Cap as the next stimulus

[one...two...tree 2,762]

FT.com highlights an impressive flash annimation on the greenness of recovery packages. Spoiler alert: China's trumps the United States' package 2:1. Green stimuli are important, but they are not the full answer. Obama's stimulus package contains provisions to the tune of $100 billion in direct appropriations and tax breaks for green energy and energy efficiency. Even that number is dwarfed by the needs.

McKinsey estimates that the United States alone will require one trillion dollars in added investment by 2020 to guide it onto a low-carbon pathway and meet climate policy goals. This translates into one stimulus bill per year, every year between now and 2020. Government spending alone will not generate the required investment.

That is where a price on carbon comes in. Joe Stiglitz and Nick Stern call for a "stable, strong carbon price" but do not say how this should be done. Anyone who's been following these pages probably knows what comes next:

Yes, in the United States in particular, the right environmental, political and economic answer is a cap-and-trade system.

I posted a response over at the FT's Economists' Forum making the case for a cap. Here's the text with a couple additional links:

Joe Stiglitz and Nick Stern are exactly right to

emphasize the role President Barack Obama can play in leading the green recovery

. They are also right to calling for a "stable, strong carbon price." But it matters how that price is set. In the United States in particular, the right environmental, political and economic answer is a cap-and-trade system.

A cap guarantees the environmental outcome; a tax does not. A cap has hope for passage in US Congress; a tax does not. A cap would not only provide the basis for the necessary long-term restructuring of the US economy, it would also act as a short-term stimulus, much more than would a tax.

A cap delivers far more innovation than a tax. The cap – even one that goes into effect in, say, 2013 – would help put assets on companies' balance sheets now, which would immediately change the financing equation in favour of increased spending and investment. This holds true regardless of whether allowances are given away for free or sold in an auction. The cost of auctioned allowances would affect company balance sheets at the beginning of the program, while every incremental investment in low-carbon technology increases the value of carbon assets on the books now.

Innovation is where the true potential of a cap becomes apparent. If we think of research and development as creating options, a future cap signed into law this year would make the "call option" on clean energy research and development significantly more valuable. This would help unleash much-needed energy investments that have been placed on hold while companies have been waiting for clear rules.

Options theory also provides direction for market design. A price ceiling for carbon allowances, like a tax, would be poisonous to the innovation process and the atmosphere alike. An initial price floor would help both. It would also counteract the dampening effects of an uncertain price on green energy investments: downside risk looms large for investments in alternative energy sources. Similarly, a well-designed cap calls for banking and limited future borrowing of allowances to smooth prices and create investment certainty and continued asset values.

Of course, the carbon market also requires utmost transparency as well as patently enforceable – and rigorously enforced – oversight rules. Any regulatory framework must start from the premise that a carbon allowance is not simply just another physical commodity and must not be regulated as such. Rather, the overarching goal of market oversight must be aligned with the fundamental goal of reducing emissions.

Finally, a US cap is the key step toward a truly global solution to our shared climate problem. The United States must lead, but it – and Europe – cannot solve the problem alone. At the very least, the largest emerging economy emitters and tropical forest nations need to limit their pollution as well. A

global cap-and-trade market

would encourage all nations to seek the lowest-cost solutions and provide incentives for others to join.

http://www.env-econ.net/2009/03/cap-as-the...t-stimulus.html

[Hilarious Clinton 452]

Cap is a tax... a carbon tax. Let's get that clear.

And remember... don't buy your carbon credits from Al Gore. Buy them from Honest Rich's House of Carbon Credits.

[DEDixon 39]

Green what? Can't hear you ... fingers in my ears... blah, blah, blah .... can't hear you ....

[one...two...tree 2,762]

Cap is a tax... a carbon tax. Let's get that clear.

And remember... don't buy your carbon credits from Al Gore. Buy them from Honest Rich's House of Carbon Credits.

Tax breaks are given to businesses with the intent to encourage or discourage behavior. This is nothing new.

[one...two...tree 2,762]

Cap and Trade 101

What Is Cap and Trade, and How Can We Implement It Successfully?

What is Cap and Trade?

The goal: To steadily reduce carbon dioxide and other greenhouse gas emissions economy-wide in a cost-effective manner.

The cap: Each large-scale emitter, or company, will have a limit on the amount of greenhouse gas that it can emit. The firm must have an “emissions permit” for every ton of carbon dioxide it releases into the atmosphere. These permits set an enforceable limit, or cap, on the amount of greenhouse gas pollution that the company is allowed to emit. Over time, the limits become stricter, allowing less and less pollution, until the ultimate reduction goal is met. This is similar to the cap and trade program enacted by the Clean Air Act of 1990, which reduced the sulfur emissions that cause acid rain, and it met the goals at a much lower cost than industry or government predicted.

The trade: It will be relatively cheaper or easier for some companies to reduce their emissions below their required limit than others. These more efficient companies, who emit less than their allowance, can sell their extra permits to companies that are not able to make reductions as easily. This creates a system that guarantees a set level of overall reductions, while rewarding the most efficient companies and ensuring that the cap can be met at the lowest possible cost to the economy.

The profits: If the federal government auctions the emissions permits to the companies required to reduce their emissions, it would create a large and dependable revenue stream. These financial resources could be used to achieve critical public policy objectives related to climate change mitigation and economic development. The federal government can also choose to “grandfather” allowances to the polluting firms by handing them out free based on historic or projected emissions. This would give the most benefits to those companies with higher baseline emissions that have historically done the least to reduce their pollution.

....

