President Obama calls for a price on carbon. Will it work?

Posted by Dave Rochlin - http://www.ClimatePath.org

In a recent speech at Carnegie Mellon University, President Obama called for a price to be put on CO2 emissions, in order to move us on the path towards renewable energy. He figures the market will help do the rest.

" ...the only way the transition to clean energy will succeed is if the private sector is fully invested in this future, if capital comes off the sidelines and the ingenuity of our entrepreneurs is unleashed. And the only way to do that is by finally putting a price on carbon pollution."

A price on carbon has dual purposes:

• It raises the cost of energy, which should encourage conservation.
• It closes the cost gap between fossil fuels and alternative energy.

But will it work?

According to the most recent EPA greenhouse gas inventory, US greenhouse gas output is 7 billion tons a year. At a price of $25 per ton -- as envisioned in the Kerry-Lieberman American Power Act -- the total added cost if we priced all US emissions would be $175 Billion dollars per year, or about $1750 per household per year. Of course we won't be charging for all emissions....more likely just those above our 17% reduction cap, so the short term number (in grossly oversimplified terms) is really more like $350 per household....and that's only if we were not simply giving away all the permits. And in the long term? The senate bill targets an 80% reduction by 2050...but I'll believe that commitment when I see it.

I suppose this could show up as an additional $.25/gallon at the gas pump, or perhaps another $.01- $.02 per KwH for electricity. More likely, a lot of it would be buried in the cost of all the things we buy...carbon pricing by a thousand paper cuts!

When I talk about offsets (which I do a lot), I often have people tell me that a carbon tax is a much better answer, because it sends clear signals about the cost of consuming energy. So let's look at some major sources of emissions to see what pricing carbon might do:

Driving (roughly 20% of US emissions)
I really doubt that adding another $10 per barrel to the cost of oil is going to change driving habits or vehicle choices much. Demand only seems to change with massive ($30 or more per barrel) type price shocks, and even then only temporarily. If you don't like a Prius at $60 per barrel, you probably still don't like it at $70. Rather than carbon pricing, we either need to tax the real price of oil (including military expenditures, health costs, and deficit-related currency weakness) or simply rely on higher mandates on gas mileage, like the ones the EPA just enacted.

Flying (roughly 3-5% of US emissions)
Much of the cost of flying is fuel related, and this is an area where carbon pricing could have the greatest impact. While 10% at the gas pump does not scare drivers much, a 5% or 10% increase in the price of flying has a big impact on demand....there are plenty of pricing studies that confirm this. But even in this case, the drop in passenger miles would probably not hit the 17% reduction target. Of course airlines are already looking for exemptions to cap and trade in both the US and Europe. Perhaps we need some sort of mandatory fuel targets (per passenger) for airplane flights?

Electricity Generation (roughly 30% of US emissions)
For a home using 9,000 KWH per year, the carbon penalty would be around $15 per month. Most homes could easily save this much by using cold water for washing clothes and changing out a few lightbulbs, or shutting off vampire appliances and computers. And yet most of us don't. We don't seem to be that rational when it comes to electricity.

The utilities would look at both cost per kWH and capital expense, if it is a purely market based decision. Many uilities don't really compete, so any cost increases would simply be passed on anyway. This makes it rational to avoid new capital expenses, and stick with the old power plants. Emissions and renewable energy targets and other mandates (like additional scrubbers) could be much more impactful.

Industrial Energy Use (roughly 10% of US emissions)
Businesses have gotten smart about energy use in a big way. The more energy intensive the business operation, the more they are conserving in order to cut cost. But if they are taking action anyway, how much more impact will carbon pricing have? For those on the margin (less energy intensive businesses) some may start to care. But the big polluters are already paying attention to conservation. The senate bill also has some trade protections (carbon tariffs) so simply raising prices on goods and services ever-so-slightly is an option...no need to worry about foreign competition.

Agriculture (roughly 7% of US emissions)
This sector seems to be given a waiver: If so, the CO2 equivalent of agriculture related Methane (21 times that of CO2) and Nitrous Oxide (310 times that of CO2) will not be priced. Need I say more?

Another big issue is that the price on carbon - as envisioned in current climate legislation - will go right back into the pockets of US consumers, either in the form of rebates or in defict reduction that will keep both taxes and inflation down. So the more we reduce our consumption or switch to renewables, the less we get back in rebates....sort of a reverse incentive.

While I think capturing the true cost of energy is an important step, I am not all that optimistic that carbon pricing alone will change behavior. What are some other options? Here are a few I can think of:

Conservation Capital
There's a high ROI on energy reduction (which would be even higher if energy costs go up due to carbon pricing.) But many changes require upfront capital. How about a low interest or no interest capital fund or Fannie-Mae type system for businesses and households to fund conservation and energy retrofits? This scheme is already being considered for residential solar.

