Courtesy: www.toothpastefordinner.com

It would surprise me if someone with the keys to this blog machine hadn’t had a beef with Kruggers in the past, but something must be said for having the gumption to explain Pigovian taxes to the masses.

In my excitement over this modicum of information about the bill, I missed a small phrase that probably doesn’t mean much to anyone who doesn’t take a daily swim in a metaphorical pool of climate economics. Quoth Darren Samuelsohn:

Additional layers of certainty for industry come via a “hard price collar” that limits greenhouse   gas allowances to between $10 and $30 per ton tagged to inflation, with an increase at a to-be-determined “fixed rate” over time. The legislation would also set aside a “strategic reserve” of 4 billion greenhouse gas credits that could be released into the market to help control price volatility fluctuations.

See anything wrong with that statement? Allow me to help with a brief discussion of price collars from an economist’s perspective.

A hard price collar in the world of environmental economics is one with a firm price floor and ceiling where once the market hits the price ceiling, emissions allowances are released into the market to maintain the ceiling until the price drops back down below it. There is no limit to how many allowances are released; the point is simply to drop the price.

Contrast that with a soft price collar, which is a collar that draws allowances from a pre-established reserve of allowances once the market hits the ceiling price. Again, the goal is to drop the price below the ceiling, but there is a limit on how many allowances can enter the market (the amount available in the reserve).

Now look at the quote again. It claims the bill has a hard collar, but then also says it has a strategic reserve, which would clearly make it a soft collar. The difference between the two is subtle, but it has important implications. A market with a hard collar is less desirable from an emissions control perspective because once the market hits the price ceiling, there is no way of knowing how many credits will enter, meaning the amount of extra emissions allowed is unpredictable. A hard collar puts a premium on price certainty. Conversely, a soft collar has more emissions certainty because once the reserve is exhausted, no more allowances enter the system, regardless of the allowance price. Environmentalists prefer this approach because it maintains the emissions cap.

If the KLG bill does truly have a soft collar, then it will have to take allowances from somewhere (presumably the initial allocation) to fill the strategic reserve. It will also have to develop mechanisms to replenish the reserve if it gets drawn down, possibly in a similar way to Waxman-Markey, which uses revenue from the reserve auctions and international forestry offsets. Bottom line: there will be slightly fewer allowances available to regulated firms both at the beginning of the program and throughout the life of the program than there would be with a hard collar.

So, what do the good senators mean when they (through Darren) say a “hard price collar?” Well, if I could read legislators’ minds, I would probably have a different job. Based on the context of the statement, however, my guess is that they are using hard collar to mean that the collar prices will increase at some fixed rate over time. This is a different approach from Waxman-Markey, which keeps collar prices 60 percent above a rolling 36-month average of daily allowance prices. Increasing the price collar at a fixed rate is better for firms as it provides more price certainty over time and protects against a steeply rising price ceiling. It’s a good idea, but it’s not a hard price collar.

You may not have noticed lately, but there are other major legislative initiatives, including climate and energy, on the Senate’s docket. One climate action bill that has received a lot of attention is the bill sponsored by Sens. Maria Cantwell (D-WA) and Susan Collins (R-ME). When the bill, officially called the Carbon Limits and Energy for America’s Renewal (CLEAR) Act, was first introduced in December, it caught the eye of some in the enviroblog world, but didn’t make much of an immediate splash in the Senate. Between the long build-up of the Kerry-Lieberman-Graham multi-partisan grab bag and the poorly understood Copenhagen outcome, however, it filled a vacuum with a poorly appreciated concept at the time: offsetting costs of climate legislation to consumers by cutting them a check.

The Basics

Also known as “cap-and-dividend,” the Cantwell-Collins bill is pretty simple: starting in 2012, it would mandate monthly auctions of pollution permits, called carbon shares, to the first seller (producer or importer) of fossil fuel carbon into the economy. The bill sets a floor price (shares can’t be sold for less) of $7 and a ceiling price (shares can’t be sold more) of $21 in the first auction in 2012, with the cap lowering — leading to rising prices — over time.

