into the single question of cost-effectiveness. The mechanisms of emissions trading and offsetting represent a reductionist approach to climate change that negates complex variables in favour of cost-effectiveness.

So when the Dutch FACE Foundation plants trees in Kibale national park in Uganda to offset consumer flights, it ignores the fact that the land has been the site of violent evictions in the recent past and is still hotly contested by the people who once lived there. When companies buy carbon credits in the EU Emission Trading scheme, the cheapness of the supposed emissions reductions is all that is important. But, any offsetting in Southern countries to justify emissions in Northern countries completely bypasses the issue of the extreme disparity in the levels of per capita carbon consumption and assumes that emissions reductions in the South can be treated like another colonial commodity to be extracted and traded.

Even within the cost-obsessed logic of the market, the use of carbon trading and offsetting goes against common sense. The point of the system is to provide opportunities for Northern companies to delay making the costly transition to low-carbon technologies. This is indeed "cost effective"in the short term, as it's easier and cheaper to buy carbon credits rather than go about the complicated business of making those changes, but studies have shown time and again that the longer we delay making those changes, the more expensive and difficult it will be, in terms of society enmeshing itself even further in the web of fossil-fuel dependency, and of even more costly adaptation to the exacerbated impacts of climate change.

In the end, what are we faced with? Even ignoring the flawed science of climate change or global warming, it is really hard to believe that carbon trading and offsetting make good sense economically. Climate change is a theory, albeit a scary one - and it is one that is being pushed not by science but by pure media hype. Of course it makes great headlines. But could it be true? The best science has to offer right now is: yes, no and maybe.

The point is, we still don't know conclusively whether the climate is truly changing or is in the midst of a normal fluctuation. However, when Gore famously declares that those who would question the global warming theory must also believe the world is flat, are we supposed to expect any reasonable debate? Or - what seems more likely - are we ready to head down the path of economic disaster based on a theory?

A Misguided Mission

Even in the midst of an economic slowdown, the United States remains the driving force worldwide. We are the global leader in gross domestic product, and we are the leader in consumption. Our quality of life is the highest, and our role as planetary policeman and watchdog is undisputed.

In front of us is the opportunity to decide to abdicate that position in favor of a misguided mission to combat a theory that is presented in the media as fact. Our next president and his or her Congress can make headlines by passing "climate change"legislation and by implementing a cap-and-trade system similar to the one in Europe. Together they will receive the applause of Al Gore, and they will undoubtedly be ready for the movies, but what will they do to our economy, to our position as economic leader and to our future as the planet's leader?

As we ponder the validity of climate science - and this debate does need to continue - we also should ponder the very real impacts that legislation could have. Europe has experienced many unintended consequences as it moves toward CO2 reductions, and as a country we need to recognize that we have a House, a Senate and a president-to-be that is going to do something on this issue.

The law of unintended consequences is geared up for America's looming cap-and-trade environment. We could end up with the examples cited by Washington Post writer Steven Mufson. Europe, he wrote, "has already hit a few bumps with its program. There's the Dutch silicon carbide maker that calls itself the greenest such plant in the world, but now can't afford to run full-time; the French cement workers who fear they're going to lose jobs to Morocco, which doesn't have to meet the European guidelines; and the German homeowners who pay 25 percent more for electricity than they did before - even as their utility companies earn record profits."

In 2005, rolling blackouts in California - a last-resort tactic to deal with the state's stressed-out power grid during a hot summer - were met with outrage. Under a national plan like cap-and-trade, shutdowns could well become commonplace, as they have at a factory in the Netherlands, which powers down routinely to save money.

All this in the name of political posturing and a theory of climate change. The United States should be the nation setting the example for energy stewardship. Right now, our politicians are busy jumping on a bandwagon that lacks a competent driver.