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.

Climate policy in China and the U.S.

China is in some ways the mirror image of the United States. Whereas in the United States the most serious efforts to date to address climate change have been made at the state and local levels and in the private sector, in China the major initiatives have come from the national-level party and government and have often been blunted by conflicting interests among local officials and enterprises.

That is Kenneth Lieberthal and David Sandalow in a new report from Brookings on the prospects for cooperation between China and the U.S. on climate change.  Here is an interesting tidbit on power generation in each country:

Coal remains king in China, and about 70% of power still comes from coal-fired plants. Over the past five years China has built the equivalent of America’s entire coal power generation system. These plants will stay on line for another 30-50 years while 60% of U.S. coal-fired power plants will be over 50 years old by 2025.

Here are the key recommendations from the executive summary.  The full report is worth reading — it is a very short and accessible 80 pages.  (It is much closer to an article from Foreign Affairs than a journal article, and yes that is a compliment.)  One of the themes running through the report is that it would be helpful to reframe the U.S.-China conversation around “clean energy” rather than “climate change.”

A mustached fox enters the EU henhouse

Secretary of the interior candidate* Czech President Vaclav Klaus is set to take over the EU’s rotating Presidency at midnight tomorrow night. Pan Klaus is most famous these days for being the head of state most openly skeptical of policies to mitigate anthropogenic global warming, which he often likens to communism. For a taste, check out his 2008 Heartland speech and subtly titled book, Blue Planet in Green Shackles. Klaus sees himself as the heir to Reagan, and seems to define totalitarianism just as subjectively as Dutch did. During his presidency he has invoked defense of liberty to rail against the Lisbon treaty, gay marriage, Kosovoan independence, and puppies (yes, puppies). But I digress…..

I could go on all day about Klaus**, but I mainly just wanted to call CT reader’s attention to this ironic turn of the tables. With PEBO on the way, the environmental community has heralded the start of a new chapter in international climate negotiations. But at the same time that America looks poised to stand up and finally show some leadership on this issue, the main leader of the past decade, the EU, looks certain to stand down, at least for the next 6 months. There is hope though: Sweden’s up next.

* Random side note: Czechs are bizarrely fascinated with “Amerikan” frontier culture generally, and cowboy culture in particular. This fascination was glorified in a Czech movie called Lemonade Joe in the 60’s and even spawned a whole movement, called tramping. Thus its not uncommon to walk into a bar in a small Czech town and find people dressed like cowboys, with country music on the radio (that and Queen. There’s always Queen on the radio in CR).

** Full disclosure, Kluas defeated former professors of mine in both of his presidential victories: Jan Sokol and Jan Svejnar (a Michigan economist).

What is up with oil?

The pithy answer is nothing — not production, not consumption, and certainly not the price.

I have heard some head-scratching and shoulder-shrugging about the recent behavior of the oil market.  (Yes, you have to listen closely to hear those things.)  In the last year we’ve had:

• the biggest run-up in oil prices in history
• the biggest collapse in oil prices in history
• the biggest announced production cut from OPEC in history
• oil prices continuing to slide down after this cut

Whiskey.  Tango.  Foxtrot.

My short answer — and I would be only too happy to receive corrections or alternate theories from more educated readers in the comments — comprises 3 factors:

1) The price rise was demand-led; the current collapse is demand-led as well. It turns out that even in car-loving America you can get a nice bit of short-term (and perhaps long-term) demand destruction with $4 per gallon gas.

2) Oil futures are not tremendously influenced by OPEC’s announced cuts.  OPEC does not have a great track record for maintaining cartel discipline when the market is loose.  Too many of the small countries oversell their quotes, and the budgetary pressure on some of these governments — who spent the last year making all their plans with $80-140 barrel per oil in mind — will be intense.

3) The most important factor in oil futures right now is not the OPEC announcement but expectations about future economic conditions.  And in this sense the oil future prices we are seeing right now are terrifying.  America is going to remain in recession in 2009 and demand will be weak, but you would think that even moderate economic growth in China would be enough to buoy the oil market.  I find the fact that futures are down so far to be extremely worrying.

By the way, here is a fascinating map that depicts where US oil imports come from.

China energy policy fact(s) of the day

China cut fuel prices for the first time in almost two years after crude oil slumped, seeking to reduce costs for companies and factories as the economy enters its deepest slowdown in almost two decades. The ex-factory price of gasoline was lowered by 14 percent to 5,580 yuan ($816) a metric ton, diesel by 18 percent to 4,970 yuan and jet fuel by 32 percent to 5,050 yuan.

