Comparing climate change plans

Per request, I wrote up a post comparing Hillary, Obama, and McCain on climate and energy policy. The post was long and dense and boring, so I threw it away and instead wrote the following long, dense and absolutely riveting primer on what to look for in a good climate change plan. These principles apply to cap-and-trade style programs, because that’s what all the presidential candidates are proposing.

1. Go deep

The “cap” part of cap-and-trade refers to the emissions level mandated by the legislation. Good legislation considers both the short term and the long term.

The available science indicates we need an 80% reduction in greenhouse gas emissions by 2050. For a variety of reasons (CO2 is a long-lived pollutant; the initial cuts will be easiest, etc.) we should start cutting quickly. 20% by 2020 is a reasonable interim target.

Use these figures as a benchmark, but don’t obsess over them. A climate change plan that calls for an 87% cut is not necessarily better than one calling for an 84% cut. Our understanding of climate change will progress over the next several decades, and we’ll adjust accordingly. The important thing for now is that the planned cuts are sufficiently deep and predictable to stimulate a cascade of infrastructure improvements.

2. Go broad

The question arises: cut 80% of what? Naively, we might assume that a cap applies to all greenhouse gas emissions, but often this isn’t the case. Some plans only cover electricity generation; some ignore aviation; etc.

Good climate change legislation will cover the entire economy, including transportation. There are at least two reasons for this. The first is the elementary fact that the climate system doesn’t care about the source of the emissions. The second is the economic problem of emissions “leakage.” If only certain portions of the economy are capped, polluting activities may just migrate to the unregulated sectors.

3. Go to the source

How to put a carbon cap into practice? The necessary accounting, monitoring, and tracking systems are complex under any circumstance, but as a general rule, we should cap as far upstream as possible, meaning close to the point where fossil fuels enter our economy.

To take an example, there are over 150,000 gas stations in the United States, but only about 150 oil refineries. Rather than trying to assess fuel usage at the pump, it’s far easier to track it at the point of distribution. Not only is an upstream cap easier to implement, it also is harder to cheat.

Note that, at least theoretically, the effects of a carbon cap are independent of where the cap is implemented. Gas prices will rise regardless of whether fuel is tracked at the pump or at the refinery. In practice, though, this issue gets rather complex.

4. Make polluters pay

A cap raises the question of who gets to pollute. Presently, we can all pollute freely. After a cap is in place, companies will have to vie for limited pollution allowances. How do these allowances get distributed in the first place?

The worst way to distribute them is simply to give them away. Painful experience has shown that free distribution of allowances creates windfall profits for polluting companies, who then pass the bill for higher energy prices on to consumers.

The best way to distribute the allowances is to sell them via auction. Not only is such a process economically efficient — people can bid whatever they feel the allowances are worth, and those who value them most will get them — but it also raises revenue for the government that can be put to good use.

5. Spend wisely

Good climate change legislation will raise many billions of dollars in revenue through the auction of pollution allowances. What to do with that money? There’s not a single right answer to this question, but there are several worthwhile goals to which the money could be applied.

  1. Invest in complementary policies such as renewable energy and efficiency
  2. Address fairness issues that arise from higher energy prices
  3. Build political support for climate change policy

Fortunately, many measures further several of these goals simultaneously. For example, polls show that public opposition to gasoline taxes drops considerably if the revenue is pledged to renewable energy development.

Unsurprisingly, opinions on how to put the money to use vary dramatically. Some propose that the revenue should simply be divided up and returned to citizens directly, which would bolster popular support for a cap-and-trade program, soften the regressive nature of higher energy prices, and keep the money away from politicians. Others put forward a range of worthwhile infrastructure projects that could benefit from public investment. In reality, there are several good uses to which the money can be put. To judge a climate change plan, ask how well the money serves the above goals.

6. Be (a little) flexible.

Cap-and-trade programs can include a variety of exotic technical features meant to soften some of the potentially harmful economic impacts of carbon pricing. These features sometimes get a bad rap as mechanisms for holding down cost of carbon (and therefore undermining the cap). At least in theory, though, the issue isn’t cost but volatility. Building some flexibility into a cap-and-trade system can lower short-term volatility without compromising long-term caps. Various flexibility mechanisms — banking and borrowing, circuit breakers, offsets — can be usefully incorporated in a limited way. Other flexibility mechanisms — particularly safety valves — are theoretically useful but in practice subject to abuse.

There is one flexibility mechanism that shouldn’t be controversial: a “look back” provision that requires the government to evaluate the cap and make adjustments if in the future we discover that global warming is worse than we thought, or that our present efforts aren’t up to the task of mitigating it.

7. Politics matter

Indulging in some harmless policy wonkery may make you popular at parties, but it also potentially obscures the fact that having a good plan on paper isn’t enough. The devil is in the details, and many of those details will be left up to the regulatory agency charged with implementing the cap. So tawdry politics matters. Who’s running the government? What priority does climate change hold in the legislature, the judiciary, and the executive? Who will be most effective at forging the coalitions necessary to shepherd through a compromise bill? What compromises will have to be made?

. . .

