Things are moving slowly on the climate legislation front these days. While there were a couple Senate hearings this week and maybe a couple more scheduled for next week, climate has taken a back seat to health care and likely won’t be a major talking point until mid-September. Though eventual passage of the bill looks a wee bit shaky right now, that’s not stopping other nations from being bullish on the prospects on of a U.S. carbon offset market.
Tim Flannery, one of my favorite science writers (his book the Weather Makers partially inspired me to start working on climate issues), and 2007’s Australian of the Year, recently told the Australian government that it should set up a single trading desk that can sell carbon offsets into the U.S. market. According to Mr. Flannery, Australia could buy up 10% of the 1 billion tons of international offsets available in H.R. 2454, generating a substantial amount of revenue for the land down under:
‘‘The Government could then buy a certain amount of permits from farmers for carbon soil storage … at, say, $15 a tonne and sell them on to the US at $20 through the desk,’’ Mr Flannery said. ‘‘If we could get 10 per cent of the US market at, say, $20 that would be about $2 billion a year coming into Australia and [would] help Australian farmers expand carbon storage projects.’’
Now, you could seriously debate whether or not the benefits Flannery claims are available for Australia. Assuming he’s speaking in Australian dollars, he’s predicting that Australia will be able to corner 10% of the international offset market by selling ag and forestry credits at $17US (current exchange rates have $1US = $1.19AUD).
Consider that EPA is predicting allowances will come into the market at $13 at the low end (though they certainly could come in higher). Also consider that the huge amount of offsets in H.R. 2454 were put in their as a cost containment mechanism, meaning they will assuredly be less expensive than allowances. Lastly, while they may not be available right away, forest offsets from developing countries are going to take up a massive chunk of the international offset market and they are likely going to be much cheaper than $17. Paying for a plot of rainforest in Bolivia is probably going to be much cheaper and better PR than paying a farmer in the Murray-Darling basin to rotate his crops differently.
Aside from the economic reality, Flannery offers a compelling institutional vision for the future of the carbon market. Presuming some vaguely similar version of H.R. 2454 passes the Senate, the international carbon market is going to blow up. That rapid growth will require a lot of quality control throughout the product chain. Establishing government agencies that are wholly responsible for managing the entry and sale of offsets in the market could help provide a level of security. Of course, it could be subject to corruption in less-stable countries (like the Democratic Republic of Congo, for example). Additionally, such an institution would limit the amount of over-the-counter (OTC) sales, which is where the offset buyer makes the purchase directly from the seller. OTC transactions dominate the voluntary market currently, and limiting them will have major implications for the functionality of the international carbon market.
The suggestion of a single carbon desk is not unlike one recently made by RFF scholars Ray Kopp, Nigel Purvis, and our own Andrew Stevenson. In the paper, they argue for the formation of an International Forest Conservation Corporation, which would be primarily responsible for working with countries to prepare them to enter the carbon market and monitoring the volatility of the market. With such an entity in place, it could encourage other nations to follow Australia’s lead and establish their own carbon-specific trading agencies.
It will be interesting to see if Flannery’s proposal gains any traction with Kevin Rudd’s government. In the meantime, I sincerely hope that carbon trading with Australians is more civilized than oil trading with Australians:
(A little forced maybe, but I gotta take my Mad Max references where I can get them.)
Have you ever found yourself wandering through midtown Manhattan, thinking “I wonder how many tons of CO2 humanity has cumulatively released into the atmosphere”? Well, you’re lucky that Deutsche Bank had you in mind when they designed their new billboard:
Now you know. And I have no doubt this counter will have as much of a lasting impact on the national conscious as the National Debt counter.
A few days ago I received an e-mail from a reader asking about allowance distribution mechanisms in Waxman-Markey. As I wrote a response, I thought it would make more sense to make a post out of it.
