Chu on Cap and Trade

(HT Drudge) Ian Talley of the Wall Street Journal describes remarks by Energy Secretary Steven Chu at a smart grid conference in, "Steven Chu: Americans Are Like ‘Teenage Kids’ When It Comes to Energy."

“The American public…just like your teenage kids, aren’t acting in a way that they should act.” Dr. Chu said. “The American public has to really understand in their core how important this issue is.”

It is exactly statements like this that convince the American public that Washington is full of elitists that view them as inferior intellectually and morally.  In addition to teaching adults, or perhaps rather than attempting to teach adults, he administration intends to teach our children. 

The administration aims to teach them—literally. The Environmental Protection Agency is focusing on real children. Partnering with the Parent Teacher Organization, the agency earlier this month launched a cross-country tour of 6,000 schools to teach students about climate change and energy efficiency.

Talley continues.

Still, Secretary Chu said he didn’t think that the public would throw the same political temper tantrum over climate legislation has has happened with the healthcare debate.

Asked if he expected a town-hall style pushback, Dr. Chu said he was optimistic the public would buy the administration’s arguments that energy efficiency and caps on greenhouse-gas emissions will spark an economic rebound.

“I don’t think so…maybe I’m optimistic, but there’s very little debate” that a new green energy economy will bring economic prosperity, Mr. Chu told reporters.

I believe Chu errs in his economic analysis in arguing that cap and trade legislation will "spark" economic growth and "bring economic prosperity."  As a new and costly policy designed to alter decisions about energy use, the policy will create uncertainty in every sector of the economy that will delay a rebound as energy users, both consumers and producers, attempt to analyze the impact of the bill and discover cheaper fuels and more efficient production methods.  Some geographic areas that have superior "green" energy sources will grow and areas with superior high carbon energy sources will decline, forcing businesses and households to relocate.  Benefits from the plan will not be felt for a generation and those who foot the bill will be festering in airtight carbon sequestering graves.   

These extraordinary adjustment costs may all be necessary if unabated carbon emissions would have a catastrophic impact on the economy and other countries follow our lead.  Otherwise, it will be cheaper to clean up the environmental mess if or as it occurs. 

I also think that Chu mistakenly believes that there will be little political pushback, particularly if the administration's private estimates that the bill will cost the average household $1,761 a year are correct (Declan McCullagh. CBSNews, "Obama Admin: Cap And Trade Could Cost Families $1,761 A Year").  That is a price that will raise complaints from the dead let alone the living. 
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Australian Senate Rejects Cap and Trade Legislation

Other countries must follow the lead of the United States in passing cap and trade legislation if its efforts are to be effective in reducing carbon emissions.  Otherwise, citizens of the United States will pay a step price for a program with few if any benefits.  Gemma Daley of Bloomberg writes in "Australian Senate Rejects Rudd’s Cap and Trade Emissions Plan," that the Australian Senate has voted against cap and trade legislation proposed by Prime Minister Kevin Rudd.

Aug. 13 (Bloomberg) -- Australia’s Senate rejected the government’s climate-change legislation, forcing Prime Minister Kevin Rudd to amend the bill or call an early election.

Senators voted 42 to 30 against the law, which included plans for a carbon trading system similar to one used in Europe. Australia, the world’s biggest coal exporter, was proposing to reduce greenhouse gases by between 5 percent and 15 percent of 2000 levels in the next decade.

Rudd, who needs support from seven senators outside the government to pass laws through the upper house, can resubmit the bill after making amendments. A second rejection after a three-month span would give him a trigger to call an election.

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Cap-and-Trade Advocates Who Oppose Waxman-Markey

I have selected three articles that point to a rift between environmental groups and the Obama administration over the Waxman-Markey cap-and-trade legislation. The writers do not oppose cap-and-trade legislation in general, but his version of it. Josh Harkinson of Mother Jones gives a good summary of the debate within and between environmental groups about the Waxman-Markey legislation in "The War Over Waxman-Markey," dated June 22, 2009.

A long-awaited vote on the Waxman-Markey climate bill, expected this week or early next month, has environmentalists teetering at the edge of existential crisis. Some believe the bill is so deeply flawed it might actually make matters worse...

