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Tilting at Windmills

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May 13, 2008
By: Kevin Drum

JOHN McCAIN AND 100% AUCTIONS....On Monday, John McCain outlined his climate change policy, which includes a cap-and-trade program:

We will cap emissions according to specific goals, measuring progress by reference to past carbon emissions. By the year 2012, we will seek a return to 2005 levels of emission, by 2020, a return to 1990 levels, and so on until we have achieved at least a reduction of sixty percent below 1990 levels by the year 2050.

....As part of my cap-and-trade incentives, I will also propose to include the purchase of offsets from those outside the scope of the trading system....Through the sale of offsets — and with strict standards to assure that reductions are real — our agricultural sector alone can provide as much as forty percent of the overall reductions we will require in greenhouse gas emissions....Over time, an increasing fraction of permits for emissions could be supplied by auction, yielding federal revenues that can be put to good use.

It's great that McCain acknowledges the reality of climate change and great that he acknowledges that we need to do something about it. But his cap-and-trade proposal is pretty weak tea.

For starters, its goal of a 60% reduction in greenhouse gas emissions by 2050 is less aggressive than Barack Obama's plan, which calls for a reduction of 80%. Since the plan will probably get watered down in Congress, that's a bad place to start.

Second, there are the offsets. It's not impossible to do offsets right, but in the reality we live in they're almost certain to end up as little more than fig leaves that give the appearance of doing something while delaying real action on GHG reductions. Promises of "strict standards" notwithstanding, this is an area where you definitely want to see the fine print before you sign up.

Third, McCain's cap-and-trade plan initially gives away emission permits instead of auctioning them. I mentioned a few days ago that that a 100% auction of emission permits is what distinguishes a real plan from a fake one, and later that day Mike O'Hare begged to differ: "The difference between a giveaway and an auction of the same total emissions is not a difference in environmental outcome or the economic cost of getting to it; it's only a matter of whose ox is gored." That's true, but it's worth unpacking that gored ox a bit.

Environmentally speaking, it doesn't matter whether you auction permits or give them away. What matters is the cap. If you cap total emissions at 90% of current levels (and enforce it), then that's what you'll get no matter which kind of system you use. And since both systems allow permits to be traded between companies, they each provide similar levels of economic efficiency. Our ox lurks elsewhere.

Here's the difference. If you auction permits, then power plants and other GHG emitters have to buy permits to operate, and this raises their cost of doing business. This will get passed along to consumers and energy prices will go up. The revenue from the permits will go to the government, just like a tax.

If you give away permits instead, common sense suggests that since there are no additional costs to emitters, they won't raise their prices. But it turns out this isn't true. Thanks to the opportunity cost of the permits, they'll raise their prices just as much as if they'd bought the permit in an auction. (This isn't just a theory, either. That's how the European cap-and-trade system worked initially, and prices really did go up. If you want the gritty detail on why it works this way, read this paper.) So: power plants end up raising their prices, but since the emission permits are free their costs don't change. Result: a huge windfall profit for GHG emitters. Some get more and some get less, but the overall net result is lots of extra profit, with the biggest polluters getting the biggest profit.

That sounds Republican bad enough already, but it gets worse. All cap-and-trade programs increase energy prices — it's like a carbon tax. But carbon taxes are heavily regressive, and a cap-and-trade program with a permit giveaway is even worse. Not only would the resulting higher energy prices hit the poor more heavily than rich, just as they would with a carbon tax, but in addition, thanks to the windfall profits, the rich would actually benefit from increased earnings in their investment portfolios. An auction system, by contrast, (a) doesn't provide windfall profits for corporations and (b) since the federal government collects the auction fees it can use them to ameliorate the disproportionate impact on the poor. It can spend some of the money on clean energy R&D; it can spend part of the money on mass transit; and it can spend part of the money by simply giving it back to taxpayers in a way that reduces the regressive nature of the original tax.

