Casas on Cap and Trade Part II
From Greg Casas, GT Houston.
As the Senate turns to an energy/cap and trade/tax bill to reduce GHG emissions, the pundits are turning to the question of whether cap and trade (a) will be enacted and/or (b) reduce GHGs. The Huffington Post’s Robert Stavins links the demise of cap and trade to the failing economy, to an endemic lack of faith in markets, and to the fact that cap and trade was the leading proposal to limit and reduce greenhouse gas emissions. In other words, cap and trade has been attacked by Republicans and coal-state Democrats because it was supported by the everyone else.
The problem with this is that not “everyone else” supports cap and trade. For example, Annie Leonard launches a hyperbolic attack on cap and trade (e.g. cap and "giveaway" was designed by Enron alumni and Goldman Sachs, and is akin to the pyramid scheme of Bernie Madoff), and misinformation about how markets actually work . According to Leonard, cap and trade is bad, can never work and will be abused by big business to make money and continue to pollute.
Leonard is not entirely wrong. Improper cap and trade programs accomplish nothing. However, Leonard substitutes invective for analysis. Her solution is to slap carbon fees on “polluters” – neglecting to mention that these “fees” will be paid by consumers – and then sending the money overseas to pay our "ecological debt." Her approach calls for severe regulation, which even she admits will be "painful," to reduce emissions.
A recent MIT report, offhandedly and wrongly cited by Leonard, demonstrates the fallacy of her approach by concluding proper cap and trade systems can reduce GHGs without significant economic impact. MIT assumes free allocations of allowances might be necessary at the outset, but that allowances will be auctioned as the system matures. Further, allowances must be created based upon realistic expectations for manufacturing and energy production. Overestimating the need will result in no incentive to reduce emissions, or worse, the misuse of unused allowances, as in Hungary. Underestimating need, on the other hand, will result in skyrocketing prices and in fact tank the economy as critics warn.
Greg, you have very high standards. I worked with Annie on the script, and as you see if you look at it - http://storyofstuff.com/capandtrade/_images/pdfs/annie_leonard_footnoted_script.pdf - there is a full footnote dealing with the MIT-generated literature. Is it the case that Annie "offhandedly and wrongly" cites this research?
14. Even pro-trading economists from the Massachusetts Institute of Technology concede that the US could well repeat Europe’s market and state failures. Denny Ellerman and Paul L. Joskow observe that the ETS’s disastrous mismatches of money, permits and polluters logically follow the EU’s uneven regulations between countries, and “the differing effects of allocation and auctioning decisions on a partially liberalized electricity sector are likely to be at least as contentious and complicated in the US as they have been in Europe.” In several other areas where the EU ETS remains flawed – political lobbying, inadequate revenue generation, ‘rent-seeking activity’ and high administrative costs – the danger remains that these will be repeated in the US, according to MIT economists Sergey Paltsev, John Reilly, Henry Jacoby and Jennifer F. Holak. For example, some inefficient coal-fired facilities should urgently be closed, but won’t be thanks to EU ETS rules, the economists admit: “The cheapest abatement option may be to simply shut down some of the highest emitting facilities, but this rule [trading rights for grandfathered permits] in the ETS creates an incentive to keep them operating at a low level, or to install more expensive abatement technology so that they do not have turn back in valuable allowances.” As for dangers associated with Cap and Giveaway (free permits to pollute), the MIT authors warn, “If the allocations are distributed on some ‘grandfathering’ principle to firms at the point of regulation [which is the case in the main 2009 legislation], then these firms receive the asset value or scarcity rent” – which means that the US follows the disastrous EU lead in ‘paying the polluter for past pollution.’ It would be a tragedy if US legislators and policy-makers know of such problems in the EU ETS case and still promote a similar scheme, instead of finding an urgent route to cutting emissions directly. For citations, respectively, see Denny Ellerman and Paul Joskow, ‘The European Union’s Emissions Trading System in perspective’, 2008, Pew Center on Global Climate Change, Arlington, www.pewclimate.org/docUploads/EU-ETS-In-Perspective-Report.pdf; Gilbert E. Metcalf, Sergey Paltsev, John Reilly, Henry Jacoby and Jennifer F. Holak, 2008, ‘Analysis of US greenhouse gas proposals’, National Bureau of Economic Research, Cambridge, Working Paper 13980, http://www.nber.org/papers/w13980; and Sergey Paltsev, John M. Reilly, Henry D. Jacoby, Angelo C. Gurgel, Gilbert E. Metcalf, Andrei P. Sokolov and Jennifer F. Holak, ‘Assessment of U.S. cap-and-trade Proposals’, 2007, Joint Program on the Science and Policy of Global Change, http://web.mit.edu/globalchange/www/ MITJPSPGC_Rpt146.pdf, last accessed October 11, 2009.