As it stands in Waxman-Markey, allowances will be distributed to LDCs based on a 50/50 split of their emissions and deliveries. This is often overlooked, but it is important as to where in the country allowance value is allocated, and ultimately how prices will change. Below i’ve listed three allocation mechanisms, their benefits and some of the problems. Keep in mind that a “benefit” in this discussion has to do with receiving more allowances ($) and hence has to do with more consumption/emissions (which we usually consider bad).
Consumption based – This metric benefits those who consume a lot of electricity, and are really inefficient at doing so. This is bad for states like California who have invested a lot in demand side energy efficiency. Consumption weighting also benefits those regions that already generate a lot of electricity from low carbon sources. If you could imagine a region that only generated electricity from zero carbon sources, they would get a whole lot of free permits, and they could turn around and sell them for pure profits. Some might argue this is unfair, but personally I think this can almost be seen as a reward for states which have spent the money to make low carbon generation investments.
Emission based – This metric is great for those states who haven’t invested money in low carbon sources of power. Think the Midwest and the Southeast. Some might argue that these are the states that need the most help, and that climate policy is going to hurt them the most in percentage terms. While I think that it is important to protect coal states, it is also important to acknowledge the expensive investments some states have made in low carbon generation.
Population based – This is not a part of Waxman-Markey, but I think it deserves a bit of discussion. This clearly would benefit those states with a high population. In some ways, this is the fairest system since one might assume that more energy is consumed in higher population areas. It does, however, disadvantage low population states that emit a lot of carbon. For example, Wyoming [remember this?] with its high emissions per capita would receive a very small amount of allowances even though it emits a ton of carbon.
At the end of the day, which system you pick depends on what you think is important. Personally (if you can’t tell already), I think it makes sense to reward those states that have already invested in lower carbon sources of power. These states typically face much higher electricity prices than the rest of the country. My personal feelings aside, there is an equally valid argument that the regions with lower electricity prices (and more emissions) also tend to have a lower cost of living. Large increases in electricity prices in these areas will constitute a larger burden as a percentage of income.
In the end, it is probably a political compromise which decided the 50/50 split, so there isn’t much we can do about it. It is just interesting that while a lot of the debate surrounds percent allocations, much less discussion has foused on the mechanism behind the allocation.
The beauty of writing for two blogs is you get to post the same thing twice and you get double the credit for it, or something like that. This post originally appeared on Weathervane, RFF’s fancy and informative climate blog:
How will the Senate Climate Debate Differ from the House Debate?
By Daniel F. Morris
The climate debate kicked off in the Senate this week with the Obama administration encouraging senators to pass legislation comparable to H.R. 2454, the mammoth bill that passed by a vote of 219-212 last month. In testimony given to the Environment and Public Works Committee, Energy Secretary Steven Chu, Agriculture Secretary Tom Vilsack, Interior Secretary Ken Salazar, and EPA Administrator Lisa Jackson all urged the Senate not to slow the momentum behind the passage of the House bill.
The formation of the Senate bill and the debate surrounding it will be significantly different from the experience in the House. First, a huge component of the Senate strategy will involve wrangling 60 votes to block a potential filibuster, which will probably require more compromises to accommodate Midwestern Democrats who currently feel compelled to oppose the bill. Concessions may involve the stringency of the cap in the early years of a cap-and-trade market (14% reduction of 2005 emissions by 2020 instead of 17%), allowance allocations given away to energy-sensitive industries, especially coal, oil, and manufacturing, and the role of nuclear power in the nation’s future energy portfolio.
Second, the bill will receive much more scrutiny at the committee level than the House bill received. H.R. 2454 was fully marked up only by the Energy and Commerce Committee. Input from other committees, like Ways and Means and Agriculture, were included in a manager’s amendment inserted during floor debate. In contrast, the lead for drawing up the Senate bill will be Sen. Barbara Boxer (D-CA) in the Environment and Public Works Committee, but the legislation will ultimately include pieces constructed by at least five other committees, including, Agriculture, Commerce, Energy and Natural Resources, Finance, and Foreign Relations. Senate Majority Leader Harry Reid (D-NV) has tentatively slated a deadline for the bill to clear the committees of Sept. 28, so September will be a hectic month. Boxer is indicating she wants to wait until after the August recess to take up any climate bill.