The cuts look consistent with a policy which is more focused on industrial support than strictly subsidies for end users (note the larger decreases for jet and diesel fuel).  Also, at the same time:

A plan to increase fuel consumption taxes was also approved, the commission said. The gasoline consumption tax will rise to 1 yuan a liter from 0.2 yuan and the levy on diesel will climb to 0.8 yuan from 0.1 yuan. Taxes on other fuel products will increase too, the commission said without giving details. The government is raising fuel consumption taxes to replace road maintenance fees to encourage energy conservation.

Here is the source.  This mix of wholesale fuel subsidies combined with end-use taxes seems to me to scream, “black market in fuels!”

Is China leading or following with this policy? The same article concludes:

Vietnam reduced gasoline prices four times in October to curb inflation. Malaysia has cut fuel costs five times since June. Indonesia may lower gasoline prices next month.

Oy.  Not good.

Suggestions for climate and trade policy

A central issue in designing US climate change policy is how to level the playing field internationally. Given uncertainties in their effectiveness and possible conflicts with WTO rules, the flowering of national trade measures and their resolution by WTO panels may not offer the best approach. … Rather than consign the crucial decisions to the WTO judicial system, key WTO members should attempt to write a new WTO Code of Good Practice on GHG rules. The idea would be to define more sharply the policy space for climate control measures that are consistent with core WTO principles.

That is Gary Hufbauer writing at VoxEU.  (How did I miss this post earlier this year?)  Here is some little-regarded info about US imports:

The US imports carbon-intensive goods largely from Canada and the EU, which emit less CO₂ than the US.  China and India, the primary targets of US trade measures, are not large suppliers of carbon-intensive exports to the US.

See the VoxEU post for a chart of the US import data.

You occasionally hear suggestions that perhaps all climate negotiations could get moved under the aegis of the WTO.  While I agree that the evolution of the GATT into the WTO is a nice success story in international relations, realistically climate negotiations are going to proceed under the UN Framework Convention on Climate Change, for reasons of path dependency if nothing else.  But given the links between climate policy, energy policy, energy prices, and international trade, I think the suggestion from Hufbauer about negotiating some good practices for climate and trade policy upfront is a very smart idea.

Here is a book (ungated version here) from the Peterson Institute (Hufbauer’s employer) on international competition and climate policy design.

More subsidies

The World Energy Outlook 2008 is just out, with updated estimates of energy subsidies:

According to our calculations, energy-related consumption subsidies, which encourage consumption by pricing energy below market levels, amounted in 20 non-OECD countries (accounting for over 80% of total non-OECD primary energy demand) to about $310 billion in 2007.  Oil products account for one-half, or $150 billion.

The WEO also states that the IEA plans to publish a special report on energy subsidies in 2009.

I’ve placed graphs of energy subsidies in non-OECD countries below the fold:

WTO it was

In response to my post on energy subsidies Ryan Avent writes:

You may remember me arguing that the WTO might be the best place to pursue international climate rules. Well, an energy subsidy is not only a carbon subsidy, but it’s also a trade subsidy. Subsidizing the inputs to traded goods, and fuel counts, is roughly the same as subsidizing the traded goods themselves. We have a trade interest, then, in removing these subsidies.

I like Daniel’s idea of initially trading pricing in developed countries for subsidy removal in emerging markets. I think the WTO might be a good place to start hammering out such deals, given their impact on the prices of tradable goods.

Quite right, and a good suggestion in theory.  But I wonder whether in practice the WTO is the right forum.

I was reminded of this yesterday at a Brookings panel on recommendations for the new President on energy and climate change.*  Bill Antholis pointed out during Q&A that one of the major shifts that has happened in Congress over the past 10-15 years is that attitudes among legislators about free trade and clean energy have essentially flipped: support for free trade has eroded while support for clean energy has strengthened.

I think the idea of using the WTO as a venue for climate negotiations is not without merit.  But I also think it is a political non-starter.  Due to a combination of history and political momentum the international climate negotiations are going to be carried out under the UN Framework Convention on Climate Change.

