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.

“Climate Protection Authority”

The President and Congress should handle the most significant climate change agreements as congressional–executive agreements, which require approval by a simple majority of both houses of Congress. Handling climate agreements as congressional–executive agreements would speed the development of a genuinely bipartisan U.S. climate change foreign policy, improve coordination between the executive and legislative branches, strengthen the hand of U.S. climate negotiators to bring home good agreements, increase the prospects for U.S. participation in those agreements, protect U.S. competitiveness, and spur international climate action. More specifically, Congress should enact “Climate Protection Authority,” which would define U.S. negotiating objectives in a statute and require the President to submit concluded congressional–executive agreements to Congress for final approval. This approach should apply both to the new global climate change agreement being negotiated in the United Nations by the United States and the rest of the international community and to other future arrangements with a smaller number of major emitting nations.

The paper is by Nigel Purvis, a visiting scholar at Resources for the Future. Nigel is interviewed today on E&ETV; it is interesting throughout. One advantage of this proposal is avoiding the 2/3 vote required for treaties in the Senate. A bigger advantage is providing negotiators with a credible mandate when negotiating — they can make offers (or threats) that have already been backed up by both of the relevant branches of government.

Note that the proposal is about procedure, not content, although wags might note that any procedure for climate negotiation in the U.S. would necessarily imply more content than at present.

On a tangentially-related note — more on content than procedure — here is Tyler Cowen with skeptical reflections on liberal internationalism:

In game-theoretic terms I would say the key question is what is the “threat point” America adopts when it offers to join international coalitions. Whatever Matt’s answer might be (his book is not written in that sort of lingo) that is now the key question, noting that whatever threat point you specify you have to be willing to live with. One paradox is that the more internationalist your default threat point is, the less effective a country actually will be in leading an international coalition.

A couple of observations:

A threat point is far less useful if it cannot be altered by any action that any other player would take. Other nations must actually believe that the U.S. would do something on climate change before we can credibly threaten to do a weaker version of that something.

I think the paradox Tyler specifies is incorrect, or at the very least incomplete. It should read something like, “the less effective a country actually will be in either leading an international coalition and/or achieving it’s own objectives.” Think of the current comparison between the EU and the US in international climate negotiations. It’s not clear to me that the EU’s effectiveness is being hampered by an internationalist threat point.

Update:  The Washington Times reports today that President Bush may soon call for Congress to pass a climate change bill.  Environmental Capital muses on the implications for an international agreement.

The political economy challenge of climate change

Ever wonder why Europe seems gung-ho about reducing greenhouse gas emissions — what with the Kyoto Protocol, the EU Emission Trading Scheme, a biofuel directive, and whatnot — while the U.S. can’t seem to get any traction on reducing emissions at all? (Unless you count subsidizing Iowa corn farmers, <cough> <cough> Evan.) Well, a clue arrives today via the CBO Director’s Blog.

Peter Orszag and Terry Dinan of the CBO respond to an article by Cass Sunstein that compares the Kyoto Protocol to the Montreal Protocol — widely hailed as the most successful multilateral environment agreement in history — and suggests ways that the Kyoto Protocol can be strengthened through lessons learned. Orszag and Dinan and more skeptical. As part of their response they collect some summary data into a table.

Note the fourth column, “Damages from 2.5 °C Warming”. Europe faces estimated damages of 2.83% of GDP, while the U.S. faces damages of 0.45%.* The fact that the potential benefit to Europe in terms of avoided damages is around 6 times higher than for the United States surely goes some way towards explaining the relative willingness of each region to act.

Doubtless there are other factors at work as well, but this strikes me as a particularly significant one that doesn’t get much recognition.

Note that Orszag and Dinan point out that one of the ways to increase willingness to act in the U.S. is to come up with damage estimates that do a much better job of incorporating the risk of catastrophic climate change, as discussed by Marty Weitzman. Where have I heard that name before?

*This data is presented in Figure 7 of Sunstein’s paper and comes from a paper by William Nordhaus and Joseph Boyer.

