The Price is Wrong
[A short excerpt from the following was previously published on the “Triple Crisis” blog of Dollars & Sense magazine]
For United States climate activists to succeed, they must demand serious government spending on energy efficiency and renewables – spending comparable to the current war budget. Calling for hundreds of billions in annual green public investment has potential for the popular appeal needed to build a powerful grassroots climate movement. That investment would be the best policy as well. Massive clean energy spending would not only provide jobs and economic growth on a grand scale. It is the most effective way to reduce greenhouse gas pollution.
It is widely, though not universally, acknowledged that solving the climate crisis will require public investment and subsidies, efficiency regulations and clean energy requirements, plus a price on greenhouse gas emissions. (The idea behind a carbon price: polluters pay per unit of greenhouse gas pollution released.) But in practice policy advocates tend to fetishize the carbon price and drop other requirements. For example, James Hansen, perhaps the world’s leading climate scientists says “..If we would put this price on carbon it would favor renewables, and it would favor energy efficiency, and it would favor nuclear power—it would favor anything that is carbon-free… ”[i]. Charles Komanoff and James Handley of the Carbon Tax center describe a carbon tax as the “sine qua non of effective climate policy” [ii]. Mainstream environmentalism tends to favor cap-and-trade over carbon fees, which indirectly results in a price on carbon. Between carbon tax and cap-and-trade advocates, most climate change opponents prioritize carbon pricing. Few join Komanoff in referring to such pricing as the “sine qua non” of carbon policy. In policy discussions, however, most environmental economists start with cap-and-trade or a carbon fee, and many never discuss anything else.
What is wrong with this? Since we can’t phase out greenhouse gas pollution instantly, it seems fair to require polluters to pay something in return for the damage they cause until that pollution ends. Further, such payments provide some incentive to reduce the amount of greenhouse gas pollution emitted.
The problem arises when pollution prices are prioritized over other solutions. The climate crisis cannot be solved without huge infrastructure investments: wind turbines, solar panels, transmission lines, smart grid upgrades, trains, electric cars and efficiency improvements. Historically new infrastructure has never been built solely or largely as profit seeking, risk taking behavior in response to what economists call price signals. Large investors mostly seek to maximize profits while minimizing risk by tapping flows of public money, either by doing business with the government, or by use of government created goods and services at below cost.
Public investment, government spending of various types has not only contributed, but been key to infrastructure transformations. Sometimes that public investment has taken the form of public ownership or subsidy, sometimes grant of land or right of way. In one form or another, public investment is always crucial.
Consider United States history. The Post Office was considered so essential it is mentioned in the Constitution. The Erie Canal, an early major infrastructure project in the United States, was financed primarily by New York State’s ability to borrow. Telegraph companies paid nothing for rights of way whose value far exceeded money invested to construct them, and direct government funds besides. The great intercontinental railroads were granted free rights of way, plus land on either side of the tracks for real estate development. Similarly, streetcars in cities flourished based on free or discounted rights of way, and other subsidies. Water and sewer infrastructure is mostly public in the United States, and always publicly subsided. Fossil fuel pipelines are granted public rights of way, and often delegated power of eminent domain to secure easements from unwilling private landowners. Electric lines, phone lines, broadband lines require similar arrangements. Public wireless spectrum is sold to private interests at far below market value. Highways, roads, airports and water ports are financed publicly, with very rare exceptions.
Maybe a massive transformation in energy producing and consuming infrastructure can reverse this. For the first time in history a change of this magnitude might be largely privately financed, with public involvement mainly bei`ng in the form of ‘getting prices right’. Maybe direct public investment and regulation other than setting a carbon price can be supplements rather than the main means. But contemporary as well as historical evidence suggests otherwise.
