You've no doubt heard about Obama's "Clean Power Plan", which if it survives legal challenges from our compulsively obstructionist friends on the right, "aims to cut emissions by 2030 to 32% below 2005 levels, mostly by creating disincentives to burn coal to generate electricity".
But how precisely is it supposed to work? The moment this was officially announced, it seemed like the pundit class all agreed this was essentially the return of "cap-and-trade"-- and I wanted to verify whether that's true, or if it's just the story they all settled on in the bar after the press conference. The short answer is "yes, it is cap-and-trade", and thanks go to the EPA site and some really excellent coverage by Brad Plummer at vox.com (I really need to start with vox.com rather than waste so much time on web searches...).
The Clean Power Plan and cap-and-trade
Here's Brad Plummer's single-paragraph summary of the CPP:
The EPA is giving each state an individual goal for cutting power plant emissions. States can then decide for themselves how to get there. They can switch from coal to natural gas, expand renewables or nuclear, boost energy efficiency, enact carbon pricing ... it's up to them. States just have to submit their plans by 2016-2018, start cutting by 2022 at the latest, and then keep cutting through 2030. Oh, and if states refuse to submit a plan, the EPA will impose its own federal plan, which could involve some sort of cap-and-trade program.
(Update: I like that last bit. Republican governors can posture about how they'll never go along with this, but they're just abdicating the details to the EPA without actually changing anything. Another fun fact is that this plan really sticks it to Florida and Texas, because they're some of the heaviest emitters at present... but you can count on both states to whine and complain no matter what the EPA comes up with, so why not stick it to them?)
Now, "cap-and-trade", if you haven't been following this stuff, is a style of going after pollution without resorting to anything as heavy-handed as an outright ban or a fixed penalty-- instead, the government levels an over-all cap on the total allowed emissions, and different players are allowed trade a "right to pollute". The idea is that if it's easy for you to scale back your emissions, you've got a financial incentive to do so, because you can then sell your emissions permits to someone else who might have a harder time of it. Then the government gradually reduces the overall cap, and we get a cleaner environment without putting industry through any traumatic conniptions.
This sort of flexible, market-based approach to a problem may sound to you like just the sort of thing that would appeal to the conservative mind, and you would be right, but only if you go back in time several decades-- it's far too sane for the present-day conservative movement.
Externalities
Burning hydrocarbons has gotten a free ride for centuries with pollution that inflicts tremendous harm even if you don't consider global warming, and when you do take it into account, the situation is beyond ridiculous. Economists call this damage "externalities", which is to say these are costs inflicted on the world that are not incorporated in the price we pay for the product: we burn a lot more of this stuff than we would if were charged for this damage up front (rather than waiting for an environmental crash decades later).
No one has even gotten remotely close to contriving a free market solution to this problem: we have little choice but to resort to some form of government intervention.
Anyone who understands that climate change is a tremendous problem, really should understand that we need to fix the market to capture these externalities.
(Caveat: there are people pushing for boycotts and divestment, which strikes me as an excellent idea for something that can be done without waiting for the government, but they're unlikely to do the job on their own. Still, boycott movements can be an excellent way of focusing people's attention on a problem, and they deserve support.)
Subsidizing Renewables is Not Enough
Despite our differences, I used to think that the pro-renewables and the pro-nuclear people agreed on this one thing: fix the energy market by making sure that GHG emissions are penalized, then whatever power sources win won't be a climate change problem. It turns out that many of the solar and wind fans seem a bit confused on this point: they hope that just subsidizing their favored technology is enough, without doing the hard work of taking on King Coal (and Daddy Oil, and the Evil Prince Fracking).
You can see this in the recent discussion of hillary clinton's climate plan, which prompted Keith Pickering to post: Why Hillary's Climate Plan Sucks. And Everyone Else's Too.
And in the comments he needed to back up and explain: "If you subsidize solar and don't tax fossil, you're saying that it's perfectly ok to use fossil fuels at night. It's not."
In this piece, Keith Pickering comments approvingly on James Hansen's scheme: "Hansen sensibly advocates a revenue-neutral carbon tax, with the revenue rebated to the population on a per-capita basis." And in passing, Keith Pickering comments that Hansen has "always been right".
Here, I have to disagree at least slightly: Hansen is right so often, I'm reluctant to disagree with him on anything, but on the economics of climate change his stated opinions have been are very peculiar.
I don't think there's any question that Hansens's right when he says (as quoted in the Guardian UK): "No, you cannot solve the problem without a fundamental change, and that means you have to make the price of fossil fuels honest. ..."
But in the past he's expressed adamant opposition to cap-and-trade schemes, and a number of things he's said really don't make a lot of sense.
Hansen vs Krugman
The last time "cap-and-trade" was under discussion was back in the dark days of 2009 when the Waxman-Markey bill was up in Congress.
