2010 - Page 4 of 5 - An Economic View of the Environment

Who Killed Cap-and-Trade?

In a recent article in the New York Times, John Broder asks “Why did cap-and-trade die?” and responds that “it was done in by the weak economy, the Wall Street meltdown, determined industry opposition and its own complexity.” Mr. Broder’s analysis is concise and insightful, and I recommend it to readers. But I think there’s one factor that is more important than all those mentioned above in causing cap-and-trade to have changed from politically correct to politically anathema in just nine months. Before turning to that, however, I would like to question the premise of my own essay.

Is Cap-and-Trade Really Dead?

Although cap-and-trade has fallen dramatically in political favor in Washington as the U.S. answer to climate change, this approach to reducing carbon dioxide (CO₂) emissions is by no means “dead.”

The evolving Kerry-Graham-Lieberman legislation has a cap-and-trade system at its heart for the electricity-generation sector, with other sectors to be phased in later (and it employs another market-based approach, a series of fuel taxes for the transportation sector linked to the market price for allowances). Of course, due to the evolving political climate, the three Senators will probably not call their system “cap-and-trade,” but will give it some other creative label.

The competitor proposal from Senators Cantwell and Collins — the CLEAR Act — has been labeled by those Senators as a “cap-and-dividend” approach, but it is nothing more nor less than a cap-and-trade system with a particular allocation mechanism (100% auction) and a particular use of revenues (75% directly rebated to households) — and, it should be mentioned, some unfortunate and unnecessary restrictions on allowance trading.

And we should not forget that cap-and-trade continues to emerge as the preferred policy instrument to address climate change emissions throughout the industrialized world — in Europe, Australia, New Zealand, and Japan (as I wrote about in a recent post).

But back to the main story — the dramatic change in the political reception given in Washington to this cost-effective approach to environmental protection.

A Rapid Descent From Politically Correct to Politically Anathema

Among factors causing this change were: the economic recession; the financial crisis (linked, in part, with real and perceived abuses in financial markets) which thereby caused great suspicion about markets in general and in particular about trading in intangible assets such as emission allowances; and the complex nature of the Waxman-Markey legislation (which is mainly not about cap-and-trade, but various regulatory approaches).

But the most important factor — by far — which led to the change from politically correct to politically anathema was the simple fact that cap-and-trade was the approach that was receiving the most serious consideration, indeed the approach that had been passed by one of the houses of Congress. This brought not only great scrutiny of the approach, but — more important — it meant that all of the hostility to action on climate change, mainly but not exclusively from Republicans and coal-state Democrats, was targeted at the policy du jour — cap-and-trade.

The same fate would have befallen any front-running climate policy.

Does anyone really believe that if a carbon tax had been the major policy being considered in the House and Senate that it would have received a more favorable rating from climate-action skeptics on the right? If there’s any doubt about that, take note that Republicans in the Congress were unified and successful in demonizing cap-and-trade as “cap-and-tax.”

Likewise, if a multi-faceted regulatory approach (that would have been vastly more costly for what would be achieved) had been the policy under consideration, would it have garnered greater political support? Of course not. If there is doubt about that, just observe the solid Republican Congressional hostility (and some announced Democratic opposition) to the CO₂ regulatory pathway that EPA has announced under its endangerment finding in response to the U.S. Supreme Court decision in Massachusetts vs. EPA.

(There’s a minor caveat, namely, that environmental policy approaches that hide their costs frequently are politically favored over policies that make their costs visible, even if the former policy is actually more costly. A prime example is the broad political support for Corporate Average Fuel Economy (CAFE) standards, relative to the more effective and less costly option of gasoline taxes. Of course, cap-and-trade can be said to obscure its costs relative to a carbon tax, but that hardly made much difference once opponents succeeded in labeling it “cap-and-tax.”)

In general, any climate policy approach — if it was meaningful in its objectives and had any chance of being enacted — would have become the prime target of political skepticism and scorn. This has been the fate of cap-and-trade over the past nine months.

Why is Political Support for Climate Policy Action So Low in the United States?

If much of the political hostility directed at cap-and-trade proposals in Washington has largely been due to hostility towards climate policy in general, this raises a further question, namely, why has there been so little political support in Washington for climate policy in general. Several reasons can be identified.

