30 December 2009The Nation
We have finally arrived at the main story: what we need to do to solve the climate problem, and how we can save a future for our grandchildren.
The problem demands a solution with a clear framework and a strong backbone. Yes, I know that halting and reversing the growth of carbon dioxide in the air requires an "all hands on deck" approach-- there is no "silver bullet" solution for world energy requirements.People need to make basic changes in the way the live. Countries need to cooperate. Matters as seemingly intractable as population must be addressed. And the required changes must be economically efficient. Such a pathway exists and is achievable.Let's define what a workable backbone and framework should look like. The essential backbone is a rising price on carbon applied at the source (the mine, wellhead, or port of entry), such that it would affect all activities that use fossil fuels, directly or indirectly.Our goal is a global phaseout of fossil fuel carbon dioxide emissions. We have shown, quantitatively, that the only practical way to achieve an acceptable carbon dioxide level is to disallow the use of coal and unconventional fossil fuels (such as tar sands and oil shale) unless the resulting carbon is captured and stored. We realize that remaining, readily available pools of oil and gas will be used during the transition to a post-fossil-fuel world. But a rising carbon price surely will make it economically senseless to go after every last drop of oil and gas--even though use of those fuels with carbon capture and storage may be technically feasible and permissible.Global phaseout of fossil fuel carbon dioxide emissions is a stringent requirement. Proposed government policies, consisting of an improved Kyoto Protocol approach with more ambitious targets, do not have a prayer of achieving that result. Our governments are deceiving us, and perhaps conveniently deceiving themselves, when they say that it is possible to reduce emissions 80 percent by 2050 with such an approach.A successful new policy cannot include any offsets. We specified the carbon limit based on the geophysics. The physics does not compromise--it is what it is. And planting additional trees cannot be factored into the fossil fuel limitations. The plan for getting back to 350 ppm assumes major reforestation, but that is in addition to the fossil fuel limit, not instead of. Forest preservation and reforestation should be handled separately from fossil fuels in a sound approach to solve the climate problem.The public must be firm and unwavering in demanding "no offsets," because this sort of monkey business is exactly the type of thing that politicians love and will try to keep. Offsets are like the indulgences that were sold by the church in the Middle Ages. People of means loved indulgences, because they could practice any hanky-panky or worse, then simply purchase an indulgence to avoid punishment for their sins. Bishops loved them too, because they brought in lots of moola. Anybody who argues for offsets today is either a sinner who wants to pretend he or she has done adequate penance or a bishop collecting moola.Be prepared for energy experts telling you that a kazillion units of energy will be needed in 2050 or 2100. They will calculate how many square miles of solar power plants must be built every day or how many nuclear power plants must be built every year, and then they will wring their hands and perhaps try to sell you something. Yes, energy use is going to increase--mainly because parts of the world are developing rapidly and raising their standards of living and energy use. But energy growth need not be exceedingly rapid--energy use hardly grew during rapid economic growth in the world's largest economy, even though the great potential of energy efficiency was barely tapped.Also remember that the solution to the climate problem requires a phasedown of carbon emissions, not necessarily a phasedown of energy use. We will need to slow the energy growth rate and decarbonizes our energy sources to solve the problem.Why do fossil fuels continue to provide most of our energy? The reason is simple. Fossil fuels are the cheapest energy. This is in part due to their marvelous energy density and the intricate energy-use infrastructure that has grown up around fossil fuels. But there is another reason: Fossil fuels are cheapest because we do not take into account their true cost to society. Effects of air and water pollution on human health are borne by the public. Damages from climate change are also falling on the public, but they will be borne especially by our children and grandchildren.How can we fix the problem? The solution necessarily will increase the price of fossil fuel energy. We must admit that. In the end, energy efficiency and carbon-free energy can surely be made less expensive than fossil fuels, if fossil fuels' cost to society is included. The difficult part is that we must make the transition with extraordinary speed if we are to avert climate disaster. Rather than immediately defining a proposed framework for a solution, which may appear to be arbitrary without further information, we need to first explore the problem and its practical difficulties.Two alternative legislative actions have been proposed in the United States: "fee-and-dividend" and "cap-and-trade." Let's begin by looking at the simpler approach, fee-and-dividend. In this method, a fee is collected at the mine or port of entry for each fossil fuel (coal, oil and gas), i.e., at its first sale in the country. The fee is uniform, a single number, in dollars per ton of carbon dioxide in the fuel. The public does not directly pay any fee or tax, but the price of the goods they buy increases in proportion to how much fossil fuel is used in their production. Fuels such as gasoline or heating oil, along with electricity made from coal, oil or gas, are affected directly by the carbon fee, which is set to increase over time. The carbon fee will rise gradually so that the public will have time to adjust their lifestyle, choice of vehicle, home insulation, etc., so as to minimize their carbon footprint.Under fee-and-dividend, 100 percent of the money collected from the fossil fuel companies at the mine or well is distributed uniformly to the public. Thus those who do better than average in reducing their carbon footprint will receive more in the dividend than they will pay in the added costs of the products they