Most of the revenue from these auctions is distributed back to citizens in the form of a monthly check, while the rest is placed in a Clean Energy Refund Trust (CERT) fund established by the bill for use on a variety of different purposes: energy R&D, climate change adaptation, non-CO₂ greenhouse gas reductions, international forestry and agriculture offsets, carbon capture and storage projects. First sellers cannot trade carbon shares and carbon derivatives are prohibited. In addition, the legislation has economy-wide emissions reduction goals of 20 percent below 2005 levels in 2020, 42 percent in 2030, and 83 percent in 2050.

The Good

Advocates of Cantwell-Collins praise it for being simple and transparent. As has been noted by others, it is a mere 40 pages, certainly an easier read than Waxman-Markey, the behemoth, 1,400-page cap-and-trade bill passed by the House last June. It regulates fossil fuel-related CO₂ as far “upstream” in the economic supply chain as possible, meaning that whoever produces or imports a fossil fuel is on the hook for the CO₂ content. Under Cantwell-Collins, coal mines and oil producers are responsible for paying for carbon, which means that only about 3,000 facilities need to be regulated. This upstream approach is administratively more streamlined, affecting far fewer parties than Waxman-Markey, which regulates electricity producers, natural gas distributors and manufacturers (over 75,000 regulated facilities).

The CLEAR Act also rejects the convoluted system of free and auctioned allocations in Waxman-Markey for a straight-up auction of all carbon shares. All regulated parties must participate in open monthly auctions, the revenue from which is split 75-25 percent: 75 percent is redistributed per capita to every American citizen and 25 percent is placed in the CERT. Whether you agree with the approach or not, offering to cut a monthly check for every U.S. citizen is not a bad way to gain some political support. Also, from the perspective of regulated firms, the use of price floors and ceilings, also known as a price collar, would reduce future price uncertainty and help them better predict investment needs.

Finally, the bill is co-sponsored by a Republican and a Democrat. That bipartisan provenance could certainly help its chances for passage.

The Bad

So with a bill that’s easy to read, easy to monitor and easy on the wallet, is there anyone who won’t like it? Well, anyone who favors hard targets for emissions reductions and anyone who believes in markets, for two. First, while the bill establishes economy-wide reduction goals as strong as Waxman-Markey, the auction system alone will not reach them. National emissions are capped at 2012 (note that it only caps CO₂ emissions, unlike Waxman-Markey, which covered other greenhouse gases as well), and the cap doesn’t tighten until 2015, at which point it decreases by 0.25 percent that year, then by an additional 0.25 percent every corresponding year (so in 2016, the cap reduces by 0.5 percent, in 2017, 0.75 percent, etc).

This slow lowering of the cap will result in only five percent reductions below 2012 emissions by 2020, well short of the 20 percent reductions by 2020 goal. Even at that, the cap is not rock solid due to the price collar, which functions as a sort of safety valve. That is, if the auction price goes higher than the established ceiling price, then that essentially releases extra carbon shares for firms to bid on until the price falls back below the ceiling.

That means the remaining reductions to be met in 2020 will have to come from technology advances, land use offsets in forestry and agriculture, and reductions of non-CO₂ gases, all of which are paid for by the CERT (which will be administered by the Department of Treasury). If we assume an initial carbon price of $15 in 2012 (a middle-range price, based on analyses done by the EPA and EIA), and the projected cap of roughly 7.2 billion carbon shares, then the CERT will get about $27 billion in the first year of the program.

That’s $27 billion to be split among all the uses listed above to help reduce emissions, as well as adaptation projects, energy efficiency efforts, and support for trade-sensitive industries and low-income families. The problem with a bill that’s only 40 pages is that it doesn’t have a lot of room for details — indeed, the CLEAR Act provides no guidance on how to prioritize uses of CERT funds. Although CERT funds will increase as the price of carbon shares rise, it will likely not even be close to enough to compensate for the majority of necessary carbon reductions.