Finally, there's a political reality here. A system that gives away permits is highly vulnerable to legislative fiddling. Just as with tax policy, it's all too easy to favor certain industries over others by doling out different permit levels, and all too easy for the whole thing to turn into yet another form of corporate welfare. It's a lot harder to do that with an auction plan, which simply sets a nationwide permit level for GHGs and then makes companies buy them in a publicly traded system. It's not impossible for legislators to game the system — it's never impossible for legislators to game the system — but it's a lot harder.

So that's that. A cap-and-trade system with a 100% auction provides revenue for green research; it reduces the regressivity of the tax hit; and it helps keep lobbyists from gaming the system. The giveaway method, conversely, is highly regressive; provides windfall profits for big polluters; and would almost certainly end up as a congressional pork barrel that eviscerated the original emission targets bit by bit by bit. It just goes to show that policy details matter. Take your pick.

Kevin Drum 1:44 AM Permalink | Trackbacks | Comments (46)

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Comments

100 percent auction makes complete sense; therefore, it cannot happen.

Posted by: Quaker in a Basement on May 13, 2008 at 2:06 AM | PERMALINK

John McCain - What a fuckin' genius. Why would anyone vote for this decrepit snake oil salesman? I did take heart yesterday over two things:

1) I spoke with a gentleman over the weekend who is a Democrat national delegate and operative whose opinion I value a great deal. He said polls conducted by the DNC indicate Obama will beat McCain by 10 percentage points or more in the general election! His exact words - "McCain will be annihilated at the polls".
2) The other is that Ron Paul is planning to spoil the Republican convention for McCain.

Take heart, Democrats!

Posted by: The Conservative Deflator on May 13, 2008 at 5:48 AM | PERMALINK

Of course the devil's in the details, but it sounds like McCain's plan repeats some of the mistakes made by the Acid Rain Program and the EU program.

The part about "Instantly, automakers, coal companies, power plants, and every other enterprise in America would have an incentive to reduce carbon emissions..." also set off alarm bells.

Prediction: The Acid Rain Program has been wildly successful--nothing to fix there. The EU is part of that "dead-end of failed diplomacy" Kyoto, which explains why they're program had so many problems.

Posted by: has407 on May 13, 2008 at 6:12 AM | PERMALINK

A lurking ox? As opposed to one who actually leaves a comment?

And what's this about an ox and Al Gore? I know this is a global warming post, but...

Posted by: Box Ox on May 13, 2008 at 6:40 AM | PERMALINK

The giveaway method, conversely, is highly regressive; provides windfall profits for big polluters; and would almost certainly end up as a congressional pork barrel that eviscerated the original emission targets bit by bit by bit.

Well, when you put it that way, you know which one we'll wind up with.

Posted by: Davis X. Machina on May 13, 2008 at 6:42 AM | PERMALINK

As you say the critical point of the cap and trade system is the cap.

And, that is the nut that just won't happen, and will be very expensive to administer.

If it applies only to electricity generation, that is nothing. Electricity generation occurs centrally (in power plants), but also decentrally (in regenerative braking). Like finance that can orient itself to dollars, euros, oat futures, an entity can shift how it stores energy (not necessarily electricity).

If it applies to all energy consumption, then that will take a 100% accounting and 100% of the activities of 100% of the people on the planet.

Otherwise, the cap and trade system ends up applying to only a sliver of a sliver of energy consumption on the planet, and accomplishes nothing.

I don't really know that that leaves, short of allowing full pricing, somehow including externalities, into the cost of fuels, so that people can make actual economic decisions, rather than engineered ones.

That or a currency backed by clean calories, (a non-fiat currency to compliment dollars/euros, etc.)

Posted by: on May 13, 2008 at 6:43 AM | PERMALINK

I think any system of cap-and-trade is the wrong approach.

Those individuals or industries making the most significant contributions to GHG need to change. Anything that creates a condition where they are not made to address the reality we all face will not get the job done. Cap-and-Trade is a band aid, not a solution.

Posted by: JK on May 13, 2008 at 7:13 AM | PERMALINK

Great post, now how can it be made to fit on a post card?

Posted by: Eric on May 13, 2008 at 7:34 AM | PERMALINK

That's how the European cap-and-trade system worked initially, and prices really did go up. If you want the gritty detail...

That's still pretty much the way it works and likely will work for some time. For the really gritty details on the what, how and how much, read this paper.

