Opportunity for a Defining Moment

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The inauguration of Barack Obama as the forty-fourth President of the United States is a defining moment in American history. For most Americans and countless others around the world, this is an inspiring political transition. The question we must face, however, is whether compelling inspiration will lead to effective action. As I wrote in a Boston Globe op-ed (November 12, 2008) one week after election day, environment and energy issues — particularly climate change policy — provide a microcosm of the forces that are shaping and will shape the actions of the new Administration and Congress.

About eight years ago, President-Elect George W. Bush promised to be President for all the people, not just those who had voted him into office. Bush’s ability as Texas Governor to bridge differences across the political aisle provided cause for optimism.

But hope for a centrist and sensible Presidency dissolved under the influence of White House political operative Karl Rove and Vice President Dick Cheney. The Bush Administration moved not to the center, but toward solidifying its base on the political right. Nowhere was this more apparent than in energy and environmental policy, with Vice President Cheney running energy policy, and EPA Administrator Christie Whitman virtually driven from office.

Will the environment and energy team of President Obama respond effectively to the serious challenges that lie ahead? Or will we find that the corporate lobbyists who filled so many key environmental positions in the Bush Administration have simply been replaced by strident advocates from the other end of the political spectrum? In other words, will ideology trump reason?

The first sign of trouble will be if the Administration issues an “endangerment finding” for carbon dioxide, as promised by the Obama campaign, thereby pleasing and solidifying President Obama’s political base, but also playing into the hands of those who oppose climate policy action, tying up progress with litigation, driving up costs, and accomplishing little or nothing.

Ultimately, will the Obama White House work with Congress to develop climate strategies that are scientifically sound, economically sensible, and thereby politically pragmatic? Will the new President –with impressive Democratic majorities in both houses of Congress — take on the difficult task of crafting meaningful climate legislation?

The only politically feasible approach that can make a real dent in the problem is a comprehensive, upstream cap-and-trade system to reduce carbon dioxide emissions 50 to 80 percent below 1990 levels by 2050. The declining cap will increase the cost of polluting, thereby discouraging the use of the most carbon-intensive fossil fuels and providing powerful incentives for energy conservation and technology innovation.

The system could start with a 50-50 split of auctioned and free allowances, gradually moving to 100% auction over 25 years. To establish political support in the short term, free allowances should be targeted to sectors that are most burdened by the policy. And the auction revenue — which will increase over time — can be used to compensate low-income consumers, finance research and development, reduce the federal deficit, or cut taxes.

The best option may be to make the program revenue-neutral by returning all of the auction revenue to citizens through direct cash dividends or annual tax credits. This can go a long way towards making the legislation palatable to Republicans and Democrats alike who are reticent to take any actions that even resemble a tax increase.

By making the overall emissions cap gradually become more stringent over time, costs can be greatly reduced by avoiding premature retirement of existing capital stock, reducing vulnerability to siting bottlenecks, and ensuring that long-lived capital investments incorporate appropriate advanced technology.

Still, the costs of meaningful action will be significant, with impacts on gross domestic product eventually reaching up to 1 percent per year. But the longer the world waits to begin taking serious action, the more ambitious will emission reduction targets inevitably become, as atmospheric greenhouse gases continue to accumulate.

The bottom line is that getting serious about global climate change will not be cheap and it will not be easy. Beware of claims to the contrary. In the midst of a significant economic downturn, with businesses closing and unemployment on the rise, it makes sense for the new Administration to give its greatest attention to economic recovery. There is nothing wrong with sequencing policies. But if current predictions about the consequences of another few decades of inaction are correct, this defining moment provides an important opportunity for serious and sensible action.

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25 Responses to Opportunity for a Defining Moment

  1. MattYoung says:

    “The bottom line is that getting serious about global climate change will not be cheap ”

    No, it will be very cheap, it will come from 30-60% efficiency gains in goods transportation of all types. It will be driven by plummeting costs of intelligent silicon, rubber, and asphalt.