Corporate decision making is far less responsive to energy costs than many economists assume. James K. Boyce’s article “Pursuing Profits – or Power” in the July/August 2013 issue of Dollars & Sense pointed out that when it comes to political lobbying, the rich will seek increased power, even at the expense of a business environment that lowers profit. That same choice is reflected in internal decision making at the individual firm level. When deciding where to invest money, businesses generally demand extremely high expected rates of return for energy savings, and other flow operating costs (such as water and raw materials) compared to returns on general investment [iii]. Most of the literature does not explicitly compare rates of return on flow savings to rates demanded for general investment. Instead extensive research shows that various rules of thumbs and shortcuts are used to evaluate this kind of project, compared to the more careful methods used to evaluate general investment. That results in demanding much higher rates of return from capital invested to reduce flow costs (energy, water, raw materials, etc.) than for savings in labor. A tiny percent of that difference is explained by factors such as transaction costs. But the primary reason businesses give is that energy (and other flow) savings are “not their core business.” In practice, “core business” usually equals increasing labor productivity. Labor savings increase leverage over workers in a way that savings in energy and other flow costs do not increase leverage over suppliers. Energy, unlike workers, does not go on strike.
Response to price increases is similarly sluggish in owner-occupied residential buildings That is because capital is much more expensive for individuals than firms, and also because people feel the need to maintain savings for emergencies – including job loss. So individuals require much greater returns before upgrading insulation in buildings than utilities require before investing in new generation. Renters have even less incentive to invest in insulation, which becomes a gift to their landlord whose value they may not recover before moving out. Similar response rates can be found in commercial buildings, and in the transportation sector, excluding freight and air travel.
Another reason price should not be the primary driver of change is that we simply cannot measure local emissions with a reasonable degree of accuracy or precision. Gases released into the atmosphere spread quickly, so taking samples in a few spots gives us a very good idea of worldwide greenhouse gas concentrations. But local emissions are very difficult to measure, and both precision and accuracy is very rough at that level. Note that levying a carbon price upstream, say when coal is mined, is NOT a workaground for this. To understand why, consider fossil fuels used to generate electricity.
In the United States, the Environmental Protection Agency (EPA) divides fossil fuels into around thirty separate classes in order to estimate pollution per ton or barrel or thousand cubic feet. The EPA requires electric utilities to report how much fuel of each class they burn. The EPA also requires most large generators to put meters on their smokestacks to measure pollution directly. If the USA wished it could put a price on carbon by having a charge per quantity of fuel multiplied by that estimate of carbon per fuel unit. (The same estimate could be used to determine the quantity of permits fuel users would need to buy.)
Scientists have generated estimates of CO2 emissions from fossil fuel powered electricity generation based on EPA and Energy Information Agency(EIA) data. For all power plants combined, the two calculations yield very similar results. However, if the pollution numbers are looked at one plant at a time, they show average discrepancies of 18% for electricity generation from conventional fuels, with worse results for biofuel and waste incineration. Differences for individual plants between the data sets cancel out, because where the EIA data may show more pollution for one plant than the EPA data, the reverse is true for another [iv]. The discrepancies are similar for plants whose emissions are calculated from fuel use, and those that directly measure smokestack emissions. In the majority of plants, the difference was 13% or greater, and in some cases the difference was as high as 40%.
This has serious implications for carbon pricing: typical proposals for reducing greenhouse gas emissions suggest annual emission reductions of 3% to 5% per year. The most radical proposals any nation has advanced was a reduction of 10% a year. Emissions at the plant level are measured with a precision and accuracy worse than any annual target proposed by a party to international climate negotiations. Worse, power plant emissions are measured with unusual accuracy. Emissions in trucks, planes, buildings and so on are measured much more roughly.
One answer to this is that power plant emissions could be measured far more precisely than they are. A followup to the previously discussed study on carbon pollution precision and accuracy suggested a better classification system for fuels that might reduce power plant measurement discrepancies to within 5% [v]. The problem with this: the original study did not capture all sources of error. One big additional source of variance between fuels are methane releases. When coal is mined, or oil or gas drilled, methane leaks into the atmosphere, and methane is 2o times more powerful than CO2 as a greenhouse gas. Waste methane is supposed to be captured and used or flared to the extent possible, but because the leakage is not always at point sources, it is sometimes impossible to capture all methane released during extraction. In addition the fossil fuel extraction industries are notorious for ignoring regulations when they can get away with it. In the case of natural gas there is also the problem of leakage from pipes during transport, and sometimes methane release during use, due either to leakage or incomplete combustion. A carbon price is unlikely to be levied on methane that leaks during extraction. The price on methane that leaks post extraction is 80% too low, because that price assumes the methane will be burned rather than released.