Posted by: has407 on May 13, 2008 at 7:40 AM | PERMALINK

The idea that by 2020 greenhouse gas emissions will be reduced to 1990 levels is such total fantasy that I don't really think it makes much difference what program people pretend the country is going to implement. It's like arguing about whether the new democracies we are going to establish in the Middle East should have governments on the presidential or the parliamentary model.

Posted by: y81 on May 13, 2008 at 8:54 AM | PERMALINK

Kevin, the quote said McCain would reduce GHG by 60% below 1990 levels. Is Obama's goal of 80% compared to current levels or to 1990?

Posted by: anandine on May 13, 2008 at 8:55 AM | PERMALINK

Kevin, this was a really useful post. Even made me (finally) look up what opportunity cost means. Thanks.

Posted by: jim on May 13, 2008 at 9:21 AM | PERMALINK

Isn't this similar to Bush's proposal prior to the 2000 election?

Posted by: Ed on May 13, 2008 at 9:23 AM | PERMALINK

Cap and trade systems, especially those that give away rights to pollute based on a history of polluting, can be an anti-competitive barrier to entry discouraging new, clean market entrants. For example, many 20 year old gas fired power plants produce 10x, 15x or more times as much NOx per MWh than new gas fired combined cycle plants. With a cap and trade system, new clean plants have to subsidize legacy polluters by buying credits from them. This is an anti-competitive, barrier to entry favoring legacy polluters. On the other hand, under an emissions tax system, the cleaner new entrant would have a competitive advantage.

Incentives under an emissions tax system are much more rational than under a cap and trade system.

Posted by: Jim on May 13, 2008 at 9:30 AM | PERMALINK

Seems like a near perfect Republican plan. (1) It enriches their corporate buddies. (2) Two it does little about GHG emissions. (3) The people, particularly the poor pay the bills.
Then they can trot out (3), and say the following:
This was a plan the liberals wanted, see how bad it was.
Since going for minimal emissions reduction hurt so much, no way to try real reductions.
Government is bad. Anything done by government is bad, and should be eliminated. (Excepting spying on citizens, and military adventurism of course).

Posted by: bigTom on May 13, 2008 at 9:37 AM | PERMALINK

Doesn't McCain know that global warming was invented by Al Gore so he could get rich and make us all use ethanol so we'll all starve and the government will take control of the food supply?

Posted by: Wingnut on May 13, 2008 at 10:03 AM | PERMALINK

post card version:
giving away the permits is more government bureaucracy.
Auctioning them off is the free market in action

Posted by: on May 13, 2008 at 10:10 AM | PERMALINK

McCain is very close to landing the killer blows on Barak Obama, before the campaign has even really opened.

A bit more of the mad Reverend on national TV, and the mafioso property developer next door (anyone remember Geraldine Ferraro's husband?) plus some sensible policies from McCain on the environment and energy, and your man is toast.

Joy....

Posted by: aaaabbbb on May 13, 2008 at 10:13 AM | PERMALINK

These guys are in the Senate now, why not just sponsor a bill to do this stuff?

Posted by: Alice on May 13, 2008 at 10:15 AM | PERMALINK

What do you all think about this? Check it out at http://obamarocks08.com

Posted by: Shirley on May 13, 2008 at 10:44 AM | PERMALINK

http://www.obamarocks08.com try this one

Posted by: Shirley on May 13, 2008 at 10:47 AM | PERMALINK

I come to pick nits. That picture looks like a cooling tower. So isn't that just steam?

Posted by: Mo MacArbie on May 13, 2008 at 10:56 AM | PERMALINK

Oh, and they tried the McCain plan in Europe-- Guess what? It didn't work.

Posted by: Sam on May 13, 2008 at 11:13 AM | PERMALINK

Excellent post, Kevin. Crystal clear and dead on. Keep it up!

Posted by: LLamura on May 13, 2008 at 11:16 AM | PERMALINK

All while Juan McCain doubles the population with fecund illegal migrants and jackpot babies!

But don't Jillary Clintn and Barack bama share the same vision of doubling the population while reducing the consumption of non-renewable resources?