  2. Matt, thanks for your comment. Many of the lowest-cost opportunities for CO2 emission reductions in the short term will indeed be from increased energy efficiency (in the transportation and other sectors), according to the best research (see the reports of the Intergovernmental Panel on Climate Change, for example). But costs will still be on the order of 1 percent of gross domestic product per year for the United States, and this is if the most cost-effective strategy — a cap-and-trade system — is employed. Is that cheap? Well, I suppose it depends upon one’s perspective, but we’re talking about hundreds of billions of dollars, or — expressed another way — costs equivalent to the cost of all other Federal environmental regulations combined. Is the cost too great to justify taking action? Not in my view, as I explained in the original posting, arguing for action. But for me to deny the cost would be both dishonest and ultimately counter-productive, because it is necessary to recognize and understand the cost of alternative policies in order to design and implement meaningful approaches that will make a real dent in the problem. RS.

  3. MattYoung says:

    Robert you responded!

    I think we underestimate the extent that freight can be automated through the autonomous cargo wagon. This wagon need only move a half mile on battery before it is powered by fixed speed diesel electric locomotives on rubber with electrical tethering. The saving on long haul freight become enormous as a large parking lot can suddenly become a automated freight yard. On long haul, a diesel electric locomotive on rubber can move 10 to 20 cargo wagons, rather than the two cargo wagons mechanically pulled in today’s tractor trailer rig.

    By going to tethered electric drive, the mechanic pulling goes awy, structural costs drop because of four wheel drive on the wagons, and the amount of human cab weight drops per ton of cargo. The net result should be drop in the weight of cargo carriers.

    An adaption of the cargo wagon becomes home delivery, carrying goods for 10 to 15 customers from the grocery store, yielding efficiencies we can only dream about. The ATM card unlocks the cargo holders for home delivery, so in a sense we are making the supermarket checkout stand mobile and ordering of goods becomes digital over the web.

    The technology then extends into the farm where autonomous cargo wagons, tethered electric ag tools yield the same savings, powered ultimately by the electic generator attachment to the farm tracor. We get a smooth transition from on the farm cargo to the long haul cargo.

    Labor is readjusted, some drivers becoming traffic managers and diesel electric engineers, for the system is autonomous with human monitoring. We are going for zero inventory storage.

    The home delivery vehicle also provides neighborhood watch, deliveries medical supplies, and combines with the UPS function.

    Some might say the technology is not here, but they are wrong. We have technology today that can drive autonomous vehicles in traffic with acceptable and improving safety records.

    UPS expects this, so does Fedex and they are both very interested in solving the “last mile” transportation problem. The new system makes the UPS style delivery affordable for a much greater variety of goods, and the instability of supporting both Internet shopping and local sopping by car goes away.

  4. Again, thanks for your response, Matt. This time, I’ll leave it others to follow up, so that we can expand the conversation. RS

  5. ars says:

    Although I agree on the need for a well-designed cap-and-trade system, this strikes me as an odd formulation of the present political situation:

    “Or will we find that the corporate lobbyists who filled so many key environmental positions in the Bush Administration have simply been replaced by strident advocates from the other end of the political spectrum? In other words, will ideology trump reason?”

    Do you really see any symmetry between the opponents of action of climate change, who celebrate their misunderstanding of basic science, with the present administration? Can you really suppose there’s any serious danger that climate policy in the U.S. will go too far, rather than not go far enough? And ultimately do you really think that a significant obstacle to progress comes from ideological environmentalists and not a determined opposition that will continue to fight any climate legislation, however reasonable?

  6. Thanks for your comment. You’ve focused on a key question. I’m certainly not suggesting symmetry between the Bush administration and the new Obama administration. I did not say that, and I hope I did not imply that. However, from my perspective as an environmental economist who works on trying to develop good environmental policy, which means well-designed policy — scientifically sound, economically rational, and politically pragmatic — I am concerned about the possibility (note, I said, possibility) that the “corporate lobbyists” who inhabited some of the key positions in the Bush administration will be replaced by equally strident advocates from the other end of the spectrum. Some of the appointments that have been announced so far are excellent, and so I am cautiously optimistic. However, playing to a political base — rather than governing for all the people — is a temptation that faces all administrations, whether Republican or Democratic. RS

  7. LRG says:

    I agree that governance on this issue needs to be guided by “scientifically sound, economically rational, and politically pragmatic” experts in the administration, and so far I am cheered by the appointments. I do believe, however, that we would not have gotten to this point on climate change (and we’re here a bit late) without those “strident advocates from the other end of the spectrum” desperately trying to get the attention of a country in love with petroleum and all things related. So here’s to having the best of both in the service of doing the right thing for a change. That said, I’m so pleased to see this blog and hope it will help inform our very local efforts at municipal climate change policy as well as the national debate. Any chance you could embed some links in your posts? I would have liked to know more in particular about the “endangerment finding” for carbon dioxide that you mentioned, and a link to more information on that phrase would be very helpful for those of us less in the know.