Competitiveness debate in Congress

I’ve written previously about the concern that U.S. climate policy will hurt the competitiveness of domestic manufacturers. (Here’s a reaction to that post from Free Exchange.) I spent most of yesterday at a Congressional hearing on this topic. I’m not going to try to summarize the entire thing — you can listen to the audio file and read the written testimony from each of the witnesses if you are that interested — but I am going to offer a few highlights and thoughts:

1. One of the most interesting ideas that came up was to convince nations like China and India to impose export taxes on their own products. In my previous post I explained the basic rationale for a competitiveness policy:

climate policy raises the price of energy and energy-intensive goods for domestic manufacturers, and thus leads to a input cost gap between domestic and overseas manufacturers. … policy to address competitiveness must either lower the costs of domestic manufacturers, or raise the cost of imported goods.

At the time I noted there were two ways to lower domestic costs — weaker requirements or direct subsidies — but when thinking about raising the price of imported goods I only discussed actions that the U.S. would take domestically to raise the cost of these goods. Indeed, these types of actions are the major focus of the debate about competitiveness, and were on center stage at the hearing. Mike Morris, the CEO of American Electric Power, was there arguing for a type of border adjustment for imported goods (basically, under a cap-and-trade program importers of energy-intensive goods would have to submit allowances to cover the embedded emissions), while former-Congressmen-turned-lobbyist* for the steel industry Jim Slattery plumped for performance standards that would apply to both domestic and imported goods.

Of course, raising the cost of goods manufactured overseas can be done not only by imposing import requirements, but also through export tariffs imposed by exporting nations. I didn’t discuss the idea previously because the U.S. can’t make China or India do so. But in his testimony David Doniger of NRDC pointed out that China already has such tariffs:

To reduce domestic energy use and pollution, China has even established special export tariffs to discourage exports of products such as cement, iron and steel. According to the World Resources Institute, the export tariff on steel equates to $50 per ton.

He argued that China is doing this because while it wants domestic industries to supply it’s own (enormous) domestic demand for these intermediate goods, at the same time it doesn’t want to become the world’s producer of low-value-added, high-pollution, energy-intensive goods.

Would a strategy of encouraging export tariffs among other major emitting developing countries work? I can’t decide what I think. It seems likeliest to work with a small group of industrializing countries who may find it in their interest to try to move up the value chain. And this may be one of China’s objectives: a preliminary draft of a paper from Paul Krugman has spurred discussion in the blogosphere about whether China’s exports are becoming more skill- (rather than labor-) intensive. On the other hand, China may be a unique case, with more desire to exert control over its industrial development, and more ability to do so as well. If they don’t produce the iron and steel, won’t someone else just do it? Still, if the U.S. can negotiate agreements with countries to impose some kind of embedded-carbon export tariffs, these agreements are much likelier to stand up to WTO scrutiny than unilaterally imposed import restrictions.

2. It’s worth remembering that the entire competitiveness discussion is one that is fundamentally about how we are going to raise the total societal cost of reducing emissions. That’s because, as Dick Morgenstern of RFF cogently pointed out during the Q&A time, if we allow some domestic sectors do less to cut emissions — presumably the entire point of a competitiveness policy — then other domestic will have to do more. (Of course, we could also have a competitiveness policy that makes other countries do more to cut emissions — we could make them do as much as domestic manufacturers, for example — but we’ll still bear some costs from that policy, in the form of higher product prices.) There may be good reasons for having a policy — emissions leakage to other countries comes to mind — but we should be clear that we’re increasing the cost of climate policy in doing so.

3. Speaking of emissions leakage, the steel industry guy testified that U.S. steelmakers emit 1.2 tons of GHG emissions per ton of steel. In China the figure is at least 2.5 tons (cited) and possibly 4 or 5 tons (uncited). That’s a big difference, although I would be curious to see these numbers normalized by the type of steel produced.

4. Which industries really get hammered by a climate policy? Generally, energy-intensive and internationally competitive industries. Specifically, according to Dick Morgenstern’s testimony, the industries at the top of the list include metals (aluminum, iron, steel), cement, and chemicals.