The split encompasses more than predictable ideological divides. Debate over the relative merits of a carbon tax versus this bill's cap-and-trade model has mostly given way to concerns about whether the legislation, sponsored by representatives Henry Waxman (D-Calif.) and Edward Markey (D-Mass.), lines the pockets of polluters with little to show for it. The most it would cut carbon emissions by 2020 is 17 percent below 1990 levels, nowhere near the 25 to 40 percent reduction sought by scientists and international climate negotiators. The Sierra Club has withheld its endorsement in hopes of improving the bill before a final vote—it wants to prevent polluters from receiving tradable emissions permits for free, preserve the EPA’s authority to independently regulate carbon, and better fund energy efficiency and clean energy—but Fahn and other environmentalists are skeptical that lawmakers will listen. “From my perspective,” he says, “the prospects of strengthening it to where we’d want to support the ultimate version are growing slim.”

Greenpeace's USA Deputy Campaigns Director, Carroll Muffett issued the following statement in "Greenpeace Opposes Waxman-Markey," dated June 25, 2009.

"Since the Waxman-Markey bill left the Energy and Commerce committee, yet another fleet of industry lobbysists has weakened the bill even more, and further widened the gap between what Waxman-Markey does and what science demands. As a result, Greenpeace opposes this bill in its current form. We are calling upon Congress to vote against this bill unless substantial measures are taken to strengthen it. Despite President Obama’s assurance that he would enact strong, science-based legislation, we are now watching him put his full support behind a bill that chooses politics over science, elevates industry interests over national interest, and shows the significant limitations of what this Congress believes is possible.

“As it comes to the floor, the Waxman-Markey bill sets emission reduction targets far lower than science demands, then undermines even those targets with massive offsets. The giveaways and preferences in the bill will actually spur a new generation of nuclear and coal-fired power plants to the detriment of real energy solutions. To support such a bill is to abandon the real leadership that is called for at this pivotal moment in history. We simply no longer have the time for legislation this weak.

“With many others in the environmental, faith and consumer rights communities, Greenpeace has expressed tremendous concern about the role of offsets in this legislation. Unless strictly controlled, the abuse of offsets could prevent real emission reductions for more than a decade. The decision to move authority over offsets from EPA to the Department of Agriculture further reduces the likelihood that such controls will be maintained and increases the likelihood they will undermine real reductions.

Clive Cook, writing for the Financial Times in "Obama is choosing to be weak," dated June 28, 2009 states that,

The cap-and-trade bill is a travesty. Its net effect on short- to medium-term carbon emissions will be small to none. This is by design: a law that really made a difference would make energy dearer, hurt consumers and force an economic restructuring that would be painful for many industries and their workers. Congress cannot contemplate those effects. So the Waxman-Markey bill, while going through the complex motions of creating a carbon abatement regime, takes care to neutralise itself.

It proposes safety valves that will ease the cap if it threatens to have a noticeable effect on energy prices. It relies heavily on offsets – theoretical carbon reductions bought from other countries or other industries – so that big US emitters will not need to try so hard. It gives emission permits away, and tells utilities to rebate the windfall to consumers, so their electricity bills do not go up. It creates a vastly complicated apparatus, a playground for special interests and rent-seekers, a minefield of unintended consequences – and the bottom line for all that is business as usual.

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Stavins On Cap-and-Trade

Greg Mankiw linked without comment to an excellent article by Robert Stavins titled "The Wonderful Politics of Cap-and-Trade: A Closer Look at Waxman-Markey," and published May 27, 2009. He defends cap-and-trade as a method to reduce pollution in general and its specific application to reducing carbon emissions through the Waxman-Markey bill. I do not know if he would support the bill in its final form. Stavins makes several points about the efficiency of cap-and-trade that he (and I) believe are not well understood. Perhaps the most important point to remember is that a cap-and-trade system efficiently reduces emissions regardless of the allocation of initial permits.

Generally speaking, the choice between auctioning and freely allocating allowances does not influence firms’ production and emission reduction decisions. Firms face the same emissions cost regardless of the allocation method. When using an allowance, whether it was received for free or purchased, a firm loses the opportunity to sell that allowance, and thereby recognizes this “opportunity cost” in deciding whether to use the allowance. Consequently, the allocation choice will not influence a cap’s overall costs.

