The draft design includes the following elements:

1. A big prominent letter grade for fuel economy and emissions performance, on a scale of A+ to D (with B- being more-or-less average)
2. Five-year savings relative to an “average” vehicle (whatever that is)
3. Fuel consumption and fuel economy (city and highway mpg; gallons per 100 miles)
4. Emissions (CO2 grams per mile)
5. Annual fuel cost

If that’s not enough data for you, the label will also provide a web link with more detailed information.

What is missing in this short list is the one factor that is most important to someone making a long-term vehicle investment decision: How many dollars worth of fuel will the vehicle consume over its entire expected lifecycle? This should technically be a discounted present value, but looking at where the economy and fuel price inflation might be headed after 2012 (when the new labeling rules will take effect), a negative discount factor might be appropriate.

In the interest of truth in advertising, the web info referenced on the label should indicate the Energy Information Administration (EIA) fuel price projections underlying the lifecycle cost estimate, and should provide a comparison of past EIA projections with actual historical fuel prices to give a sense of their reliability. The analysis underlying the new federal CAFE standards assumed a price projection (from EIA) of $3.18/gallon (2007 dollars) in the 2010 to 2030 time frame. To get a sense of the assumptions underlying this estimate, look at Craig Severance’s recent Grist article on peak oil. (Look for “Unidentified Projects” after 2012.)

Disclosing lifecycle fuel costs to consumers is especially important because even with the EIA’s rose-colored $3.18/gallon long-term price projection, the fuel-saving incentive of efficient vehicles could alone be over twice the regulatory incentive of new CAFE standards if lifecycle costs were fully considered. By only giving people information on short-term costs and savings, the fuel-economy labels will just reinforce short-sighted and ill-informed preference choices.

Lifecycle fuel costs should replace item 2 — savings relative to an average vehicle — which is pretty meaningless because you won’t see any vehicle model designated “Average” in the new-car lot. It is also redundant because the letter grade basically tells you whether the car is relatively “Good” or “Bad”.

The emissions value in CO2 grams-per-mile is not likely to impress many buyers. As an average (American) consumer, I can’t relate to grams. I just know that a “gram” is really tiny, so anything measured in grams must be pretty insignificant.

Emissions, like fuel costs, should be reported as a lifecycle aggregate, in tons of CO2. Consumers have a good sense of what “a ton” of something is, so they will get it. A typical car’s lifecycle emissions are on the order of 50 tons.

Comments? Suggestions? Don’t just comment here; cross-post your ideas on the EPA/NHTSA blog, where they might motivate someone to actually do something. Tell them to disclose total lifecycle fuel costs and GHG emissions on fuel economy labels.

Ken Johnson says:
January 31, 2010 at 9:39 pm

Regarding Fred Krupp’s comment about China’s “centralized industrial policy that we can’t match and don’t want in the United States …,” that sounds to me a lot like a top-down, economy-wide cap-and-trade system in which central planners set production targets and allocate quotas.

[JR: It may sound a lot like that to you -- but not to anyone else. It is the opposite of central planning and it is Orwellian to say otherwise.]

[snip]

********

Here is the original, uncensored post:

Regarding Fred Krupp’s comment about China’s “centralized industrial policy that we can’t match and don’t want in the United States …,” that sounds to me a lot like a top-down, economy-wide cap-and-trade system in which central planners set production targets and allocate quotas. That approach indeed seems to be unworkable in our political environment. Broad scope of coverage begets broad-based, consolidated political opposition, and the hard-caps-at-any-cost approach just leads to weak, politically emaciated targets. Sector-specific regulations could be more practical (in terms of political palatability and administrative simplicity) than trying to pursue Krupp’s dream of One Universal, Worldwide Carbon Price. Furthermore, a policy that is more favorable to price certainty could help overcome political obstacles to more ambitious environmental goals.