Aside from dynamics distinct to the Senate, there are a number of specific issues that may develop disparately from the House debate. Some of the prominent topics are:
Price collar: H.R. 2454 established a minimum carbon price (or price floor) of $10, but did not include a matching maximum price. The strategic reserve auction mechanism (Sec. 726) protects much more against extreme price volatility than consistently high allowance prices. In the interest of protecting regulated industries and reducing overall costs of the entire program, the Senate will likely take a much closer look at employing a price collar that sets both a minimum and maximum price for emissions allowances. Previous studies conducted by RFF scholars, one by Dallas Burtraw and Karen Palmer and another by Harrison Fell and Richard Morgenstern show that use of a price collar can reduce the total costs of implementing a cap-and-trade system.
Competitiveness: President Obama expressed some dismay about the last-minute addition of protectionist language (Sec. 3) included in H.R. 2454 targeting imports from emerging economies that do not take on similar emissions reductions. Language in the bill explicitly names China and India as countries that deserve scrutiny. Those concerned that such language will lead to conflict in future climate negotiations with the two countries see the Senate as the place to scrub the inflammatory verbiage. Foreign Relations Chairman John Kerry (D-MA) has already stated that he and others in the committee intend to make changes in the hopes of avoiding retaliatory measures from India and China. Midwest Senators Carl Levin (D-MI) and Sherrod Brown (D-OH), however, have expressed support for the provisions and disagree with the President’s assessment. The matter will no doubt receive considerable attention from both the Foreign Relations and Finance committees.
Market Regulation: Both chambers want to see stringent regulations for the potentially huge carbon trading markets to come out of cap-and-trade measures. H.R. 2454 split responsibility for oversight between the Commodity Future Trading Commission and the Federal Energy Regulatory Commission. Sen. Dianne Feinstein’s (D-CA) experience with FERC during California’s deregulation woes of the early part of the decade have led to her strong distrust of the agency, and she has introduced a bill giving CFTC full authority for regulating carbon markets. This debate may continue to evolve as the Senate bill begins to take shape.
Agriculture: In the House debate, powerful agriculture concerns found voice in Rep. Collin Peterson (D-MN), who had a major influence over the final version of the bill, including a provision that give authority to the Dept. of Agriculture to determine what constitutes domestic forestry and agriculture offsets. Many farm groups lined up against the House bill after its passage and their influence could spell doom for Senate passage. Agriculture Committee Chairman Tom Harkin (D-IA) has already expressed his dissatisfaction with the House bill and intends to protect agriculture and farmers. Expect agriculture to play an even bigger role in the Senate debate.
Undoubtedly, other issues will surface over the summer as committees begin drafting separate pieces. The Senate has somewhat of a head start in that a major energy provision has already been shepherded through committee by Energy and Natural Resources Chairman Jeff Bingaman (D-NM).
The path to President Obama signing climate and energy legislation is far from clear, however. The Senate bill must navigate skeptical and apprehensive Midwest Senators, substantial efforts from environmental groups to strengthen it, and ardent opposition from many in the Republican minority. Even though the Fourth of July was last weekend, it appears that we can look forward to plenty of fireworks for the rest of the summer.
A previous post gave a small introduction to Local Distribution companies (LDCs) and allowance distribution. I would recommend checking it out since LDC allocation is central to Waxman-Markey. It is so important, that I would wager quite a bit that Waxman-Markey or any climate bill will NOT pass without some sort of LDC allocation built in.
One area which hasn’t received that much attention is how LDC allocation affects the incidence of the policy. LDC allocation is hailed as a method to protect households from higher electricity prices, but ultimately it can make them worse off compared to cap-and-dividend.
