GUEST JUICE: Cap & Trade - Misplaced Confidence

By Laurie Williams & Allan Zabel As poles and glaciers melt, permafrost thaws and oceans acidify from our ever-increasing greenhouse gas emissions, the question of whether a carbon cap-and-trade program or carbon fees would provide swifter, more equitable and certain emissions reductions is increasingly urgent. Based on our experience as environmental enforcers (including Allan’s experience with cap-and-trade programs), we believe that the California Air Resource Board’s confidence in cap-and-trade is misplaced and that carbon fees provide the more effective and efficient path to the goals of AB 32, California’s landmark climate protection law. As long expected, California’s recently released AB 32 Draft Scoping Plan relies heavily on “cap-and-trade” to reduce the state’s significant contributions to global greenhouse gas emissions. The draft minimizes the value of a system of “carbon fees.” The Air Resources Board justifies its preference by calling cap-and-trade a more certain route to meeting AB 32’s requirement to reduce California’s emissions 30 percent below “business as usual” by 2020. However, cap-and-trade has serious downsides. Unless all cap-and-trade elements, including offsets, are limited to systems with accurate emissions measurement, the cap on total emissions will likely be inflated and claimed reductions exaggerated. While the emissions of large electrical generating facilities with continuous emission monitoring systems can be accurately tracked, many other sources of emissions and offsets cannot be as closely monitored. If these less-accurately-measured sources participate, the integrity of the cap-and-trade program will be undermined, as will the certainty in reductions that CARB seeks. In addition, even if the market is limited to facilities with continuous emission monitors, this will create artificial scarcity that is likely to result in disruptions and unfairness, as initial and future allocations of the right to emit are distributed and traded. A preview of such disruptions was provided by the manipulations that created the California energy crisis early in this decade. This potential was also demonstrated in a recent simulation at the University of California at Berkeley’s Haas School of Business, in which students gamed a carbon-trading market for individual gain, leading to scarcity and high prices. This potential for market manipulation could contribute to undesirable price volatility. The resulting lack of price predictability in a cap-and-trade system (specifically, the lack of certainty that the price of energy from fossil fuels will exceed the price of green energy) reduces the incentive for the substantial investments in the new infrastructure and innovation necessary to provide alternative energy at affordable prices. The history of cap-and-trade demonstrates the limitations of the state’s proposal. The so-called “cap-and-trade” of the federal acid rain program in no way resembles the complex challenge we face in reducing greenhouse gases. Under the program, all facilities had monitors, so the system had the integrity of accurate measurement. There was relatively little trading, particularly outside of any given corporation and its subsidiaries. Trading in the acid rain program primarily meant that some corporations complied with the gradual reductions in total sulfur emissions by averaging among several of their facilities. In addition, there was no significant need for investments in new technologies or innovation in order to reduce sulfur. All that was needed--and what happened--was a “fuel switch” from high-sulfur coal, to the low-sulfur coal found in Wyoming’s Powder River Basin. In contrast, another cap-and-trade program failed spectacularly in Los Angeles. Known as RECLAIM (the Regional Clean Air Incentives Market), it was aimed at reducing ground level ozone. In RECLAIM, despite the presence of monitors, an inflated cap delayed most emission reductions for over seven years. At the end of that time, the market collapsed and the necessary control technology was required by regulation. Similarly, attempts to design an effective carbon cap-and-trade system have failed under the Kyoto Protocol--a 1997 international accord to cut greenhouse gas emissions which the U.S. never ratified. Utilities and other sources have underreported their emissions, purchased flawed offsets, driven up prices, reaped billions in undeserved profits and generally failed to produce promised emission reductions. Despite cap-and-trade’s enormous disadvantages, it is ardently supported by two disparate groups. This first consists of those who stand to profit, whether from trading, certifying offsets and/or delaying the phase-out of fossil fuels. The second includes those who truly want rapid reductions, but believe that the greater efficiency and transparency of carbon fees is politically unattainable and/or fail to understand that the vulnerabilities of cap-and-trade to manipulation and fraud will make the “cap” illusory. The advantages of carbon fees, in contrast, include simplicity and transparency. For instance, the U.S. Congressional Budget Office stated in its February 2008 report: “A tax on emissions would be the most efficient incentive-based option for reducing emissions and could be relatively easy to implement.” These advantages include that it is much easier to effectively trace and impose a fee on all fossil fuels at the point of importation or extraction than it is to accurately measure all greenhouse gas emissions. By phasing in gradually increasing carbon fees that would go up each year until the price of energy made from fossil fuels exceeds the price of clean technologies, carbon fees would create the certainty needed to spur investment in post-fossil fuel energy sources. A per-capita rebate of these carbon fees to all California taxpayers would cushion the impact of higher energy prices, particularly for low and middle income taxpayers, during the transition to the post-fossil fuel economy. The relative certainty provided by escalating carbon fees and the investments they would foster are likely to catapult California and the nation into a leadership position in green technology and set a roadmap for the rest of the world on how to move beyond the ineffective policy of cap-and-trade. As CBO acknowledges, the main barrier to the carbon fees approach is a lack of political acceptability. It in turn is based on a lack of public education about why carbon fees (and a ban on new coal-fired power plants without sequestration) are our best hope to save our way of life and leave a habitable biosphere to the next generation. By selecting carbon fees to meet AB 32’s goal, California could lead the nation in effectively and efficiently addressing climate change. While CARB’s draft scoping plan attempts to support its preference for cap-and-trade by indicating that it would fit well with expected cap-and-trade programs by the Western Climate Initiative and the federal government, this justification is unworthy of California’s proud tradition of environmental leadership. Only if we discuss the urgency of the problem and the most effective solution with friends, families, neighbors and colleagues, and ask them to join us in calling and writing our representatives, can we jump-start the huge outpouring of public participation necessary to make carbon fees the acceptable as well as the wise choice. --Laurie Williams and Allan Zabel of www.carbonfees.org wrote this editorial as citizens and parents. In May, the two lawyers issued an open letter to Congress urging lawmakers to put their efforts into setting carbon fees in place of a carbon cap-and-trade program. For details about their professional experience and carbon fees approach, see their website. This article was edited by:

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GUEST JUICE: Cap & Trade – Misplaced Confidence

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