  8. LRG, thanks for the comment and the excellent suggestion about including links in postings. I will check with the blog guru to find out if that’s feasible. It’s certainly a good idea! With regards to the substance of your comment, I agree that in our pluralistic system there’s a potentially constructive role for advocates (from both sides of most issues), and having spent part of my life working full time within the environmental advocacy world makes me even more sympathetic to that notion. However, I don’t believe that simply replacing one set of “extremists” in public office with another is likely to provide the best way forward. (I don’t mean to suggest that you recommended this.) In any event, thanks again for your very helpful comments. RS

  9. Professor Stavins: It’s a real pleasure to have you writing a blog. I look forward to reading it on a regular basis.

    I saw the recent symposium in REEP discussing cap-and-trade verses GHG taxes. This is not an area of the literature I’ve spent a lot of time studying and found the symposium interesting. It’s clear you prefer cap-and-trade over taxes. Is this primarily because you see this as “the only politically feasible approach that can make a real dent in the problem…”? I ask because I saw that Exxon recently endorsed a tax over cap-and-trade. This surprised me. I’m wondering what your take on that might be.

  10. Michael, thanks for your kind welcome to the blogosphere. For those of you who don’t know, Michael Roberts maintains an excellent blog — with a considerably longer track record than this new one of mine — at: http://greedgreengrains.blogspot.com/ As for the question you raise about why I have favored cap-and-trade for climate over a carbon tax, I will give my reasons for coming down on the side of cap-and-trade in a future posting, but let me at least address your specific question regarding Exxon here. It seems to me that one of the reasons Exxon-Mobil prefers a carbon tax to a cap-and-trade approach may well be the greater degree of certainty regarding costs that a tax would bring, but I would assume (without knowing for sure) that another reason may well be that they recognize that political forces would lead to any implemented carbon tax being much less ambitious (and hence less effective and less costly) than the cap-and-trade system that appears to be coming. RS

  11. Dallas Burtraw says:

    The suggestion that 50% of allowances be given away for free initially is practical in “real” politics. You calculate that this initial beginning, phased out over time, is roughly equal to the loss in market value for incumbent firms. I understand, but it is not really practical to achieve the goal of compensation of shareholders because of the great difficulty of targeting compensation to deserving parties. Most will accrue to undeserving parties. Nonetheless, it may be a necessary political buyout; it is not an economic ideal.

    The suggestion of dividend to people of allowance value, moving to 100 percent dividend over time, is also a practical solution, and in this case a defensible one. The economic ideal might use new sources of revenue to reduce other distortionary taxes or make investments where net benefits are greatest.

    But cap and dividend has huge political appeal. First, it is based on a philosophy of a common pool resource. This would be the largest federal enforcement of an intangible property right since the 19th century. We can do better than was done with the railroads by recognizing the common pool resource. Furthermore, cap and dividend would be politically reinforcing. It would be popular. It would avoid a middle class tax increase; indeed we find that well into the 8th income decile households would be *better off* under cap and dividend. And, if as may be necessary, we have to go back to families to ask them to make further sacrifice in the next decade cap and dividend would create the precondition for such a collective social sacrificed. Cap and dividend is the one approach that is truly simple, transparent and has the appearance of fairness.

    My concern is the first part. Free allocation of 50% of the allowances to incumbent firms does little to nothing for the principals of the firms (shareholders). It is for the benefit of management – the squeaky wheel in the political economy. And, fully 10% of that free allocation leaves to go overseas to foreign holders of equity and paper in American corporations and is not available for compensation to any households! Meanwhile, shareholders’ interests are what happens to the general economy, not what happens to specific firms, because shareholders today hold diverse portfolios. If it is a practical solution to buy out management of the corporations, it may be real politics, but it says something about the larger problems troubling our economy these days.

    What do you think?

  12. First of all, thanks for the very constructive comment. You and I have discussed this before, and I agree with everything you say, with one exception, or at least clarification. When I suggested in my posting that a national cap-and-trade system begin with 50-50 auction and free allocation and move to 100% auction over 25 years, I did so because , first, it is consistent with compensation for equity losses of existing firms due to the enactment of the program — according to a number of research initiatives, including your own — and, second, because the front-end starting point will increase greatly the political feasibility of the system. Being housed in a school of public policy, my thinking tends to gravitate toward what is feasible, as well as what might be optimal in “policy heaven.” Indeed, as I will write in a future posting, my overall support for cap-and-trade (as opposed to a carbon tax) in this realm is partly premised on that same kind of thinking.