Regarding Krupp’s assertion that “A clear and declining cap on carbon emissions will send the essential market signal to industry …,” Senator Kerry recently said this: “Comprehensive climate change (legislation) means pricing carbon and setting a target for reduction. It’s open to how you price carbon. People need to relax and look at all the ways you might price carbon. We’re not pinned down to one approach.” Targets are fine when framed as minimal objectives — not as the “ultimate goal,” and not with regulations that seek to prevent and deter emission reductions beyond the cap even when the cap doesn’t come close to sustainability requirements and when further reductions could be achievable at low (e.g., negative) net cost.

Regarding “all the ways you might price carbon,” cap-and-trade is not “the only game in town,” and carbon taxes are not the only other game. Carbon pricing does not necessarily mean imposing a high price on emissions. A high subsidy on low-carbon energy (e.g. via feed-in tariffs) could be more effective at decarbonizing energy generation — particularly when low-carbon energy has small market share. The market competition for clean, low-carbon energy engendered by such subsidies could protect ratepayers from high energy prices more effectively than tax-and-dividend.

A Universal Carbon Price is an extremely blunt policy instrument. I am encouraged that Graham and Kerry seem to be open to regulatory alternatives outside the scope of the US-CAP recommendations, and I hope that the likes of Krupp will also “relax and look at all the ways you might price carbon”.

There has been a lively discussion of this topic on James Handley’s blog at carbontax.org. My last comment, responding to Dan’s 11/19/2009 comment, was blocked, but is replicated below:

Dan,

Thank you for the calculations. This is excellent.

One point of clarification, re “As I understand, Ken would have the entire cost of wind power subsidized from the carbon fee revenue.” If $100/MWh wind power is competing against $50/MWh fossil fuels, then wind would only need a $50/MWh subsidy (not $100/MWh) to be cost competitive. So the $10/MWh carbon fee could actually support 0.46 TWh of wind power (not 0.23), nearly 12 percent of total U.S. generation. The total increase in national generation cost would be about $23 billion (not $11.5 billion), corresponding to a retail rate increase of almost 6 percent (not 3 percent).

The $23 billion cost is unrelated to the choice of policy instrument — it is simply the technology cost of replacing 12 percent of U.S. fossil fuel generation (at $50/MWh) with wind energy (at $100/MWh). That money has to come from somewhere. When wind energy is one or two percent of total generation, the money can come from government financing (grants or tax credits), but probably not when it gets up to 10 or 20 percent. The problem with government subsidies, like “cash for clunkers”, is that the subsidy ends when the cash runs out. With financing derived from carbon pricing, the financing source is depleted only as carbon is phased out.

At current growth rates, it would take perhaps another decade for new wind energy to reach the 12 percent level, at which time the costs will probably be significantly below $100/MWh, and may have attained grid parity. (PV is also quickly catching up with wind.) Of course, we would like to accelerate that transition, not just in the U.S., but globally. New-source subsidies are primarily intended to facilitate low-carbon energy expansion in the early phase of this transition.

The key point that I hope you (and your readers) recognize is this: An initial carbon fee of $10/tCO2, with revenue recycling, will give renewables approximately a $10/MWh price advantage over coal; whereas new-source subsidies, financed by carbon fees starting out well below $10/tCO2, could provide new renewables a price advantage on the order of $100/MWh immediately — not ten years from now.

If low-carbon energy prices do not come down, as expected, then high technology costs will lead to increasing electricity rates as low-carbon energy gains market share. In this case, a minor fraction of revenue might appropriately be used to sustain particularly disadvantaged consumers; but giving relief to poor people is not the same as distributing most or all carbon revenue to all consumers regardless of need.

Regarding energy conservation incentives, one of the most-cited examples of pricing impacts on conservation is high gas prices. But the conservation incentive from gas prices is already well in excess of $200/ton (and rising), far higher than any contemplated carbon price. Clean-vehicle technology is limited more by lack of efficient financing incentives than by lack of a carbon price. But pricing instruments such as appliance feebates could also create targeted incentives for energy efficiency.

Regarding NG substitution for electricity, new-source subsidies are based on emission performance, not technology type, so new NG generation would gain an immediate price advantage over coal, as would renewables.

