Today’s ridiculous abuse of patriotism

“The EOR (Enhanced Oil Recovery) tax credit has served the country well by encouraging the development of expensive oil reserves when prices would make them uneconomic.”

– Independent Petroleum Assocation of America

Right…

The carbon offset and international development act of 2009

Consider this new policy idea: The United States Government will tax all domestic carbon emissions between now and 2025 at some relatively small amount, let’s say $10/ton CO2. Then each year it will take this entire sum of money and use it to buy international offsets. If it acts through its development agencies or some sort of iterative bidding process, the government could essentially play a monopsony role in this new market, extracting the rents from offset suppliers and refunneling them back into the program.  This would maximize the number of carbon offsets purchased (and therefore tons of CO2 abated) for a given level of domestic carbon taxation. If, on the other hand, there are multiple buyers of offsets (like the EU) or the informational/ bureaucratic deficiencies of the “monopsony-like” arrangement become too costly, the US could simply purchase all offsets at the market clearing price. This would effectively send the rents of the program to the offset suppliers (or some middleman) so that emissions “reductions” would be smaller, but the same amount of money would still be flowing to developing countries.

A tax of $10/ ton would do little to change domestic CO2 consumption, which is around 6 billion tons per year. But it would purchase a lot of international offsets, especially if the government can price discriminate. In EIA’s 2008 analysis of Leiberman-Warner, in 2015, the government purchased over 750 million tons of international offsets at around $21/ton, for a total cost of around $16 billion. Using this point and the origin, we can map a very crude estimate of EIA’s international offsets supply curve. A back of the envelope calculation reveals that the US could purchase over 1.5 billion tons of offsets for $60 billion at the market clearing price, and over 2 billion tons if it can price discriminate. If you believe offsets are real (which is outside the scope of this post), then the US could effectively reduce its carbon footprint by 33% overnight for around $200 per person! Moreover, it would send $60 billion / year in revenue to developing countries, placing them on a cleaner path to development. A 2.3 second Wolfram Alpha search revealed that 2006 US economic aid was around $23 billion.

I’m actually pretty skeptical of international offsets as a compliance mechanism personally but in recent weeks I’ve come to see that Waxman-Markey is really just one big offsets program anyways (as Josh and Danny already pointed out). Congress and the lobbyists involved have become fixated on lowering the carbon price (which EPA now says will be in the $13-17 range for the early part of the program). Yet the only way you get this price without completely gutting the abatement targets is through offsets. The bill allows for up to 2 billion tons of offsets per year, which is more than the total ammount of abatement required under the cap during at least the first decade. Thus, if EIA’s L-W analysis is any indication of what will happen under Waxman-Markey (and I believe it is), the US will continue to chug along during the first decade, with domestic emissions declining by maybe a percent or two. Compliance will come in the form of massive amounts of offsets, which, depending on how its handled, will send large rents overseas at the expense of American taxpayers (as Josh argued yesterday). If this is really what cap-and-trade is going to boil down to anyways, a mandate to purchase international offsets, would it make sense to simply make that an explicit policy? Would this simple policy be more or less easy to sell politically?

Or is this new policy idea so obviously ridiculous/ undesireable that this simple thought experiment makes you question the role of offsets in Waxman-Markey…….

How International Offsets Hurt Low Income Families

There has been some great discussion on the new Waxman-Markey bill including Danny’s previous post.  One aspect of the legislation, however,  that I don’t think has received enough attention is how offsets affect low income Americans.

First it is important to realize how large of a part offsets play in Waxman-Markey.  For a quick refresher on their role, check out Danny’s post on the subject.  Besides their large and increasing percentage of abatement, offsets are a huge factor in allowance price.  Here are a few quotes on the importance of offsets from the EIA analysis of the Waxman-Markey draft.

“Without international offsets, the allowance price would increase 96 percent.”

“The availability of offsets under WM-Draft significantly influences the allowance price.”

And from the appendix.

“Without the use of international offsets, covered sectors are forced to find an additional 39 billion metric tons of abatement.”

So, offsets have a HUGE impact on how the program functions.  Just how huge? Check out this graph from the EPA analysis.

Looking at the highlighted statistics, you can see that the 1,677 international offsets dwarfs the 408 domestic abatement in 2015.  Also, this equates to $4 billion being spent on domestic covered abatement, while $17 billion is spent on international offsets.  (The story balances out a bit looking into the future, but it still leaves us spending 50% of abatement costs abroad in 2030.)