    The clarification I wish to add is that I certainly recognize that if 50% of the allowances were allocated uniformly across the entire private sector that some firms would be over-compensated. That is why whenever I have written about this in more detail than in a brief blog posting or op-ed I have always emphasized that the partial free allocation should be targeted specifically to those sectors and firms most burdened by the policy, not spread evenly across the economy. A good example would be the paper I wrote for the Hamilton Project at the Brookings Institution.

    Also, I should emphasize that I did not claim in the posting and would never claim that free allocation of allowances addresses so-called “competitiveness effects.” It does not (despite the fact that many firms claim that it will, and many politicians around the world seem to share that view). Indeed, that’s a subject for a future posting. In any event, thanks for taking the time to offer these detailed and helpful comments.

    RS

  13. It’s great to see your take on the subject, Professor. I look forward to following your blog! Having said that, I think we at least need to include a revenue-neutral carbon tax in the debate. Political expediency is not reason enough to implement a fundamentally flawed plan. Better to have a full and open debate and educate people–politicians and the public alike–on the options BEFORE we settle on a plan. I think when that happens, a revenue-neutral carbon tax will be preferred, in large part because a carbon tax avoids the evasion and market manipulation inherent to a cap and trade model, while simultaneously incentivizing the creation of new, climate-friendly technologies. I look forward to hearing your opinion in a later article. http://www.climatetaskforce.org

  14. Dallas Burtraw says:

    I follow your reasoning all the way through. I too am writing from the school of practical thought. The additional problem that I raise is simply that the free allocation to incumbent firms is unlikely to achieve its ostensible goal of compensating shareholders for a change in market value of existing assets. The reason is that it is so difficult to “target specifically those sectors and firms most burdened by the policy.” In the electricity sector, where some of the greatest effects will be felt, we explore a number of decision rules based on publicly available information. The cost of compensating the losers is many times the actual harm because so much compensation will accrue to undeserving parties. We also reviewed the experience with stranded asset recovery during the restructuring of the late 1990s. That experience was very problematic. Free allocation to existing firms may be politically necessary. I argue that it will not obtain its ostensible justification. It is a political buy out; not an unfamiliar occurrence in politics. What is unnerving upon further reflection is the distinction between the interests of shareholders and of management in this instance.

  15. I agree that it can be a real challenge to identify (and then target) specific sectors, firms, and individuals burdened by this (and many other public policies). But we need not worry too much about that, because ultimately it probably will not be the analysis of affected sectors, firms, and individuals that will determine either the allocation of free allowances or the allocation of revenues from auctioned allowances; rather both will be based upon the collective judgment of Congress of what is “equitable,” i.e. “what’s good for my district.” With that, I’ll pass on responding further so that others can join the conversation if they wish. But thanks again for your very constructive comments.
    RS

  16. Torben says:

    This is great, welcome to the blogsphere dear Rob!!
    A quick question. The political perspective is understandable. But from the perspective of climate policy, why should we worry about “Will the environment and energy team of President Obama respond effectively to the serious challenges that lie ahead? Or will we find that the corporate lobbyists who filled so many key environmental positions in the Bush Administration have simply been replaced by strident advocates from the other end of the political spectrum?” unless for policy reversal? If the current administration succeeds in securing a workable global deal, do we have to fear that the successor, possibly republican administration, will undo the achievements? Do you we know something about environmental policy reversals? I haven’t come across so far.
    Kind Regards,
    Torben

  17. Torben, the reason for this concern, to answer your question, has to do with the fact that in the environmental sphere, “good” environmental policy is not simply a function of the stringency of the policy. On the contrary, there are numerous considerations in policy design (and implementation) that affect whether and to what degree the policy is environmentally effective, economically sound (that is, requires the least sacrifice of other things we care about — in terms of other public goods, as well as private ones), and ultimately politically pragmatic. Bouncing back and forth between the flame-throwers on either end of the political spectrum from one administration to another is not necessarily (and I would suggest is probably not) the best prescription for the intelligent design of progressive policies that are scientifically sound, economically rational, and politically pragmatic. That said, I am very happy with many of the appointments in the new administration. Thanks very much for your comment and question.
    RS

  18. Michael Cahill says:

    Thanks for inaugurating this blog. It’s already getting interesting. One question I have comes from my environmental law class last term. We discussed the Lieberman-Warner bill. All students (both grad and professional) thought something along the lines of cap & trade should be tried. None thought the federal government could pull off the scale of an economy-wide regulatory program. Why not start with the power sector, building off the acid-rain program, and add credits from other sectors of the economy (landfills, agriculture) voluntarily via the private climate exchange trading mechanisms?