5. When I wrote about competitiveness policy previously I argued for using a limited free allocation (or redistribution of auction revenues) as the primary instrument of competitiveness policy. One good argument for this approach that I didn’t previously mention was brought up during Q&A by Dick Morgenstern: proposals that require importers to either submit carbon allowances or conform to carbon-intensity standards will require us to somehow calculate the emissions from producing these imports. Performing this calculation for goods produced in the U.S. — where we probably have the best economic information in the world — is difficult.** Doing it for countries like China or India is almost unfathomable. A targeted free allocation requires only the first calculation; proposals for import requirements just assume that somehow we are going to be able to do the second.

6. Another strike against these import requirements is that there is a lot of concern that unilateral U.S. import rules are going to spark a global trade war. This was largely the point made by two of the witnesses, Gary Hufbauer of the Peterson Institute for International Economics and (particularly) Christopher Wenk of the U.S. Chamber of Commerce. During the Q&A time the subcommittee ranking member Fred Upton (R-MI) read excerpts from and submitted into the record a letter the committee had received from U.S. Trade Rep Susan Schwab expressing “serious concerns” about the import requirements being discussed at the hearing, calling them a “blunt and imprecise instrument of fear.” (Letter source: E&E Daily.)

7. These hearings seem stacked to provide more heat than light: the witnesses who get to talk the most are the ones who are there to advocate for a specific policy; the brief question-and-answer format encourages sound bites over analysis; most legislators are there to promote whatever policy they already prefer and aren’t much interested in new ideas. On the bright side, I get the sense that the written testimony from most of the witnesses is on a somewhat more thoughtful level, and the committee and Congressional staffs are doing a responsible job of digesting this information rather than focusing too much on the spectacle of the hearing itself.

8. And the spectacle is at least occasionally entertaining. People are allowed to go up there and say ridiculous things. Energy and Commerce Committee ranking member Joe Barton (R-TX) used his opening statement to argue that “the probability that mankind’s actions are influencing the temperature of the planet is much closer to 0 than 100%. I would almost say say it’s less than 1%.”*** Am I wrong to call this ridiculous? Well, there is an easy test. Congressman Barton, I have $1,000 I will donate to a charity of your choice if by an agreed-upon future date — 2015? 2020? — there is significant doubt that humans are the major cause of recent warming. If you truly believe the statement you made in yesterday’s hearing, you should be willing to put up $100,000 for charity against me. If you’re not, I’d like you to revise your estimate based on whatever sum you are willing to put up. Contact me anytime to negotiate the details.

*There needs to be some kind of shorthand for this creature. “Lobbyist ex officio” comes to mind, but is just a bit too literal to be truly clever. Reader suggestions are welcome.

**Paul Krugman cleverly reminded us about the fundamental uncertainty associated with all economic statistics when he said, “I like to describe economic data as a peculiarly boring form of science fiction.”

***The IPCC report that came out last year stated, “The understanding of anthropogenic warming and cooling influences on climate has improved since the Third Assessment Report, leading to very high confidence [at least 90% likely] that the global average net effect of human activities since 1750 has been one of warming.”

A novel, yet nascent, approach to coordinating international emissions reductions

Over on Vox Hans Gerbach summarizes his idea for a Global Refunding System (GRS). The GRS attempts to reign in global externalities by providing incentives for actually reducing emissions once a country has entered the program. Gerbach’s system also avoids a plethora of coordination costs, by allowing each participant to set its own tax rates and targets. Here’s his summary of how the system works:

• Countries decide whether they want to join the GRS. A country can join the GRS if it accepts the rules and levies a minimal carbon emission tax. Industrial countries pay an initial fee.
• In each period, every country belonging to the GRS independently determines its level of taxes on CO2 emissions. Emission taxes are the sole policy instrument a country is allowed to adopt.² All tax revenues are collected in a global fund.
• In each period, the GRS refunds a share of the accumulated wealth to the participating countries.³ Each participating country receives an annual refund in proportion to the share of total CO2 emission reductions it achieves in the period under consideration.⁴
• Non-refunded wealth of the GRS is invested in order to maintain funds for future refunding activities.
• In each period a country is allowed to exit. If a country leaves the GRS, it loses its right to refund.
• Decisions within the GRS are governed by majority rule.

