July 28, 2008
Let the Record Stand
The Breakthrough Institutes' position on carbon pricing and cap and trade is frequently mischaracterized. As sometimes vocal critics of cap and trade and regulation-centric approaches to climate solutions, we're all too often thrown together with real opponents of serious action that misuse similar arguments to sow confusion and inaction.
In stark contrast, the Breakthrough Institutes' criticism and concerns about cap and trade are motivated by the desire to see advocates and policymakers adopt successful strategies and policies that can truly put our nation and our planet on a path to climate stability and sustained prosperity. With the climate crisis increasingly urgent, our economy heading south, and a new president and congress soon to be elected, climate and clean energy advocates face a critical moment to re-evaluate our strategies and policies and ensure that we can successfully advance climate solutions in the coming year. In that context in particular, we remain steadfast in the position that our efforts are ill-served by continuing forward with a blinding focus on cap and trade that frequently obscures the critical technology innovation challenge at the true heart of our quest for climate stability (and continued and expanded global prosperity).
In a recent discussion with Eric Pooley, I tried to set the record straight and articulate as clearly as possible where the Breakthrough Institute stands on emissions caps and carbon prices and why. Since that piece was long and covered several subjects, I've reposted and reprised the section on cap and trade and carbon pricing here. So, let the record stand...
Contrary to the all-to-frequent mis-characterizations of our position, the Breakthrough Institute does, in fact, agree that a carbon price would be an effective and desirable accelerator of clean technology development and deployment. We support the highest politically sustainable price on carbon possible, both to set a new price signal that will accelerate innovation, and (perhaps more importantly) to raise revenues for critical public investments in clean energy research, development and deployment.
However, given today's political climate, we are increasingly concerned that the highest politically sustainable price on carbon is getting pretty close to $0 per ton, at least for the foreseeable future. We of course hope that we're wrong, but recent news from Canada and the EU doesn't offer much inspiration. And whatever that politically-sustainable price is, it is highly unlikely that it will be high enough for price signals alone to drive the necessary emissions reductions.
This political assessment is the first source of our ambivalence about cap and trade, and the reason we do not champion the policy with as much fervor as other climate and energy advocates. It is also the reason that we fervently maintain that any cap and trade program must devote considerable revenues to public investments in clean energy technology development and deployment, and stand opposed to schemes (like Cap and Dividend) that would instead rebate or refund the bulk of allowance revenues to consumers. If a carbon price high enough to do the heavy lifting is politically impossible, then strategic public investments are our best option to pick up the slack.
The second source of our ambivalence requires a close look at the assumptions behind cap and trade, which I'll delve into next (time to put on your wonk hats!)...
A mandatory, declining cap on emissions would imply that emissions reductions would be required, no matter what the price of compliance is. That's the whole idea behind a mandatory cap and trade program: in theory, emissions reductions are guaranteed, and the price of carbon will rise to whatever level is necessary to drive those reductions.
This supposed certainty is probably the primary reason climate advocates champion cap and trade. Set the cap and emissions reductions are guaranteed. Anyone who opposes a cap must therefore be opposed to mandatory emissions reductions and a proponent of voluntary efforts to reduce emissions, or so the charge against us often goes.
But let's be clear: this theoretically mandatory cap and the guaranteed emissions reductions it will achieve are just that - theoretical. In reality, every single cap and trade policy proposed in the United States and elsewhere has included various forms of cost containment, from safety valves and cost off-ramps to borrowing from future allowances, and from "carbon allocation boards" that can issue extra allowances if necessary to international offset programs that simply outsource emissions reductions overseas, funding offset projects of a dubious quality.
This is a critical observation and lies at the crux of our concern with cap and trade: any provision that constrains the price of carbon without directly lowering the cost of actually reducing emissions under the cap (as investments in clean energy or energy efficiency would) will mean the cap is not in fact mandatory, nor does it guarantee emissions reductions targets are achieved.