Another problem is black carbon, one component of the soot, smoke or dust from burning and transporting hydrocarbons (like coal). Black carbon is a far more potent contributor to global warming than CO2. Although regulations have greatly reduced particulate pollution from coal and oil in the US, it is nowhere close to zero. Black carbon produces far more variation in global warming impact on a plant by plant level than is captured by even the most accurate and precise carbon measurements. Diesel engines powering trucks, ships, boats, trains and heavy machinery also emit black carbon. Combustion of biomass and many biofuels does as well, though this a more prevalent black carbon source in poor nations than in rich ones such as the United States.
These discrepancies are caused by variations in the fuel itself when extracted, variations in emissions during that extraction and during transport, and finally variations in emissions during fuel combustion. Charging a carbon price as far upstream as possible (upon extraction or import), as far downstream as possible (during use) or midstream (during refining or processing) makes no difference. Carbon content within similar types of of fuel, and methane and black carbon emissions associated with extraction, transportation and combustion vary too greatly to measure pollution per unit of fuel with much precision. Even at the national level, imprecision often exceeds the 18% discrepancy of the power plant study. For example, two emissions measurements for the Netherlands in 2009 had a 66% difference [vi]. Direct measurement of HFC-23 (which is more than ten thousand times as potent a greenhouse gas per ton as CO2) released into the atmosphere in Western Europe reveal pollution levels of around double what national reports estimated. [vii] The National Academy of Sciences believes that independent verification of national estimates could take place with an uncertainty of 10% or less [viii]. Many researchers believe it is possible to improve national emissions measurements to the point where verified precisions is plus or minus 5%. Such an improvement would require much more widespread use of local metering and infrared measurement than at present [ix].
If 5% to 10% is the range of verifiable precision and accuracy for national aggregates, then local measurement, such as when fossil fuel is extracted, processed or used is probably a high multiple of that, 20% at best. 20% represents an achievable maximum; it is very unlikely that we currently measure local emissions with anything like that degree of precision or accuracy.
This has implications for what form an emissions price should take. All existing greenhouse gas cap-and-trade schemes, and some proposed greenhouse gas taxes, have some form of free permit, where tradable permits to pollute, or tradable exemptions from the tax are given at no charge to major polluters – to buy their support for a pollution price. The unfairness of this should be obvious, but the ways in which it weakens the effectiveness of carbon pricing may be less so.
Imagine two polluters given the same number of free permits. Mr. Dirty pollutes 10% more than the number of free allowances he is given. Ms. Clean pollutes 10% less. Suppose measured pollution for Mr. Dirty is 20% less than his actual pollution. So he only needs around 90% of the permits he receives and can sell around 10% “leftover” permits. Measured pollution for Ms. Clean is around 20% more than she actually pollutes, so she has to buy “excess” permits from Mr Dirty. The person who pollutes more makes money; the person who pollutes less has to spend money. What was just imprecision and inaccuracy has been transformed to the point where intended incentives are reversed. That is a qualitatively different level of error than before the free permits.
Rewarding those who pollute more and punishing those who pollute less may not be typical under a free permit system, though if there are enough firms or individuals receiving free permits it is likely to happen occasionally. However, it reveals a second problem: the same process that will occasionally turn imprecision and inaccuracy into perverse incentives will frequently multiply the size of errors. A 20% average combined inaccuracy and imprecision can easily be multiplied into a 40% to 60% measurement variance once carbon trading starts.
So long as a price system does not multiply its imprecision and inaccuracy with permit giveaways, or undermine itself in other ways, a greenhouse gas emissions price is not useless. Even a highly imprecise and inaccurate price provides a better incentive to reduce use than a price of zero. But that rough and ready incentive is all a greenhouse gas emissions price provides, an incentive people respond to slowly and partially. Normally, prices are treated by economists as price signals. Prices, according to this view, convey information so that people can optimize choices, however imperfectly. A rough and ready price signal, highly imprecise and inaccurate, does not provide that degree of feedback. It is an incentive and nothing more, suitable as reinforcement for public investment and quantity based regulation, but not suitable as the primary driver of policy.