A carbon market could mobilize private capital to help address some of these issues efficiently, instead of leaving all the choices and funding responsibility to the federal government. While it’s understandable that the public and politicians might still distrust markets in the wake of the recent financial collapse, the fact is that when it comes to finding inefficiencies and catalyzing innovation, nothing works better. But the “market” in Cantwell-Collins is simply an auction system. Unlike in Waxman-Markey, regulated firms can’t trade their permits, and carbon derivatives are strictly prohibited. These restrictions are going to severely limit the efficacy of the program to find the cheapest emissions reductions.

Also, there is a huge amount of risk in carbon markets (both in terms of accurate compliance and extreme events), so while they should be tightly regulated, derivatives are a necessary component because they allow firms to hedge against the risk of non-compliance or shifting standards. You will be hard-pressed to find any industry player who will advocate for a market without any trading, and there will need to be at least some industry support for any viable future climate legislation. Moreover, the monthly auction system may generate more carbon share price volatility than a continuous market, making it even more unattractive to firms.

The Upshot

Cantwell-Collins injects some great ideas into the climate policy debate that had not been prominently discussed before. If a policymaker wants to reduce the burden of increased energy costs on consumers, a direct rebate is an efficient and effective way to do it. The bill overall, however, is a somewhat naïve approach that does not fully appreciate the ability of markets to generate efficient emissions reductions and does not limit carbon emissions effectively. Its merits (simplified approach, upstream regulation, price collar) are outweighed by its limitations (extremely slow cap reduction, heavy reliance on CERT-funded reduction programs, draconian market restrictions). The CLEAR Act will continue to play a role in the climate debate of the Hill, but in its current form, it is unlikely to be the last bill standing.

Hazy from the O-fever today, I Google “climate change and curling.” To my surprise, the Internet spit something interesting back at me. Apparently, according climatologist Philip Mote, the world’s population is like a collective curler and global temperatures—and all their environmental consequences—are the stone.

Based on what those guys who call the matches on CNBC have taught me, curlers have an awful lot to consider. Throw too hard, you miss the goal completely and get no points, not hard enough and you still lose. The key is figuring out what it will take when you let go to get the stone in the house.

Curling is fraught with uncertainty. So is predicting the interaction of policy, emissions and temperatures. From (the now-defunct, RIP paper newspapers) Seattle Post Intelligence’s Dateline Earth:

In projecting where the temps will go, scientists must first consider the various scenarios for greenhouse gas emissions, Mote said. There’s no way to know where we’ll end up, policy-wise, and what that will mean in terms of emissions.

Scientists also are not sure just how sensitive the globe and its atmosphere are, global warming-wise, to those emissions scenarios.

Whenever we can reduce emissions is analogous to when the player lets go. After that, does the stone go a long way? “Or do we have a very unresponsive climate that will stop at a few degrees” increase?

With no interest in wading into a scientific debate, I’ll just say for those of you who’ve been missing out on curling, its super disappointing when your team effs up its throw, even when they’re wearing pants like this.

The first deliverable in the Copenhagen Accord was a pledge by all nations to submit their planned mitigation actions or targets to the United Nations Framework Convention on Climate Change (UNFCCC) secretariat by January 31, 2010. Since nations “took note” of the Accord instead of adopting it, in the weeks after Copenhagen there was uncertainty about whether some countries would ignore this quasi-commitment. Even UNFCCC head honcho Yvo de Boer was concerned, calling the deadline “soft” while imploring nations to “associate” themselves with the Accord. “Association” was likely understood to mean acknowledgement of some formal status for the Accord within the UNFCCC, giving the secretariat greater authority to convene official negotiating sessions around the document.

In any case, from the perspective of developed nations the central task for 2010 was to merge any new discussions around the Copenhagen Accord with the Kyoto Protocol (KP) and long-term cooperative action (LCA) negotiating tracks that were created by the Bali Action Plan in 2007 and intended to be the fundamental basis for negotiating an agreement in Copenhagen. While countries made progress on these tracks in Copenhagen—including things like forestry and adaptation—when they “took note” of the Accord on the last night of COP-15 they essentially left all that progress on the table to be taken up in 2010. Many developing countries wanted, and still want, to just pick up where they left off on these texts and pretend the Accord never happened.