Getting back to the original question of how offsets harm low income families, it is important to remember that climate policy is regressive.  One way to remedy this is to redistribute some of the money raised by selling allowances.  International offsets, however, don’t allow this to happen.  The EPA analysis says:

“International offset payments are calculated for each model as the product of the amount of international credits purchased and the international credit price.  Unlike the abatement costs associated with domestic covered abatement and domestic offsets, … international offsets .. are all purchased at the full price of international allowances and those payments are sent abroad.”

So, basically purchasing international offsets is equivalent to shipping money overseas.  For example, if the cheapest international offset in Mexico costs $4/ton to offset, U.S. firms still have to buy it for the international offset allowance price of $10/ton.  The remaining $6 (called the rent) will flow to international firms.  If this abatement or offset was done in the U.S., either the government or U.S. firms would be able to capture this rent.  These captured rents could then be redistributed to low income U.S. households bearing the brunt of climate policy.  With international offsets, this money is lost abroad.

I understand that offsets are being relied upon heavily for cost containment, but why hasn’t the idea of rents being shipped overseas showed up in the political debate?  Considering the average American doesn’t know what cap-and-trade is, this might be an effective way to sway public support towards a more effective system.

Unfortunately, in the current political climate, offsets will continue to be a significant part of climate policy.  Offsets can have many positive components, but they also have a direct harmful effect on low income Americans.  If this is the pill we have to swallow for climate policy to pass, then so be it.  However, I would at the very least like to see this important trade off enter the discussion.

A compromising position

The reviews are in and things are…bearable. I was hoping the brand spanking new Waxman-Markey (now w/ substitute amendments!) would be like a Star Trek, but it looks like instead we got a Soloist. The enviro-blogs from Grist to the Rommtrack are voicing their qualified, lukewarm support for the bill, essentially saying a bill that half sucks is better than no bill at all. Even the mighty Paul Krugman is willing to look past the the obvious flaws, saying

The legislation now on the table isn’t the bill we’d ideally want, but it’s the bill we can get — and it’s vastly better than no bill at all…

…opponents of the proposed legislation have to ask themselves whether they’re making the perfect the enemy of the good. I think they are.

After all the years of denial, after all the years of inaction, we finally have a chance to do something major about climate change. Waxman-Markey is imperfect, it’s disappointing in some respects, but it’s action we can take now. And the planet won’t wait.

You can’t make everyone happy, though. Greenpeace and friends expressed their disappointment in the bill before they even had a chance to read it. And we won’t even start on the Republicans, who have around 450 amendments they want to tack on to the bill.

Generally, I agree with Krugman et al. that it’s not the best bill, but it will do. The most important thing about a climate change bill is that it puts a price on carbon. This bill will do that. Awesome. Now, if it requires firms make up their reduced evil quotient by drowning a puppy for every ton of avoided carbon emissions, then I won’t be stoked on the idea. But it doesn’t do that (from what I’ve read so far). It sets a limit on the amount of emissions the US can generate every year, starting in 2012. That’s pretty cool.

Does it suck that it allocation will not be 100% auctions from Day 1? Yes, but if you really thought this thing was going to make it through committee with anything close to that, then you must have a sunnier outlook on the world in general than I. On the aggregate, I’d rather give away emissions credits to polluting industries for a few years than let them continue polluting with no restrictions. We’re trying to moving the marginal private cost curve toward the marginal social cost curve, and that will require a little give and take, especially when you’re dealing with Blue Dog Texas Democrats with oil refineries in their home districts.

One part of the bill that holds a lot potential (both good and bad) is the section about offsets. Again, as we’ve discussed ad nauseum, their is a lot of controversy surrounding them. If they prove to be legit, then they can be a boon for both industry and the environment. If not, then we’ll throw a lot of money down a hole potentially bigger than the TARP.

The biggest factor in determining which one we’ll have on our hands is international offsets. The Rommtrack says in his post that he’s a big believer in domestic offsets and the systems set up in the bill will help make them robust. He’s probably right, but that doesn’t mean firms will buy them. The EPA analysis of the first version of Waxman-Markey says even if you exclude international offsets, the market volume never reaches the $1 billion limit, and it definitely won’t if there are plenty of cheap and delicious offset credits floating around in the forests of Brazil and Indonesia.

Regardless, they are an important part of an important bill that could be a lot better in a lot a of ways. You may disagree with me, but can we at least say something is better than nothing. Is that a good compromise?

Inconsistent WSJ logic of the day

From Martin Feldstein, last Thursday. First, he justifies the seemingly time-inconsistent notion that we shouldn’t cap carbon in 2012 because we’re in a recession now:

Even if the proposed tax increases are not scheduled to take effect until 2011, households will recognize the permanent reduction in their future incomes and will reduce current spending accordingly.

