Tax-and-Charade
By Breakthrough Senior Fellow Roger Pielke Jr., cross posted from Prometheus
Yesterday's New York Times had an article on the upcoming carbon dioxide auction of the Regional Greenhouse Gas Initiative (RGGI) of 10 northeastern U.S. states participating in this new cap and trade program (h/t Adam Zemel at the BT blog). The evolving performance of RGGI should add weight to the argument that cap and trade is simply not up to the challenge of reducing greenhouse gas emissions. Here is an excerpt from the NYT article:
The program is due to get off the ground in nine days, but already there are worries that it may fail to reduce pollution substantially in the Northeast, undermining a concept that is being watched carefully by the rest of the country, by Congress and by European regulators. . .The concept has been praised by environmentalists and state officials. But the emissions cap was based on overestimates of carbon dioxide output, which has dropped sharply from 2005 to 2006 and is on a lower trajectory than anticipated.
This means that there are more emissions permits available than emissions (can you say ETS Phase 1?). From the NYT again:
The trading scheme would hold carbon emissions to 188 million tons annually through 2014, and scale them back by 2.5 percent each year through 2018. The cap was set in 2004, based on analysis by energy experts and some pressure from the regulated utilities to keep the ceiling at or above the anticipated emissions. . . .Phil Giudice, the commissioner of the Massachusetts Department of Energy Resources, said, "The 188 million tons estimate was put together a number of years ago from both an analytical aspect and, not surprisingly, a political one."
But in the end, emissions from the 10 states went down instead of up. After growing from 176.9 million tons in 2002 to 184.5 million tons in 2005, they dropped in 2006, the most recent year for which there is complete data, to 164.5 million tons. Estimated emissions for 2007 are 172.4 million tons, according to Environment Northeast, a research and policy organization.
A figure from a report from Environment Northeast (PDF), shown below, illustrates the problem.
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Using the Environment Northeast data, I have calculated annual emissions for the 10 states since 2000 to their estimated 2008 value, and they have declined by just under 1% per year. If we take a look at the cumulative emissions allowed under RGGI for 2009-2018 we see that the total is about 1.83 GtC. Because emissions allowances that are unsold in one auction roll over to the next, it is the cumulative number of permits over the performance period that matters, not the annual amount.
The following figure shows that emissions will have to grow by more than 1% per year for the RGGI to even have any effect on business as usual. And even a growth rate of 2% would result in a reduction in emissions from 2008 of less than 4%. So for RGGI to actually make a difference on emissions trajectory for these 10 states will require a stark departure from emissions trends over the past 9 years. Energy prices, fuel switching, and the push for alternative energy all work against this for this region. Champions of cap and trade will find themselves in the awkward position of cheering for rapid emissions growth for RGGI to show any teeth. Otherwise, it is just business as usual.
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Over at the BT blog a commenter observes:
It would seem that the problems are with the "political and economic realities", rather than with cap and auction. That is, the problem is that the RGGI cannot go back and lower its cap, or that it wasn't designed with a more flexible/current cap. That is a political problem. If there were great public outcry, it could get fixed; that there isn't says something about where we are.
And this is indeed the problem with cap and trade. Any policy, no matter how theoretically sound, that cannot meet the test of political and economic realities is indeed fatally flawed. RGGI may do many things, but reducing emissions does not seem to be among them. It is high time we started calling cap and trade what it really is -- tax and charade.