If all key countries “associated” themselves with the Accord, one theory was that this would streamline the process of merging the Accord with KP and LCA by giving it at least some level of official status. For many developed countries, it was hoped that this would lead to the dissolution of these tracks and the use of the Accord as the new basis for negotiating a comprehensive global agreement. The fundamental developed-developing distinction of Kyoto would fall by the wayside, and the new starting point could eventually lead to the only kind of agreement the United States might be able to ratify. This is why some international policy wonks in the United States were so excited about Copenhagen.

However, one assumption implicit in this was that submission of targets or actions would necessarily go hand-in-hand with association, and vice versa. If a country wanted to “associate” itself with the Accord, it would entail accepting the Accord’s obligations, including the submission of a target. If a country submitted a target that would also imply acceptance of the Accord’s obligations and indicate that a country wished to be “associated” with the Accord going forward. In turn, it was thought that a country could not “associate” itself with the Accord without acknowledging it had some kind of official status.

As expected, by Monday nearly all developed countries, including the United States, will have both submitted their target and expressed their willingness to be associated with the Accord. Many of these targets are on the lower end of what was conditionally proposed (Europe 20 percent instead of 30 percent below 1990 levels by 2020, Australia 5 percent below 2000 levels by 2020) and come with numerous strings attached (Japan 25 percent below 1990 levels by 2020 with a global agreement), but they are on the table and show a commitment both to the Accord’s obligations and using it as a primary focus of negotiations in 2010.

However, a recent joint statement from the BASIC countries (Brazil, China, India and South Africa) presents a more complicated situation, and reveals that the association-with-action-implies-acceptance-of-some-official-status assumption is highly suspect, if not outright false. It appears that these countries are willing to submit their actions, as pledged in the Accord, but do not view this submission as implying any “association”—at least in the sense likely envisioned by the UN secretariat and most developed countries. Even if China, India, Brazil and South Africa technically “associate”, they do not see this as creating any obligations under the UNFCCC (such as the submission of targets, which they claim to do voluntarily), and certainly not as giving the Accord legitimacy as a negotiating text. It seems that in their view, they made a political pledge in Copenhagen to submit their actions—which just happened to be included in the Accord—and they will do so in order to uphold that pledge, but they will not do so because it is an obligation created by the Accord.

While this does not mean the Accord is “dead”, it does have implications for the negotiating process in 2010. For starters, it would be a heck of a lot easier to negotiate a binding agreement in Cancun, at least one that would be preferable to the United States, if all countries formally “associated” themselves and understood that “association” to create legitimacy and obligations. The reality of the BASIC position makes Mexico’s already delicate task—massaging the two-track UNFCCC process and Copenhagen Accord process together in a way that satisfies 190+ countries—that much more difficult. As a positive sign, they appear to understand the difficulty of this task and be up to taking it on. It will require delicate diplomacy that escaped the Danes, but the fact that Mexico is a “developing” country and OECD member could give it the needed climate cred to make it happen.

Observing this dance will require tracking both any “friends of the Accord” processes that occur outside or on the sidelines of the UNFCCC (and seeing who shows up, what they say and how), and tracking how key elements of the Accord are discreetly worked into the two official tracks. If anything, it will be fascinating to watch.

A polluter emits something that hurts people in a community. These people get together and sue the polluter. Courts then side with the victims under the common-law tort of nuisance, and award damages (or an injunction shutting down the polluter). Before the era of modern environmental regulation, all pollution-related disputes were solved this way.

Regulation has made environmental nuisance suits much less common and less necessary, but they have not disappeared completely. The problems presented by climate change are broadly similar—polluters emit greenhouse gases (GHGs) that ultimately cause harm. In the absence of government regulation of GHGs, can nuisance suits be used to force polluters to reduce emissions or to compensate for adaptation costs?

Suits seeking answers to these questions exist and are making their way through courts now. Some of them have made headlines, such as that filed by Kivalina, Alaska—a town on a barrier island formerly protected by Arctic sea ice, but which now faces increasing erosion. The New York Times reported on the case in an article that also discusses some similar cases, including perhaps the most widely-reported, Connecticut v. AEP.  In that case a group of states and private conservationist landowners are suing power companies under a similar nuisance theory.