For one thing, U.S. public support on this issue has decreased significantly, as has been validated by a number of reliable polls, including from the Gallup Organization. Indeed, in January of this year, a Pew Research Center poll found that “dealing with global warming” was ranked 21^st among 21 possible priorities for the President and Congress. (It should be noted some polls are not consistent with these.) This drop in public support is itself at least partly due to the state of the national economy, as public enthusiasm about environmental action has — for many decades — been found to be inversely correlated with various measures of national economic well-being.

Although the lagging economy (and consequent unemployment) is likely the major factor explaining the fall in public support for climate policy action, other contributing factors have been the so-called Climategate episode of leaked e-mails from the University of East Anglia and the damaged credibility of the Intergovernmental Panel on Climate Change (IPCC) due to several errors in recent reports.

Furthermore, the nature of the climate change problem itself helps to explain the relative apathy among the U.S. public. Nearly all of our major environmental laws have been passed in the wake of highly-publicized environmental events or “disasters,” ranging from Love Canal to the Cuyahoga River.

But the day after Cleveland’s Cuyahoga River caught on fire in 1969, no article in The Cleveland Plain Dealer commented that “the cause was uncertain, because rivers periodically catch on fire from natural causes.” On the contrary, it was immediately apparent that the cause was waste dumped into the river by adjacent industries. A direct consequence of the “disaster” was, of course, the Clean Water Act of 1972.

But climate change is distinctly different. Unlike the environmental threats addressed successfully in past legislation, climate change is essentially unobservable. You and I observe the weather, not the climate (note the dramatic difference of opinion about the reality of climate change between climatologists and television weathercasters). Until there is an obvious and sudden event — such as a loss of part of the Antarctic ice sheet leading to a disastrous sea-level rise — it’s unlikely that public opinion in the United States will provide the bottom-up demand for action that has inspired previous Congressional action on the environment over the past forty years.

Finally, it should be acknowledged that the fiercely partisan political climate in Washington has completed the gradual erosion of the bi-partisan coalitions that had enacted key environmental laws over four decades. Add to this the commitment by the opposition party to deny the President any (more) political victories in this year of mid-term Congressional elections, and the possibility of progressive climate policy action appears unlikely in the short term.

An Open-Ended Question

There are probably other factors that help explain the fall in public and political support for climate policy action, as well as the changed politics of cap-and-trade. I suspect that readers will tell me about these.

Opportunities and Ironies: Climate Policy in Tokyo, Seoul, Brussels, and Washington

As I write this, I’m on board a flight from Seoul, South Korea, to San Francisco, California, on my way home to Boston, having spent the week of Harvard spring break meeting with senior government officials, academics, and leaders of civil society in Tokyo and Seoul on behalf of the Harvard Project on International Climate Agreements. Reflecting on these meetings in Asia and recalling meetings I’ve previously had in Brussels and Washington, some important opportunities and ironies about national and international climate policy come to mind.

Opportunities

The 15^th Conference of the Parties (COP-15) of the United Nations Framework Convention on Climate Change (UNFCCC), which met in Copenhagen, Denmark, in December, 2009, produced two significant outcomes. The key substantive outcome, of course, was the Copenhagen Accord, about which I’ve written in detail in a previous blog post. The key institutional outcome was speculation that the UNFCCC may not be the best venue going forward for productive negotiations on climate change. (This is also a topic about which I’ve recently written at this blog.)

These dual outcomes of the Copenhagen conference point to the special importance of two key nations in international climate policy developments this year. I’m not referring to China and the United States (despite the fact that they are, of course, the world’s two leading emitters of carbon dioxide). Rather, I am referring to Korea and Mexico. Why?

First, these two nations are unique in being both long-time members (Korea since 1996, Mexico since 1994) of the Organization of Economic Cooperation and Development (OECD) and members of the group of non-Annex I countries under the Kyoto Protocol, which have no direct commitments under that international agreement. The OECD comes as close as anything to defining the set of industrialized nations of the developed world. Thus, Korea and Mexico have their feet planted firmly both in the developed world and the developing world (a fact that is readily apparent on even brief visits to these nations). This gives Korea and Mexico remarkable credibility with the two key blocks in international climate negotiations. That, on its own, would be of considerable importance, but there is another reality that makes this of even greater significance (and opportunity) in this year of 2010.

Coming out of Copenhagen, many participants in the international climate negotiations (as well as informed observers), noted that the UNFCCC has real limitations as the sole venue for future climate negotiations: too many countries – 192, excessively stringent requirements for agreement – unanimity, and a distinct tendency to polarize debates between developed and developing countries. Two other, potentially supplementary venues stand out as promising: the Major Economies Forum (MEF) and the G20.