Ok, I’m not really sure how much I believe that a <1% increase in prices 4 years out influences current consumption, but its a pretty common economic assumption. Yet in the next paragraph, Feldstein seems to forget his own forward looking assumption:

Official budget calculations disguise the resulting fiscal drag by treating Mr. Obama’s proposal to cancel the 2011 income tax increases for taxpayers with incomes below $250,000 as if they are real tax cuts….But those are false tax cuts in which no one’s tax bill actually declines.

So apparently people immediately incorporate the impact of proposed future tax increases into current consumption decisions, but then fail to reevaluate their budgets when previously incorporated projected tax increases are removed. Got that?

932 pages of excitement

It’s official. The American Clean Energy and Security Act, brought to you by Henry Waxman and Ed Markey, is here, weighting in a whopping 932 pages. It should provide plenty of leisurely weekend reading. Fan of compromises will particularly enjoy the following highlights:

• Emissions targets: 20 percent reduction below 2005 emssions levels by 2020, 44 percent reduction by 2030 and 83 percent by 2050.
• 85% of emission allowances allocated for free, including 35% to the electricity industry, 15% to trade-sensitive industries, 9% to natural gas distributors, 2% to oil refineries, 5% to stop tropical deforestation, and 2% for adaptation.
• Tons of goodies to charm moderate Democrats from the Rust Belt, South, and Mountain West.

My initial reaction is that there are probably going to be a lot of things in here that piss me off, but reading legislation is not my idea of a fun Friday night. Stay tuned for marginally worthwhile analysis…

ET to the rescue

Seriously people? We’ve been talking about energy and climate issues for years, and with all the brilliant people out there devising clever solutions, you’re telling me no one though of the most obvious solution? Of course I’m talking about stealing alien technology and using it for our benefit. Even though we’ve all dropped the ball, a lobbyist named Stephen Bassett is picking up the slack for us and Greenwire (sub req’d) reports on his crusade:

The government has in its possession “extraterrestrial vehicles,” lobbyist Stephen Bassett said. As in flying saucers.

Imagine the power source, he said, behind a 30-foot wide saucer that weighs the same as a tractor-trailer yet hurtles through galaxies at 20,000 miles per hour.

“What is the energy system operating that craft?” Bassett said. “They’re not burning kerosene.”

He added, “It eliminates oil. It eliminates coal. If it’s as good as we think it is, it transforms everything.”

No more ozone hole or melting polar ice caps, Bassett said. And the price of electricity would drop to almost nothing.

Bassett believes this. Fervently.

Well, I’m sold. It’s about damn time we stop importing energy from unstable parts of the world and starting utilizing energy we snake from much more stable civilizations in other solar systems. If Obama is truly the most popular leaderin the galaxy, then he should have no trouble negotiating with the Alpha Centarians for some friendly interstellar technology transfer. Bassett obviously agrees:

Those who believe the truth is out there have been waiting for someone like President Obama to come clean about the government hiding information on extraterrestrials, Bassett said. Obama would be “sensitive to the concerns of the military intelligence community,” Bassett said, plus he is popular worldwide, and he “has the intelligence to handle it.”

Bassett and fellow believers during the presidential campaign launched the “Million Fax on Washington” and have been sending Obama faxes and e-mails and leaving voice mail messages asking him to admit that E.T. is real. Documents should be released. There should be congressional hearings. And that spaceship technology should be made available to the public.

Next step: electric-dilithium crystal hybrids that go from 0 to 670,000,000 mph in 1.2 seconds and get XM radio.

A Bit More on Cash-for-Clunkers

The WSJ ran an interesting article on the Cash-for-Clunkers program today.  Their general conclusion is that the program is mostly going to spur the sale of trucks.  I recommend you check it out

Here are a few of my favorite examples that illustrate how the program will probably function:

Say you owned a 2001 Dodge Ram four-wheel-drive pickup with a 5.9-liter engine. That truck has an EPA combined fuel economy of just 13 miles per gallon. Under the House proposal, you could scrap that vehicle and get up to $4,500 toward a truck weighing more than 6,000 pounds that got at least 15 miles per gallon. One that might qualify — depending on how weight is defined and measured — is a 2009 Dodge Ram 1500 four-wheel-drive pickup with a 5.7-liter V-8 and a combined 15 mpg.