buy.The fee-and-dividend approach is straightforward. It does not require a large bureaucracy. The total amount collected each month is divided equally among all legal adult residents of the country, with half shares for children, up to two children per family. This dividend is sent electronically to bank accounts, or for people without a bank account, to their debit card.A rising carbon price does not eliminate the need for efficiency regulations, but it makes them work much better. The best enforcement is carbon price--as the fuel price rises, people pay attention to waste.Let's discuss cap-and-trade explicitly. Then I will provide a bottom-line proof that it cannot work.In cap-and-trade, the amount of a fossil fuel for sale is supposedly "capped." A nominal cap is defined by selling a limited number of certificates that allow a business or speculator to buy the fuel. So the fuel costs more because you must pay for the certificate and the fuel. Congress thinks this will reduce the amount of fuel you buy--which may be true, because it will cost you more. Congress likes cap-and-trade because it thinks the public will not figure out that a cap is a tax. How does the "trade" part factor in? Well, you don't have to use the certificate; you can trade it or sell it to somebody else. There will be markets for these certificates on Wall Street and such places. And markets for derivatives. The biggest player is expected to be Goldman Sachs. What is the advantage of cap-and-trade over fee-and-dividend, with the fee distributed to the public in equal shares? There is an advantage to cap-and-trade only for energy companies with strong lobbyists and for Congress, which would get to dole out the money collected in certificate selling, or just give away some certificates to special interests.Okay, I will try to be more specific about why cap-and-trade will be necessarily ineffectual. Most of these arguments are relevant to other nations as well as the United States.First, Congress is pretending that the cap is not a tax, so it must try to keep the cap's impact on fuel costs small. Therefore, the impact of cap-and-trade on people's spending decisions will be small, so necessarily it will have little effect on carbon emissions. Of course that defeats the whole purpose, which is to drive out fossil fuels by raising their price, replacing them with efficiency and carbon-free energy. The impact of cap-and-trade is made even smaller by the fact that the cap is usually not across the board at the mine. In the fee-and-dividend system, a single number, dollars per ton of carbon dioxide, is applied at the mine or port of entry. No exceptions, no freebies for anyone, all fossil fuels covered for everybody. In cap-and-trade, things are usually done in a more complicated way, which allows lobbyists and special interests to get their fingers in the pie. If the cap is not applied across the board, covering everything equally, any sector not covered will be able to lower its price. Sectors not covered then increase their fuel use.In contrast, the fee-and-dividend approach puts a rising and substantial price on carbon. I believe that the public, if honestly informed, will accept a rise in the carbon fee rate because their monthly dividend will increase correspondingly. The cap-and-trade target level for emissions (defined by the number of permits) sets a floor on emissions. Emissions cannot go lower than this floor, because the price of permits on the market would crash, bringing down fossil fuel prices and again making it more economical for profit-maximizing businesses to burn fossil fuels than to employ energy-efficiency measures and renewable energy technology.With fee-and-dividend, in contrast, we will reach a series of points at which various carbon-free energies and carbon-saving technologies are cheaper than fossil fuels plus their fee. As time goes on, fossil fuel use will collapse, remaining coal supplies will be left in the ground, and we will have arrived at a clean energy future. And that is our objective.A perverse effect of the cap-and-trade floor is that altruistic actions become meaningless. Say that you are concerned about your grandchildren, so you decide to buy a high-efficiency little car. That will reduce your emissions but not the country's or the world's; instead it will just allow somebody else to drive a bigger SUV. Emissions will be set by the cap, not by your actions.Fourth, Wall Street trading of emission permits and their derivatives in the anticipated multitrillion-dollar carbon market, along with the demonstrated volatility of carbon markets, creates the danger of Wall Street failures and taxpayer-funded bailouts. In the best case, if market failures are avoided, there is the added cost of the Wall Street trading operation and the profits of insider trading.In contrast, a simple flat fee at the mine or well, with simple long division to determine the size of the monthly dividend to all legal residents, provides no role for Wall Street. Could that be the main reason that Washington so adamantly prefers cap-and-trade? Fee-and-dividend is revenue neutral to the public, on average. Cap-and-trade is not, because we, the public, provide the profits to Wall Street and any special interests that have managed to get written into the legislation. Of course Congress will say, "We will keep the cost very low, so you will hardly notice it." The problem is, if it's too small for you to notice, then it is not having an effect. But maybe Congress doesn't really care about your grandchildren.Hold on! Or so you must be thinking. If cap-and-trade is so bad, why do environmental organizations such as the Environmental Defense Fund and the National Resources Defense Council support it? And what about Waxman and Markey, two of the strongest supporters of the environment among all members of the House of Representatives?I don't doubt the motives of these people and organizations, but they have been around Washington a long time. They think they can handle this problem the way they always have, by wheeling and dealing. Environmental organizations "help" Congress in the legislative process, just as the coal and oil lobbyists do. So there are lots of "good" items in the 1,400 pages of the Waxman-Markey bill, such as support for specific renewable energies. There may be more good items than bad ones--but unfortunately the net result is ineffectual change. Indeed, the bill throws money to the polluters, propping up