Is this logical or liberal?

Liberals are great people, but they think with their hearts instead of their heads.

Posted by: Luther on May 13, 2008 at 11:19 AM | PERMALINK

Policy details do matter, but appearances matter even more.

The salient advantage of a cap-and-trade system is that it allows the costs of reducing carbon emissions to be camouflaged. Politicans, and even bloggers, can assure their audiences that it is someone else's fault if energy prices go up -- utilities, auto makers, oil companies, Republicans (it goes without saying that businesses ensnared in the rat's nest of rules that a cap-and-trade system would require would also have someone else to blame: bureaucrats).

If the point is to increase energy prices and reduce energy demand, why not simply apply a carbon tax? We know how to do it, we know that gaming a tax system requires more time and effort than gaming any regulatory system, and it wouldn't require government regulation of every business's emissions of multiple pollutants we haven't recognized as pollutants before. It would also provide a more reliable revenue stream than the sale of carbon credits would.

The reason is how a carbon tax would look. No politician voting for it would be able to blame the resulting higher energy prices on someone else. Economists (and what do they know anyway?) generally favor a carbon tax, but for people in public life, who have to run for election or even who write blogs and risk angry e-mails, it is very, very important to have cover and the ability to blame something unpopular on someone else.

Climate change is the defining moral issue of our time. It demands that we do something clever that won't make the public mad. If we maintain message discipline about cap-and-trade being a question of high principle, we might just pull it off.

Posted by: Zathras on May 13, 2008 at 11:28 AM | PERMALINK

The idea that by 2020 greenhouse gas emissions will be reduced to 1990 levels is such total fantasy that I don't really think it makes much difference what program people pretend the country is going to implement. It's like arguing about whether the new democracies we are going to establish in the Middle East should have governments on the presidential or the parliamentary model. -y81

I couldn't agree more. The whole thing will end up being a ridiculous shell game that will make the electricity scandal in California pale in comparison. It would be far more effective to mandate the mix of energy sources for electricity and to raise CAFE standards for portable fuel. Barring that, just ration the goddamn stuff.

Posted by: Doc at the Radar Station on May 13, 2008 at 11:29 AM | PERMALINK

Did anyone mention that you are showing steam in the photo?

Anyway, the system is missing half the market, the damaged parties. Unless the damaged parties obtain greater income from using less then the system reaches a stopping point.

I did read the paper which says:

"Third, revenue from the sale of permits is deposited into a trust fund and paid out equally to every woman, man, and child in the country. "

Since my additional income has nothing to do whether I drive less or more, my utility for using petrol is distorted. That is petrol is no longer distributed to those who use it most effectively and cash is no longer distributed according to damages.

Republicans like the one sided nature of the system because it forces us to use a regressive tax to yield progressive results, but the results depend on a system of using petrol ineffectively.

In other words, we adjust progressivity by giving poor people more gas, rather than more money, in a very short period.

You need the other half. The individual needs to effectively sell gas emission permit, not the government sell it for him.

This is what I have been bitching about, this has less to do with reducing gas use and more with letting some special interest groups get a break on gas.

Progressives will not implement any emission reduction scheme unless their people are protected. But ultimately, the only way to protect their people is to pay them cash for compensation in damages, and charge them cash in compensation to gas usage.

Posted by: Matt on May 13, 2008 at 11:39 AM | PERMALINK

Like LLamuera said. This is an excellent post with a really important message. The only thing that I would add is that the stakes are very high: to the tune of $50 - 300 billion per year.

Posted by: Jimmy Brad on May 13, 2008 at 11:40 AM | PERMALINK

But Cap'n Trade will get you high tonight,
And take you to your special island,
Cap'n Trade will get you by tonight,
Just a little push and you'll be smilin'

apologies to Billy Joel

Posted by: thersites on May 13, 2008 at 11:44 AM | PERMALINK

Zathras got it right.

Put the tax on the pump and in the electricity bills.

But even with that, one still has to charge additional for past damages. Once people are paying the real cost, then let the damaged parties sue to get compensation.

Congress needs to pass one bill allowing individuals access to the tort system for GHG damages.