Benefits of the GRS include incentives to reduce emissions and remain in the program after joining, as well as the system’s inherently flexible and likely redistributive properties. Costs include the ever present monitoring and informational costs, which will be exponentially greater at the international level.

I’m not entirely sure how the GPS would play out in practice, and I was unable to find and ungated version of the paper, Gersbach and Winkler (2007), which supposedly formalizes the GRS. There are certainly some interesting game-theory and political economy questions posed by such a system. On the PE side Gerbach mentions that GPS undermines national tax-sovereignty. I’m also a little skeptical of the notion that rich nations have to buy their way in whereas developing nations don’t. Seems like once you get down to setting that entry fee, we’re right back to the point that derailed Kyoto (at least if you believe W.). Nevertheless the GRS is an interesting idea and perhaps a useful starting point for future international climate negotiations.

Competitiveness under climate policy

One of the debates surrounding climate policy in the United States is how to address concerns about international competitiveness — a climate policy here will raise prices for domestic manufacturers, leaving them at a disadvantage relative to producers in countries without comparable policies. (This sometimes gets raised in Washington as the “China problem”; I think in Brussels they may currently refer to this (with justice) as the “America problem.”) This is not only a problem for domestic manufacturers; shifting production and associated emissions overseas to unregulated regions won’t mitigate a global pollutant.

Congressmen John Dingell (D-MI) and Rick Boucher (D-VA) last week released a white paper summarizing this competitiveness issue and proposing policy solutions. They describe three specific approaches: 1. border adjustments, 2. performance standards, and 3. (dis)preferential carbon market access. Their discussion of border adjustments focuses on the idea of a kind of “carbon border tax” as proposed by American Electric Power and the International Brotherhood of Electrical Workers. The second option they discuss is “carbon intensity standards” that would apply to both domestic and imported products. In the discussion the white paper notes that such standards could be either separate from, or in addition to, obligations under a domestic cap-and-trade program. Their third option, carbon market access, is a proposal to either limit or give preferential access to carbon offset markets to developing nations depending on their actions to reduce emissions.

Reading the paper gives the sense that there has been little structured thinking on the Hill about the competitiveness issue. The focus rather is on tossing around whatever policy proposals are already on the table and musing on what is politically feasible.

So to step back and provide a simple framework for competitiveness concerns: the short version is that climate policy raises the price of energy and energy-intensive goods for domestic manufacturers, and thus leads to a input cost gap between domestic and overseas manufacturers. (This implies that competitiveness concerns loom largest in those industries which are most energy-intensive and internationally competitive.) Fundamentally, policy to address competitiveness must either lower the costs of domestic manufacturers, or raise the cost of imported goods. Further, to lower domestic manufacturing costs, you can either significantly weaken the program requirements for domestic manufacturers, or you can subsidize them directly. Those three broad categories of response — two ways to lower domestic manufacturing costs and the option of raising importers’ prices — can be used to classify any of the various specific proposals.

Border adjustments attempt to raise the price of imported goods. The legitimate concern with such “adjustments” is that they will lead to retaliatory trade policies that will be harmful to the world economy. (See the FT article linked previously for more discussion.) Further, there’s every reason to suspect that they will mainly be used by domestic manufacturers as political cover for protectionist policies in industries that are not so much feeling the pressure of energy prices as wage and health care costs.

Performance (product) standards also raise importers’ prices. Depending on how they are structured and whether they are used for domestic manufacturers in lieu of (rather than in addition to) inclusion in a mandatory economy-wide (e.g., cap-and-trade or tax) program, they may also reduce costs for domestic manufacturers (relative to full inclusion in the larger climate program). Note, however, if such standards are weaker than the economy-wide policy that while domestic manufacturers will not feel as large a pinch, the net social cost will be higher because there will not be as strong an incentive for reducing consumption of GHG-intensive goods among end users.

Limiting other countries’ access to a potential U.S. carbon market is an intriguing idea, but it’s a misguided implement for addressing competitiveness policy. It does not address the prices of either domestic or imported goods, affecting instead the relative prices of carbon offsets, an entirely market. Such a proposal relies on setting the interests of offset generators against those of manufacturers in a developing country, and hoping that internal politics resolves this dispute in favor of offset generators. To me it appears the likeliest outcome of such a proposal will be to create distortions in two markets rather than one — GHG-intensive manufactured goods, and carbon offsets.