Regarding “giving a boost to wind power developers that greatly exceeds their needs,” again, the policy is technology-neutral, and the $50/MWh subsidy that wind power now gets from government subsidies and tax credits may be difficult to sustain as wind energy gains significant market share. Also (responding to your first observation), RPS standards, like cap-and-trade, are more “brittle” than pricing instruments in the sense that they impose a predetermined target no matter how high the cost, and do not provide incentives for exceeding the target no matter how low the cost. (On that point, I think you might agree.)

Waxman-Markey’s faults notwithstanding, it could be a positive step forward if it does not impede complementary efforts to achieve further emission reductions and to set precedents for more effective federal action. And yet the House bill would perversely impede and undermine such efforts. How so? 

Suppose, for example, that you wanted to install photovoltaic panels on your home to reduce your carbon footprint. By reducing your dependence on coal-powered electricity, less coal would be burned, and your personal contribution to greenhouse gas emissions would be diminished — you would hope. But with cap-and-trade it doesn’t work that way. 

Under Waxman-Markey’s emission trading system, your local electricity distribution company would be required to hold and surrender allowances for its greenhouse gas emissions, including the emissions resulting from your electricity consumption. But even if you reduce or eliminate your consumption of grid-supplied electricity, the allowances that would have been used to cover your emissions will still be allocated, and will be available to allow more emissions elsewhere. Those additional emissions would not have been allowed without your action, and will nullify any environmental benefit of your action. Unless there is some mechanism for capturing and retiring the surplus allowances resulting from your action, you will have accomplished nothing more than to marginally reduce industry’s compliance costs by increasing the supply of surplus allowances. 

Complementary greenhouse gas reduction actions by companies and local governments would similarly be subverted by emission trading. The Waxman-Markey law makes a feeble attempt to address this issue in a singular provision allowing states to “require surrender … of emission allowances” from regulated entities (HR2454, p. 1018), but this authority is only granted in the context of states’ own cap-and-trade programs and is apparently intended to be exercised only for the purpose of demonstrating compliance with such programs. States could use this authority to ensure that their cap-and-trade regulations achieve emission reductions that are additional to what the federal program alone would achieve. However, states are barred from implementing such programs between 2012 and 2017, and the provision does not address the additionality problem in the context of other types of programs such a vehicle emission regulations and photovoltaic financing programs. 

A practical resolution to this problem would be to authorize the U.S. EPA to set aside and retire (or allow states to retire) the surplus allowances resulting from states’ complementary greenhouse gas reduction programs. There is a growing awareness of this issue among some state governments and public interest groups (even though the press and the public are largely oblivious to the problem), and the Senate will soon have an opportunity to formulate a legislative remedy. 

Yes, “it’s easy being green,” but saving the planet is harder. Congress might not be able to pass climate legislation if it isn’t as cheap and easy as Krugman says it will be, but the law should not deter and diminish the efforts of those who are able and willing to do more and to pay more to help avert climate catastrophe. The fundamental question before the Senate is this: Should individuals, corporations, municipalities, and states have the ability and the right, under federal cap-and-trade legislation, to take action to further reduce their carbon footprint without their action resulting in, and being nullified by, increased emissions elsewhere?

July 9, 2009 at 11:25 pm

For all of Waxman-Markey’s faults, I think it gets two things right: (1) allowance set-asides to fund tropical forest conservation, and (2) a meaningful price floor. These measures move U.S. policy closer to the rational and pragmatic goal of minimizing emissions within limits of cost acceptability. However, they leave W-M with no coherent policy foundation, because its other regulatory mechanisms — the cap, trading, economy-wide linkage, banking, borrowing, and offsets — all operate to achieve the converse objective of minimizing costs within limits of a predetermined (and unsustainable) emission cap.

The irrationality of the latter objective is demonstrated by the U.S. SO2 trading system, which continues to focus regulatory incentives on further cost reductions — not emission reductions — even when allowances are selling at a fraction of what was expected when the cap-and-trade system was enacted, and even when quantifiable benefits of further emission reductions would exceed costs by a factor of 25.

[Note to JR re "... So they do more than is necessary ...": That is because of banking, which has the effect of shifting the over-allocation into future compliance periods. They do more now only so they can do less later.]