A new technical memo that Rich and I worked on finds that the average household could find itself $157 worse off under LDC allocation. This number shrinks to $66 if there is widespread reform of electricity pricing by separating fixed and variable charges, and if industrial and commercial customers respond rationally (more on this in a subsequent post). These values are compared to a full cap-and-dividend, where all permits are auctioned and carbon revenue is redistributed to households through a per-capita dividend.
How could households be worse off under LDC allocation? First, a bit of background. Households feel the burden of climate policy through two large categories: direct expenditure on electricity/heating and indirect costs associated with higher good prices. The direct prices are easy to account for since they are on utility bills, but the indirect costs are a bit trickier. Every good and service you consume has an embedded carbon content due to the energy and emissions associated with its production.
When permits are allocated to LDCs to keep down the direct energy costs, the indirect energy costs a household pays will increase. This increase will ultimately overshadow the savings a household receives from direct energy costs not increasing. So, while under LDC allocation, households might think they are better off since their utility bills aren’t increasing, they ultimately are worse off since everything else in their life is now more expensive.
This result is not exactly what policy makers want to hear. One of the arguments for LDC allocation is to protect electricity consumers. While LDC allocation accomplishes this for direct expenses, it backfires in ultimately protecting households. On the political side of things, it spreads out the household burden of carbon policy and silences enemies of climate policy who simply claim “cap-and-trade makes your utility bills go up.” In the end, this might be what really matters, and the loss in efficiency is just another sacrifice necessary to pass climate policy.
Something was made very clear to me last night, courtesy of Coors Light (it was not the kind of moment of clarity referred to at 4:09 in this video). As part Coors’ bludegeoning advertising campaign surrounding cans that turn blue when cold, the announcer in at least one tv commercial claims the cans offer an ‘insurance policy for cold beer.’ Sounds pretty awesome, right? Not so fast. At that exact moment, fine print appears at the bottom of the screen to inform viewers:
There is no insurance policy for cold beer.
My first thought was ‘That’s a huge bummer.’ Then my inner nerd kicked in and brought about my moment of clarity. My corresponding thought was ‘There’s no real insurance policy for climate change either.’
The environmental news gods are smiling on today because the first article I saw on ClimateWire was a rundown on a new study (sub req’d) being conducted by FEMA on the effects of climate change on the National Flood Insurance Program. In my pastravings about insurance and climate change, I haven’t made much mention of the flood insurance program, but it is a massive piece of the puzzle to figure out how the nation can adapt well to climate change.
The NFIP was designed to protect people from being totally exposed to losses from major floodsthat tend to hit the southeast and midwest every year or so. Unfortunately, because people no longer had to worry about losing everything (i.e. they could not fully internalize their risk), they moved into floodplains and coastal areas that before were too dangerous to live in. Now, you have trillions of dollars in sunk capital all over the nation in areas where the risk is changing rapidly and in a way that we don’t fully understand.
The new FEMA study is trying to identify how climate change will affect inland floodplains, coastal areas, and how sea level rise will affect the program. The outcomes of the study could lead to redrawing of 100-yr floodplain boundaries, resulting in higher premiums. The study will not be complete for another year or so, but things do not look good already. According to one of the authors:
“There may be no solid projections. We’re not even coming up with squishy assumptions.”
Imagine, if you will, the political catfight that could surround this study when it’s completed. Here you have FEMA (not the most popular or trusted agency in the land) potentially coming out and saying we need to redraw our flood maps, but they don’t even have squishy assumptions. Perhaps as the study progresses, they will develop slightly more solid assumptions (think jello vs. pudding), but this may be one of the big climate change issues we have to grapple with domestically in the future and it is going to be messy. At least, that’s clear to me.
Originally posted on RFF’s climate policy blog Weathervane.
For many environmental advocates, the generous forest conservation provisions in the Waxman-Markey energy bill (summary here) are a no-brainer. They target one of the world’s largest—20 percent of the global total—and most cost-effective—about half the world’s deforestation at under $10 per-ton—sources of greenhouse gas emissions reductions while protecting some of the world’s most treasured natural places.