Stavins believes that

...the political process of states, districts, sectors, firms, and interest groups fighting for their share of the pie (free allowance allocations) serves as the mechanism whereby a political constituency in support of the system is developed, but without detrimental effects to the system’s environmental or economic performance. That’s the good news, and it should never be forgotten.

I believe that he is largely correct in stressing that the political allocation does not affect cap-and-trade's environmental impact, but I disagree that it is a health process. Stavins implicitly assumes that the bill is necessary and that building a constituency for it is a political necessity. Politicians can bribe carbon emitting special interest groups with allowances if they support the bill or extort support from them with the threat of higher taxes if they don't. Bjorn Lomborg refers to the alliance of politicians and pocket lining businessmen as the "climate industrial complex."

I will illustrate the point with an example. Representative G. W. Green has two carbon emitting producers in his district, Coal Inc. and Dairy Farms. Each will suffer net losses of $100 if the bill passes. Green informs them that the first to announce their support of his vote for the bill will receive allowances valued at $120 paid for by taxes on the other emitter. Dairy Farms caves first, and earns a net profit of $20. Coal Inc. stands on principles and pays the cost of $220. Its not difficult to envision bills passing that are bad for the country but are vociferously supported by special interests who have been paid off. Let me emphasize that Stavins carefully explains how the allowances were allocated as of the publication date and that consumers were the primary beneficiary. My normative value is that $1 of allowances allocated to a consumer is of no more value to society than $1 of allowances allocated to any other group. I suspect that I am of the minority position yet again.

Finally, Stavins lists his concerns of which I mention two. He seems to prefer an auction to free distribution of allowances.

First, auction revenue may be used in ways that reduce the costs of the existing tax system or fund other socially beneficial policies. Free allocations to the private sector forego such opportunities. Below I will estimate the actual share of allowance value that accrues to the private sector.

I agree that auction revenue might be wisely used, but that there is a high probability that it will not.

Stavins and I share a concern about the impact of cap-and-trade on the competitiveness of the United States in international markets. He is optimistic about potential solutions; I am not. He writes,

The only real solution to the competitiveness issue is to bring non-participating countries within an international climate regime in meaningful ways. (On this, please see the work of the Harvard Project on International Climate Agreements.)

As a skeptic of anthropogenic global warming theories and particularly catastrophic predictions of death and destruction, I recommend that those interested in global warming and possible solutions read Stavin's original article and the links in his quotes. Given the assumption that global warming is largely a man-made problem, he gives good analysis of possible solutions.
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What's in a Name?

That which we call a rose by any other name would smell as sweet.  Maybe a rose by any other name might smell as sweet, but would it sell?  From John Broder of the New York Times in "Seeking to Save the Planet, With a Thesaurus," we learn that,

EcoAmerica has been conducting research for the last several years to find new ways to frame environmental issues and so build public support for climate change legislation and other initiatives...

The answer, Mr. Perkowitz said in his presentation at the briefing, is to reframe the issue using different language. “Energy efficiency” makes people think of shivering in the dark. Instead, it is more effective to speak of “saving money for a more prosperous future.” In fact, the group’s surveys and focus groups found, it is time to drop the term “the environment” and talk about “the air we breathe, the water our children drink.”

“Another key finding: remember to speak in TALKING POINTS aspirational language about shared American ideals, like freedom, prosperity, independence and self-sufficiency while avoiding jargon and details about policy, science, economics or technology,” said the e-mail account of the group’s study.

Broder discusses and then links to a New York Times editorial dated March 23, 2009 titled, "Environmental Word Games."  Not surprisingly, Republicans use the same tactics.  The article reads,

Whenever the Republicans find themselves in trouble on environmental issues, the call goes out for Frank Luntz, a respected party strategist. Back in 1995, Mr. Luntz urged the party to soften its language when it became clear that the Gingrich revolution had gone too far in its attacks on environmental law. Mr. Luntz is now making the same point. In a memorandum recently described by The Times's Jennifer 8. Lee, he warns that after two years of regulatory rollbacks, environmental issues have become ''the single biggest vulnerability for the Republicans and especially for George Bush.''

Mr. Luntz's remedy is not to change the policy, but to dress it up with warm and fuzzy words. As in 1995, he says that the problem is one of communication, and that what must be done is to start using comforting words like ''balance,'' ''common sense,'' ''safer,'' ''cleaner'' and ''healthier.''