Suppose that the SO2 allowances had been sold at fixed price (no emission cap), with sales revenue distributed according to the same proportionate allocation formula that was used for allowance allocation (or any other preferred formula). If the price were set at the lower limit of the original expectation level (about $650/ton, compared to the actual market of about $200/ton) then SO2 scrubber technology would have been adopted much sooner, and the more ambitious goal of the EPA’s recent Clean Air Interstate Rule might have been achieved years ago without further regulatory intervention.

But that’s not the kind of program that Hansen and other carbon-tax advocates are propounding for GHG regulation. Their proposals are very similar to Obama’s original 100% auction, 80% tax dividend plan, the main difference being that allowances would be sold rather than auctioned. Obama, to his credit, knows how to recognize a brick wall when he sees it and he backed off on his original plan. The carbon-tax lobby, by contrast, is still banking its head against the wall in its insistence that carbon taxes operate primarily to extract revenue from the regulated industry. In my view, it is this dogged and dogmatic adherence to a “punitive” regulatory approach that leaves W-M as “the only game in town”.

However, if tax revenue is used only to finance or incentivize emission reductions in the taxed industry, then I think there would be three consequences: (1) Industry costs would be dramatically lower (even if emission-reduction incentives are much higher than cap-and-trade’s), so pricing instruments would lose their political stigma. (2) Price certainty, in addition to low costs, would make pricing instruments much more attractive to industry. (3) Pricing instruments would be more compatible with sectoral policies having limited scope, and hence limited political opposition. (Monolithic, economy-wide policies like W-M’s tend to lead to “monolithic, economy-wide” political opposition, but the rationale for economy-wide linkage disappears when the policy objective is minimum emissions — not minimum costs.)

Passage of W-M is not a sure bet, so it would be prudent to start thinking about some kind of viable “Plan B”.

I am a California resident and climate policy activist with a particular interest in legislative policy related to climate change.

Recent writings:

“Going Beyond CAFE Standards: Feebate Financing Incentives for Fuel Economy” (September 3, 2010)
http://ssrn.com/abstract=1624672

“A Decarbonization Strategy for the Electricity Sector: New-Source Subsidies” (January 13, 2010)
http://ssrn.com/abstract=1427106

Circumventing the Weight-Versus-Footprint Tradeoffs in Vehicle Fuel Economy Regulation (December 14, 2009)
http://ssrn.com/abstract=1523398

“Preserving Additionality of Complementary GHG-Reduction Actions Under Waxman-Markey” (June 16, 2009)
http://ssrn.com/abstract=1421947

“The Role of Policy Logic in U.S. Climate Legislation” (July 23, 2009)
http://ssrn.com/abstract=1437741

I have provided comments, testimony, and technical analysis for the following groups and activities (search for “Johnson”):

Western Environmental Law Center — Federal climate policy and states’ rights

Comments for CARB’s Economic Allocation and Advisory Committee, July 1, 2009 meeting

Comments on Design Elements of the Cap-and-Trade Program (March 23, 2009)

Comments and recommendations for AB 32 Proposed Scoping Plan (Scoping Plan – #39, #346, CEQA Evaluation – #1)

Comments and recommendations for AB 32 Draft Scoping Plan (Program Design – #19 , General Comments – #234, Transportation – #64, Measure Documentation Supplement – #2 )

AB 32 Economic Analysis Technical Stakeholder Work Group Meetings

AB 32 Program Design Technical Stakeholder Work Group Meetings

AB 32 Input Solicitation

California Public Utilities Commission

Western Climate Initiative

California Air Resource Board

Market Advisory Committee

I have also published several peer-reviewed papers relating to climate policy:

Johnson, K., 2010. Circumventing the weight-versus-footprint tradeoffs in vehicle fuel economy regulation. Transportation Research Part D, Available online 20 May 2010.
http://dx.doi.org/10.1016/j.trd.2010.04.013

Johnson, K., 2010. A decarbonization strategy for the electricity sector: New-source subsidies. Energy Policy 38 (2010) 2499–2507.
http://dx.doi.org/10.1016/j.enpol.2009.12.044

