Thursday, 21 April 2011

Why American Electric Power v. Connecticut doesn't matter

Greenwire reports that the justices of the US Supreme sounded skeptical of the plaintiffs' claim that greenhouse gas emissions by American Electric Power, the world's largest greenhouse gas emitter, and four other named defendant investor-owned electric utilities, could constitute a common-law public nuisance that could result in legal liability to the State of Connecticut, the Open Space Institute, and a handful of other states. I would reserve judgment; the tone of oral argument is not a great predictor for how justices will vote or for the outcomes of cases, and in the case of public nuisance for emitting greenhouse gases, there are a lot of hard questions that need to be asked whether you're inclined to rule in favor or not.

I wrote an article back in 2008 that climate litigation like this was not likely to be a very effective way to reduce greenhouse gas emissions. Looking forward and finding an ideal plaintiff -- which I concluded was the Inuit people of Canada, the US, Denmark (through its territory of Greenland), and Russia -- and pitting it against the most vulnerable defendants -- American Electric Power and a longer list of other emitters -- the chances of prevailing on a common law nuisance suit were.... OK, but not fabulous. There are just too many leaps that a court of law would have to make in order to find that AEP and the others actually did something significant to harm the Inuit people, when even a large aggregation of the greatest emitters in history did not contribute more than about 8-10% to the existing stock of greenhouse gases. And if winning this "ideal" case was going to be challenge, what does that say about all the other climate change cases that could be brought? (Note: the article benefited from the detailed comments of Matthew Pawa, attorney for plaintiff Open Space Institute; while disagreeing with my ultimate conclusion, Pawa acknowledged the hurdles he needed to overcome to win.)

But there is another reason that environmentalists should not become too enamored of climate litigation: it perpetuates a myth that climate change is the fault and responsibility of a few evil barons of industry. It is not. It lies with us: certainly all of us living in affluent countries, but even those of us with small carbon footprints. We have done this to ourselves, and it is misleading to think that we can vindicate ourselves by sticking it to The Man. This is the specious tack taken by the Canadian NDP and the British Columbia NDP, which have attacked carbon taxes proposed by the Canadian Liberal Party and implemented by the BC Liberal Party. What we need is a price on carbon, so that all of us Canadians, Americans, and everybody else feels the pain of contributing to the climate change problem. A carbon tax does this, and does this best under most politically realistic scenarios.

Please don't complain to me about regressiveness until you've studied the literature. There will be some regressiveness to carbon taxes; that much has to be acknowledged and addressed. But there are many subtleties that have been ignored in the discussion about distributional impacts of carbon pricing. First of all, revenue recycling can and should address some of that. Dallas Burtraw and his colleagues at Resources for the Future have carefully modeled the effects of carbon pricing on different demographic and regional groups, and explored ways of recycling revenue to reduce impacts. And second, recent research seems to suggest that when government programs that provide aid for the poor are indexed to inflation, that the regressiveness problem is narrowed. This is of little comfort to those whose government benefits will *not* increase with inflation, but it is a start, and the kind of subtlety that has been ignored in the debate about regressiveness. Thirdly, do we define "poor" as people with low income? That fails to capture the affluence of two large groups of people: students and retirees. And finally, of all of the offenses that we visit upon the least fortunate in affluent societies, we're going to hold climate policy hostage until we fix income inequality?! Bailing out General Motors, perhaps the most stubbornly inefficient long-lived corporation in the history of human industry -- this insult to generations of American taxpayers is more important than climate change? The edgy language in this post is not targeted at the poor; it is targeted at those who purport to care about the plight of the poor, but haven't devoted the time to think through the various complicated issues around carbon pricing and distributional impacts, but would rather just use the poor as a political lever.

Friday, 15 April 2011

Renewable Portfolio Standards -- the Californication of Carbon Pricing

Governor Jerry Brown signed into law this week SB X1-2, the California Renewable Portfolio Standard which requires investor-owned utilities and other major electricity service providers to obtain 33% of their electricity from renewable energy sources by 2020. The law is not really much news, as it is just the legislative ratification of Executive Order S-14-08 signed by then-Governor Arnold Schwarzenegger in November of 2008. Admirably, the California Energy Commission's definition of renewable energy does not include large hydro projects, which, as Roberta Mann has written, is a somewhat ironic way to address climate change, given the future water supply issues that climate change will bring.