Broder uses Drexel University professor, Robert Brulle as a foil to take a stab at politicians, an easy and popular endeavor that I recommend. 

Robert J. Brulle of Drexel University, an expert on environmental communications, said ecoAmerica’s campaign was a mirror image of what industry and political conservatives were doing. “The form is the same; the message is just flipped,” he said. “You want to sell toothpaste, we’ll sell it. You want to sell global warming, we’ll sell that. It’s the use of advertising techniques to manipulate public opinion.”

He said the approach was cynical and, worse, ineffective. “The right uses it, the left uses it, but it doesn’t engage people in a face-to-face manner,” he said, “and that’s the only way to achieve real, lasting social change.”

Neither Broder nor Brulle mentioned that politicians often exaggerate their side of an argument.  Read anything on climate by world climate change leader Al Gore, or this article (HT Drudge) describing House Minority Leader John Boehner's claim on the cost of cap-and-trade.  Apparently exaggeration is leadership.  
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Cap-and-Trade is a Tax

Representative John Dingell, questioning former vice president, Al Gore said,

"Nobody in this country realizes that cap-and-trade is a tax -- and it's a great big one," Rep. John Dingell (D-Michigan) said Friday.

Dingell compares the efficiency of a cap-and-trade tax to an energy tax and finds it wanting.  He should invite Greg Mankiw to provide testimony to the House and consider joining the Pigou Club.

Al Gore favors both taxes.
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Pragmatism and Anthropogenic Global Warming

“U.S. to be pragmatic on Climate Issue,” is the headline that Roger Harrabin chose for his BBC article describing the Obama administration's policy on reducing carbon emissions. A pragmatic stance depends on the consequences of possible actions. If I am a smoker concerned with my health, a pragmatic response is to quit smoking. If a man in a neighboring community is a smoker who is knowledgeable about the health consequences and alternative programs to quit, a pragmatic response is to mind my own business. If my wife was an informed smoker, and her smoking affects my health, a joint solution is needed even if she is unconcerned with her health.  The final example describes an externality or spillover affect; a third party, me, the non-smoker, is affected by my wife's decision to consume tobacco.  It is the same problem caused by carbon emissions on an international basis; one country's consumption may affect other countries. 

There have been a great number of dire predictions of the climatic consequences of unabated carbon emissions.  The Stern Review is an important example of a document listing severe consequences.  The "Executive Summary" of the Stern Review estimates the cost.

The evidence shows that ignoring climate change will eventually damage economic growth. Our actions over the coming few decades could create risks of major disruption to economic and social activity, later in this century and in the next, on a scale similar to those associated with the great wars and the economic depression of the first half of the 20th century. And it will be difficult or impossible to reverse these changes. Tackling climate change is the pro-growth strategy for the longer term, and it can be done in a way that does not cap the aspirations for growth of rich or poor countries. The earlier effective action is taken, the less costly it will be.

War Chronicles estimates World War II deaths, both civilian and military, at 48 million, or approximately 2% of world population.  If the same percentage of deaths occurs, the approximate deaths would be 167 million assuming a population of 8 billion.  GDP losses would be of a similar magnitude, and would be caused by flooding, declining crop yields, deaths from malnutrition, heat stress, and vector-borne diseases.  Irreversibility of climate change is often called a tipping point.  The Stern Review states that annual emissions would have to fall by 80% to achieve a sustainable world climate. 

Harrabin interviews Jonathan Pershing, the head of the U.S. delegation to the United Nations meetings on climate change.  A few quotes from the article suggest that the administration assessment is in line with the Stern Review, but it pushes off much of the cost on future administrations.

But he [Pershing] said the US should not make promises for 2020 that it could not keep: "It is not the point in time in 2020 that matters - it is a long-term trajectory against which the science measures cumulative emissions.

"The president has also announced his intent to pursue an 80% reduction by 2050.

"It is clear that the less we do in the near-term, the more we have to do in the long-term. But if we set a target that is un-meetable technically, or we can't pass it politically, then we're in the same position we are in now… where the world looks to us and we are out of the regime...