And given the domestic political environment, I think this may be a good thing on balance.  In negotiating with countries like China or India I think it is better for us to be trading off things like the stringency of our domestic policies against their approach to energy subsidies, rather than pulling trade policy onto the negotiating table.  Trade has been freed up quite a bit in the last 15 years, mostly for the better.  It would be a shame to see these gains reversed in the context of the climate negotiations.

*One in a series of events focusing on recommendations for the new administration.

A subsidy by any other name…

A couple of posts in recent months on energy subsidies, and particularly subsidies to fossil fuels in non-OECD countries, have drawn immediate responses implying that energy subsidies in the U.S. are quite large themselves, particularly indirect subsidies through the military to maintain international oil production.

I am skeptical that this comparison is relevant, or fair.  A few points:

1. The IEA estimated in 2006 that subsidies to fossil fuels in non-OECD countries were $220-280 billion per year.  This represented the net economic value of subsidies — essentially, the amount by which local fuel prices were lower than a competitive market price (i.e., an international oil price combined with some calculation of local refining and delivery costs).  These are net direct subsidies; they make fuel prices lower and encourage (over)consumption.

2. In the U.S. the EIA recently estimated that current energy subsidies are around $16.6 billion on gross, with about half of this going to renewables (particularly biofuels), nuclear power, conservation, and energy R&D.  Fossil fuels get around $5 billion, and this is gross, not net.  Note that the Highway Trust Fund, which is filled mostly from America’s small 18.4-cent per gallon gas tax, collected almost $39 billion in 2007.  The simple truth is that on a per-unit basis energy is neither much subsidized nor taxed in the U.S.*  In most other OECD countries meanwhile, fossil fuels — particularly transport fuels — are taxed on net.

3. What about indirect subsidies?  You can certainly find estimates that imply total U.S. energy subsidies are north of $100 billion a year, but I haven’t seen any estimates that look rigorous or convincing.  This study put out by (or linked from) EarthTrack looks at least somewhat more respectable; it finds that total U.S. subsidies are $37-63 billion per year.  But notice that much of this is of an indirect nature — more than a third comes from the estimates of defending Persion Gulf oil shipments — and it is unclear who these indirect subsidies are supporting.  Securing the Gulf arguably subsidizes the world oil market — U.S. consumers may benefit, but so do all other world consumers.  Further, what percentage of our military expenses should be counted as an energy subsidy?  We have many strategic objectives beyond energy policy when we deploy forces in the Middle East (or elsewhere).

4. What about indirect subsidies in non-OECD countries?  China has made no attempts to hide its policy of securing access to energy supplies for its national firms.  Much of this is being done in a naked quid pro quo way in Africa, with aid such as infrastructure development tied directly to energy access.  Are we going to count these costs?  And don’t forget that China is also dealing with — and turning a blind eye to the actions of — some unsavory regimes in Africa.

In the end I think the basic story you should have in your head goes essentially like, “Fossil energy is subsidized in most of the non-OECD, is not much taxed or subsidized in the U.S., and is taxed on net in most of the rest of the OECD.”  Yes, there are complications and you can do lots of spinning of sophomoric midnight theories while sitting with your friends over cigarettes and coffee, but you are going to need to offer me some hard evidence and persuasive arguments to get me to change my basic tune.

*As a result the U.S. price for transport fuels is frequently used as the international metric for a competitive market price.  See Figure 3 in this report for a nice graphic comparing gasoline and diesel prices in the U.S. to many of the large non-OECD countries.

Assorted links

1. What is the likely direction of energy and climate policy under the new Obama administration and a Democratic Congress?  Joe Romm gives his thoughts on E&E TV; here is a panel of respondents at Green Inc.  There is a fair amount of wishful thinking floating around.  Count me among the skeptics that a cap-and-trade bill will pass in calendar year 2009.

2. Henry Waxman has launched an insurgency against John Dingell, attempting to take over as chairman of the Energy and Commerce Committee.  If you have an E&E Daily subscription there is a good article here.  Brad Plumer also provides ungated commentary at the Vine.  I don’t really know much about this but I will take a shot in the dark and predict that Dingell is not going anywhere.

3. Obama will keep Bush’s ethanol mandate.  Blech.

4. Here is another (longer) version of that story about carbon sequestration that Rich linked below.  Here is Sarah Forbes of WRI talking about guidelines they have published for CCS.

5. The Economist has a story this week on urbanization, largely touting its benefits.  It is a nice mix of economic geography and history.  Hmmm, no byline of course, but could this be the work of urbanist Ryan Avent?  Speaking of Ryan, he is blogging from a conference this week on urban design in a post-oil age; here he discusses the role of urban design in solving climate change.