Surprisingly, the white paper fails to address one of the more likely possibilities for addressing competitiveness: using allowance allocation within a cap-and-trade system to subsidize domestic manufacturers. (The paper acknowledges in a footnote that this could be done but leaves any discussion for a later white paper.) While most entities regulated under a cap-and-trade program will be able to pass cost increases through and thus do not need to receive free allowances (just ask Europe about how embarrassing it is to explain those windfall profits for electric utilities which got free permits), giving away allowances to a limited number of domestic manufacturers in internationally competitive industries may make sense. While domestic manufacturers would still have increased costs (of fuel, electricity, inputs, etc.), they could use the free allowances to subsidize product prices and thus remain competitive in international markets in the near-term. Further, most current proposals gradually phase out free allocation in favor of auctions. This gives the U.S. further time to encourage developing countries to gradually come alongside and join international climate policy, while providing manufacturers time to adjust and prepare for the end of free allowances. Further, while some political observers will hold their nose at the political horse-trading that must be done to eventually pass a bill, I would argue that it’s preferable to include domestic manufacturers, thus reducing the distortions that would be created by giving exemptions to certain industries, and have to worry instead only about the distributional consequences of giving away some of the allowances.

Here is Dick Morgenstern (and others) at RFF with some analysis attempting to quantify cost increases for manufacturers under climate policy. Here is Dick with a longer discussion of policy options for competitiveness. Here is Ray Kopp at RFF discussing allowance allocation more generally.

Update: One of the Free Exchange bloggers seems to think I have given up the game by providing a sheen of economic respectability to what amounts to unnecessary market interventions.  I don’t think the differences between us are quite as large as they initially appear, however.  Perhaps I didn’t make it sufficiently clear in the post, but I assume that some type of competitiveness policy will be a political prerequisite to the passage of a climate bill.  The question then becomes, “What is the best (or least bad) competitiveness policy we can feasibly achieve?”  I freely admit that some may find this a depressingly low hurdle.

Bali news roundup: Deal unlikely for targets, but probable for forests

Today’s New York Times and Christian Science Monitor both report that the current UN talks in Bali — intended to design a road map for negotiations on a post-2012 climate architecture to be concluded by 2009 — are unlikely to result in agreement between the EU and the US on a specific target for reductions in greenhouse gas emissions. The EU wants a commitment that industrialized countries will cut emissions by 25 to 40 percent from 1990 levels by 2020, while the US is opposed to including specific targets in the road map, preferring to put off discussion of emissions reduction commitments — and perhaps whether such commitments will be mandatory — until later negotiations.

Over at FT.com, meanwhile, there is nice short article on a likely agreement at Bali that would aim to reduce emissions from deforestation. The article is highly recommended for those who want a primer on some of the issues surrounding measuring deforestation and properly encouraging conservation. Here’s an excerpt:

Forestry is one of the least contentious issues at the talks but there has been disagreement over how to give financial incentives to poor countries to retain their trees in the face of illegal logging and other forms of exploitation.

One option would be to grant countries carbon credits for their trees, in the same way that projects such as wind farms or solar power are awarded credits for cutting emissions under the “clean development mechanism” of the Kyoto protocol. However, the United Nations said this would be impossible because if the trees in one area were protected, loggers or farmers could simply move elsewhere.

Another option, which Brazil is understood to favour, would be for countries to be given credit for curbing deforestation at a national level.

For those who are ready for more of a graduate course in reducing deforestation emissions, Environmental Economics recently had a couple of posts that explored this topic. The second, basically a guest post from Brent Sohngen, is particularly recommended. I’m hoping to write more about this topic in the next couple weeks.

Incorporating adaptation

Peter Spotts has a good article in today’s Christian Science Monitor that talks about the push in Bali to incorporate more funding for adaptation into the next global climate change agreement:

High in the Himalayas, Bhutan is scrambling to fend off the onrushing effects of climate change. Two dozen lakes swollen by glacial melting are in danger of bursting their earthen dams and sweeping through the mountain kingdom like an inland tsunami. …

To reduce the risk, the government has set up a flood-adaptation project, splitting the $6.9 million cost with the Global Environment Facility (GEF), which oversees two funds to help developing countries cope with global warming.