It seems these provisions provide something for everyone, as they have found support from a broad coalition of stakeholders. U.S.-regulated entities like the potential cost-containment benefits from offsetting up to 1.5 billion tons of their emissions by paying for cheaper reductions in developing nations, and that forest conservation does not create competitiveness concerns. The global development community likes the possible poverty reduction benefits of channeling an additional $10 billion per year by 2015 in what could be seen as U.S. foreign aid to tropical forest nations. Climate policy wonks like that this forest financing will strengthen U.S. participation in ongoing global negotiations.
Is it possible, therefore, that these provisions could survive attacks from equally-strong skeptics of offsets, foreign aid, and climate action during House and Senate debates?
As the debate unfolds, expect three key issues to come into play:
1) Whether the uncertainties in Waxman-Markey’s forest “set-aside” provisions can be clarified.
Currently the bill allocates 5 percent of allowance values (Section 753(b)(1)) for the purchase of “supplemental emissions reductions”—not offsets—solely from international forest conservation. This “set-aside” must be used to purchase 720 million tons of emissions reductions per year from 2020 to 2025 and 6 billion tons overall from 2012 to 2025, and the EPA administrator is required to increase the allowance allocation if necessary to meet this target.
Based on reasonable assumptions about the size of the cap-and-trade program and cost of forest tons, including analysis done by EPA, the U.S. will be lucky to purchase half that amount (about 300 million) with the current 5 percent set-aside. Meeting the required amount may require saving up money in the initial years to spend later, but even this approach cuts it close, and will take away funds from needed capacity building in early years. Does the EPA have the authority or the will to actually follow-through with this requirement? Where will these allowances come from (they’re certainly not going to come without a fight)?
2) Whether the U.S. can demonstrate a plausible pathway to delivering offset tons from forests when cap-and-trade kicks off in 2012.
Forest carbon transactions in voluntary carbon markets accounted for about 7.5 million tons in 2007. With the relatively stringent requirements in the bill for developing countries’ participation in U.S. carbon markets—and the current low levels of market-readiness in many of these countries—how will they be ready to potentially deliver 1 billion or even 100 million tons in 2012? One answer is that they need funding for policy-planning and capacity building, on the order of several billion dollars per year between 2010 and 2012.
The good news is that these needs are being addressed by international negotiators in Bonn as we speak—including a strong U.S. forest team—and through other initiatives. The question is, will it be enough? Should the U.S. allocate substantial additional funds in its FY10, FY11 and FY12 foreign aid budgets to specifically target this issue? Or is there another innovative solution out there?
3) Whether the institutional structure that manages these forest programs can be strengthened.
Currently, the bill places authority to manage the forest set-aside and offsets programs with the EPA, in consultation with the State Department and several other departments. This is not ideal for several reasons. First, although the EPA has expertise in environmental markets, these forest programs will require much greater on-the-ground international development and conservation experience, and international environmental negotiation experience than it possesses. With the amount of funding on the table—about $10 billion per year, as stated before—and the need to get the most bang for the buck, it may make sense to create a specialized agency with expertise in all of these key areas. What should this agency look like? How should it be structured to most effectively manage these new funds and programs?
These are some of the key questions that academics and environmental organizations—including RFF’s climate and forest carbon policy teams—will be seeking to answer over the next several months. If policymakers are going to continue to support strong forest conservation provisions in U.S. climate policy, which many stakeholders would argue are absolutely essential from a scientific and economic perspective, these salient questions will need good, robust answers.
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.”
“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.
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.
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.
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.
A little while back, Josh asked the question ‘how do catastrophes factor into our calculations?’ He asked the question in the context of cost-benefit analysis, but it’s a critical question for almost every facet of climate change research. The journal Nature used this week’s issue to shed some light on the subject. Since you have to pay to access Nature, I recommend the short but informative rundowns of the content from Environmental Capital and RealClimate. According to these studies, if we as a global society want to avoid catastrophe climate change, then we need to cap the world’s emissions at 1 trillion tons of CO2. Considering that we emitted one-third of that in the past 9 years, we could be in for a rough ride.