6. And in (mostly) non-environmental economics news, everyone is aware, right, that one of the worst wars/humanitarian crises of the last half-century has now reignited in a big way in eastern Congo?  (Yes, I could make this on topic for the blog by discussing the natural resource curse but given the scale of the crisis at the moment that seems coldly academic.)  For those who are perplexed by (shamefully cursory Western) media coverage of events I recommend this post and its four predecessors from Wronging Rights.

Removing energy subsidies in China

There is a new discussion paper out from William Pizer, Takahiro Ueno, Michael Levi, and (ahem) Daniel Hall.  We talk about options for engaging countries in the developing world in a post-Kyoto climate agreement.

Here is an interesting sentence:

the elimination of subsidies for transport fuels in China would be equivalent to an $11 per ton CO₂ tax on gasoline – or a $25 per ton CO₂ tax on diesel – relative to current prices.

The upshot is that the removal of subsidies for fossil fuels in non-OECD countries — where subsidies remain widespread and encourage fuel and emissions growth — could be a near-term bridge for international climate negotiations.  Developed countries could raise fossil energy prices — through taxes or cap-and-trade systems — while simultaneously developing countries reduced or eliminated fossil fuel subsidies.  Eventually one would like to harmonize prices on emissions/fuels globally, as this would be most efficient.  In the near-to-medium term, however, moving closer to market prices in the developing world while taxing externalities in the developed world would be a big step forward.

I suspect I may have other sentences of interest from this paper in coming days.

Here is the website for the Harvard Project on International Climate Agreements.  Our discussion paper is one among a great number of very interesting papers for the project.

John Deutch on energy security

I attended a portion of today’s event at RFF on energy policy challenges.  MIT Professor John Deutch — who has an absurdly broad and interesting personal biography — spoke on energy policy and national security just after lunch.  He had three headline points:

1. Energy independence is not feasible for the U.S. (or its allies).  We can talk about improving energy security but basically people should stop using the term energy independence.
2. Our domestic political institutions are not set up in a way that acknowledges or deals with the links between domestic energy issues and foreign policy decisions.  As examples he pointed out the disconnect between the House Energy and Commerce Committee and the Senate Foreign Relations Committee; the inconsistency of our long-standing (though recently expired) restrictions on domestic drilling and our persistent requests to overseas producers to ramp up production; and the necessity of U.S. domestic action on climate change as an essential pre-condition for a robust international agreement on climate change.
3. Increasing energy security will require incremental changes and a long-term perspective — you are not going to get an overnight overhaul of U.S. energy policy or practice.

Deutch proposed that there were four key areas where energy policy has significant intersection with foreign policy and national security:

• Oil and gas import dependence
• The vulnerability of energy infrastructure to disasters both natural and man-made (including terrorist attacks)
• Nuclear proliferation
• Climate change, including its growing role in the North-South diplomatic dialogue, its growing importance to U.S. standing abroad (and the diplomatic capital it will require in future), and its role in causing migration and conflict in some of the less stable parts of the world in the coming years

He made many other points along the way which I found interesting.  I’ve placed these below the fold in no particular order:

Overheard

I have been far too distracted by global financial calamity this week to spend much time thinking or writing about environmental economics.  As way of apology I’ve rounded up some good quotes that touch on a few of the (often tenuous) links between the complete meltdown of our economic system and environmental economics:

But the gloomy investment climate suggests that clean energy needs a quick rebound in credit markets more than it needs lawmakers to renew tax credits if it is to avoid a desert of financing options for the rest of 2008 and 2009.

– Nathanial Gronewold and Michael Burnham at Greenwire

The most passable carbon pricing policy up until now was believed to be cap and trade, a system in which emission permits are bought, sold, banked, and so on. Will that begin to look undesirable in the wake of this crisis?

– Free Exchange, wondering whether market skepticism will influence the course of climate policy

I think we’ll only get one shot to set things right by throwing a ton of money at the problem, so we’d better think carefully before we throw it at symptoms rather than causes. … As far as the money is concerned, throw it at infrastructure. Increase worker bargaining power by offering Federally funded retraining sabbaticals for any worker over thirty who decides they want to retool. I’d rather see a new WPA than a new RTC.

–  Steve Randy Waldman, with smart thoughts on bailout money and infrastructure spending.  I do worry a bit though about where the green collar job nuts supporters are going to run with this.