The country’s vulnerability – and the effort it’s making to reduce it – highlights one of the hot-button issues at UN-sponsored climate talks here in Bali: The burgeoning need to help developing countries adapt to global warming. Despite mechanisms such as the GEF, demand for adaptation assistance far outstrips the cash on hand to supply it. …

Currently, adaptation money comes from two global funds that rely on voluntary donations from wealthy nations, but falls far short of what is needed. Rich nations have pledged a combined $220.4 million, but as of September had delivered only $116.6 million – a “pathetic” amount, says Ms. Raworth, who puts the immediate needs among the poorest nations at $1 billion to $2 billion a year.

This sounds like a lot of money but is actually not that large when you think about the potential size of a global carbon market. For example, the article points out that the Lieberman-Warner bill now before the Senate would provide about this level of adaptation funding:

The US Senate took a step in that direction Wednesday, when the Environment and Public Works Committee finished its work on the Lieberman-Warner Act. In addition to setting up CO₂ emissions targets and a carbon-trading system to help meet them, the bill would earmark $1 billion a year to help poor countries adapt to global warming. The money would come from government auctions of greenhouse-gas emission permits.

How much of the total permit market would $1 billion be? Well, U.S. CO₂ emissions are around 6 billion metric tons per year.  If permit prices were around $20 per metric ton — a not unreasonable guess based on modeling work of other similar bills by the EIA — and all permits were auctioned the government would raise more than $100 billion a year.  I think the bill actually auctions around one-quarter of permits initially, so this might be more like $25 or $30 billion a year early on in the program.  Either way, there is certainly a ready and sufficient source for adaption funding; the question then is whether wealthy countries are truly willing to write the checks.

Good news for people who love Bali news

More than 110 countries in the world now have higher per capita incomes than the poorest country that agreed to join Annex I in the Framework Convention in 1990 (when the FCCC negotiation process began).

That’s an incredible testament to the success of the global economic system over the last 15+ years.  But it’s pretty easy to remain skeptical that this will translate into more countries taking on emissions reduction targets.

The source is Joe Aldy over at the ClimatePolicy blog.  He suggests that in response to this reality the successor to Kyoto should include a “variable geometry” of commitments.  He also argues that a successor agreement should provide better incentives for participation and compliance, and should not focus solely on emissions mitigation but should also facilitate adaptation.

Can China move towards a culture of energy conservation?

We’ve noted previously (as have others) that while China has an objective of increasing the energy efficiency of its economy, it has struggled to achieve goals for energy conservation, partially because the career prospects for local party officials depend far more on delivering breakneck economic growth than on saving energy. It appears that China may be trying to shift this balance:

China stepped up its energy conservation drive with a law that makes officials’ career prospects dependent in part on their energy-saving efforts, according to Xinhua News Agency, the official press agency of the People’s Republic of China. …

Among the new provisions is one that requires the performance reviews for local government officials’ — vital for advancement in the Communist Party — to include an assessment of their energy-saving efforts.

Further, China is expanding its conservation programs from the industrial sector alone to include sectors such as transportation and buildings:

New entities have been included under the amendment ranging from the construction sector to transportation, while the old law only held industrial enterprises responsible for energy conservation.

According to the revised law, local energy saving standards in the construction industry must be stricter than those set by the central government and industrial associations as energy saving on buildings is closely related to the local geographic situation.

The revised law also requires property developers to inform buyers of energy saving measures in each building for sale. This obligation has to be stated in the property quality certificate and also in contract papers.

This sounds promising. In general by including more sectors in the conservation efforts China should be able to get more reductions at the same marginal cost (or the same reductions at lower marginal cost). The last paragraph indicates the Chinese are trying to minimize asymmetric information problems in developer-buyer transactions. I am not sure exactly why, as stated in the middle paragraph, efficiency standards in the construction industry must be stricter than those set by the central government just because savings are “closely related to the local geographic situation” — wouldn’t geographic variation imply that some regions should do more and some less? — although perhaps this based on a presumption that the building sector contains more energy-saving opportunities than industry. Regardless, the broad picture that emerges seems promising.