The MEF, which has hosted productive discussions among 17 key countries and regions that together account for nearly 90 percent of global carbon dioxide (CO₂) emissions, may be somewhat limited by the fact that is was created by and is chaired by the United States, a nation with constrained credibility on climate issues among some countries, particularly in the developing world. The G20, which brings together twenty of the world’s largest economies, focuses on economic as well as other global issues and consists of almost the same set of nations as the MEF, likewise accounting for about 90 percent of global emissions. The G20 could thus be an exceptionally promising supplementary venue for meaningful and realistic climate discussions. And in November of this year, the G20 will be hosted by Korea, when it convenes in Seoul. This gives the Korean government a special role in setting the agenda for the discussions and presiding at the sessions.

The G20 meetings in Seoul will come just two weeks before the Sixteenth Conference of the Parties of the UNFCCC, which will take place in Cancún, Mexico. Thus, the Mexican government is also in a key position this year, because it will hold the Presidency of COP-16.

Add to this the fact that both Korea and Mexico have been particularly creative in their domestic climate policy initiatives and international proposals over the past year. Harvard Kennedy School Professor Jeffrey Frankel notes at his blog — Views on the Economy and the World — that Korea and Mexico were particularly ambitious with their submissions to the Copenhagen Accord, when comparing the submissions of all countries in terms of 2020 emissions targets relative to business-as-usual, controlling for per capita income.

Together, Korea and Mexico, share credibility in the developing and developed worlds, and likewise share unique international legitimacy as the hosts and presidents of the G20 and COP-16 in 2010. This is why these two countries have a remarkable opportunity this year to provide leadership of the international community, and make real progress on negotiations to address the threat of global climate change. Those are the opportunities. Now, let me turn to the ironies that have come to the fore.

Ironies

More than a decade ago, it was the United States, as the leader of the so-called “Umbrella Group,” that successfully fought for the inclusion in the Kyoto Protocol – over the objections of the European Union – of three “flexibility mechanisms” to bring down the costs of meeting the Protocol’s objectives: joint implementation (Article 4), a global emissions reduction credit system, the Clean Development Mechanism (the CDM, Article 12), and emissions trading among countries (Article 17). Ironically, once the George W. Bush administration officially pulled the United States out of the Kyoto Protocol process, it was the European Union that implemented the world’s first CO₂ emissions trading program, the European Union Emission Trading Scheme (EU ETS).

Beyond this, the United States was a pioneer with the use of national cap-and-trade systems, including lead trading in the 1980s and the SO₂ allowance trading program beginning in 1995 under the Clean Air Act Amendments of 1990. In addition, despite its lack of ratification of the Kyoto Protocol, the U.S. government very early on began to give serious consideration to the development of an economy-wide cap-and-trade system for CO₂ with the McCain-Lieberman legislation in the U.S. Senate (followed later by the Lieberman-Warner bill). More recently, of course, the U.S. House of Representatives passed the Waxman-Markey bill in June of 2009, including a significant economy-wide cap-and-trade system.

Over the past nine months, however, the very phrase, “cap-and-trade,” has evolved from being politically correct in Washington to nothing less than politically anathema. (How and why this happened is a topic for a future essay at this blog.) The great irony is that just when cap-and-trade has been under such vociferous attack in Washington, countries throughout the world are embracing this instrument, recognizing its great potential to address climate change cost-effectively and equitably.

In addition to the EU ETS, already in force, Australia is primed to put its cap-and-trade system in place, as is New Zealand. And just a few days before I arrived in Tokyo, the Japanese cabinet announced that the government will move forward with a cap-and-trade system (in contrast with Japan’s previously proposed sectoral approach). And, not to be outdone, Korea is considering the use of cap-and-trade as an element of its own domestic climate policy.

This irony is striking. Of course, it could be reduced or eliminated if Senators Kerry, Graham, and Lieberman can use their much-anticipated new climate proposal to pull victory from the jaws of anticipated defeat. Only time will tell.

What’s the Proper Role of Individuals and Institutions in Addressing Climate Change?

This may seem like a trivial question with an obvious answer. But what really is the proper role for individuals and institutions in addressing climate change? An immediate and natural response may be that everyone should do their part. Let’s see what that really means.