Although there are a number of experiments with carbon pricing world-wide, the two most often offered as success stories are the European Union Emissions Trading System (ETS) and the carbon tax in the Canadian province of British Columbia. The ETS example strongly supports the view that a carbon price is supplementary and not a main driver of change. Even many of the strongest supporters of the ETS admit that most of the drop in EU emissions are due to the combination of the economic downturn, and various policies such as large scale investment in public transit and feed-in tariffs [x]. Supporters defend carbon trading on the grounds that can be paraphrased as “it is not a bug! It is a feature!”. Their argument is that if emissions are falling for other reasons, that carbon trading does not need to accomplish much. In the authors opinion that argument is wrong; but it is not the topic of this article. Whether defensibly or not, carbon trading accomplished little compared to other factors.
British Columbia (BC), Canada has taxed carbon for five years, which contributed to a fall in taxed fossil fuel consumption within the province. For most of that period, the drop was only slightly greater than the fall in consumption in the rest of Canada. From June 2011 to June 2012, the difference grew. Taxed emissions in BC continued to fall slightly, while Canadian national emissions rose. In the 2012-2013 period, once the full tax was in place, fossil fuel use within BC dropped significantly compared to a moderate national rise – a large overall difference. A few factors besides a carbon price contributed to this. There has been significant public investment in BC mass transit compared to the rest of Canada. BC also invested significant funds in energy efficiency upgrades through programs such as “Live Smart” efficiency incentives. It is also worth remembering that just after the 2008 crash, the ETS showed very promising results. In the early stages of unexpected savings, the take was, “yes, some of this is due to a warm winter and an economic downturn, but some of it is because carbon trading rules!” That triumphalism soon turned sour as the emission drops came faster than the trading could possibly explain and the price of permits dropped drastically.
British Columbia domestic carbon use dropped much faster from June 2012 through June of 2013 than even the most optimistic carbon tax advocates expected. In the long run advocates will probably have to admit the drop in taxed BC fuel usage owes less to the carbon price than currently claimed. Though ultimately, advocates will probably have strong evidence that a significant portion of the drop is due to the carbon tax, at least on the sectors to which that tax applies. Unfortunately, logs and fossil fuels extracted for export are not covered by the carbon tax [xi]. Those exempted sectors produce many times the emissions of fossil fuel burned within BC. BC taxes about a quarter to a third of the total greenhouse gas pollution the province is responsible for.
Another serious problem with the BC carbon tax is that it has encouraged increased use of wood for heating, and even for electricity production and industrial use. At first glance this may seem like good news. The problem is that burning wood is usually much worse in terms of climate change than using it for construction, furniture and products. Burning wood, with the exception of high efficiency pellet combustion and variants, produces significant black carbon. The problem: black carbon is 600 times more intense a greenhouse gas per gram than CO2. Thus, any energy or power source with significant black carbon emissions has a worse impact on global warming than natural gas. To the extent the carbon tax encourages wood heat other than high efficiency pellet burning, it contributes to global warming. (Also pellets from British Columbia are not always low carbon, depending on their source.) None of this suggests that the carbon tax in BC should be repealed. In fact, it implies that it should be extended to other sectors, and more of the revenue used in ways that benefit the poor, working and middle classes. But it also shows that carbon taxes, even much larger ones than currently exist in a few places, cannot serve as the primary means to reduce emissions to near zero. The deal making process by which a carbon price becomes the lead policy to fight climate change inevitably results in gaping holes in coverage.