Hard Targets
We could simply set renewables and emissions targets, as has been done with automobiles. If the market knows that a utility needs to get to 20% renewables in ten years, the "ingenuity of entrepreneurs" that The President referred to will kick into high gear an compete vigorously for a piece of the pie, lowering costs and increasing innovation.

Cost Transparency
Better feedback on energy use and costs would lead to better decisonmaking. Let's hook those smart meters into our thermostats and iphones, so we can see at anytime how much we are spending on power. And instead of an MPG gauge on cars, how about a taxi-meter style read out that shows how much we are spending on gas as we drive? These sort of in-your-face mechanisms are more likely to change behavior.

Spend Intelligently and Holistically
While we are pricing carbon at $25 or higher, I can think of an amazing innovation that 'eats' carbon for $10 per ton, and has years of successful field trials. It's called a tree, and we are losing as much as 80,000 acres of them each day. Trees also can preserve biodiversity and provide income in poverty zones. Using less and cleaner energy is a worthwhile goal, but a planet covered with solar panels and turbines instead of trees is not the kind of future we should aspire to. It's all about balance.

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Original photo CC license http://www.flickr.com/photos/bdburton/ modified by ClimatePath. All rights reserved.

Coming Soon To Our Planet: Two Billion Cars.

By Dave Rochlin - originally posted on care2.com

Over the break I've been reading Daniel Sperling's book Two Billion Cars, an exploration of how the planet can handle the two billion vehicles that will be in service by 2025.

Is this number inevitable? Sperling says yes: There are over a Billion vehicles today, and 2.4 Billion emerging consumers in China and Indian interested in 'personal motorization'. He also points out that most automakers are focusing their efforts on building and conquering these new markets. His projections actually show roughly 1.2 Billion cars, another 500 Million trucks/buses, and 500 Million motorcycles and scooters, but the forecasted growth in each segment is still staggering and a little scary.

We clearly live in what Sperling and his co-author call a "gas-guzzler monoculture". Only 2% of passenger travel in the U.S. is via public transportation, and even in Europe where fuel is expensive and trains plentiful, 80% of travel is via automobile. He calls this car-centric western lifestyle "an extravagant consumer of resources and producer of greenhouse gasses."

On the Daily Show earlier this year, Sperling stated that one of the problems is that "There is no value placed on carbon production." I totally agree, and whether we end up with cap-and-trade, a carbon tax, low carbon fuel standards, or voluntary offsetting, factoring the environmental cost of burning gasoline into the cost of ownership is needed to start to change consumer behavior. So is an honest assessment and forecast of how much oil is left and what it will cost. Sperling is pretty optimistic about oil reserves, but does see the price of oil driving supply, and therfore an end to cheap oil.

Unfortunately, he also sees a lot of this higher cost and regulatory action focused primairly on driving automobile and fuel innovation...hybrids, biofuels, lighter cars, and more. Clearly these are needed: the book compares a 1976 Honda accord (2000 pounds, 46 MPG) with a 2008 model (3600 pounds, 29 MPG) to demonstrate the stagnation in innovation related to the resource intensity of automobiles. But two Billion vehicles? Isn't there a better way for us to plan communities and get around?

Sperling presents some interesting and promising alternatives including 'smart paratransit' (point to point public transport like airport Super Shuttles), carsharing (think Zipcar), small powered vehicles (Smart Cars and Segways), and ridesharing (Pickup Pal). He also discusses the idea of redesigning roads to be more bus (and bike!) friendly. All of these seem to be gaining traction, but none are growing as fast of personal vehicle ownership.

Part of this is financial, I suppose....we pay endlessly for roads and (hidden) oil subsidies, while underfunding light rail and other alternatives -- expecting them to pull their own financial weight in a way in which automobile travel does not. Part of it is also the desire for the 'freedom of the open road', an aspiration which will become more elusive as cars and traffic multiply. Maybe its time take some focus away from automobiles and highways, and to re-imagine and fund infrastructure that creates a different future.

Photo copyright: http://www.flickr.com/photos/bike/ / CC BY-SA 2.0

Cap and dividend would put consumers in charge. Can we handle it?

By Dave Rochlin - originally posted on care2.com

While the climate talks in Copenhagen ended with the world wondering if the US will commit to emissions targets, I have been wondering how we will deliver on the reduction promises made in Copenhagen. Apparently Senator Maria Cantwell has been thinking about this as well.

Cap and Trade? As I wrote earlier this year, a poorly designed cap and trade scheme could lead to market manipulation and speculation in carbon credits and pollution permits that transfers much of the money to Wall Street type firms. And giving away virtually all of the the permits (as has been proposed) won't increase the cost of energy, and so won't motivate changes in underlying demand.

A carbon tax? Well it certainly factors the cost of climate change into all the stuff we consume, which will change behavior, but trusting the government to spend the money wisely on investing in new energy policies (rather than pork) and keeping the economy on track requires a large leap of faith, whether you believe in big government or not.

