March 13, 2009
Will Economic Recession Kill Cap and Trade?
Everyone's talking about the prospects for cap and trade legislation in the context of economic recession and financial uncertainty. Greens are arguing that cap and trade would provide revenue for investments in technology and infrastructure. Is legislation that would raise energy prices politically feasible now? Breakthrough senior fellows and staff discuss. This conversation was sparked by a recent column in Slate, "Save the Economy, Save the Planet", by Eric Pooley of Harvard's Kennedy School of Government.
The participants in the discussion were Michael Shellenberger of the Breakthrough Institute, Steve Rayner, professor at Oxford's Said Business School, Chris Green, professor of economics at McGill University, Roger Pielke, Jr., of UC-Boulder, and Peter Teague, director of the environmental program at the Nathan Cummings Foundation.
Michael Shellenberger (the Breakthrough Institute):
The Slate piece epitomizes conventional thinking on climate and energy. The idea that handing over climate change policy to the same people who brought us subprime mortgages and a $45 trillion market in credit default swaps will be viewed on Capitol Hill as either good policy or good politics is almost as hilarious as Pooley's view that consumer opposition to higher energy prices will be allayed with promises of rebates. Focus groups and polls show that voters don't trust they'll ever see a rebate, and cap and dividend was the least popular of three policy proposals tested in an EMC poll we commissioned last year.
Professor Steve Rayner (Oxford University):
My answer to [the] question "Do we want carbon trading" run by the same corrupt crowd who have been milking the carbon economy through CDM and offsets is "Fuggedaboutit!" It simply cannot deliver the innovation necessary in the time available but gives people the comfortable delusion that everything is under control - the same comforting message that we got as we slipped into the current global financial meltdown. I predict that the carbon price will collapse catastrophically once people realize that it cannot deliver and is simply enriching the fat cats.
It took a global meltdown to get the world's governments to take financial collapse seriously and the response has been strategic (who knows if it is the right strategy, but politicians have at least now acknowledged the magnitude of the task.). What we need is an energy modernization strategy of the same order, directed towards converging goals.
We may be stuck with carbon trading as part of this because of the sunk political costs, but let's not encourage it.
Professor Chris Green (McGill University):
I cannot imagine governments, at least not ones already committed to a cap and trade system, adopting one after what is now happening. The only sure winners from cap and trade are those who gain from price volatility--the same crowd that has brought us the present financial debacle. (If "offsets" are allowed, then hucksters will also be winners.)
I read the U.S. presidential campaign as moving slowly toward agreement on long term funding of research and development of carbon emission-free energy technologies. Two questions arise: The first is how to finance a R&D commitment, given the budgetary constraints that the US now faces. Cap and trade with auctioned permits will be even less politically acceptable and auctioning opens the door to large purchases by non-covered entities (including financial market ones) who may be in a position to manipulate prices.
Would the U.S. buy a low carbon tax to pay for the R&D expenditures? $5/tCO2 would more than pay for Obama's plan to spend $150 billion over a 10 year period. While $5/tCO2 would be $14/tonne coal, it would hardly make a ripple where oil and natural gas is concerned. If someone can find a way of credibly treating the $5/tCO2 a user fee (not a tax), it might be sellable.
The second question is how to slow emissions growth and even decrease emissions in the near term. The long-lived economic doldrums that the severe financial market problems are likely to produce (neither a short recession nor a depression) will probably do that job. For the longer term, having the "user fee" rise gradually over time, say at a 10% rate per year (so that the fee doubles in 7 years to $10/t and to $20 in 14 years) would send a forward price signal that can help induce deployment of effective, scalable, non-inferior carbon-emission free technologies as they reach "the shelf". In time, this "model" might be acceptable to China, India and other major emitters. At least it holds out more hope for the world than a transatlantic rescue of a faltering/flawed EU ETS.
Professor Roger Pielke, Jr. (University of Colorado):
One reality is that historically on this issue, presidential leadership hasn't mattered much ... since the Bush then Clinton then Bush policies differed much more in tone than in substance.
Presidential leadership will be a lot easier when politically tractable solutions are available. The odds of such solutions will be increased (but not guaranteed) with more RD&D. If leadership is defined simply as tone or exhortation, then regardless of who is elected there will be a marked change in the next administration.
One key to pay attention to is if the next president focuses on technology over science. Bush 1, Clinton, Bush 2 all emphasized science over technology.
I don't expect adaptation to be part of the discussion, unfortunately...
Peter Teague (The Nathan Cummings Foundation):
I hope you're right 1) about the assumptions underlying C&T; and 2) that this shift will open the door to the kind of public investment we all agree is needed. But the conventional wisdom is that the bailout makes additional government spending less, not more likely, and given the Obama [cap and trade] plan it doesn't sound like sufficient dollars for RD&D are likely to be in the offing from a Democratic administration. If it's true that responses to the financial crisis could lay the foundation for either greater fiscal restraint or a more Keynesian approach, the question is what can we do to push in the direction of increased investment? Is there any hope of creating a budgetary distinction between spending and investment?