Initial estimates by the Congressional Budget Office project that an economy-wide cap-and-trade program would generate at least $50 billion per year, but could reach up to $300 billion.

http://www.americanprogress.org/issues/200...ndtrade101.html

[Hilarious Clinton 452]

The tax (cap) expense will be passed on to consumers. So when someones electric bill doubles it only has an effect if you are poor or middle class. Hence, a tax on the poor and middle class. Thanks Obama.

As emission cuts deepened, the danger of disruptions would mount. Population increases alone raise energy demand. From 2006 to 2030, the U.S. population will grow 22 percent (to 366 million) and the number of housing units 25 percent (to 141 million), the Energy Information Administration projects. The idea that higher fuel prices will be offset mostly by lower consumption is, at best, optimistic. The Congressional Budget Office has estimated that a 15 percent cut of emissions would raise average household energy costs by almost $1,300 a year.

http://www.washingtonpost.com/wp-dyn/conte...8060101913.html

[GaryC 7]

Money and Lobbyists Hurt European Efforts to Curb Gases

Frank Augstein/Associated Press

By JAMES KANTER and JAD MOUAWAD

Published: December 10, 2008

BRUSSELS — The European Union started with a high-minded ecological goal: encouraging companies to cut their greenhouse gases by making them pay for each ton of carbon dioxide they emitted into the atmosphere.

But that plan unleashed a lobbying free-for-all that led politicians to dole out favors to various industries, undermining the environmental goals. Four years later, it is becoming clear that system has so far produced little noticeable benefit to the climate — but generated a multibillion-dollar windfall for some of the Continent’s biggest polluters.

As President-elect Barack Obama considers how to curb the gases that contribute to global warming, Europe’s struggle with the problem illustrates the momentous task ahead for the United States.

European politicians, who acknowledge that their system got off to a rocky start, contend that after an initial experimental phase that lasted from 2005 to 2007, the system has improved. But some outside analysts doubt Europe can achieve its lofty goals.

The original European plan called for issuing a restricted number of permits to emit carbon dioxide, the main gas that contributes to global warming, then creating a market in which they could be freely traded. If a company produced more gas than its permits allowed, it would be penalized by having to buy more; if it managed to reduce emissions by switching to cleaner fuels or technologies, it would be able to sell its permits to polluting companies. The marketplace would set the price.

In the United States, a similar market approach is credited with reducing acid rain, another environmental problem. The system encourages efficiency and innovation by rewarding companies that can cut the most pollution at the lowest cost.

But global warming is a far larger, more complicated problem than acid rain, and setting up a workable market in Europe has proved to be difficult and contentious. As the incoming Obama administration contemplates creation of an American market, Washington has already seen the beginnings of the same lobbying frenzy that bedeviled Europe.

Beseeched by giant utilities and smokestack industries that feared for their competitiveness, the European Union scrapped the idea of forcing industries to buy their permits, with the money going to public coffers. Instead, governments gave out the vast majority of the permits for nothing, in such quantity that the market nearly collapsed. The basic question of whether to sell permits, give them away or do some of both has yet to be resolved in the United States.

“Everybody will fight their own corner,” said Nicholas Stern, a British economist, who recommended that the United States charge for a substantial number of permits rather than dole them all out as the Europeans have. “That’s why it’s so important to have a clear conception from the start, to start off with a clear strategy.”

After the initial crash, Europe tightened its system and issued new permits, and they have acquired substantial value. Nearly $80 billion will change hands in 2008 on the European emissions market, making it by far the world’s largest, according to estimates by Andreas Arvanitakis, an analyst at Point Carbon, a research firm.

Much of the cost of the European system is being paid by the public in the price of goods and services, including higher electricity bills, but whether the money is doing any good is an open question. The amount of carbon dioxide emitted by plants and factories participating in the system has not fallen. Their emissions rose 0.4 percent in 2006 and another 0.7 percent in 2007.

Meanwhile, a series of disputes has erupted about the way companies are carrying out the system.

http://www.nytimes.com/2008/12/11/business...arbon.html?_r=1

[Ban Hammer 13,355]

ah more regulations. so why does steven hate poor people?

[Hilarious Clinton 452]

ah more regulations. so why does steven hate poor people?

He just loves taxes... er I mean 'stimulus'.

[HAL 9000 96]

Yep. I sure hope the President cleans up the Lobby Paradise that Washington tends to be. Tall order.

[I AM NOT THAT GUY 5,715]

Yep. I sure hope the President cleans up the Lobby Paradise that Washington tends to be. Tall order.

He can start by firing most of his cabinet and the rest of his political appointees. When your party is out of power, you become a lobbyist. When your party is back in power, you become a political appointee. Facts of Washington.

[HAL 9000 96]

Yep. I sure hope the President cleans up the Lobby Paradise that Washington tends to be. Tall order.

He can start by firing most of his cabinet and the rest of his political appointees. When your party is out of power, you become a lobbyist. When your party is back in power, you become a political appointee. Facts of Washington.

If that's your strict definition of a lobby as it pertains to corrupting lobbies then perhaps its time to take a look at the whinefest in Washington and then ask yourself... 'what am I criticizing in post after post?'

[I AM NOT THAT GUY 5,715]

Yep. I sure hope the President cleans up the Lobby Paradise that Washington tends to be. Tall order.

He can start by firing most of his cabinet and the rest of his political appointees. When your party is out of power, you become a lobbyist. When your party is back in power, you become a political appointee. Facts of Washington.

If that's your strict definition of a lobby as it pertains to corrupting lobbies then perhaps its time to take a look at the whinefest in Washington and then ask yourself... 'what am I criticizing in post after post?'

I am missing something in your question. Most lobbyists are folks who used to hold office in government (including the military), or on the staff of an office holder.