Posted by: Matt on May 13, 2008 at 11:51 AM | PERMALINK

go to infowars.com and see faux news put mccain in subliminal message

Posted by: mrmakimkay on May 13, 2008 at 12:25 PM | PERMALINK

Is there a way to spread the cost of these permits across the whole energy consumption spectrum? As an individual I don't know if my power comes from coal, gas, or nuclear. But even if my local utility is largely powered by wind, by turning on a light I'm increasing the load on the whole grid and somewhere, a lump of coal catches fire.

When a fossil fuel-based utility pays for the permit, they pass the cost along to "their" consumers. Does this cause people in coal-powered regions to pay higher costs for energy decisions that they don't make? If so, how can you spread that cost around while still creating incentives to a) use less power b) switch to non fossil fuel power sources?

Posted by: thersites on May 13, 2008 at 1:09 PM | PERMALINK

Why doesn't EVERYBODY stop telling us what will, will not, who cares, what ever are you thinking-- the world will move along just fine with out all of you telling us what will do, won't do, what happens.

Hay,relax people, its a lovely May, summer will be lovely, we have more months until November.

Enjoy our world!!

Posted by: SAL on May 13, 2008 at 3:00 PM | PERMALINK

If you give away permits instead, common sense suggests that since there are no additional costs to emitters, they won't raise their prices.

Common sense suggests that the people/companies that receive the permits will auction them in the free market. That will either reduce their costs or else provide the capital for CO2 sequestration (or other updating.)


Considering how much money has been invested in energy generation, and how much money we want invested in energy generation in the near future, why is the phrase "windfall profits" even bandied about? I support ending the tax benefits that the petroleum producers receive, but so doing will increase consumer prices. However, the only "windfall" here is the tax increase by the federal government.

According to Ray Kurzweil, by 2028 the U.S. will be producing so much electricity from solar power that most of today's discussion will be outdated. All that is needed is for current investment levels to be maintained, though an increase would be nice. For current levels to be maintained, all that's needed is to extend the current supports/credits for solar development. If Kurzweil is right, then the details that you are sweating over today are completely irrelevant.

Posted by: spider on May 13, 2008 at 3:08 PM | PERMALINK

Jim:
Cap and trade systems, especially those that give away rights to pollute based on a history of polluting, can be an anti-competitive barrier to entry discouraging new, clean market entrants. For example, many 20 year old gas fired power plants produce 10x, 15x or more times as much NOx per MWh than new gas fired combined cycle plants. With a cap and trade system, new clean plants have to subsidize legacy polluters by buying credits from them. This is an anti-competitive, barrier to entry favoring legacy polluters. On the other hand, under an emissions tax system, the cleaner new entrant would have a competitive advantage.

Well said.

If somebody would propose a tax on CO2 emissions offset by an income tax reduction, I think that would both work and pass Congress.

Posted by: on May 13, 2008 at 3:17 PM | PERMALINK

McCain To World: Global Warming Is A Problem

Posted by: Michael on May 13, 2008 at 3:57 PM | PERMALINK

Headlines about CO2 emissions should not be accompanied by pictures of those huge concave-sided cooling towers. The white stuff coming out of the top is steam, not smoke. And the cooling towers may be part of a nuclear plant - i.e. no CO2 emissions at all. Now if there's a smoke-stack in the picture, then maybe ok...

Just sayin'

Posted by: DNS on May 13, 2008 at 4:25 PM | PERMALINK

It is telling that not one commenter is willing to suggest the possibility that CO2 from fossil fuel has little or nothing to do with climate change. Now that the Republicans have jumped in - or sold out - outcompeting the Democrats to act like they are going to do something about it, you can toss off your partisan hats.

Keep an open mind. Observational data continues to confound the GHG models, and suggest that CO2 is not a factor in driving climate change. The irony is that other things we do, like subsidize biofuel that causes tropical deforestation, may actually cause climate change.

Posted by: Jack Sprat on May 13, 2008 at 7:01 PM | PERMALINK

"...and suggest that CO2 is not a factor in driving climate change."

Source? (not a wingnut site please).