There’s another way in which the House plan would help sell trucks. Someone who owns a big work truck — a van or pickup in the 8,500-to-10,000-pound weight class — built before the 2002 model year could get a $3,500 voucher for trading in that vehicle for a truck in the same or lower weight class. No mileage limits would apply, as trucks that big don’t have official EPA mileage ratings. In other words, a contractor who drives a Ford F250 could ditch the old one and get a new one, with the help of the Treasury.

The article makes a great point that due to CAFE standards, which haven’t increased much over the last 20 years, there aren’t many passenger cars which qualify.

To qualify for a scrappage voucher, the old car would have to get less than 18 miles per gallon. There aren’t that many “clunker” passenger cars on the road that are that thirsty on gas. You could drag in a 1987 Lincoln Town Car, if you happen to own one. (There’s one from that vintage for sale at a small used-car lot near my house.) But since passenger cars have had to measure up to a 27.5 miles-per-gallon fleet average for more than two decades, the few gas-guzzling sedans and coupes left are either pricey exotics or classic Detroit iron, neither of which are likely to be worth less than the $4,500 the government is offering.

This program basically is a cash subsidy to help automakers get rid of huge stocks of oversized pickup trucks.  There is nothing fundamentally wrong with that, just please don’t call it green and stick it in with climate legislation.

Visualizing the Grid

I’m a huge fan of NPR, and they just finished running a series on the U.S. electrical grid and how we can/might move forward.  The full story can be found here.

My favorite part, however, is the interactive map they put together on the grid.  You can see the current and potential future incarnations of the grid and sources of power.

A fun game you can play is “guess which senators are more likely to be against cap-and-trade.”  All you have to do is select the sources of power tab, select coal and see which states are darker.

Have fun!

Cash for Clunkers, Turning Beaters into Value

For every good idea there are ten bad ones, and this seems to be one of the bad ones.  The program is just like it sounds.  Turn in your used car; get $3,500 – $4,500 towards a new, fuel efficient one.

Rich put it in perspective by saying that it clearly isn’t an environmental program, it’s an auto subsidy.  But still, seriously???  If we are interested in promoting the purchase of new autos, the government should provide an across the board credit for purchasing a new car.  All Cash for Clunkers does is greenwash an auto subsidy and put it under the climate umbrella.  It also ads a number of strange quarks to what might have been a straightforward auto credit.

Let’s think some reasons that cash for clunkers is a bad idea for an environmental (or economic) perspective

1.  There is no way to know how much someone drives the car they turn in.  I could bring in my 1975 Gremlin which has sat in my front yard collecting rust for the last few years.  As long as I can drive it to trade it in, I get the credit.  Basically, having an old beater gives you a free credit.  In the end a family might end up driving more since they now have more cars than they previously did.

2.  Building a new car generates around 6.7 tons of CO2 emissions according to a duke’s Bill Chameides.   He estimates that it would take at least 5 years to offset this with the new vehicles lower MPG.  This increases to almost 20 years if the new car is an SUV.  This of course assumes that people drove their old cars as much as they drive their new cars.  If they didnt’ drive their old cars it will take a LONG time to offset the zero emissions they gave off.

3. A SUV which has at least 18 MPG (sticker, not actual MPG) gets a voucher (WSJ).

4. Democrats want to potentially fold this into the larger energy bill, “unless [the] measure becomes hopelessly entangled in policy disputes (NY times).”  Adding provisions like this is exactly how a large energy bill is not going to pass.

5.  This is the sort of thing Stavins was trying to warn against…don’t cook dinner and eat in the shower at the same time.  Remember?

I guess we have to give the compromise some credit for not including a “buy American” or flex fuel provision.

One Step Forward, Two Steps Back

Today was a curious day in biofuels land, where it seems that the corn ethanol industry both lost and won on the same day.  Here’s some background and what happened.

The Energy Independence and Security Act of 2007 stipulated that 15 billion gallons of conventional biofuels must be produced in 2015 under the Renewable Fuel Standards.  These 15 billion gallons need to have 20 percent less lifecycle emissions than gasoline, as judged by the EPA.  When the bill was written, the conventional biofuel was assumed to be corn ethanol.  However, a proposed ruling released today shocked many people by declaring that currently corn ethanol was only 16% better.

Much of this low estimate results from indirect land use statistics.  These account for previously uncultivated land being brought into production to produce biofuels (or displaced food).  This is a good development since these effects have the potential to be sizeable.