Johnson, K., 2006. Refunded emission taxes: A resolution to the cap-versus-tax dilemma for greenhouse gas regulation. Energy Policy 35 (5), 3115-3118.
http://dx.doi.org/10.1016/j.enpol.2006.10.020

Johnson, K., 2007. California’s greenhouse gas law, Assembly Bill 1493: Deficiencies, alternatives, and implications for regulatory climate policy. Energy Policy 35 (1), 362-372.
http://dx.doi.org/10.1016/j.enpol.2005.11.026

Johnson, K., 2006. Feebates: An effective regulatory instrument for cost-constrained environmental policy. Energy Policy 34 (18), 3965-3976.
http://dx.doi.org/10.1016/j.enpol.2005.10.005

Re “U.S. to Issue Tougher Fuel Standards for Automobiles” (NY Times, 5/18/2009)

“President Obama will announce as early as Tuesday that he will combine California’s tough new auto-emissions rules with the existing corporate average fuel economy standard to create a single new national standard …”

Four questions:

(1) Which will it be: an emission standard or a fuel-economy standard? (California scrupulously avoided structuring its Pavley regulations as a fuel-economy standard, to avoid conflict with federal preemption rules.)

(2) Will the new federal standard preempt California’s even tougher “Pavley II” regulations under AB 32?

(3) California’s standard was based on the AB-1493 mandate requiring “the maximum feasible and cost-effective reduction of greenhouse gas emissions from motor vehicles.” Will federal standards be based on any comparable requirement?

(4) The California standard, when fully phased in by 2016, would be 205 gm-CO2/mi for cars and 332 gm-CO2/mi for light trucks. Has anyone in the federal government, or in any of the state governments that have adopted California’s standard, seen or understood the calculations underlying these numbers?

The acid-rain program’s regulatory costs were indeed low, partly because emission allowances were freely allocated to industry. But Obama’s plan calls for 100 percent auctioning of allowances, which erases the perceived cost advantage and puts cap-and-trade on par with carbon taxes in terms of political viability.

To ameliorate cost impacts, the plan would allocate most (80 percent) of the auction proceeds to a permanent $800 “Making Work Pay” tax cut for working families; but with cap-and-trade nothing is ever “permanent.” Carbon trading prices in Europe have dropped from over $30 to $10 per ton CO2 over the last year, and in the U.S. northeastern states allowances are currently selling at a meager $3 per ton. Obama’s plan is betting on $20 per ton, but linking the nation’s tax system to an erratic revenue source would be imprudent.

The obvious, but unanswered, question is why a 100-percent auction would be preferable to a fixed-price sale of allowances, i.e. a carbon tax, which could simply be set at $20 per ton. There would be no price volatility.

Regarding the claim that cap-and-trade “dramatically reduced acid rain,” the reduction was not sufficiently dramatic to actually solve the acid rain problem. Further reductions would yield an estimated societal return-on-investment of 2,500 percent from health and environmental benefits, and yet emission trading creates no incentive for such further reductions even when costs are far below initial expectations. The EPA has been trying for years to institute rules for more stringent acid rain regulations, but under the current cap-and-trade regime the rules cannot be strengthened without an Act of Congress — or a very protracted court battle. The implications for global climate policy should be clear.

A carbon tax would create a stable price signal and a predictable investment climate that would be more conducive to long-term investments in clean-energy technology and infrastructure. Alternatively, a price floor applied to allowance auctions would avert the kind of price erosion and collapse that has characterized prior trading systems. Had a price floor been applied in the acid rain program, there may have been no need for the EPA’s new rules.

Irrespective of whether carbon pricing revenue comes from an auction or from a fixed-price sale of allowances, the allocation of the revenue to a Making Work Pay tax cut would be problematic because consumers would not be equitably compensated for high energy costs. The tax burden would shift, not just onto wealthy taxpayers, but also onto low-income groups such as retirees on fixed incomes or people who expend a relatively large portion of their income on energy. The tax cut would have to somehow be linked to energy consumption to make it equitable.