Not all is rosy, however. As the New York Times pointed out in the piece we discussed previously, China has for years tried to increase energy conservation (officially) while at the same time holding down electricity rates. This attempt to swim upstream against a river of its own creation looks set to continue:

The revised law also stipulates that energy producers are not allowed to provide free energy to their employees. But it did not tackle an issue which many analysts say is at the root of China’s wasteful energy use — low state-set prices for power.

The source is Xilin Zheng at the new ClimateIntel blog. The blog’s section on international law and policy looks like it might evolve into a valuable resource.

The political economy of Chinese pollution

Today’s New York Times has the latest entry in their excellent series on pollution in China. It focuses on the difficulties China confronts as it tries to improve the energy efficiency of its economy, with a goal of cutting energy use per unit of output by 20% by 2010. One root cause of their failure that the article highlights is a lack of control over local government officials, combined with mixed signals regarding what constitutes successful economic governance:

Officials in Beijing, faced with the likelihood that they will fall short of their target, have issued uncharacteristically scathing assessments of the performance of some local leaders, and they have vowed to use more of their powers to bring wayward officials into line. …

The struggle to meet the target highlights the challenge of making China greener at a time when China’s top leaders have continued to emphasize breakneck growth, even as they worry about its costs. Officials at all levels arguably still face greater risks to their careers if they allow economic performance, job creation or tax revenue to lag than if they fail to curb pollution. Slower growth also means fewer opportunities for friends and relatives of people in power to cash in on the country’s boom.

We’ve highlighted this dynamic — the relative autonomy of local leaders in China — previously in regards to “illegal” electric plants.

Indeed, the article notes that many regions, rather than raising electricity prices to encourage conservation and efficiency, are actually subsidizing rates for energy-intensive industries such as metals production:

Even after the national government canceled exemptions to special consumption fees that used to be available to companies like Qingtongxia in 2004, the local government extended them for another year, obtaining huge savings for its metal industries. As recently as 2005, regional officials continued to argue that the exemptions should remain.

Local officials have long permitted big companies like Qingtongxia to undercut even officially established energy prices. The lowest officially permitted electricity price in Ningxia, usually reserved for the most efficient of big industrial energy users, is 5.3 cents per kilowatt hour. But until this past May, Qingtongxia had managed to win itself a rate of 4.8 cents per kilowatt hour.

This brings the frustrations of energy-intensive industries in the EU and the U.S. into sharper focus, as these regions either implement or consider emissions pricing. It will be difficult enough for these industries to remain in business if they must pay for their emissions while Chinese companies do not; it is that much worse when China is actively subsidizing energy costs to enable even faster economic growth.

Tradeoffs in energy: the Three Gorges Dam

The Three Gorges Dam (TGD) has been a source of controversy in the environmental world since the project’s inception. However, it effectively embodies some of the tradeoffs inherent in energy production. As part of a series on “China’s epic pollution crisis”, the New York Times has an article outlining the consequences and tension surrounding the TGD.

The problem of balancing economic growth and development with carbon mitigation is not new, but China is a somewhat unique example due to its sheer size:

China’s insatiable appetite for energy is mostly being met with a building spree of coal-fired power plants. Coal accounts for 67 percent of China’s energy supply. Just last year, China added 102 gigawatts of generating capacity, as much as the entire capacity of France.

Canadia, part deux

I finally got around to reading last week’s New Yorker and Elizabeth Kolbert has a short piece on Alberta’s tar sands (abstract only online). If you can track down a copy its worth reading, at least for a layman’s description of the tar sand to crude process. Kolbert’s broader point is that as petroleum reserves decline, or at least as prices continue to increase, the world will eventually turn towards even dirtier sources of oil, like tar sands. Oddly though, the article makes no mention of the current push to cap or tax carbon emissions. Sure extracting crude from petro is a messy, energy intensive process. But if we attached a cost to each ton of carbon, the market would determine which sources of energy it can produce most efficiently.