the coal industry with tens of billions of taxpayer dollars and locking in coal emissions for decades at great expense.Yet these organizations say, "It is a start. We will get better legislation in the future." It would surely require continued efforts for many decades, but we do not have many decades to straighten out the mess.The beauty of the fee-and-dividend approach is that the carbon fee helps any carbon-free energy source, but it does not specify these sources; it lets the consumer choose. It does not cost the government anything. Whether it costs citizens, and how much, depends on how well they reduce their carbon footprint.A final comment on cap-and-trade versus fee-and-dividend. Say an exogenous development occurs, for example, someone invents an inexpensive solar cell or an algae biofuel that works wonders. Any such invention will add to the 28 percent emissions reduction in the fee- and- dividend approach. But the 17 percent reduction under cap-and-trade will be unaffected, because the cap is a floor. Permit prices would fall, so energy prices would fall, but emission reductions would not go below the floor. Cap-and-trade is not a smart approach.Contrary to the assertion by proponents of a Kyoto-style cap-and-trade agreement, cap-and-trade is not the fastest way to an international agreement. That assertion is another case of calling black "white," apparently under the assumption that the listener will accept it without thinking. A cap-and-trade agreement will be just as hard to achieve as was the Kyoto Protocol. Indeed, why should China, India, and the rest of the developing world accept a cap when their per-capita emissions are an order of magnitude less than America's or Europe's? Leaders of developing countries are making that argument more and more vocally. Even if differences are papered over to achieve a cap-and-trade agreement at upcoming international talks, the agreement is guaranteed to be ineffectual. So eventually (quickly, I hope!) it must be replaced with a more meaningful approach. Let's define one.The key requirement is that the United States and China agree to apply across-the-board fees to carbon-based fuels. Why would China do that? Lots of reasons. China is developing rapidly and it does not want to be saddled with the fossil fuel addiction that plagues the United States. Besides, China would be hit at least as hard as the United States by climate change. The most economically efficient way for China to limit its fossil fuel dependence, to encourage energy efficiency and carbon-free energies, is via a uniform carbon fee.The same is true for the United States. Indeed, if the United States does not take such an approach but rather continues to throw lifelines to special interests, its economic power and standard of living will deteriorate, because such actions make the United States economy less and less efficient relative to the rest of the world.Agreement between the United States and China comes down to negotiating the ratio of their respective carbon tax rates. In this negotiation the question of fairness will come up--the United States being more responsible for the excess carbon dioxide in the air today despite its smaller population. That negotiation will not be easy, but once both countries realize they are on the same boat and will sink or survive together, an agreement should be possible. Europe, Japan and most developed countries would likely agree to a similar status to that of the United States. It would not be difficult to deal with any country that refuses to levy a comparable across-the-board carbon fee. An import duty could be collected by countries importing products from any nation that does not levy such a carbon fee. The World Trade Organization already has rules permitting such duties. The duty would be based on standard estimates of the amount of fossil fuels that go into producing the imported product, with the exporting company allowed the option of demonstrating that its product is made without fossil fuels, or with a lesser amount of them. In fact, exporting countries would have a strong incentive to impose their own carbon fee, so that they could keep the revenue themselves.As for developing nations, and the poorest nations in the world, how can they be treated fairly? They also must have a fee on their fossil fuel use or a duty applied to the products that they export. That is the only way that fossil fuels can be phased out. If these countries do not have a tax on fossil fuels, then industry will move there, as it has moved already from the West to China and India, with carbon pollution moving along with it. Fairness can be achieved by using the funds from export duties, which are likely to greatly exceed foreign aid, to improve the economic and social well-being of the developing nations.In summary, the backbone of a solution to the climate problem is a flat carbon emissions price applied across all fossil fuels at the source. This carbon price (fee, tax) must rise continually, at a rate that is economically sound. The funds must be distributed back to the citizens (not to special interests)--otherwise the tax rate will never be high enough to lead to a clean energy future. If your government comes back and tells you that it is going to have a "goal" or "target" for carbon emission reductions, even a "mandatory" one, you know that it is lying to you, and that it doesn't give a damn about your children or grandchildren. For the moment, let's assume that our governments will see the light.Once the necessity of a backbone flat carbon price across all fossil fuel sources is recognized, the required elements for a framework agreement become clear. The principal requirement will be to define how this tax rate will vary between nations. Recalcitrance of any nations to agree to the carbon price can be handled via import duties, which are permissible under existing international agreements. The framework must also define how proceeds of carbon duties will be used to assure fairness, encourage practices that improve women's rights and education, and help control population. A procedure should be defined for a regular adjustment of funds' distribution for fairness and to reward best performance. Well, what happens if, instead of accepting the need for a rising carbon price, our governments continue to deceive us, setting goals and targets for carbon emissions reductions?In that case we had better start thinking about the Venus syndrome.
