Obama can be in a position to take advantage
of a very happy coincidence. In an unexpected
“win-win,” the most intriguing potential long-term revenue source in our tax-averse nation
turns out to be a climate and energy policy
that economists call an “upstream cap and 100
percent auction.” The cap-and-auction would
eventually produce hundreds of billions of dollars a year while steering energy investments
away from such carbon-intensive fuels as oil,
coal, liquids from coal, bituminous sands and
oil shale. At the same time, it is the climate
strategy most likely to alter the world’s energy
markets before irreversible harm is done.
Auction — and Account for —
Every Carbon Unit
Any serious program to limit greenhouse
gas emissions has to cap carbon at the 2,000
places where it enters the U.S. economy (coal
mines, oil fields, pipelines, ports) — not the
millions of places where it leaves our smokestacks and tailpipes.
Efforts that focus on emissions themselves
are guaranteed to fail because (1) there are
far too many emissions sources to efficiently
regulate; ( 2) America periodically goes on a
conservative, anti-regulatory jihad, whereas
climate policy requires a multi-century commitment; ( 3) it is impossible to measure, let
alone control, a colorless, odorless gas that
immediately mixes with the atmosphere from
billions of sources (including farms and forests) around the world; and ( 4) creative traders will find myriad ways to game a system that
has multiple sources and sinks. If you liked the
$63 trillion in “credit default swaps” and other
unfunded credit derivatives that were traded
last year, you are going to love the new derivatives designed around complex international
emissions trades.
A global cap-and-trade program is conceptually elegant. However, we lack the real-time
knowledge, let alone the enforcement power,
to make it function. For example, 17 percent
of annual carbon emissions come from deforestation. Almost any forest can be protected
for less than the cost of sequestering CO at
2
a power plant, so power plant operators will
seek to offset their emissions by buying forests. But forests are complex and varied, with
vastly different rates of carbon uptake, and
even “protected” forests suffer occasional
forest fires. Forests affect climate through
evapotranspiration and their albedo as well
as by carbon storage; on balance, protected
boreal forests in the arctic actually make the
earth warmer, not cooler. Even where forest
protection is clearly desirable climatically,
how do we assure the protection of a forest in
Papua New Guinea forever?
A better course is to require carbon permits
where carbon fuels enter the economy and
use other instruments to safeguard forests and
farms. Under a cap-and-auction system, it will
be illegal to sell a unit of any fossil fuel in the
United States unless the seller possesses a permit for the amount of carbon it contains. In
setting the number of carbon permits issued
— and thus determining how much coal, oil
and gas can enter the economy — the government would be establishing an absolute, easily
enforced cap on emissions. (Such a system is
part of ASES’ policy recommendations for the
111th Congress.)
By reducing the number of permits auctioned each year, the government can guarantee that its carbon emissions targets are met:
no fuel, no emissions.
Companies that use carbon-based fuels will
know exactly how much less fuel will be available five years and 10 years from now, and
they can adjust their investments and manufacturing processes accordingly.
It’s critical that all carbon permits be auctioned — not given away. In Europe, emissions permits were given away to large carbon
users to ease their transition to the new trading regime. This gave windfalls to the worst
polluters, penalized companies that already
had invested in efficient new factories and
renewable energy, and helped guarantee that
Europe would miss its Kyoto targets.
In contrast, auctioning 100 percent of all
carbon permits would be fair and transparent.
It benefits firms that have voluntarily reduced
their carbon footprints and thus need less fuel.
It eliminates backroom special-interest pleadings by recalcitrant firms.
If Congress fears a catastrophic disruption
to major industries at this delicate economic
moment, it could auction enough permits
the first year to reduce the previous year’s
consumption just 1 percent (so the price of
a permit will be very low) and get the system
started. It could reduce the number of permits
the following year by 2 percent, and then by 3
percent or more in subsequent years after the
economy has stabilized.
In addition to reducing greenhouse gas
emissions with precision, weaning America
off foreign oil and accelerating investments
in efficiency and renewable energy sources
to produce green jobs, an upstream cap-and-auction would eventually produce hundreds
of billions of dollars of revenue each year.
Because an auction would draw money
from the economy, and because an auction
would require at least a couple of years to
get functioning and the first year’s cap would
probably be fairly loose, it would not serve as a
short-term economic stimulus. However, over
a four- to eight-year horizon — a horizon of
great interest to President-elect Obama — it
would combine smart climate policy and smart
energy policy with sound financial policy.
Over this longer period, the auction revenues could be used to build a national “smart
grid” for electricity to coordinate power from
intermittent and diurnal sources; construct
high-speed electrified railroads that, unlike
airplanes, can operate on carbon-free fuels; assure large federal markets for solar technology
and the other sunrise industries of the post-carbon economy; and finance large boosts
in federal research. To compensate for the
slightly regressive nature of the auction, a portion of the revenues should be used to underwrite training programs for green-collar jobs
and to help meet shortfalls facing Medicare or
other programs that benefit the poor.
So, In Conclusion
America has unparalleled scientific and
engineering excellence, formidable financial
muscle, bountiful natural resources, a democratic political system and an entrepreneurial
culture well-suited to helping lead the world
into a prosperous, carbon-neutral era. For a
fraction of the taxpayer money being spent
to bail out an overpaid, under-regulated collection of investment banks, brokerage firms,
mortgage companies and insurance companies, we can usher in a solar-powered era.
Let’s create a political climate that permits
— that ensures — that President Obama
and the Democratic Congress take advantage
of this opportunity. A crisis is a terrible thing
to waste. ST