James Hansen and Paul Krugman had dueling op-eds, where Hansen came out strongly against cap-and-trade in favor of a scheme he liked to call "Fee-and-Dividend", but which sounded for all the world like a carbon tax.
I'm a big fan of James Hansen, and I think that on Climate Change he's done an excellent job of identifying both the problem and the solution (which is more than you can say for the nuclear power denialists of the left), but in his objections to cap-and-trade he seems to making errors in economics that are so obvious, it's astounding.
(I'm also a big fan of Paul Krugman, by the way, though I'd have to say he's got some problems in these realms as well-- I talked about those here).
Hansen's case against cap-and-trade is in essence that he worries that these kinds of schemes are too complicated, and hence politically gameable. He says that that while the similar system of capping SO2 emissions worked, it hadn't done enough, with the implication being that it was sabotaged by a process of political compromise. The whole idea of trading emissions permits gives him the heebie-jeebies, he's afraid we're looking at another Enron/Goldman-Sachs scene. These are perhaps reasonable (though I think, answerable) fears, but he's not at all persuasive on the point that his "Fee-and-Dividend" scheme would fare any better after it was actually implemented.
Krugman in his response (Unhelpful Hansen) makes the point that carbon-taxes and cap-and-trade are really economically equivalent, and essentially argues for going with the existing scheme that has some momentum.
It's Hansen's response to all this that really gives me pause:
Cap‐and‐trade is a hidden tax. An accurate name would be cap‐and‐tax, because cap‐and‐trade increases the cost of energy for the public, as utilities and other industries purchase the right to pollute with one hand, adding it to fuel prices, while with the other hand they take back most of the permit revenues from the government. ... Fee‐and‐dividend, in contrast, is a non‐tax. The fee collected at the first sale of oil, gas and coal in the country does increase the price of fossil fuel energy.
I'd thought that Hansen was calling it a Fee (rather than a-- hoch, spit-- tax) was because he was trying to be clever about marketing. He really thinks that charging a "fee" from producers is somehow different from leveling a tax on them, and that there's some way you can levy a tax or fee on hydrocarbons that will discourage their use, but without the additional charge being passed through to consumers. (Update: Ah, actually he's placing the emphasis on where the money goes-- if we give it all back to the consumers via a "dividend", he figures it doesn't count...).
The piece continues like this... would China accept a cap? No way, they're in early stages of development (would he still say that now? China's per capita CO2 emissions up at the European level), but they would accept Hansen's magical "fee" system, because they know they need to clean up their act. But why would that be any different?
He says later "Krugman says that the fee‐and‐dividend I propose is "essentially equivalent" to cap‐and‐trade. Here I may not have been clear. I do not dispute the economic theory that a cap and a fee are, in principle, equivalent." Uh... but he was just saying that they weren't equivalent: one effects energy prices and the other somehow doesn't. (Update: I think the idea is having funds explicitly handled by the government, so they can be earmarked to be passed on to the tax-payers.)
Gameability and Politics
The real questions on all these schemes are the political issues concerning gameability and the potential for international acceptance:
From Paul Krugman's opening column in the duel with Hansen The Perfect, the Good, the Planet May 17, 2009:
One objection — the claim that carbon taxes are better than cap and trade — is, in my view, just wrong. In principle, emission taxes and tradable emission permits are equally effective at limiting pollution. In practice, cap and trade has some major advantages, especially for achieving effective international cooperation.
Not to put too fine a point on it, think about how hard it would be to verify whether China was really implementing a promise to tax carbon emissions, as opposed to letting factory owners with the right connections off the hook. By contrast, it would be fairly easy to determine whether China was holding its total emissions below agreed-upon levels.
William Nordhaus, in his book A Question of Balance (2008) essentially agrees with Krugman on this point (p.162-3):
... we must be realistic about the shortcomings of the price-based approach. It is unfamiliar ground in international environmental agreements. "Tax" is almost a four-letter word. Many people distrust price approaches for environmental policy. Many environmentalists and scientists distrust carbon taxes as an approach to global warming because they do not impose explicit limitations on the growth of emissions or on the concentrations of greenhouse gases. What, they ask, would guarantee that the carbon tax would be set at a level that would prevent "dangerous interferences"? Do carbon emissions, some worry, really respond to prices? Might the international community fiddle with tax rates, definitions, measurement issues, and participation arguments while the planet-burns? ...
By contrast, quantitative approaches such as cap-and-trade regimes are widely seen as the most realistic approach to slowing global warming. Quantitative restrictions are firmly embedded in the Kyoto Protocol, and most proposals for individual-country policies in the United States and elsewhere, as well as those proposals for deepening the Kyoto Protocol, follow this model. A realistic worry about polices today is not whether they will be cap-and-trade instead of carbon taxes, but whether they will be just plain cap-without-trade. For example, in implementing the Kyoto Protocol, some approaches favor countries doing a substantial fraction of their own mitigation through "domestic implementation" rather than "buying their way out" by purchasing emissions permits from other countries. Even worse, countries might continue to argue and end up doing nothing, as has been the case for the United States up to now.