Posted by: smuggler on May 13, 2008 at 7:10 PM | PERMALINK

did c02, presumably from campfires, "drive" temperature increases that led to the medieval warming period?

if not, I wonder what did?

Posted by: neill on May 13, 2008 at 9:09 PM | PERMALINK

The National Oceanic and Atmospheric Administration (NOAA) states that the "idea of a global or hemispheric "Medieval Warm Period" that was warmer than today however, has turned out to be incorrect" and that what those "records that do exist show is that there was no multi-century periods when global or hemispheric temperatures were the same or warmer than in the 20th century".

Indeed, global temperature records taken from ice cores, tree rings, and lake deposits, have shown that the Earth was actually slightly cooler (by 0.03 degrees Celsius) during the 'Medieval Warm Period' than in the early- and mid-20th century.[4]

Bradley, R.S. et al, "Climate Change in Medieval Times", Science, 302 (2003): 404-05

Posted by: trex on May 13, 2008 at 9:22 PM | PERMALINK

If I'm a big emitter, like a power plant, or a giant landfill leaking methane, and if I think a giveaway is coming, why would I do anything at all right now to cut back on emissions? If I cut back by 20% now, I'll only get free permits for 80% when the giveaway happens.

Or is that incorrect?

Posted by: ferd on May 13, 2008 at 9:46 PM | PERMALINK

...since the federal government collects the auction fees it can use them to ameliorate the disproportionate impact on the poor. It can spend some of the money on clean energy R&D; it can spend part of the money on mass transit; and it can spend part of the money by simply giving it back to taxpayers in a way that reduces the regressive nature of the original tax.

That's where you lost me -- auction fees as a government windfall, as pennies from heaven that can be used for all kinds of assorted favored programs of lefties. The phrase not used here, but often seen in this context is 'pool of money' as in a carbon tax or a credit auction will generate just an awesome new 'pool of money'.

If you loved what our various state governments did with their tobacco settlement windfalls, you'll love this sort of thinking. But my reaction is -- yikes. Yikes as in this would be an absolutely massive indirect tax increase. The feds sell credits to emitters, emitters charge consumers to pay for them -- money is transferred from consumers to the federal government via emitters. As with the tobacco settlement, 'progressives' pretend this arrangement 'punishes' the greedy, evil corporations but in fact, the corporations are just the collection agency through which billions are sucked out of consumers' pockets and sent to the government. And laundered, so consumers don't realize they're being taxed. In the case of the tobacco settlement, those pockets were those of smokers only (which is bad enough). In the case of the kind of auction being discussed here, it'll be everybody.

If you want to talk about a carbon tax or permit auction that is crafted to be revenue neutral by design, from the beginning, with no 'pool of money' for the government to screw around with, OK. But otherwise...NF way.

Posted by: Slocum on May 13, 2008 at 10:22 PM | PERMALINK

trex, (from the same page you referred to)

"A radiocarbon-dated box core in the Sargasso Sea shows that the sea surface temperature was approximately 1C cooler than today approximately 400 years ago (the Little Ice Age) and 1700 years ago, and approximately 1C warmer than today 1000 years ago (the Medieval Warm Period).[11]

During the MWP wine grapes were grown in Europe as far north as southern Britain[12][13][14][15], as they are today."

Y'know, when y'all don't want to deal with an issue, your tap-dancing skills are admirable.

I repeat: did c02, presumably from campfires, "drive" temperature increases that led to the medieval warming period?

if not, I wonder what did?

don't you?

Posted by: neill on May 14, 2008 at 12:17 AM | PERMALINK

You can't have a 100 percent auction as long as the cap and trade bill includes rural electric co-ops and municipal systems.

They simply don't have the wherewithal to compete against investor-owned utilities for allowances.

Some of the electric co-op generation systems are quite large but a lot aren't and they're still chartered non-profit. Same with munis. Driving the costs of allowances up at auction would drive their pride of power beyond reason.

Giving them a small amount of free credits at the outset and then sliding it back to pay-for would be a smoother approach.

Posted by: Steve on May 14, 2008 at 10:46 AM | PERMALINK




 

 

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