Mr Pershing did promise that the US would help poor countries to fund clean technology. He would not mention figures but he hinted the sums would be much less than many developing countries demanded.

"The notion that the USA would transfer funds to pay for the entirety of the world's development is implausible. The characterisation often made in these meetings [from developing countries] is that we will only do actions that are paid for. That's a limited vision and we'd like to turn that round."

In "The Cost of Cap-and-Trade," I note that current implementation of a cap-and-trade system is estimated at $2 trillion over an eight year period, about 175% of the cost suggested by the Stern Review that would be necessary to reduce carbon emissions by 80%.   Congressmen who always seem ready to spend and reluctant to tax has voiced considerable opposition to the plan.  
There are methods of forcing reluctant countries to fund their own "clean" technology.  Some are discussed in a note by The United Nations Framework Convention on Climate Change.  The note lists negative and positive consequences for poor countries of carbon reduction policies by wealthy countries.  To be sure, the note envisions large transfers from wealthy countries to the poor, and expresses concern that lowering carbon emissions will be used as a pretext to impose protectionist policies.  The note also describes how tax regimes could force poor countries to fund carbon reduction technologies.  The numbers refer to the paragraph of the note.

21.  Carbon taxes or levies have been implemented in several countries, and have been proposed in many others.  They are generally based on the carbon content of the covered items, and tend to be focused on energy products such as fuels.  Imported fuels are also subject to the schemes, as the tax is typically levied at the point of domestic sale.  The key overseas consequences of such taxes would fall upon foreign exporters of relatively carbon-intensive energy products such as oil and coal, who could see their market share drop as the relative prices of their goods increased.  Conversely, foreign exporters of environmentally sound energy technologies would see increased market share...

34.  Border carbon adjustment:  Countries that take strong measures to address climate change often also consider parallel measures to address what they see as competitiveness and carbon leakage problems.  Among these measures are two types of border measures that have been widely proposed to impose costs on imports equivalent to that faced by domestic producers.  The first, usually considered as a complement to a carbon tax regime, is a tax adjustment, which imposes a levy on imported goods equal to that which would have been imposed has they been produced domestically.  The second, considered as a complement to a cap-and-trade regime, is a requirement to buy offsets at the border equal to that which the producer would have been forced to purchase had the good been produced domestically.  The impact of such schemes would be functionally equivalent to an increased tariff: decreased market share for covered foreign producers.  While border carbon adjustments would involve negative consequences for foreign producers, such schemes would not likely be implement in isolation, but would function as parallel initiatives to climate change action in the implementing state.  If they were implemented fairly, such schemes would leave trade and investment patterns unchanged, being aimed at just offsetting the competitiveness impacts of domestic policies such as carbon taxes or cap-and-trade.

My pragmatic response is somewhat different based on what I believe to be a possible overestimation of the cost of AGW based on a lower probability of extreme negative costs, the positive externalities of trade, negotiating complexities, and the negative tendencies of politicians to follow populist and badly reasoned trade policies.

After a review of the IPCC cited papers used to support claims of drastic climate change, Kesten Green and Scott Armstrong researched ("Global Warming: Forecasts by Scientists Versus Scientific Forecasts," Energy and Environment, Vol. 18, No. 7+8, 2007 ) conclude,

The forecasts in the Report were not the outcome of scientific procedures. In effect, they were the opinions of scientists transformed by mathematics and obscured by complex writing. Research on forecasting has shown that experts’ predictions are not useful in situations involving uncertainly and complexity. We have been unable to identify any scientific forecasts of global warming. Claims that the Earth will get warmer have no more credence than saying that it will get colder.

Green, Armstrong and Soon, ("Validity of Climate Change Forecasting for Public Policy Decision Making," International Journal of Forecasting, forthcoming) find that a model predicting no temperature change is as accurate in short range predictions, and more accurate in long range predictions than the .03 degree Celsius per year rate of change claimed by the IPCC. The policy implication is that government should not take action to reduce carbon dioxide emissions.

Beginning with Adam Smith, economists have stressed the good economic and moral value of trade.  Specialization through trade makes countries wealthier, and wealthy people demand a cleaner environment.  Trade results in shared ideas which are often converted into new production methods and products.  Finally, trade may result in a lower probability of war, as positive associations between people in different countries create an economic constituency for peaceful international relations--a sort of anti military industrial complex complex. 