So I was intrigued to see that Senator Cantwell just unveiled an alternate climate bill for the US called the CLEAR (Carbon Limits and Energy for America's Renewal) act, which would create emissions caps but give the proceeds of tradeable emissions rights to consumers, in the form of a rebate. One hand taketh away, but the other hand giveth right back. Now why didn't anyone think of that sooner?

As the Wall Street journal reported:

"2,000-3,000 of the nation's largest emitters would be able to buy and sell emission credits auctioned by the government, with credit values rising as mandated greenhouse gas levels fall. Seventy-five percent of auction revenues would be recycled into monthly tax-free checks to the public to help pay for rising energy costs. (Cantwell) estimates between 2012 and 2030, for the average family, those checks could average $1,100 a year for a total of around $21,000 for the period."

The AARP said that "The CLEAR Act offers a simple, straightforward approach for reducing carbon emissions in a manner that will mitigate energy cost increases and minimize administrative costs for consumers."

Grist called it "a heartbreaking work of staggering genius" (although while they gave it an A for intention, they gave it only a C for execution.)

Without question, the current version of the proposed CLEAR act is far too brief...and of course the devil is in the details. But this direction seems to tackle the problem while overcoming concerns that trouble legislators on both sides of the aisle.

I personally love the idea that the average consumer can decide which steps to take with their rebate checks, whether it is to caulk, buy a new car, add solar panels, or support fair trade offset projects that help small farmers in Mexico or Uganda.

But I suppose one of my biggest fears is that consumers will take this check and buy more gas (or just subsidize their fuel purchases), acquire more stuff, or take trips to Disneyland....and then complain that "Everything is more expensive." Future versions of the bill may have to address this potential fatal flaw. Giving money to taxpayers has usually been characterized as a stimulus designed to get us to buy and consume more. Will this be different? "Cap and dividend" puts the people back in charge. But can they handle it? Let us now what you think in the poll question below.

In any case, I am sure we'll be hearing more about CLEAR in the upcoming weeks. You can read up on it on Senator Cantwell's website.

Photo copyright: http://www.flickr.com/photos/portofsandiego/ / CC BY 2.0

Barbarians at The Turbine

By Dave Rochlin - Originally posted on care2.com

In a recent column in Rolling Stone, Matt Taibbi described cap and trade as "a groundbreaking new commodities bubble, disguised as an environmental plan" and further asserts that it will "allow a small tribe of greedy-as-hell Wall Street swine to turn yet another commodities market into a private tax collection scheme." A pretty scary critique.

Now I should start with the caveat that Taibbi is a somewhat opinionated and controversial figure, prone to hyperbole. He once described Thomas Friedman (NY Times writer and author of "The World is Hot, Flat and Crowded") as someone who "flies around the world, eats pricey lunches with other rich people and draws conclusions about the future of humanity by looking out his hotel window and counting the Applebee's signs." He called Goldman Sachs "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money" and he also penned an infamous piece called "The 52 Funniest Things About The Upcoming Death of The Pope."

But for me, the Enron-induced market manipulation of the energy markets that nearly bankrupted California still stings, as does the more recent mortgage backed securities fiasco that may end up bankrupting our country (thanks to the TARP, housing bubble, and stimulus packages that it has spawned). While carbon prices should drive us to demand greater energy efficiency and use less energy, the real underlying purposes of carbon credits are to fund ecosystem services (such as vibrant forests) and to finance the cost of permanent changes to the world's energy production and consumption infrastructure. A poorly designed cap and trade scheme could lead to market manipulation and speculation that transfers most of the money to sophisticated financial firms and market intermediaries, rather than groups that actually do the projects. A carbon price "spike" could easily lead to $10 of paper profits for every $1 that actually funds firms making a difference.

We set up ClimatePath so that money goes to a nonprofit that permanently retires the credits...no resale or speculation. Many of our mission based project partners also insist that credit transaction lead to retirement, not resale. We avoid treating carbon as a commodity, by linking money spent to the underlying project work. These aren't the only answers, and I do believe that market making firms are needed to make cap and trade work. But it is important that the final cap and trade bill contains strong provisions and penalties to prevent a speculative bubble. The language is there now, but as Mother Jones reports "regulation of carbon markets will probably be swept up in broader financial reforms that are the subject of intense lobbying and political pressure. It's too soon to take for granted that cap and trade will contain rules that go far enough to prevent speculation and fraud."

If you write rules for Wall Street, they follow them. If you leave loopholes, they exploit them. In the end, if your utility ends up paying $50 a ton while they transition away from coal, while the renewables supplier, forest preservation project, or conservation project receives only $10, then we have legislated the massive wealth transfer that Taibbi fears.

Photo copyright artemuestra at flickr.com (CC License)