  19. Thanks very much for your comment and question. The reason to begin with an economy-wide cap-and-trade system, as opposed to one limited to electricity generation (and then expand the scope of the cap later) is that: first, a program of limited scope will be of limited effectiveness in terms of emissions reductions; second, a program of limited scope will be very costly for what is accomplished, because some low-cost options are left off the table; and third, it is very difficult to expand the scope of the cap if one begins with a narrow focus, as the Europeans have seen with the European Union Emission Trading Scheme. In future postings on the blog, I will talk in more detail about all of these issues. Thanks again for the comment. Good to hear from you.
    RS

  20. Torben says:

    Dear Michael and Rob,
    Looking at the situation on the ground, the power sector has greater potential for low cost abatement partly from fuel substitution and gains in energy efficiency when compared with transport and households. I would think, from the perspectives of
    1)removing the most binding constraint
    2) Political feasibility
    3)cost effectiveness
    it can be better to start with the power sector. Don’t you think that it is better to clean up the power sector first using cheaper opportunity and proceed with increasingly costly options later? One advantage of this approach would be removing the most binding constrain with a more politically feasible sector. Why limited scope in this sense be a good strategy for political feasibility compared to nation wide sort of ‘shock therapy’? I am very much looking forward to read Rob’s future postings on this issue.

  21. Hi, Torben, I don’t want to bore you and others by repeating myself, so I will let stand the three reasons I gave to Mike regarding why not to start with a program aimed only at the electricity sector. This is the mistake that the EU made; we need not repeat it. Thanks for your comments and questions, as well as your good wishes, which are very much appreciated.
    RS

  22. Professor Stavins,

    As a long admirer, I very much appreciate seeing your new blog, and your endorsement of the three key components of the cap and dividend strategy: economy-wide; upstream auction; per capita dividends.

    One question I have follows up on Dallas Burtraw’s advocacy for 100% auction from the get-go. Don’t we need the revenue of the full auction to have sufficient dividend resources to hold consumers harmless “well into the 8th decile”? In other words, if we had only half the revenue, wouldn’t we need to rely on a means-tested distribution to consumers, obviating the property rights arguments? Stated another way, if over the first 25 years we are transitioning to a 100% auction as President Obama has called for, don’t we need to think of the lower deciles as needing an income transfer–a politically vulnerable aspect to a carbon capping policy?

    Very interested in your thoughts on this.

  23. Michael, thank you for the kind comments. To address your question, a 50% auction transitioning (in straight line) to 100% auction over 25 years would provide more than sufficient funds — in principle — to compensate the consumers most burdened by the policy. However, there is a trade-off, in my view, between the size of the initial auction (hence, the amount of revenue made available for redistribution) and the political feasibility of the overall system. I cannot quantify that trade-off, but I suspect that it’s key. In any event, just to insert a dose of reality here, given the track record, I am doubtful that Congress will be able to avoid the temptation of using the revenue from a cap-and-trade auction for all sorts of other “special purposes.” We’ll see. Thanks again for your note.
    RS

  24. Sally, first I want to apologize for the delay in your comment being posted. For reasons I don’t understand, our spam filter placed it in a bin with “spam comments.” I just noticed it, and immediately approved it for posting. In terms of the substance of your comment, I agree that there should be a full and open discussion in the Congress of the various alternative policy instruments that can enable the U.S. to achieve sensible greenhouse gas targets. In a future posting, I will be writing about the differences and trade-offs between cap-and-trade and carbon taxes, and so — if you don’t mind — I won’t comment further on this right now. Again, I regret the delay in posting your comment.
    RS

  25. I think when that happens, a revenue-neutral carbon tax will be preferred, in large part because a carbon tax avoids the evasion and market manipulation inherent to a cap and trade model

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