Science models can only tell us (to a degree of certainty) where to expect a greater chance of catastrophe, but how can we translate that into economic analysis. There are a couple ways to do it. First, you can use a low discount rate to better internalize the possiblity of a major disaster. Discount rates are often huge sticking points for economists arguing about each other’s models (take Bill Nordhaus vs. Nick Stern, for example) and there’s still no consensus as to what is the ‘correct’ rate.
Second, you can use risk analysis to better understand how bad disasters can be. A recent paper by Carolyn Kousky and Roger Cooke of RFF (which you really should read) does an excellent job of laying out some of these risk considerations, and it definitely provides some food for thought. The three major risk considerations are:
Micro-correlations – The events of El Nino years are a good example. If you look at events in isolation (heavy rains and mudslides in Cali, poor fishing seasons in Peru, etc), they might not be noticeable, but that would lead you to underestimate your risk of major damages . If you take the broader picture though, you can see that disasters can be correlated and you can accordingly adjust your risk assessments.
Fat tails (of a bell curve/normal distribution) – Basically, extreme outcomes are more likely. Disasters and extreme events compound on each other to create fat tails, which increases solvency risk of insurance, meaning that you might have way more damage than you can afford. A good example of that is Florida with their Citizen’s Property Insurance Corp., which has $3 billion to cover its $450 billion worth of exposure.
Tail dependence – Tail dependence is essentially the likelihood that bad outcomes occur together. It is distinct from micro-correlations and fat tails, and they explain it much better than I can, but it relates to the idea that insurance lines can be independent of each other until there is a disaster, at which point they become dependent.
If you don’t account for these issues, you can severely underestimate your risk related to climate change. Cost-benefit analyses seem to have a pretty difficult time incorporating these factors, but there is still much research to be done on this front. It could be a while before we have reliable methods for incorporating catastrophes into our modeling. I don’t know about you guys, but I’m still miles and miles away from fully understanding this stuff. At least I can tell the difference between weather and climate, so I got that going for me, which is nice.
I keep hearing about how we need really high carbon prices (or a revenue allocation scheme that does not blunt the consumer’s pain) or else we’ll never move from coal to renewables. But if we cap carbon emissions, how does it matter where they’re coming from? I realize there are some path dependency issues with coal and scale and (largely unproven) LBD advantages to using renewables now, but in general where do we get this idea that the goal of carbon policy is to end all coal use? Instead of cap-and-trade, maybe the government should just get the military involved and take out all coal plants.
If any of you are avid readers of the Washington Post editorial pages, then lately you might have noticed some climate change-related hating. There was of course the well-documentedbrouhaha back in February surrounding George Will’s spurious climate change articles and the Post’s editorial board refusing to do anything about his painfully incorrect assertions. Accusations and double talk bandied about, arguments were made, a good time was had by all.
This week, Post columnist Robert Samuelson decided to get in on the act as well. His column doesn’t do anything as egregious as question whether global warming is real or not. Instead, he goes after environmental groups that are trying to convince the public that climate change legislation will cost almost nothing. Why is this bad? Because according to him:
The claims of the Environmental Defense Fund and other environmentalists that this reduction can occur cheaply rely on economic simulations by “general equilibrium” models…The trouble is that these models embody wildly unrealistic assumptions: There are no business cycles; the economy is always at “full employment”; strong growth is assumed, based on past growth rates; the economy automatically accommodates major changes — if fossil fuel prices rise (as they would under anti-global-warming laws), consumers quickly use less and new supplies of “clean energy” magically materialize.