A simpler and more direct way to mitigate energy costs — one that is not discussed or considered in Obama’s plan — would be to apply most of the carbon pricing revenue to subsidize energy prices, e.g. at a uniform cents-per-kilowatt-hour rate for electricity. If the revenue is allocated to industry as an energy production subsidy it would have much the same cost-cutting effect as free allocation of allowances — but with one crucial difference: Clean and renewable energy technologies would also qualify for the subsidy, and would therefore not be disadvantaged by the allocation method. Competition from subsidized clean energy would deter polluting industries from passing their costs onto consumers, and would make fossil-fuel energy progressively less economically viable as clean energy attains economies of scale and gains market share. (By contrast, free allocation is equivalent to giving all of the revenue to polluters.)

For example, if the electricity industry comprises 90 percent fossil-fuel energy and 10 percent renewable, then the subsidy would reduce the net tax on fossil fuels by a factor of ten while providing a per-kilowatt-hour subsidy of nearly ten times that amount to renewable energy. The same net tax could even support a much greater subsidy if the subsidy were focused on new renewables, excluding legacy hydroelectric and nuclear power. Eventually, as carbon is phased out of the electricity industry, the clean-energy subsidy would automatically diminish and the net tax on fossil-fuel energy would increase until the latter becomes uneconomical.

In essence, the subsidized-energy approach replaces the big “stick” of a high tax with a big “carrot” of high subsidies, which can be equally effective at incentivizing clean energy deployment. Carrots might succeed where sticks have so far failed to achieve political consensus on federal climate policy.

[Revised 3/22/2009]

Last month, Senator Barbara Boxer proposed six principles for climate legislation, the first of which was:

1. Reduce emissions to levels guided by science to avoid dangerous global warming.

The National Call to Action on Global Warming, announced last week by a coalition of fifty environmental and public-interest groups, is more specific. Its first stated objective is the following:

Establish Science-Based Pollution Reduction Targets. Cut total, economy-wide global warming emissions by at least 25 percent below 1990 levels by 2020 and by at least 80 percent below 1990 levels by 2050 …

How were these targets established? The coalition’s announcement outlines the scientific basis in the introductory paragraphs:

To avoid the worst effects of global warming, there is broad scientific agreement that we must limit additional warming to no more than 2 degrees Celsius over pre-industrial levels. According to the IPCC, we have a reasonable chance of meeting this objective if developed countries as a whole cut their emissions by 25-40 percent below 1990 levels by 2020 and by 80-95 percent below 1990 levels by 2050; within this time frame, major developing countries also must act.

More recent findings since the publication of the latest IPCC assessment suggest that even more urgent action may be needed. …

Regarding the comment that “recent findings … suggest … may …,” the latest science is less equivocal:

Recent observations confirm that, given high rates of observed emissions, the worst-case IPCC scenario trajectories (or even worse) are being realised. For many key parameters, the climate system is already moving beyond the patterns of natural variability within which our society and economy have developed and thrived. These parameters include global mean surface temperature, sea-level rise, ocean and ice sheet dynamics, ocean acidification, and extreme climatic events. There is a significant risk that many of the trends will accelerate, leading to an increasing risk of abrupt or irreversible climatic shifts.

Apparently, the coalition’s first objective is not “science-based,” in the sense of ensuring avoidance of catastrophic climate change, because it is based on the most minimal IPCC-based targets, which have been superseded by more recent findings. And whatever Senator Boxer and Congress do, they are not going to mandate science-based targets sufficient to “avoid dangerous global warming”—that threshold has evidently already been crossed.

The objective reality is that climate legislation is and always has been driven primarily by politics and cost-consciousness, and only secondarily by scientific realities. But does it do any harm to pretend that policies are “science-based”? Yes, it does.

The pretense lulls us into a self-deceptive sense of security, thinking that no effort or expense need be expended to surpass mandated caps or targets because their “scientific basis” ensures “environmental certainty.” For example, there is no perceived justification for a meaningful price floor to stabilize carbon trading prices, because low prices (e.g. the recent price collapse in the EU ETS, or the RGGI’s anemic $3/ton price) are an indication that environmental goals are being achieved at the lowest possible cost.

This perspective was articulated by EDF’s Tony Kreindler in seeking to rationalize EDF’s opposition to a price floor:

If we’re reducing emissions on schedule, if we’re achieving the environmental goal with the cap, why would we not want to do it at the lowest-possible cost?