Certainly AIG though with the construction bonds that they’re holding and with the insurance that they are holding very, very impactful to Americans…

– Sarah Palin, who caught a lot of flak — much of it deserved — for her responses to questions about the crisis.  However, she actually seems to be right about the construction bond point, as Tyler Cowen points out.  Credit conditions are going to make it difficult for municipalities to build infrastructure over the next couple years so in my mind this strengthens Waldman’s argument above.

It’s useful that Paulson seems to have excellent contacts and working relationships with China, which will be America’s most challenging bilateral relationship for the next decades.

– Jonathan Zasloff, arguing that Paulson should be kept on as treasury secretary regardless of who the next president is.  Zasloff previously discusses climate change — Paulson is a committed environmentalist — although he doesn’t draw the obvious link: doing anything substantial about climate means getting China on board, and ASAP.  China’s relationship with the U.S. right now is the most important bilateral relationship affecting global economic health, and long-term China’s relationship with the U.S. is the most important bilateral relationship affecting global environmental health.  Speaking of which, who is bailing out whom again?

surely it would be more rational for the Chinese to own the American financial system itself

– Robert Preston

In our central scenario, we estimate that the crisis could lower real GDP growth in 2008 and 2009 by an average of 1.8 percentage points per year.

– Jan Hatzius.  I’ll note that substantially reducing economic growth should also slow down carbon emissions in America over the next couple years!  Unfortunately this is rather like getting killed by lightning while looking for that silver lining in the cloud.  Speaking of which:

Annoying our neighbors so much that they cut off our oil supplies would, I suppose, be one way of helping us achieve energy independence, but it doesn’t seem like a particularly good idea.

– Hilzoy, wondering who exactly is the most knowledgeable person in the U.S. on energy issues these days.  (Hint: It’s not Sarah Palin.)

Energy subsidies

There is a good article in today’s New York Times that discusses fuel subsidies, particularly in Asia:

From Mexico to India to China, governments fearful of inflation and street protests are heavily subsidizing energy prices, particularly for diesel fuel. But the subsidies — estimated at $40 billion this year in China alone — are also removing much of the incentive to conserve fuel. …

China raised gasoline and diesel prices on June 21, though still keeping them below world levels. World oil prices plunged more than $4 a barrel within minutes on the expectation that Chinese demand would slow.

In Indonesia, the government spends six times as much on energy subsidies as it does on agricultural investments, even as rice prices have skyrocketed this year.

Many countries, like India, have raised oil prices considerably in recent months, only to watch world prices climb even further, pushing up the cost of subsidies once again. China’s estimated $40 billion in subsidies this year is up from $22 billion last year, mainly for this reason, although consumption has also risen, with Chinese buying 18 percent more cars in the first half of this year than in the period a year earlier.

A few comments:

1. It is reasonable to wonder how long many of these countries can afford these policies if oil prices stay around current levels.  (“Before adjusting the prices, Malaysia was spending 7.5 percent of its entire economic output on fuel subsidies, a greater share than any other nation. Indonesia follows with 4 percent.”)

2. The $40 billion figure for China is eye-popping, but it is not entirely clear what fuels it is for and how it was calculated.  The IEA has estimated that in 2005 China subsidized oil products to the tune of around $7 billion, out of $25 billion in total energy subsidies.  My understanding is that the 2008 World Energy Outlook is going to take another look at developing country energy subsidies.  I wait with curiosity.

3. As Free Exchange notes, a lot of the increase in oil consumption in China is being driven by increases in wealth and consumption more broadly.  Market prices won’t stop demand in China from growing but they might help prevent China from developing into an oil-addicted behemoth (see America, 1950s).

4. The EIA estimates that the U.S. currently subsidizes energy at around $16.6 billion, with about half of this going to renewables (particularly biofuels), nuclear power, conservation, and energy R&D.  About $2 billion goes to oil and natural gas, almost all in the form of tax expenditures.  On a per-unit basis energy is neither much subsidized nor taxed in the U.S.

Assorted links

Sometimes I wish the internet would slow down. There is just too much interesting stuff out there.

1. I don’t think I would want Bryan Caplan as a neighbor, since he seems to think pissing on my front steps is A-OK. Mike Moffatt snaps back.

2. Quiz time! See if you can spot all of the errors in this horribly glib Megan McArdle post on emissions permit allocation. Bonus points for citing previous CT posts that provide rebuttals in the comments.