Congratulations if you made it this far. Although I will eventually return to the specific question of the presidential candidates, my main recommendation is to put your new knowledge to work using the Grist posts linked to in the following haiku:

Eighty percent cuts
For Clinton and Obama
McCain can’t keep up

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  1. facethemusic - February 20, 2008

    You have discussed one important solution, cap-and-trade, but you have not even mentioned the more powerful, effective, and faster solution: tax carbon rather than income.
    80% across the board reductions in greenhouse gases by 2050 is too slow according to the latest data. The real target, scary and unreasonable as it may seem is 80% by 2020! A tax directly on carbon emissions is the only way to make that happen.
    Shields up!

  2. Kees - February 20, 2008

    Amen to carbon taxes. Anything less is rearranging deck chairs on the Titanic. Most scientists, authors and politicians are afraid of “crying wolf” and being wrong, and the underestimation of the climate crisis we face makes me want to scream. Most change in nature, and that includes humans, occurs slowly, like the bell shaped curve of population growth that will inexorably take us to over 9 billion humans. Place that same curve on our gas emissions and the atmospheric CO2 and do the math. The only dramatic decrease I see in the future is the complete collapse of the ecosystem, all economics and human civilization. If you believe as I do that humans started raising CO2 levels 8,000 years ago with the beginning of agriculture (read Rudiman “Ploughs, Plagues and Petroleum”), only a handful of humans hunting and gathering is sustainable on this planet. Let’s not feel guilty though, 99.9% of species that ever existed are extinct already. Did we really think we were exempt?

  3. Murphy - February 20, 2008

    The issue with a carbon tax as opposed to a “cap and trade” system is that a carbon tax hits low and middle income people first. Adding carbon taxes to private jet flight and the price for owning & operating one might go up a bit, but people who own private jets will be unfazed. On the other hand, add an extra $2.00 to the cost of filling up the tank in the average car and those who are already struggling may no longer be able to get to work. The advantage of a “cap and trade” is that it goes to the source, big emitters must reduce first. I am not entirely against people being personally responsible for their output in the way a carbon tax would make them, especially since one can argue that under “cap and trade” companies will pass the cost onto the consumer, and low income people will still be affected first. But “cap and trade” will still be more effective in curbing the big emitters first-and it provides more incentive for renewable energy projects in emission heavy industries.

  4. Doug - February 20, 2008

    British Columbia, Canada has become the first North American Jurisdiction to implement a carbon tax in their budget this year. There is also speculation that a cap and trade system will follow in July for large polluters. I am not going to go into detail as you can search the details if you like but this is a huge step (with a few holes and in my opinion not far enough) in North America that brings this debate to the forefront of mainstream media. I applaud that government and hope others will follow.

  5. Adam Stein - February 20, 2008

    Murphy —
    This isn’t quite right. Both carbon taxes and cap-and-trade programs cause a rise in energy prices, which, as you note, disproportionately hurt the poor. That’s why addressing fairness issues (point 5) is an important part of effective policy.
    All —
    I’m not going to jump into the overblown debate over carbon taxes vs. cap-and-trade. Both policies have pros and cons, both can be an effective means to fight climate change.
    But I am surprised at how consistently people conflate the issue of the type of carbon pricing with the level of carbon pricing. In plainer English, the question of how you charge for carbon (tax vs. cap-and-trade) is totally separate from how much you charge for carbon (in dollars per ton).
    If you think we need faster results, deeper cuts, whatever, you’re making an argument that carbon should be more expensive, not an argument for one type of carbon pricing system over another.
    (And a final aside: if speed is your primary concern, I would think you’d favor cap-and-trade over a tax. The most oft-touted virtue of cap-and-trade is that it prioritizes certainty of cuts over certainty of price. Again, I personally think this distinction is way overblown, but if you really think the world is going to end in five years, you should probably come down in favor of hard targets.)
    (Whoops, I guess I did jump into the debate. Let the flaming begin.)

  6. JeffB - February 20, 2008

    Great post Adam. The one item which you don’t mention is that we need to draw a line in the sand on deforestation. The Amazon, Indodesia and Malaysia are key. A four prong strategy is required –
    1) provide health services, schools and government services to stabilize rural populations
    2) improve soil conservation policies to eliminate the slash-and-burn agriculture practices
    3) discourage industrial agriculture…especially for biofuel production
    4) enact and enforce strict conservation laws

  7. Adam Stein - February 20, 2008

    Doug —
    The news from BC is indeed exciting. I’ve got a post up that briefly discusses it.
    JeffB —
    Point well taken. The question of how to harmonize any federal legislation with international schemes is an interesting topic in its own right. Good idea for a future post.

  8. Sharon Kenyon - February 20, 2008

    We don’t have time to wait for government and businesses to take the reign on carbon. Those of us with a passion are already offsetting all of our home and transportation use. Even our church, in caring for Creation, has stepped up to offset its carbon use.
    We now need to take it a step further and include offsetting our government

  9. Pete - February 21, 2008

    Thanks, Adam, for a much more substantive article. This gave me what I was looking for.

  10. Edward Mangold - February 21, 2008

    Unfortunately, I think that Kees is correct!
    Homo Sapiens Sapiens has lived on Planet Earth for 200,000 years. But in the last 12,000 years or so, we have come to dominate the surface land area in an unsustainable manner. (We have trashed up the oceans too, without actually living there.) As time has gone on and our technologies progress, we have arrived at a situation where population increase expands ever more rapidly, animal, mineral, farmland, etc. are utilized at ever increasing rates. Rather than minimize, recycle, conserve and accept limitations, our national policy is MORE, Shop