So far this article has discussed policy reasons why a carbon price should not be the “headline” in climate change policy. But there are important political factors as well. Polls show that a majority of American oppose a carbon tax. The only exceptions are push polls (polls that pressure those surveyed into giving the answer the pollster wants) or polls that describe a carbon tax in extremely misleading terms. One recent poll includes a fee-and-dividend where carbon tax revenues are returned to consumers, without significantly increasing support [xii]. In the same poll, opinion about cap-and-trade public opinion is mixed, divided roughly between support, opposition, and don’t understand/undecided, though opposition is larger than support. During the American Clean Energy and Security Act (ACES) fight polls showed that a majority weakly and briefly supported cap-and-trade, though even then a larger and stronger majority supported efficiency regulations. Other polls show that a large majority of Americans support regulations and subsidies to encourage use of clean energy, oppose carbon taxes and oppose, are undecided or weakly support cap-and-trade [xiii]. Public opinion about cap-and-trade varies because the public does not understand it. Public opinion consistently opposes a carbon tax because the public DOES understand it.
Note that this seems to apply until a carbon price is won. The ETS apparently enjoys support among the majority of the inhabitants of Europe, in spite of being poor policy. The BC tax is extremely popular. It is worth remembering that the ETS was passed as part of a larger agreement. The BC tax was passed by a conservative government that was interested in an income tax cut. In the latter case, even though most of the income tax cut benefits businesses and top earners, it includes a refundable credit for people in BC who make too little to pay any income tax, and a large cut to the lowest income tier that affects everyone in BC who pays income tax. In contrast, an Australian carbon tax was repealed after being in effect only a short time, in part because too much of the revenue was diverted to buy off powerful interests. The failed Australian attempt did not create some simple obvious universal immediate benefit that everybody enjoyed. So costs were obvious, and pointed out by the opposition in case anyone missed them, but benefits were diffuse, without emotional impact. Although the BC tax has many flaws as policy, both in terms of incompleteness, and use of most of the revenue to benefit the rich and near rich, that tax is structured in a way that will probably ensure political longevity. Under the BC system everybody gets either a check or a significant income tax reduction. Fee-and-dividend, (Or cap-and-dividend) where carbon tax (or auctioned permit) revenue is divided equally among the residents of the jurisdiction taxed, may not prove easier to win than other forms of carbon price. However, if such a system ever passes, equal monthly payments to every resident will probably make it politically immortal.
Politically, cap-and-trade and carbon taxes have always been policies designed to bring powerful interest groups on board. They are usually unpopular, or at best have weak majority support, at least until after they are passed. They are part of an approach centered on lobbying and negotiations. After the failure of the ACES bill in 2010, the climate movement seems to have finally realized that fighting climate change in the United States requires a grassroots movement. The powerful political interests that oppose doing anything to solve the climate crisis won’t yield to persuasion and deal making. They are not parties to a negotiation; they are obstacles that need to be bulldozed by a grassroots political movement. In terms of policy, the best chance of building such a movement is for supporters to headline popular concepts, such as public investment, rather than unpopular or weakly popular ones such as carbon pricing. Climate activists will find more success in a grassroots coalition built around popular large scale green investments that directly provide jobs and economic growth than trying to attract support with an approach centered around pollution pricing policy.
Both for policy and political reasons, a carbon price should not be the primary emphasis of any climate movement. Even if dinner includes a kale salad, why focus on a side dish? Isn’t a loud and truthful “lasagna’s ready” a better way to bring people to the table?
[i]< Joe Conason. 2013. “An Interview With Pioneering Climate Scientist James Hansen.” Truthdig:Apr-26. http://www.truthdig.com/report/item/an_interview_with_pioneering_climate_scientist_james_hansen_20130426/
[ii] Charles Komanoff. 2012. “Carbon Tax on Trial: Chimera or Green Charm?” Carbon Tax Center. http://www.carbontax.org/blogarchives/2012/12/03/charm_or_chimera/
[iii]Jerry Jackson. 2010. “Promoting energy efficiency investments with risk management decision tools.” Energy Policy 38(8):3865-73.
Catherine Cooremans. 2012. “Investment in energy efficiency: do the characteristics of investments matter?” Energy Efficiency 5(4): 497-518.
Surash Muthulingam, Charles J Corbett, Shlomo Benartzi, Bohdan Oppenheim 2009. Managerial Biases and Energy Savings: An Empirical Analysis of the Adoption of Process Improvement Recommendations. Los Angeles: Anderson School of Management – University of California Los Angeles.
