Who Killed Cap and Trade?

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The new political center on climate will be defined around cost-containment and technology investment. If it's done right, it will establish American economic leadership on energy, strengthen our economy, and create a win-win for Americans and Chinese alike.

June 7, 2008 | Michael Shellenberger,

Who killed cap and trade? Dogmatists on left and right.

On the right, Senate Republican leadership insisted that the problem of climate change isn't serious and nothing should be done. On the left, environmentalist Democratic Senators insist that the only way to emissions reductions is to price our way to a clean energy economy. In this way Democrats actually helped Republicans, who didn't need to do much more than repeat "higher gasoline prices" to defeat the bill.

The price-centric approach is a political, technological, economic, and ecological loser. Voters, and thus politicians, will never accept raising energy prices high enough to make clean energy cost competitive.

The insistence by cap and trade boosters on a high price for carbon dioxide pollution disproves the oft-made claim that clean energy sources are almost cost-competitive with coal. Some, like wind, can compete with more expensive natural gas plants at peak load hours. But clean energy as a whole remains expensive, which is part of the reason Europe can have a high price for carbon dioxide pollution, $40 a ton, and neither reduce its emissions nor stop the building of coal plants, 50 of which will be constructed over the next five years.

The insistence by environmental and Democratic leaders on a high price for carbon dioxide led to the creation of a bloated bill that attempted to do things that have nothing to do with energy or climate, like deficit reduction, all while putting very little money into the development and deployment of new technologies -- 20 or 30 years from now.

One would have thought that with oil at $138 a barrel and voter anxiety over rising prices, environmental groups and Democratic lawmakers might have considered an alternative approach, one focused on making clean energy cheap rather than making dirty energy expensive. But doing so is outside of the price-pollution paradigm.

I think there is reason to hope that political center of gravity on energy and climate will shift to principles outlined by the "Technology Ten" -- the ten centrist Senators who wrote to Reid to call for stronger cost-containment measures and greater investment in technology. Click here to download and read their letter as a PDF.

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The lead author of the Technology Ten letter is Debbie Stabenow (D-MI).

The Technology Ten would do well to put forward an even simpler bill than the one they describe in their letter, a bill that embraces cost-containment, establishes a modest price for carbon -- one high enough to pull viable clean energy technologies onto the market and no higher -- and puts all the money raised from auctioning allowances into a clean energy lock-box. Even a relatively low price for CO2 like $8 per ton, would raise around $50 billion a year -- enough to get started on things like building transmission lines, revamping the grid, developing new technologies, and deploying them, not just here but also in the developing world, where the bulk of new emissions will come from, perhaps as part of a U.S.-Asian energy partnership.

The politics aren't complicated. The next president, along with centrist lawmakers, should put for legislation focused centrally on making clean energy cheap -- not making dirty energy expensive. Americans don't want to price their way to a clean energy economy -- they want to invest their way there. While 68 percent of voters oppose raising gasoline prices to change consumer behavior, 64 percent support a tax on gas and electricity IF the money is specifically ear-marked for investments in technology aimed at making clean energy cheap.

The new political center on climate will be defined around cost-containment and technology investment. If it's done right, it will establish American economic leadership on energy, strengthen our economy, and create a win-win for Americans and Chinese alike.


Comments

Thanks for weighing in here, Matt. You write:

[W]e've had plenty of bills that offered help for renewables. But the problem is that whenever we do that, Congress also throws another bone for fossil fuels. Since it's politically easier to pick winners than losers, our energy policy has been to declare everyone a winner.


Well, no, that's not what's happened. Congress has invested virtually nothing (under $300 million per year) in renewables -- not enough to bring technologies like solar down in price. That's part of the reason why solar remains three to five times more expensive than coal in the U.S., and many times higher in China.

In terms of picking winners, do you wish that the Pentagon had not picked microchips and the Internet as winners? How would the communications and computing revolutions happened without the government decided that some technologies were so promising -- and so crucial to national security -- that they merited subsidies? The microchip went from $1,000 to $20 a chip in under 10 years thanks to those subsidies. Thank god for the government picking winners and losers -- it makes this blog conversation possible!

You acknowledge that the public doesn't want to pay higher energy prices. But public opinion against your carbon pricing strategy is actually much stronger than that. The evidence shows the public is far, far more concerned about higher gasoline prices than global warming. How do you expect to convince them that $4.75 for a gallon of gas is too little? By educating them about the policy need of internalizing externalities?

You write:

The special interests that killed Lieberman Warner will kill just as fast any support for renewables that might be anywhere near high enough to actually push them over fossil fuels in terms of investment appeal� Fossil fuel companies would see a huge boost to renewables' competitiveness as just as threatening as any sort of tax/cost on themselves.