So are these cases going to end up with major judgments that effectively set policy? Is big tobacco going to be the model for redressing harms from climate change? If tobacco is the model, I wouldn’t get your hopes up. But it is likely that these lawsuits will end up playing a big role in the policy process.

Despite the relatively high-profile coverage of some of the cases, there is not much for advocates of GHG regulation to be excited about. No climate nuisance case (that I know of) has been successful. The biggest “victory” so far has been in Connecticut v. AEP. Still in that case, the Second Circuit simply reversed a lower court’s comprehensive dismissal of the plaintiffs’ claims.  The appellate court ruled that courts could decide the case in principle (it was not a “political question”) and that the states did have standing to sue over climate harms. This says almost nothing about the plaintiffs’ likelihood of success on the merits of the case. Causation and damages will be big hurdles for the states when the lower court reaches the merits.

It’s also possible that EPA action could preempt these suits. The Second Circuit ruled that the lack of EPA GHG regulation left the field open for nuisance suits, but strongly implied that any EPA regulation would preempt them. Connecticut was decided just before the EPA released its endangerment finding for mobile sources in December. It’s likely that any nuisance suit aimed at auto manufacturers would fail for preemption reasons now that the EPA has committed to regulating mobile-source GHGs. If the EPA, as many expect, moves to regulate stationary-source GHGs, then Connecticut itself would presumably be preempted also.

This link between EPA regulation and nuisance lawsuits, however, creates a lever through which those suits might still have a big effect on how climate policy gets made—as Jonathan Zasloff at UCLA has pointed out. As nuisance suits proceed, they will put increasing pressure on the EPA to regulate to preempt them since regulation is generally perceived as a superior approach (especially by the EPA itself, one expects). Both nuisance suits and EPA regulation put pressure on Congress to enact climate legislation.

Opponents of action on climate are effectively stuck playing whack-a-mole – if they succeed in blocking action in Congress and through the EPA (possibly by getting a Murkowski-style resolution passed), nuisance suits will proceed with unpredictable results. If they quietly let the EPA regulate, those suits go away, along with a lot of pressure on Congress. But Clean Air Act regulation is a bitter pill to swallow. The most likely long-term result seems to be congressional action—opponents can’t push for inaction forever with the twin threats of EPA regulation and nuisance suits.

In short, nuisance suits make business-as-usual on climate much less likely, even if they are not themselves very likely to succeed. This should be cause for some optimism about the long term if you are frustrated by the current inability of Congress to enact climate legislation.

Nathan Richardson is a Visiting Scholar at RFF.

“Realistically, the cap-and-trade bills in the House and the Senate are going nowhere,” said Senator Lindsey Graham, Republican of South Carolina, who is trying to fashion a bipartisan package of climate and energy measures. “They’re not business-friendly enough, and they don’t lead to meaningful energy independence.”

Mr. Graham said the public was demanding that any energy legislation from Washington focus on creating jobs, whether by drilling for offshore oil or building wind turbines.

“What is dead is some massive cap-and-trade system that regulates carbon in a fashion that drives up energy costs,” he said.

Not ready to let that be the last word, Sen. John Kerry told a clean energy forum cap and trade’s obituary is premature:

We have not scaled back our goals, they are the same,” Kerry said. “We have not recalibrated some lesser approach that is only energy or only this or that … We have to price carbon in order to get the marketplace moving properly.

According to the Reuters story, Graham is scheduled to speak later today at the same event. Talk about your all-time awkward greenroom chit-chat.

To take a single example: The price that American drivers pay at the pump, frightening as it is these days, does not reflect the cost of oil and gasoline. There are additional costs to the reliance on oil that simply don’t show up in the twirling numbers at the gas pump, whether they are the environmental costs of oil extraction, transport and combustion, or the cost of U.S. military engagement to protect oil supplies and keep vital sea lanes open.

