Storms of My Grandchildren (33 page)

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 benefit from reduced fuel demand, and thus reduced fuel 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.

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.

In contrast, the fee-and-dividend approach has no floor, so every action you take to reduce emissions helps. Indeed, your actions may also spur your neighbor to do the same. That snowballing (amplifying feedback) effect is possible with fee-and-dividend, but not with cap-and-trade.

Third, offsets cause actual emission reductions to be less than targets, because emissions covered by an offset do not count as emissions. They don’t count as emissions to the politicians, but they sure count to the planet! For example, actual reductions under the Waxman-Markey bill have been estimated to be less than half of the target, because of offsets.

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. To believe that there will be no insider profits is to believe that government overseers are more clever than all the people on Wall Street and that there is no revolving door between Wall Street and Washington. Where will Wall Street profits come from? They too will come from John Q. Public via higher energy prices.

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 quantitative comparison of fee-and-dividend and cap-and-trade has been made by economist Charles Komanoff (
www.komanoff.net/fossil/CTC_Carbon_Tax_Model.xls
). If the carbon fee increases by $12.50 per ton per year, Komanoff estimates that U.S. carbon emissions in 2020 would be 28 percent lower than today. And that is without the snowballing (amplifying feedback) effect I mentioned above. By that time the fee would add just over a dollar to the price of a gallon of gasoline, but the reduction in fossil fuel use would tend to reduce the price of raw crude. The 28 percent emissions reduction compares with the Waxman-Markey bill goal of 17 percent—which is, however, fictitious because of offsets. This approach, small annual increases of the carbon fee (ten to fifteen dollars per ton per year), is essentially the bill proposed by Congressman John B. Larson, a Democrat in the U.S. House of Representatives. Except Larson proposes using the money from the fee to reduce payroll taxes, rather than to pay a dividend to legal residents. The Democratic leadership and President Obama, so far, have chosen to ignore Congressman Larson.

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.

But, you may ask, was it not proven with the acid rain problem that cap-and-trade did a wonderful job of reducing emissions at low cost? No, sorry, that is a myth—and worse. In fact, examination of the story about acid rain and power plant emissions shows the dangers in both horse-trading with polluters and the cap-and-trade floor.

Here is essentially how the acid rain “solution” worked. Acid rain was caused mainly by sulfur in coal burned at power plants. A cap was placed on sulfur emissions, and power plants had to buy permits to emit sulfur. Initially the permit price was high, so many utilities decided to stop burning high-sulfur coal and to replace it with low-sulfur coal from Wyoming. From 1990 to today, sulfur emissions have been cut in half. A smaller part of the reduction was from the addition of sulfur scrubbers to some power plants that could install them for less than the price of the sulfur permits, but the main solution was use of low-sulfur coal. Now what the dickens does that prove?

It proves that in a case where there are a finite number of point sources, and there are simple ways to reduce the emissions, and you are satisfied to just reduce the emissions by some specified fraction, then emission permits make sense. The utilities that were closest to the Wyoming coal or that needed to install scrubbers for other reasons could reduce their emissions, and so overall the cost of achieving the specified reduction of sulfur emissions was minimized. But the floor of this cap-and-trade approach prevented further reductions. Analyses have shown that the economic benefits of further reductions would have exceeded costs by a factor of twenty-five. So, in some sense, the acid rain cap-and-trade solution was an abject failure.

Those people, including the leaders of our nation, who tell you that the acid rain experience shows that cap-and-trade will work for the climate problem do not know what they are talking about. The experience with coal-fired power plants does contain important lessons, though.

First, it shows that the path we start on is all-important. People who say that cap-and-trade is a good start and we will move on from there are not looking at reality. Four decades later we are still paying for an early misstep with coal-fired plants.

Second, it shows that we need a simple, across-the-board solution that covers all emissions. A fee or tax must be applied at the source. If Congress insists that it must help somebody who will be hurt by the carbon fee, such as coal miners, fine—Congress can provide for job retraining or some other compensation. But the fee on fossil fuel carbon must be uniform at the source, with no exceptions.

Finally, let me address the ultimate defense that is used for cap-and-trade: “The train has left the station. It is too late to change. President Obama has decided. The world has decided. It must be cap-and-trade, because an approach such as you are talking about would delay things too much.” That latter claim turns truth on its head, calling black “white” and white “black.” The truth is shown by empirical evidence. In February 2008, British Columbia decided to adopt a carbon tax with an equal reduction of payroll taxes. Five months later it was in place and working. This year there was an election in British Columbia in which the opposition party campaigned hard against the carbon tax. They lost. The public liked the carbon tax with a payroll tax reduction. Now both parties support it. In contrast, it took a decade to negotiate the cap-and-trade Kyoto Protocol, and many countries had to be individually bribed with concessions. The result: slow implementation and an ineffectual reduction of emissions. The Waxman-Markey bill is following a similar path.

I almost forgot that I had agreed to provide a proof that the approach pursued by governments today cannot conceivably yield their promise of an 80 percent emission reduction by 2050. It is an easy proof. An 80 percent reduction in 2050 is just what occurs if coal emissions are phased out between 2010 and 2030, as shown in figure 26. This is based on the moderate oil and gas reserves estimated by IPCC—implying also that we cannot go after the last drops of oil. First ask if governments are building any new coal plants. The answer: “Lots of them.” Then ask how they will persuade the major oil-producing nations to leave their oil in the ground. The answer: “Duh.” Proof complete.

Okay, at long last, we can address the fundamental problem. What is the backbone and framework for a solution to human-caused climate change?

The backbone must be a rising fee (tax) on carbon-based fuels, uniform across the board. No exceptions. The money must be returned to the public in a way that is direct, so they realize and trust that (averaged over the public) the money is being returned in full. Otherwise the rate will never be high enough to do the job. Returning the money to the public is the hard part in the United States. Congress prefers to keep the money for itself and divvy it out to special interests.