That's not true. Special interests will make money selling renewables just as they make money selling fossil fuels. What's killed support for renewables in Congress is the fact that Democrats keep tying funding for clean energy to taxing fossil fuels or removing subsidies. It's not clean energy subsidies that are a political loser, it's cutting subsidies to fossil fuels. We can the former without the latter.

Finally, I believe you have way more confidence in a carbon price than is merited. First, you are never going to get a carbon price that increases the cost of coal-powered electricity by three or five times so that solar is cost-competitive. Voters are in control, and if their representatives vote for it they will vote them out of office. That's why Lieberman Warner allowed so much borrowing of allowances from the future: to delay real action until lawmakers are out of office or even dead.

Second, if a carbon price is so effective, what explains why Europe as a $41/ton price for CO2 and is on a coal-building boom, with 50 plants slated to be built in 5 years? Carbon price boosters have long said that $35 would have been enough to stimulate a huge amount of carbon capture and storage and renewables. But that's not what's happening in the real world.

At the end of the day, all that matters is making clean energy as cheap as possible as quickly as possible. If the price doesn't work in China, then someone will have to subsidize it until it does, since even if Congress were to miraculously price carbon at $50 a ton starting in 2012 (not gonna happen!), China and the rest of the developing world would continue on its coal path, and perhaps accelerate it, if the price for coal came down with reduced demand.

We lay out an alternative case to the pollution and price paradigm here.

http://thebreakthrough.org/blog/2008/06/new_piece_in_democracy_journal.shtml#more

I'd be interested in your thoughts to "Scrap Kyoto."

Michael

By Michael Shellenberger on 2008 06 14


Michael, you're certainly right that pricing fossil fuels up is politically difficult, but the greater political acceptance of helping renewables is not a golden opportunity for better policy there. In fact, I think this idea is exactly how we got into this mess in the first place. We've had plenty of bills that offered help for renewables. But the problem is that whenever we do that, Congress also throws another bone for fossil fuels. Since it's politically easier to pick winners than losers, our energy policy has been to declare everyone a winner. And as a result we all lose.

The symptoms of this are all too clear - significantly depressed energy prices. These depressed prices discourage efficiency, both on the demand side, and supply (such as cogeneration/CHP). The bottom line is that whenever you're dealing with a commodity that has serious externalities, environmental or otherwise, you should make sure that whatever you pay for it, you pay directly. We've been paying plenty for energy for years, its just that we pay for it through the IRS. This is the worst possible way to go about it- pay a lot, but pay indirectly to circumvent the high prices, which are the best incentive to conserve.

The special interests that killed Lieberman Warner will kill just as fast any support for renewables that might be anywhere near high enough to actually push them over fossil fuels in terms of investment appeal. Prices are all relative. Fossil fuel companies would see a huge boost to renewables' competitiveness as just as threatening as any sort of tax/cost on themselves. Remember demand for energy - electricity and oil - is highly inelastic. Meaning that consumers will pay whatever they have to for it. If prices double, consumption goes down a bit but not nearly half. So it wasn't the cost that bothered fossil fuels (they could just pass them along to consumers), its the loss of relative competitiveness - that the costs might actually convince a significant amount of the investment money to flow to renewables/nuclear. That means that any benefit for renewables that gets through Congress without being derailed by the same interests that killed Lieberman Warner only got through because it won't
actually make any significant difference.

This is what we see in every energy bill. And it will just continue unless we face up and admit the facts. Yes, prices will go up. But since the economy reacts rationally to carbon pricing, we will raise more revenue than the amount of aggregate costs that get passed along to consumers. So while we can't prevent price increases (like I describe in the oped), we have more than enough money to allow everyone to afford them, as well as plenty extra for needed R&D. If we do it right.

By Max Epstein on 2008 06 11


Ids: Thanks. Yes, the Tech Ten got some things right and some things wrong. Picking winners is inevitable -- cap and trade picks winners and losers, even if its boosters deny they do.

Sam: Thanks for your insightful analysis. You might find more like minded folks here:

http://www.alaska.net/~clund/e_djublonskopf/Flatearthsociety.htm

By Michael Shellenberger on 2008 06 11


Carbon Dioxide is not pollution.

Your entire premise is flawed and completely invalid.

By Sam on 2008 06 11


Read the letter you linked to.

By ids on 2008 06 08


I never said "without selecting winners and losers." Not sure what you're referring to.

By Michael Shellenberger on 2008 06 08


" . . .without selecting winners and losers." Next sentence: we want to provide funding for ccs in advance.

How stupid is that?

By ids on 2008 06 08