3. RealClimate puts concerns about the global warming impacts from flat screen TVs in perspective.

4. “Free” roads — available for only $2.22 in gases taxes per gallon! What a steal!

5. Free Exchange is hosting a discussion on global inflation this week. Many interesting comments on the rise in energy and food prices.

6. Speaking of the food crisis, here are some sensible policy recommendations, starting with the no-brainer (and non-starter) idea of making U.S. food aid cash rather than crops.

7. I discussed the G-8 summit last week while guest-blogging at Free Exchange. Leaders at the summit have pledged to cut greenhouse gas emissions by 50% from current levels by 2050. Cue muffled laughter.  Addendum: Creative ambiguity — whether the 50% cut is from current or 1990 levels was left undefined.

Climate policy as diplomacy

Ryan Avent has been doing a lot of good blogging about cap and trade recently. Today he assesses the political environment — the combination of near certain defeat for the Lieberman-Warner bill this summer with likely election returns this fall — and argues:

Congress is almost certain to be more Democratic next year, and the White House will be more friendly to climate bills whoever the president is (but substantially more so if Obama is the victor). … Democratic leaders are watching now to see how their opponents plan to fight, so that next year, they’re prepared to use their majority to effectively counter opposition en route to a truly good climate bill.

I thought this was a bit optimistic about how smoothly Democrats would operate next year, a point I made (rather sarcastically) in the comments.

In response, Ryan offers up a pitch-perfect response:

Ah, but you failed to take into account the fact that Obama is going to CHANGE WASHINGTON WITH CHANGE WE CAN BELIEVE IN YES WE CAN.

This is still making me chuckle after repeated reads.

I happen to agree that among the presidential candidates Obama would get a climate bill with the least amount of political wrangling and infighting. But relative to what? There is going to be pork all over the floor before this thing gets done and that is just the facts. The domestic political machine has to run its course and President Obama is not going to be able to strong-arm Congressman Dingell into rolling over on Detroit or Senator Reid into greenlighting Yucca Mountain.

So why do I think that Obama could get a bill with less partisan hackery even while I’m pessimistic he’ll do much to change Washington? I think it’s because I view Obama as being most concerned among the candidates about America’s standing in the world and with reaching out to our partners. Having America perform an about-face on climate policy could be a key part of a broader diplomatic strategy of engagement and cooperation. This could then put indirect pressure on Congress to deliver a well-designed bill.

In the end I guess I am agreeing that Obama does have the best chance of getting legislators to work with him on climate policy but I am positing a different channel through which this works.

I think the challenge he will face if he chooses this strategy is to simultaneously be realistic about the domestic policy constraints he faces and not promise allies things that he cannot deliver, while at the same time having a clear set of goals that do indeed signal American leadership on global climate policy along with concrete strategies for how he is going to get people on board with his goals.

Greenpeace takes on biodiesel

So I’m in week two of a three-week trip through Argentina, which is why I haven’t been posting.  Basically, I’ve had limited internet access, and frankly have been more focused on eating steaks and goat than on economics. 

But last night I was half-watching TV at the café, and in between skits centered on the hilarity of men wearing wigs and news segments alternately worshipping and subtly mocking Diego Maradona, there was an advertisement from Greenpeace Argentina (in conjunction with GP Germany) blasting soy biodiesel production.  Basically, it pointed out how the nation is literally burning through its land to plant energy crops.  Over 2 million hectares of forest have been converted into energy croplands in the past nine years — much of this goes to fuel German diesel vehicles that are widespread in Europe.  Diesel vehicles are indeed often longer-lasting and more efficient than the US’s gas-fueled fleet, but as with ethanol we must be careful about leaping too enthusiastically on the biofuel bandwagon.  Not this is that new to anyone; it’s just becoming more and more apparent to me that the solution to our transport emissions has to involve a move away from liquid fuels through a combination of efficiency and the tricky electric car. 

Anyway, I’ll be back around June 10th or so, with (hopefully) better thought-out posts not hastily written in an internet café.

Reforming carbon offsets, a continuing series

The World Bank Carbon Finance Unit has released its annual report on the state of the carbon market. The report summarizes the broader carbon market, with primary focus on two areas: the allowance market in Europe (the EU Emission Trading Scheme, or ETS) and the Clean Development Mechanism (CDM), the primary global offset market. As part of their discussion the authors note some of the criticisms and problems the CDM has faced, and recommend improvements. I’m going to focus on two of their critiques and one of their suggestions. I’m then going to synthesize these to argue that for some types of projects — particularly energy sector projects — we should move from an offset model to a straight subsidy payment model.