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[iv] Katherine V. Ackerman and Eric T. Sundquist. 2008. “Comparison of Two U.S. Power-Plant Carbon Dioxide Emissions Data Sets.” Environmental Science & Technology 42(15): 5688-93.
[v] Jeffrey Quick. 2010. “Carbon Dioxide Emission Factors for U.S. Coal by Origin and Destination.” Environmental Science & Technology 44(7):2709–1.4
[vi] Shakeb Afsah and Michael Aller. 2010. CO2 Discrepancies between Top Data Reporters Create a Quandary for Policy Analysis. CO2 Scorecard:Aug-28. http://co2scorecard.org/home/researchitem/17
[vii] C. A. Keller, D. Brunner, S. Henne, M. K. Vollmer, S. O’Doherty, and S. Reimann. 2011. “Evidence for under-reported western European emissions of the potent greenhouse gas HFC-23.” Geophysical Research Letter: 38( L1580). http://www.empa.ch/plugin/template/empa/*/110824
[viii] Committee on Methods for Estimating Greenhouse Gas Emissions of the National Research Council of the National Academies of Science. 2010. Verifying Greenhouse Gas Emissions: Methods to Support International Climate Agreements. (Washington D.C.:National Academies Presss):1.
[ix] Natalie Obiko Pearson. 2010. “Climate Change Math in Treaties Flawed by Suspect Calculations.” Bloomberg Markets Magazine:Nov-22. http://www.bloomberg.com/news/2010-11-23/climate-change-math-in-treaties-flawed-by-suspect-pollution-calculations.html
[x] David Roberts. 2013. “Everybody chill out a little, carbon trading will be fine.” Grist:Apr-26. https://grist.org/climate-energy/everybody-chill-out-carbon-trading-is-doing-fine/
[xi] Jens Wieting and Colin R. Campbell. 2012. Emissions Impossible? British Columbia’s Uncounted Greenhouse Gas Emissions. Victoria, BC:Sierra Club BC. http://www.sierraclub.bc.ca/publications/scbc-reports/emissions-impossible
Stephen Leahy. 2013. “Unreported Emissions from Natural Gas Blow Up British Columbia’s Climate Action Plan – BC’s Carbon Footprint Likely 25% Greater Than Reported.” DeSmog Canada. http://desmog.ca/2013/05/08/unreported-emissions-natural-gas-blows-british-columbia-s-climate-action-plan-bc-s-carbon-footprint-likely-25-greater
Stephen Leahy. 2013. “BC LNG Exports Blow Climate Targets Way, Way Out of the Water.” DeSmog Canada. http://desmog.ca/2013/05/09/bc-lng-exports-blow-climate-targets-way-way-out-water
[xii]Frederick Mayer, Sarah Adair, Alex Pfaff. 2013. Policy brief: Americans Think the Climate Is Changing and Support Some Actions. Durham, NC: Duke Nicholas Institute for Environmental Policy Solutions, Duke University. http://nicholasinstitute.duke.edu/sites/default/files/publications/ni_pb_13-01_0.pdf. Question by question results: http://nicholasinstitute.duke.edu/sites/default/files/publications/topline_results.pdf.
[xiii] Hart Research Associates. Study #10681a. September 2012. Washington DC: SEIA . http://www.seia.org/sites/default/files/resources/seia-2012-national-solar-poll-questions-121001131704-phpapp02.pdf
Amy Harder. 2012. “Congressional Connection: Poll Public Wary of Sequestration, Not Clean Energy. National Journal May 22 2012.” http://www.nationaljournal.com/daily/public-wary-of-sequestration-not-clean-energy-20120522.
Anthony Leiserowitz, Edward Maibach, Connie Roser-Renouf, Geoff Feinberg, Jennifer Marlon and Peter Howe. 2013. Public support for climate and energy policies in April 2013. Yale University and George Mason University. New Haven, CT: Yale Project on Climate Change Communication. http://www.climatechangecommunication.org/sites/default/files/reports/Climate-Policy-Support-April-2013.pdf. (Majority supports carbon tax if misled on nature)
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