Furthermore, even if a cap and trade policy includes no explicit cost containment provisions, in any democratic society, the electorate's sensitivity to energy price increases will act as a default cost containment provision. In the face of a public backlash, elected officials can simply be forced to cut back the emissions reduction program or be ousted from office. Since a cap and trade program is ostensibly designed to ensure emissions reductions over a many decades-long time period, there will be plenty of election cycles to act as a check on the ultimate price of compliance with any "mandatory" cap and trade program.
So, if we recognize that any real-world cap and trade policy will have either explicit or implicit factors constraining the price on carbon, we see that all the focus on the supposed certainty of mandatory caps really obscures a very uncertain technology innovation challenge: the only way a cap will really deliver it's promised emissions reductions is if technology solutions exist that can deliver those reductions at a cost that's lower than either the explicit cost containment provisions of the legislation or the publics' ultimate tolerance for increased energy prices.
This technology innovation challenge - a challenge the McKinsey Global Institute describes as of the same scale as the industrial revolution but in one third the time! - is the real heart of our quest for climate stability (not to mention continued and expanded global prosperity). We are therefore ill-served by obscuring this critical innovation challenge behind the frequently blinding focus on emissions caps and carbon prices.
If we put aside the supposed certainty that cap and trade delivers, we are free to recognize that there are ultimately several tools at our disposal to focus the human and financial capital necessary to overcome this critical innovation challenge -- including carbon pricing/cap and trade, direct regulations, and strategic public investments (all of which are ultimately designed to drive significant quantities of private capital to tackle the challenge).
In an ideal world, we should be advancing all options simultaneously and using each where most appropriate. One could certainly design an omnibus climate action bill that includes a declining cap, auctioned allowances raising revenue for direct investments, and complementary direct regulations (new efficiency and building standards, for example). If such a bill were politically possible, we'd fervently support it. But when the rubber meets the road in the US Senate or at the ballot box, there sadly seems to be far too little elite or public support for that kind of proposal today.
Given the urgency of the situation, I think it would therefore be a tragedy to hold any one strategy hostage to any other. That is, if today's political climate offers an opportunity to advance new strategic public investments in clean energy technology, infrastructure and efficiency under the framework of economic recovery, we cannot afford to hold those investments hostage to a cap and trade policy that faces a steep uphill battle in Congress in the foreseeable future (to say the least).
If we can advance critical clean energy investments now and a full-on cap and auction bill is politically impossible, then we should move investments now and pay for them with something else: a more modest carbon price, general budget funds, a subsidy shift, oil royalty funds, deficit spending, whatever. We're pretty agnostic from a climate perspective about where the funds come from, as long as the critical investments can move forward as soon as possible.
From a political standpoint, though, some funding sources are obviously more strategic than others. And if we want to make the most credible argument about economic stimulus, Keynes would argue that deficit spending is in fact the best way to fund these clean energy investments. Taxing one sector to pay for another isn't a very effective way to spur any net economic stimulus, or so I'm told (I'm no economist, I'll readily admit).
However, in today's political climate, there's a powerful political case to be made for strategic deficit spending that has multiple economic benefits. These investments would lay the groundwork for a major new growth sector (clean tech), a dramatic improvement in the energy efficiency (and therefore productivity) of our economy, and reign in our out-of-control trade deficit while shielding us from increasingly volatile commodity prices (by reducing oil dependency).
That is why, while we think cap and trade, or carbon pricing in general, could be a very powerful and effective tool to overcome this innovation challenge, we at the Breakthrough Institute do not think it is the only game in town, nor do we think it is sufficient to overcome the technology innovation challenge alone.
I hope this elucidates what is often characterized as our "basic disagreement" about the necessity of a cap and trade program. We want to be as clear as possible about our reasoning and assumptions so we can avoid any misunderstanding and drill right down to the substance of the question: what is our best strategy to achieve climate stability and sustained prosperity, both here and abroad. Few other questions are more critical given the state of our economy and our climate, and the political opportunities marked by what will no doubt be an historic election in just a few weeks.