This could be a giant thwack on the head for the already ailing biofuels industry.  If strictly enforced, this means that all current corn ethanol production does not satisfy the 10.5 billion gallon ethanol requirement for 2009.  However, a statement from Lisa Jackson, the EPA administrator, illustrates how this will most likely play out

“There are things that could be done to make corn-based ethanol more sustainable” (http://www.eenews.net/Greenwire/2009/05/05/2 sub required)

Basically, the ethanol industry just needs to clean up their act…a little bit.  This most likely can be accomplished by using more sustainable land management (conservation tillage techniques) or switching to cleaner fuels (natural gas instead of coal) for the distillation process.

If the corn ethanol industry is able to clean up its act (and I would bet my corn futures on them being able to without much work) then this ruling might actually be of little consequence.    The flip side of the coin is that ruling also included a nice juicy carrot to the ethanol industry.  The new “Biofuels Interagency Working Group” will provide around billion for ethanol companies with difficulties.

So in the end, it seems that a potential attack on the corn ethanol industry might just end up as a way to hand them a fat wad of cash.  This isn’t how Environmental Capital sees it, in their post   Out of LUC: Team Obama Prepares Ethanol Smackdown. [http://blogs.wsj.com/environmentalcapital/2009/05/05/out-of-luc-team-obama-prepares-ethanol-smackdown/]  I agree with what they are saying about how this highlights how dependent the ethanol industry is on the government.  However, at the end of the day, today’s biofuels news seems more like a stealthy way to provide a handout.

Today was a curious day in biofuels land.  It seems that the corn ethanol industry both lost and won on the same day, potentially coming out on top.  Here’s some background and what happened.

The Energy Independence and Security Act of 2007 stipulates that 15 billion gallons of conventional biofuels must be produced in 2015 under the Renewable Fuel Standards.  These 15 billion gallons need to have 20 percent less lifecycle emissions than gasoline, as judged by the EPA.  When the bill was written, the conventional biofuel was assumed to be corn ethanol.  However, a proposed ruling released today shocked many people by declaring that currently corn ethanol was only 16% better.

Much of this low estimate results from indirect land use statistics.  These account for previously uncultivated land being brought into production to produce biofuels (or displaced food).  This land, when left unused serves as a carbon sink which releases a sizable amount of carbon when cultivated.

This could be a giant thwack on the head for the already ailing biofuels industry.  If strictly enforced, this means that all current corn ethanol production does not satisfy the 10.5 billion gallon ethanol requirement for 2009.  However, a statement from Lisa Jackson, the EPA administrator, illustrates how this will most likely play out

“There are things that could be done to make corn-based ethanol more sustainable” (sub required)

Basically, the ethanol industry just needs to clean up their act…a little bit.  My guess is that this can be accomplished by using more sustainable land management (conservation tillage techniques) or switching to cleaner fuels (natural gas instead of coal) for the distillation process.

If the corn ethanol industry is able to clean up its act (and I would bet my corn futures on them being able to without too much work) then this ruling might actually be of little consequence.    The flip side of the coin is that Obama included a nice juicy carrot to the ethanol industry.  The new “Biofuels Interagency Working Group” will provide around $1.8 billion for ethanol companies.

So in the end, it seems that a potential attack on the corn ethanol industry might just end up as a way to hand them a fat wad of cash.   Environmental Capital takes a different perspective it in their post   Out of LUC: Team Obama Prepares Ethanol Smackdown.  I agree with what they are saying about how this highlights how dependent the ethanol industry is on the government.  However, at the end of the day, today’s biofuels news seems more like a stealthy way to provide a handout than a smackdown.

CliffsNotes for Climate Change

Looking to brush up on your climate change economics so you can argue with your friends and loved ones? Need a new website to read when you should be doing something else? Well, if you ask, the intertubes shall provide. Welcome RealClimateEconomics to the world of electronic information sharing. The site, run by Ecotrust and the E3 Network, is a clearinghouse of recent climate econ-related journal abstracts. To quote the site itself:

As the climate policy debate intensifies, economic analysis is playing an increasingly central role. The case for inaction is no longer argued on the grounds of skepticism about the science; instead, some have claimed that it will be too expensive to take more than token initiatives. While some economists still claim that it is too expensive to take more than small, gradual steps to reduce emissions at present, there is now extensive economic analysis that challenges and refutes the go-slow theory.

The articles collected on this website demonstrate that there is rigorous economic support for immediate, large-scale policy responses. The economics literature justifies immediate action to minimize the risks of climate change.

So, apparently they are not so keen on obtaining an unbiased sample of the literature. Even so, they already have a pretty solid collection of abstracts across nine different focus areas, including model reviews, uncertainty, and costs of mitgation/adaptation. One downside: no access to the actual journal articles. They’re still young though, so give them a chance. We’ll give them a try, so it’s been added to the Blogroll.

H/T: RealClimate