So, either climate change doesn’t exist or it’s a great way for those evil enviro-types to lie to us all with their voodoo economics models, according to the WaPo editorial stable. Samuelson’s claims don’t hold up much better than Will’s, though. Just like Will got pummeled by the blogosphere, Paul Krugman rides into the picture to lay an editorial pimp-slap on Samuelson, saying:
I don’t think there’s a single thing there that’s right. What on earth do business cycles have to do with it? The models may assume growth based on past trends, but they DO ask whether emissions policy would greatly slow growth — and the answer is no. Consumers aren’t assumed to “quickly” use less — the time frame in these models is decades long. And new supplies don’t “magically” appear — they respond to price incentives, which is what economics usually says…this column exemplifies a strange thing about the climate change debate. Opponents of a policy change generally believe that market economies are wonderful things, able to adapt to just about anything — anything, that is, except a government policy that puts a price on greenhouse gas emissions.
Well said, Dr. Krugman. Needless to say, if you are looking for a well thought-out and robust discussion about the pros and cons of climate change legislation, perhaps it would be wise to steer clear of the Washington Post.
On your list of things that climate change could possibly ruin, be sure to add weekends. If you read Env-Econ, which I presume a lot of you readers out there do, then you know than Tim scooped me on talking about my own climate change and recreation paper. That’s an illustration of why he and John are the big dogs and I’m still a wee pup. I’ll just add two quick points to what Tim already highlighted:
Recreation resources are going to become more and more scarce due to climate change, but demand is likely going to continue to increase. More people are into outdoor sports than ever before and that’s probably not going to drop off anytime soon.
Adaptation is key, but figuring out to implement strategies effectively, especially related to natural ecosystems is going to be a huge challenge.
National Parks are an excellent illustration of the challenges we’re already starting to face. Not only could they be canaries in the coalmine as far as major ecosystem shifts are concerned, but they also show how much federal agencies can struggle to deal with environmental issues under constrained resources. So, if you want to see a glacier in Glacier National Park, or even a Joshua tree in Joshua Tree National Park, you might want to make travel plans soon.
I’ve always been fascinated by the idea of including the probability of a catastrophic climate event when calculating the costs and benefits of climate change. Even if the probability is very small, the sheer devastation of such an event can factor into climate estimates. Other models can have tipping points, where once a certain temperature is reached, a chain reaction is triggered which can accelerate CO2 release. I am in no way an expert on models that deal with each of these phenomena, but I did recently see a piece of news which disturbed me greatly.
The article titled “Forests could flip from sink to source of CO2: study” link discussed findings by “35 of the world’s top forestry scientists”
If temperatures climb even further, the consequences could be devastating, according to the report by the Vienna-based International Union of Forest Research Organisations (IUFRO).
“The current carbon-regulating functions of forests are at risk of being lost entirely unless carbon emissions are reduced drastically,” said Alexander Buck, IUFRO’s deputy director and coordinator of the report.
“With a global warming of 2.5 C (4.5 F) compared to pre-industrial times, the forest ecosystems would begin to turn into a net source of carbon, adding significantly to emissions from fossil fuels and deforestation,”
While estimates of devastation due to large temperature increases are not new, these recent warnings are still very scary. A lot of the carbon loss will be in the tropics, an area which captures almost 20% of total carbon emissions according to the article.
This recent finding brings a few questions to mind. First, as another tipping point is identified, how do we account for it in our cost/benefit analysis of climate policy? Hopefully results such as these will highlight the growing importance of Domestic and International climate agreements.
My second question is about forestry offsets. Do they not lose some of their value if they might eventually release the CO2 they were supposed to be offsetting?
It’s a nice day here in our nation’s capital (one of the few over the past few months), which is making many of us here feel chipper, sunny, and generally at peace with the world. We shouldn’t feel that way though, because we are in DANGER! Well, sort of. The WaPo is reporting that sometime this afternoon the EPA will official announce its findings that carbon dioxide emissions pose a danger to the public’s health and welfare. The endangerment finding, as some in the Beltway bubble call it, is a response to the Supreme Court’s ruling on Massachusetts vs. EPA two years ago, where it found that the EPA can regulate emissions of GHG emissions under the Clean Air Act.