Kolbert goes on to quote Alex Farrell of the Energy and Resources Group at Berkeley. Farrell does a good job of explaining just why unconventional oil is so bad for the environment. But then he says that he’s in favor of dealing with the problem by “imposing federal fuel standards, requiring oil companies to achieve a certain emissions target across all the products they sell.” Now I don’t want to sound like a broken record here, but I don’t see why this is necessary if we’re gonna cap or tax carbon.

*********************************************************************************

On my previous Canadia post, noting how clean the country’s electricity generation mix was, Nick posed a very good question:

A logical question: so why, then, are our emissions per capita just as bad ?

I honestly didn’t know that at that time, but I checked, and Nick’s correct. My first thought was that there are two possible explanations: Canadians have cleaner electricity but use a lot more of it, or some other sector of the Canadian economy is much dirtier/ bigger than the US. My initial findings seem to indicate that it’s a bit of both. Surprisingly, Canada uses much more electricity per capita than the US. Possibly because all that hydro makes it cheaper?  Canadians also possibly use more heating oil and drive further than Americans. Finally, if you buy the tone of the article referenced above, it would appear that energy production activities are both dirtier and more economically important in Canada than in the US.

Anyone else know what’s going on in Canada?

Electricity in Canadia

is absurdly clean. In fact, America’s Hat generates only 21% of its electricity from fossil fuels, compared with 68% in the US. That’s largely because Canada has at ton of hydro (~60%). Surprisingly, it also has a quite a bit of nuclear (~15%).

Given the glaring disconnects between available renewables supply curves and some proposed RPS quotas in the US, maybe we should look into working more with our neighbor to the north.

Anyways I don’t have anything too brilliant to say.  I’m helping my boss prepare for a speech in Toronto next week and was just looking for an excuse to include this:

Deregulated electricity, extreme makeover edition

There is more electricity out there in the world than official statistics suggest, and that is both scary and comforting.

First, China is generating a lot more electricity – and hence carbon emissions – than is officially on the books. Arnold Kling sat down with some researchers from MIT, who report that:

At a local level, “government” consists of powerful party officials who are more interested in business than in public goods. They are outside the central government’s control, as exemplified by the fact that there are 100 gigawatts of “illegal” electric power plants in China, meaning plants not approved by the central government. (The entire nation of France uses 80 gigawatts of power. China uses 650 gigawatts.)

Second, I attended a talk this week by Hisham Zerriffi from the University of British Columbia, who presented some of his research – soon to be published in a book – that examines rural electrification schemes and tries to quantify what works and what doesn’t.

The most striking and encouraging part of his presentation was his micro-level data on rural electrification in Cambodia, which suggests that access to basic electricity services in rural areas is far more widespread than official numbers report. Officially, only 15% of Cambodians have electricity. But this is just the number who have access to the grid. The reality is that 90–95% of the population has basic electricity services, with nearly the entire gap being made up by what he called “Rural Electricity Entrepreneurs.”

The REEs are tiny local operators who have distributed generation resources – typically a diesel generator – and set up their own micro-grid to sell electricity. In fact, they typically serve three market segments: 1) businesses, which need power throughout the day; 2) village households, who want power in the evenings; and 3) remote households, who use (typically car) batteries for power and need them charged every 3–5 days. During the day the REE sells electricity to businesses and battery chargers, and in the evening most power goes to village households, who are typically powering lights and a small TV.

How valuable is this electricity to rural residents? Very valuable, based on their willingness to pay. Typical electricity rates are around 50 cents per kilowatt-hour, around 3 to 5 times what you probably pay for your electricity. Even at these rates – and despite median per capita household income of around US$350 per year – Cambodians want to buy this electricity, with most households consuming 3–5 kWh per month, thus spending 5–10% of their income on electricity.

These REEs are not unique to Cambodia – similar entrepreneurs exist in many places in the world. This is good news in regards to statistics about how many of the world’s residents lack even basic electricity services.

One take-home point from the presentation was that while there is abundant talk about using scalable and distributed renewable generation technologies – solar, wind, hydro, etc. – to encourage rural electrification, the reality on the ground is that people prefer using technologies that they are familiar with. The lesson for those who attempt to deploy renewable resources off the grid is to engineer systems which are simpler and built from parts that can be easily obtained and worked on.