And up to now.
Nordhaus, I gather has his own pet ideas on the scheme he'd like to see adopted:
Given the strong support for cap-and-trade systems among analysts and policymakers, is there a compromise with cap-and-trade to get a hardy hybrid? Perhaps the most promising approach would be to supplement a quantitative system with a carbon tax that underpins it-- a "cap-and-tax" system. For example, countries could buttress their participation in a cap-and-trade system by imposing a tax of $30 per ton of carbon along with the quantitative restriction.
Eric de Place in his How James Hansen Gets Cap and Trade Wrong agrees with Krugman, but goes further, citing even more examples of cap-and-trade schemes that have worked in the past:
It’s also worth noting that Hansen ignores the other US cap and trade programs, all of which have also been successful. Like, for instance, the program to reduce nitrogen oxides (a contributor to smog and threat to public health) as well as the other regional cap-and-trade programs designed specifically to mitigate health impacts. As it turns out, when cap and trade is directed at reducing health threats, it does so quite effectively.
For more on how the SO2 and NOx programs have worked, see my blog post, “How Cap-and-Trade Markets Work For Acid Rain and Smog.”
CPP, the new ACA?
My take: this is looking a lot like the Obamacare debate, where many on the left were upset that we didn't just go with single payer (i.e. Medicare for all). Instead we went with a Rube Goldberg scheme that kept the old insurance companies in the loop. There isn't much doubt that a single-payer scheme would've worked even better than the Obamacare hack-- which was originally a conservative idea, backed by the Heritage foundation, and implemented by Romney in Massachusetts. The argument in favor of Obamacare was entirely a matter of political feasibility-- rather than go up against the Insurance industry in the middle of a difficult political fight, the industry was bought off: now they get an increase in business (insurance purchases mandated by the government) for less work (they're not allowed to screen out high-risk cases any more, so they don't have to worry about it). Now that we're seeing the result, this all looks impressively clever: something better might have been done, in theory, but this actually did get done, and we've succeeded in increasing health care coverage as well as restraining costs.
Now, bribing the bad guys is one of those things that many people balk at, for obvious reasons, but here we have at least one example of a case where getting over your natural repugnance to the idea can get you to a scheme that breaks political deadlocks, and get to a pragmatically achievable solution.
If you let your morality get in the way of actually improving the world, that's not a very moral outcome.
The ideal really can be the enemy of the good.
If you look at the Hansen/Krugman debate, Hansen does seem to be putting a lot of emphasis on rewarding the virtuous, and making sure the villainous don't get away with anything. He may have fallen into a trap of focusing on morality in preference to practicality...
Nuclear Difficulties
I'm at least tentatively positive on the "Clean Power Plan", though it's apparently a mixed-bag where nuclear power is concerned.
Brad Plummer goes into this in detail in his piece One potential loser in Obama's climate plan? Existing nuclear plants.
Now along comes Obama's Clean Power Plan, under which every state gets an individualized target for curtailing electricity emissions by 2030 and has to come up with a plan for getting there. States can do so by reducing emissions from their existing coal and gas plants (considered in total), by improving energy efficiency, or by building new sources of clean energy.
That third part is mildly good news for new nuclear. Tennessee, Georgia, and South Carolina will be able to make headway on their state emissions goals by bringing online the five new reactors they're already building, so they now have extra incentive to finish. (This was a big change from the original draft version of EPA's rule, which basically assumed these plants were as good as built.)
But aside from those five reactors, industry observers say it's unlikely we'll see many more built elsewhere, at least in the near term. Even with EPA's new emission goals, it's easier for most states to switch from coal to natural gas or to build wind farms than it is to build a brand new reactor. (Arguably, we may need new nuclear reactors in the longer term if we want to go totally carbon-free, but that would require a new set of policies beyond the Clean Power Plan.)
Brad Plummer continues:
The Clean Power Plan doesn't really do anything to forestall potential closures. It doesn't give states any extra credit for extending the life of their nuclear plants beyond their 40- or 60-year lifespans, nor does it penalize states for shutting down nuclear plants early. (This is because existing nuclear isn't included in the baseline for setting state emissions goals.) ... "States were basically given no incentive to look at extending these assets," says Steve Skutnik, an assistant professor of nuclear engineering at the University of Tennessee Knoxville who has studied the effects of the Clean Power Plan on nuclear power. "EPA essentially said [in its rule], 'Well, we can't predict which plants will close, so we won't deal with that.' I was surprised by that."