Decisions affecting carbon dioxide (CO₂) emissions, for example, are made primarily by companies and consumers. This includes decisions by companies about how to produce electricity, as well as thousands of other goods and services; and decisions by consumers regarding what to buy, how to transport themselves, and how to keep their homes warm, cool, and light.

However, despite the fact that these decisions are made by firms and individuals, government action is clearly key, because climate change is an externality, and it is rarely, if ever, in the self-interest of firms or individuals to take unilateral actions. That’s why the climate problem exists, in the first place. Voluntary initiatives – no matter how well-intended – will not only be insufficient, but insignificant relative to the magnitude of the problem.

So, the question becomes how to shift decisions by firms and individuals in a climate-friendly direction, such as toward emissions reductions. Whether conventional standards or market-based instruments are used, meaningful government regulation will be required.

But where does this leave the role and responsibility of individuals and institutions? Let me use as an example my employer, a university. A couple of years ago, I met with students advocating for a reduced “carbon foot-print” for the school. Here is what I told them.

“I was asked by a major oil company to advise on the design of an internal, voluntary tradable permit systems for CO₂ emissions. My response to the company was ‘fine, but the emissions from your production processes — largely refineries — are trivial compared with the emissions from the use of your products (combustion of fossil fuels). If you really want to do something meaningful about climate change, the focus should be on the use of your products, not your internal production process.’ (My response would have been different had they been a cement producer.) The oil company proceeded with its internal measures, which – as I anticipated – had trivial, if any impacts on the environment (and they subsequently used the existence of their voluntary program as an argument against government attempts to put in place a meaningful climate policy).”

My view of a university’s responsibilities in the environmental realm is similar. Our direct impact on the natural environment — such as in terms of CO₂ emissions from our heating plants — is absolutely trivial compared with the impacts on the environment (including climate change) of our products: knowledge produced through research, informed students produced through our teaching, and outreach to the policy world carried out by faculty.

So, I suggested to the students that if they were really concerned with how the university affects climate change, then their greatest attention should be given to priorities and performance in the realms of teaching, research, and outreach.

Of course, it is also true that work on the “greening of the university” can in some cases play a relevant role in research and teaching. And, more broadly — and more importantly — the university’s actions in regard to its “carbon footprint” can have symbolic value. And symbolic actions — even when they mean little in terms of real, direct impacts — can have effects in the larger political world. This is particularly true in the case of a prominent university, such as my own.

But, overall, my institution’s greatest opportunity — indeed, its greatest responsibility — with regard to addressing global climate change is and will be through its research, teaching, and outreach to the policy community.

Why not focus equally on reducing the university’s carbon foot-print while also working to increase and improve relevant research, teaching, and outreach? The answer brings up a phrase that will be familiar to readers of this blog – opportunity cost. Faculty, staff, and students all have limited time; indeed, as in many other professional settings, time is the scarcest of scarce resources. Giving more attention to one issue inevitably means – for some people – giving less time to another.

So my advice to the students was to advocate for more faculty appointments in the environmental realm and to press for more and better courses. After all, it was student demand at my institution that resulted in the creation of the college’s highly successful concentration (major) in environmental science and public policy.

My bottom line? Try to focus on actions that can make a real difference, as opposed to actions that may feel good or look good but have relatively little real-world impact, particularly when those feel-good/look-good actions have opportunity costs, that is, divert us from focusing on actions that would make a significant difference. Climate change is a real and pressing problem. Strong government actions will be required, as well as enlightened political leadership at the national and international levels.

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Epilogue: After I posted the above essay, I was reminded of an incident that took place many years ago (before I came to Harvard for graduate school, in fact) when I was working full-time for the Environmental Defense Fund in Berkeley, California, under the inspired leadership of the late (and truly great) Tom Graff, the long-time guru of progressive California water policy. EDF was very engaged at the time in promoting better water policies in California, including the use of trading mechanisms and appropriate pricing schemes for scarce water supplies. A prominent national newspaper which was not friendly to EDF’s work sent a reporter to EDF’s office to profile the group’s efforts on water policy in the State. A staff member found the reporter in the office bathroom examining whether EDF had voluntarily installed various kinds of water conservation devices. Our reaction at the time was that whether or not EDF had voluntarily installed water conservation devices was simply and purely an (intentional) distraction from the important work the group was carrying out. After several decades, my view of that incident has not changed.