Negotiations to reduce carbon emission are very complex.  The citizens of some nations would benefit from a warmer climate.  Others may not trust the science behind AGW.  Still others would cheat on agreements, viewing cheating as beneficial to them if others live by the agreement.  It is the prisoners' dilemma problem on an international stage, and peaceful enforcement of any agreement would be difficult.

Finally, politicians do what's best for them.  That may include continued employment and wealth as well as the public interest.  If their constituents want to seek in protectionist trade restrictions, they are likely to get them.  If inefficient "green" technologies benefit some constituents, we are likely to see impoverishing "green" technologies supported through law and tax subsidies.  Unless carbon emissions result in dire consequences, the cost of a global solution is likely to be higher than any associated benefit.
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The Cost of Cap-and-Trade

The Obama administration plans to establish a cap-and-trade system to reduce carbon emissions. Economists generally consider a cap-and-trade system[1] or a Pigovian tax[2] to be the best methods to correct market failures caused by externalities[3]. Both methods purposefully increase the cost carbon dioxide producing goods and services. Commitment to carbon dioxide emissions seems to come at a time when many climate scientists are expressing skepticism about the link between carbon dioxide emissions and global warming, and about the anthropogenic contribution to climate change.
Tom Lobianco, writing for the Washington Post in “Obama climate plan could cost $2 trillion,” reports that,
President Obama's climate plan could cost industry close to $2 trillion, nearly three times the White House's initial estimate of the so-called "cap-and-trade" legislation, according to Senate staffers who were briefed by the White House.
At the meeting, Jason Furman, a top Obama staffer, estimated that the president's cap-and-trade program could cost up to three times as much as the administration's early estimate of $646 billion over eight years. A study of an earlier cap-and-trade bill co-sponsored by Mr. Obama when he was a senator estimated the cost could top $366 billion a year by 2015.
Paul Fuhr reports for the examiner.com in “More than 700 scientists discredit man-made global warming fears,” that
According to a new report, the 700-plus scientists are “now more than 13 times the number of U.N. scientists who authored the media-hyped IPCC 2007 Summary for Policymakers.” Many of the scientists are “affiliated with prestigious institutions” including NASA, the U.S. Navy, the U.S. Defense Department, Princeton University, as well as countless others.
Skeptical scientific voices are enjoying more and more company in past weeks, especially in light of a recent article published in The Australian that says Japanese scientists are largely rejecting man-made global warming claims. Japanese Geologist Dr. Shigenori Maruyama, professor at the Tokyo Institute of Technology’s Department of Earth and Planetary Sciences, said this month that “there was widespread skepticism among his colleagues about the IPCC's fourth and latest assessment report that most of the observed global temperature increase since the mid-20th century 'is very likely due to the observed increase in anthropogenic greenhouse gas concentrations.'"
According to a report published by the U.S. Senate Committee on Environment and Public Works, Maruyama noted that when this question was raised at a Japan Geoscience Union symposium last year, "the result showed 90 percent of the participants do not believe the IPCC report.”
I am not a climate scientist, but I do know something of the collection and reporting of data. Linking of climate change to carbon dioxide emissions is extraordinarily difficult. The only forecast of which I am familiar, discussed in “A Prediction Market for Global Warming,” finds that a forecast of no climate change more predictive over long periods than the .03 degree Celsius benchmark set by the IPCC. Meanwhile, at Hubdub, Armstrong leads Gore 64 to 36%.
[1] A cap-and-trade system would establish a permissible level of carbon dioxide to be emitted per year. The permissible level of emission would be below current levels. The government would sell the permits to polluters. To maintain production, polluting firms would be forced to adopted or create technologies to reduce carbon dioxide emissions or curtail production. The government could continue to reduce emissions by attaching a periodic reduction of emissions to permits, or by buying back permits.
[2] A Pigovian tax, named after Cecil Pigou, would attach a per unit tax on fuels that release carbon dioxide into the atmosphere. Greg Mankiw is a leading supporter of a carbon dioxide based Pigovian tax (See “The Pigou Club Manifesto”).
[3] An externality is the byproduct or spillover of the production, sale or consumption of a good or service that affects a third party who did not a participant in its production, sale or consumption.

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