There have been rumors that this was going to drop right around Earth Day, which could ensure a lot of media coverage and much green revelry. Now that it’s official (it needed approval from the OMB), consider it one more spice in the fiery cauldron that is the U.S. response to climate change. If Congress can’t get its act together and pass some kind of legislation passed (Henry Waxman wants his bill through committee by Memorial Day), then the EPA will step up to the plate and regulate, which will be industry’s worst nightmare come true. Truth be told, not many people want EPA to regulate on its own, including EPA head Lisa Jackson. As she says in the article:
The best solution, and I believe this in my heart, is to work with Congress to form and pass comprehensive legislation to deal with climate change. We hope to avert a regulatory thicket where governments and businesses spend an inordinate amount of time fighting. We are not looking for a doomsday solution.
This is a big trump card for the Obama Administration and those in Congress who want to see something passed this year. The way things are going these days, doomsday solutions don’t seem all that unlikely. Stay tuned…
I don’t know what you guys think, but I have to say that I think the internets are amazing. Far more than just a series of tubes, the internets are a fantastic tool for people to share important and unimportant information (this blog specializes in both). One way to share good information (the kids tell me) is on these so-called wikis, where everyday web 2.0 users like you and I can add, edit, and scrutinize informative articles. The king of all wikis is of course Wikipedia. As it is a fount of useful knowledge, however, it will tell you that specialization of labor leads to increased production, so it’s only a matter of time before specialized wikis take over the internets.
One of the newest and most exciting is Climate Lab, the most advanced climate change wiki I’ve encountered in my daily internet travels. The team behind Climate Lab explains the site thusly:
Climate Lab’s mission is to develop web-based tools for knowledge sharing and collaboration that drive action to address climate change. We are a nonpartisan nonprofit organization based in Washington, DC that began operation in November, 2008. As a 501(c)(3) organization, Climate Lab relies on support from foundations, government grants, and individual donations.
On March 2, 2009, Climate Lab beta-launched climatelab.org, a wiki addressing issues related to climate change. Given the enormous scale of the climate change crisis and the short timeline to take action, professionals working on climate change often cite the need for better information sharing and collaboration. Climate Lab’s wiki technology allows policy experts, development specialists, engineers, academics and others to define a common language, identify the most relevant information, and discover better ways of working together.
Hooray for information democratization. Go forth, climate minions, and populate the site with your unparalleled knowledge and understanding of all things climate change related. Just make sure not to do it all at once, we don’t want to clog up the tubes.
Reading this article I couldn’t help but think of Daniel Day-Lewis’ outstanding performance as the oil tycoon Daniel Plainview in There Will be Blood. There’s this liquid substance under your property, and we’re going to pay you just for the right to drill and take it out for you. You won’t even have to lift a finger! Or, in 2009:
“There’s an odorless, colorless gas that is sucked out of the air by your trees, and somebody’s going to pay you for that.”
I don’t want to be overly cynical (although it does seem to be a theme of this blog), but when most Washingtonians or New Yorkers read about people like Justin Maxson who are using market mechanisms to promote sustainable forestry (and that’s what we’re all about here on CT), the only green they can think of isn’t the kind growing on trees.
Continuing on Danny’s and Josh’s week o’ offsets, I think stories like this (and the issue of offsets in general) really illustrate the difficulty many “environmentalists” still have in using “economics” to achieve their goals. Is it morally wrong to support something that will do a lot of good but that people are only interested in because they can make money? Many climate activist-types I know are seriously angry with the huge amount of offsets in Waxman-Markey. Shouldn’t they be happy because more reductions will be achieved at a lower total cost? Or is that not really the goal here? Do we really want to cause the power companies some pain and make them take clean energy more seriously? But, you say, those costs will just get passed on to the consumer anyway…and on it goes.
Of course, I’m not about to resolve this debate right here, but I do know that it’s a really important one to keep having. Oh, and when you’re finished with all that arguing, there is A LOT OF GREEN to be made for whoever gets forestry right in the U.S. (if the EPA allows domestic forests as an offset category). To the tune of 150 million metric tons…just in Wisconsin.