The consequence of EDF’s “lowest-cost-at-any-cost” philosophy is evidenced by the U.S. SO2 trading system, which continues to focus regulatory incentives on further cost reductions, not further emission reductions, even when costs are far below initial expectations and when further investment in SO2 emission reduction would yield an estimated societal return-on-investment of 2500 percent. Under the cap-and-trade regulatory regime established by EDF such further reductions can only be sought through an Act of Congress (or through a very protracted court battle). And yet this very same regulatory model is being adopted on a global scale for GHG’s under the mythic notion that caps somehow ensure “environmental certainty”.

The practical consequences of our self deception are illustrated by California’s implementation plan for GHG regulation (AB 32). It is estimated, for example, that further reductions in passenger-vehicle CO2 emissions (beyond the state’s established Pavley regulations) could be achieved at an incremental cost of $149 per metric ton (MT), but would yield savings of $411/MT (from reduced fuel consumption), resulting in net savings of $262/MT. A couple of regulatory options that are under consideration might motivate such further reductions, but under the current AB 32 plan this would not result in any benefit to statewide emissions because the state’s planned cap-and-trade system would simply shift emission allowances from transportation to other sectors. The only benefit would be reduced CO2 trading prices below the currently-projected $10/MT. This minimalist approach of seeking only the minimum emission reductions sufficient to achieve the cap contravenes the AB 32 mandate requiring “the maximum technologically feasible and cost-effective greenhouse gas emission reductions …” But with the exception of Earthjustice, I am not aware that any of the 50 signatories to the National Call to Action on Global Warming have supported action to secure CARB’s compliance with the maximum-reduction requirement.

California’s maximum-reduction mandate, though not yet effected, represents a pragmatic alternative to fictionally “science-based” targets. Emission targets and caps can be employed to establish minimal regulatory requirements (as they are under AB 32)—which will invariably be based more on considerations of political acceptability than on science. But beyond that regulations should operate to motivate further emission reductions to the extent possible within defined limits of feasibility and cost effectiveness. The realities of science and politics require a best effort to reduce emissions—not the minimalist, least-effort approach currently advocated by EDF and California regulators.

[Revised 3/21/2009]

Chaz Teplin gave some approximate numbers for how much Obama’s cap-and-trade plan would raise energy prices (based on a $14.30/MT carbon price):

Effect of the Obama carbon price

• Petroleum fuel: adds 15¢/gallon
• Electricity: adds 0.8¢/kWh (compare to 7-10¢/kWh residential rates)
• Natural gas: adds 8¢/therm (compare to 85¢/therm residential rates)

The conclusion: “… energy prices would increase by about 10 percent. It’s a start, but a very slow one.” But that’s not the whole story.

Suppose the revenue is used to subsidize clean energy. If renewable energy makes up about 10 percent of the market, then the above cost increases would be balanced by the following cost reductions:

Potential effect of the Obama carbon price on renewables (10% of market)

• Sustainable biofuels: subtracts $1.50/gallon
• Renewable electricity: subtracts 8¢/kWh
• Solar heat, CHP, etc.: subtracts 80¢/therm equivalent

The subsidies increase decarbonization incentives by an order of magnitude.

For this to work, auction revenue has to be used primarily to reduce the regulated industry’s carbon emissions. The Obama plan doesn’t do this. Only 20 percent of the auction revenue is slated for “clean energy technologies,” while 80 percent would be returned to taxpayers in the form of a Making Work Pay tax cut. The tax shift mitigates any (minor) demand reduction that might result from the carbon price, and reduces the potential renewables incentive by an order of magnitude. In effect, the dilution effect of the 80 percent tax shift is equivalent to reducing the carbon price by 80 percent, e.g., from $14.30/MT to $2.86/MT.

If we are serious about using cap-and-trade to reduce greenhouse gas emissions, then auction revenue should be used primarily for that purpose. Either way, the money would be feeding back into the economy, creating jobs and investment opportunities. But clean energy subsidies have greater long-term investment value than free handouts.