I’ve written previously about the problems with the CDM, including the idea that it is often tricky to measure when offsets are ‘additional’ since we can’t observe the counterfactual — a world without any carbon offsets.

The concept of additionality also becomes problematic when the baseline is unacceptable, or even perhaps immoral. The report authors write:

As clean energy projects begin to dominate the CDM, their developmental benefits are a lot more direct and visible than in the case of so-called “industrial gas” projects. Energy efficiency and renewable energy projects are now emerging as the most common type of CDM projects and this development should be encouraged. Many projects in Africa, likewise, have finally been transacted and this momentum too should be encouraged…

This has been a chief criticism of the CDM up until now. Most projects have been done in the more-developed poor countries — Brazil, China, India — while almost none were conducted in Africa in the first few years. And how could they be? If the ‘baseline’ is the absence of any grid-based electricity, how many emissions do you save installing a wind farm? An Africa with a renewable energy project is better than one without electricity at all, but it is hard to get support for it through the offsets market since there isn’t anything to offset. This is the first critique.

Reforming carbon offsets, first in a series

How well is the carbon offset market working? Not as well as might be hoped; the Wall Street Journal has done much recent reporting on how the architects of the Clean Development Mechanism (CDM) — by far the largest carbon offset program in the world, and a key part of many countries’ strategy to achieve compliance with the Kyoto Protocol — are struggling to determine which offset projects should be eligible, to keep pace with demand for new offsets, and to clamp down on questionable projects.

Now Michael Wara and David Victor have a new working paper with some recommendations for reforming the system:

We argue that the U.S., which is in the midst of designing a national regulatory system, should not to rely on offsets to provide a reliable ceiling on compliance costs. … We suggest that the actual experience under the CDM has had perverse effects in developing countries — rather than draw them into substantial limits on emissions it has, by contrast, rewarded them for avoiding exactly those commitments.

Offsets can play a role in engaging developing countries, but only as one small element in a portfolio of strategies. We lay out two additional elements that should be included in an overall strategy for engaging developing countries on the problem of climate change. First, the U.S., in collaboration with other developed countries, should invest in a Climate Fund intended to finance critical changes in developing country policies that will lead to near-term reductions. Second, the U.S. should actively pursue a series of infrastructure deals with key developing countries with the aim of shifting their longer-term development trajectories in directions that are both consistent with their own interests but also produce large greenhouse gas emissions reductions.

There are many interesting aspects to the paper, and to this topic more broadly. I am going to try to write several posts about it over the next week or two. For this post I’m going to discuss one of the fundamental problems in offset markets that the authors identify.

Heterogeneity and emission reductions

The Independent today notes that four nations — Iceland, New Zealand, Norway, and Costa Rica — have formally signed up to go carbon neutral, thus kick-starting a race to become the first such nation in the world.  The most interesting aspect of the article is that it really emphasizes how each nation faces different obstacles to reducing emissions.  The aforementioned countries are, of course, already getting much of their energy from (mostly endowed) renewable sources.  However, each nation faces a specific challenge.  Iceland has the world’s largest automobile fleet in per capita terms (and Icelanders like their cars big), Norway has an enormous oil and gas industry, half of New Zealand’s emissions come from agriculture, and Costa Rica (more than the others) has to balance emissions reductions with economic development.  Costa Rica, in particular, faces a difficult challenge common amongst many developing nations:

Last year [Costa Rica] planted five million [trees], a world record, and the banana industry – the country’s largest exporter – has promised to go carbon neutral.  However, its number of cars has increased more than five-fold in the past 20 years and its air traffic more than seven-fold in just six, making its task far harder.

This group of four establishes a lower bound of the degree of heterogeneity in technology and change needed to reduce carbon emissions.  Keep in mind that these four nations hardly run the full gamut of national per capital income level, are starting from a very high degree of renewable energy, and are already willing to establish strong, relevant legislation.

It really looks like a mess, but to me it underscores why we need a flexible, market-based solution like a carbon price coupled with appropriate R&D support.  As we’ve been told again and again, there is probably not a silver bullet.  Hopefully policymakers will remember that as they look forward.