For economists, all these hidden costs are called “externalities.” They’re as real as they are hard to spot, from the Fifth Fleet’s operating expenses to the pernicious health costs of a coal-fired electricity sector.

For policymakers, these externalities represent an opportunity as much as a headache. For all the worries that a bigger role for government in the energy business—from cap-and-trade schemes to solar-power subsidies—represents a retreat from free markets, that’s hardly the case. Energy markets aren’t “free” today, and the playing field is anything but level.

Not sure how I’m going to fill the informative-and-useful gap now. I could spend more time with the obviously-based-in-reality observations on Climate Depot. I could also bludgeon my head with a piece of rebar even morning for 20 minutes for similar effect.

So now that farmers got what they want, that’s one less obstacle for climate legislation working through the Senate, right?

Sigh…
The American Farm Bureau Federation, the most powerful group in this most powerful lobby, has come out firmly against any climate bill. According to Reuters:

In a speech opening the four-day AFBF convention, Stallman said American farmers and ranchers “must aggressively respond to extremists” and “misguided, activist-driven regulation … The days of their elitist power grabs are over.”

…

Vast amounts of farmland could become carbon-capturing woodlands under cap-and-trade, “eliminating about 130,000 farms and ranches,” said Stallman. One federal analysis says 8 percent of crop and pasture land could be turned into trees by 2050 because trees would be more profitable than crops.

On top of that, Rep. Peterson is having second thoughts about all his hard work being difficult last Spring:

Blue Dog Democrat Collin Peterson, who played a major role securing rural lawmakers’ support for cap-and-trade climate legislation this summer, now says he would vote “no” if a similar bill returned to the House for final passage.

The Agriculture Committee chairman said he was “stuck voting” for the bill (which awaits Senate action) in June because House Speaker Nancy Pelosi granted his requests for broad agriculture concessions, but he won’t support it again if it remains unchanged.

Man, I totally hate it when I get ‘stuck’ soing something I agreed to do in exactly for just about every concession I asked for. Poor Collin Peterson, 2009 was a rough year.

As for the Farm Bureau Federation and their concern that a swarm of carbon-hungry forests are going to swoop in and conquer the Grain Belt, they might yet be saved from the onslaught of immobile carbon zombie hordes, with their sinister foliage and penetrable cellulosic skin. A new study out of the University of Gothenburg in Sweden finds that paying people to preserve forests may not be sufficient to keep them standing. According to researchers Martin Persson and Christian Azar, a price on carbon from a cap-and-trade regime will drive demand for carbon-neutral fuel sources, such as palm-oil. This will compete directly with REDD schemes designed to pay for the preservation of tropical forests. In almost all the scenarios modeled in the study, clearing forests and planting palm oil is more profitable, meaning additional incentives aside from REDD program are necessary to keep forests standing.

While the study focuses on tropical forests and palm oil, and thus is not directly applicable to the Grain Belt per se, it does suggests that the competition for land between biofuels and forest carbon offset is not  so cut and dry. Demand for biofuels from US sources has the potential to overwhelm demand for offsets, especially if cheaper international options are available. Farmers may yet be saved from being taken over by ravenous groves of fast growing trees. Thank God, because they need all the help they can get.

The architects aren’t asked to paint sea level rise as a positive thing, but instead to propose ways for the city to make the city more resilient and to make the best out of a bad situation. The teams acknowledge that if predictions of a rise of 2 feet or more over the next several decades prove correct, large chunks of the city that are now populated will have to be permanently abandoned to the ocean. But allowing the sea to once again creep into city space doesn’t necessarily have to be all negative, they say.

So what does this hypothetical post-climate-change NYC Look like?

Well, maybe not exactly. (But who isn’t looking forward to drinking their own urine?)

Ideas on display in “Rising Currents: Projects for New York’s Waterfront” would make certain parts of lower Manhattan Venice-like, allowing water in during high tide and convert Battery Park into wetlands. And, apparently, rising sea levels might help revive the long-extinct oyster industry. I find it difficult to believe the edibility of the tiny, slimy boogers on the half-shell delicacies could be improved by NYC waters, but stranger things have happened.