But although California takes a step in the right direction, it is worth taking a step back and looking at the overall climate change policy landscape in California and like-minded Western jurisdictions. Although a requirement that electricity service providers obtain electricity from renewables does boost the economics of renewable energy -- it forces providers to bid more for renewable energy in order to get their portfolio to 33% -- it doesn't actually do as much as it could. A direct carbon price -- in the form of a carbon tax or from the cap-and-trade program under California's AB 32, now pending a challenge by some environmental justice groups -- will more effectively reduce greenhouse gas (GHG) emissions.

There are a number of problems with the RPS. First, it will not be clear what kind of a price signal electricity consumers will see. Ideally, a consumer should pay in proportion to her GHG emissions, which of course means paying more with greater usage. But cost-recovery plans for the procurement of renewable electricity that are likely to be approved by the California Public Utilities Commission may or may not allow the completely transparent pass-through of emissions. Cost recovery will focus on how electricity providers can recoup the costs of paying more for renewables, which is different from making consumers pay for their emissions. It's a backwards way of pricing GHG emissions. Second, assuming that AB 32 survives the legal challenge, the RPS will distort the cap-and-trade market for permits, and that distortion will have more significance if the Western Climate Initiative's multi-state and -provincial cap-and-trade program comes into effect. Limiting California's energy consumption to 66% will have a profound effect on fossil fuel plants that ordinarily might compete in California's market -- they will be directed to, well, other WCI jurisdictions. This more ready availability of fossil-fuel-fired electricity will depress permit prices. This is potentially a large effect, as California's energy market is big enough to influence cap-and-trade permit prices very significantly. Finally, we need all the technological innovations we can get, at all levels of the energy production and consumption cycle, and an RPS only focuses on the production side. RPS does not directly encourage the search for ways to improve energy efficiency.

Thursday, 7 April 2011

The Impending US Government Shutdown... and Carbon Taxes?!

Of course, only "non-essential" US government personnel will be off-duty if the budget stalemate isn't resolved by COB Friday, April 8. And of course, it will be temporary. Just the same, I am glad to be living here north of the border for now.

In research published in a volume of collected works, Fiscal Challenges: An Inter-disciplinary Approach to Budget Policy (Garrett, Graddy, & Jackson, eds., Cambridge Press 2008), Jonathan Baron and Edward McCaffrey show in their chapter (The Political Psychology of Budget Deficits) that people want lower taxes, less government spending, but no reductions in the sum of spending on all specific government programs. People just want it all, and they want it to cost nothing. And politicians pander to one or the other impulse depending on which one will yield greater political support. 

How is this related to carbon taxes? On both sides of the political chasm in the budget battle there is a delusion that something can be had for nothing. Fiscal conservatives don't have the slightest idea of what the "job-killing" EPA does for them, and fiscal liberals simply have no appetite for reducing spending on anything. Similarly, when it comes to climate policy, people want something for nothing, and politicians are willing to tell them they can have it. In my forthcoming book, The Case for a Carbon Tax: Getting Past Our Hang-ups to Effective Climate Policy (Island Press, 2011), I explore why people hate carbon taxes as opposed to other, generally (not always) less effective climate policies. I conclude that at least a strong component of this has to do with the transparency of the price of carbon reduction. The more transparent the price is, the less popular a policy will be. Hence, the political popularity of "game-changing," "home-run" technologies like biofuels, nuclear energy, and carbon capture and storage, and George W. Bush's ballyhooed but failed hydrogen fuel cell initiative. Above all, government subsidies to promote these technologies clearly cost something -- but proponents and gullible (or opportunistic) legislators seize on these technologies as supposedly painless ways to make our economies less carbon-intensive economies without suffering any economic pain. 

Well, actually, we do suffer economic pain. In the same way that people delusionally want lower taxes and continuing support for specific government programs, people want to reduce greenhouse gas emissions but don't want it to cost them anything. So the idea of subsidizing wonderful and miraculous technologies that will lower emissions without cost is bound to be attractive. As a substantive matter, I challenge anyone to demonstrate to me how any specific government-subsidized project to reduce greenhouse gas emissions (I'm leaving geo-engineering measures out of this) can more effectively lower greenhouse gas concentrations, dollar-for-dollar, than a carbon tax. There is no free lunch. Lowering greenhouse gas emissions is going to cost money, and it's going to have to cost even the poorest among us, although there are things we can do in terms of income redistribution to make things easier. But shame on the sympathy entrepreneur politicians, especially in Canada, that play on the fears of people by claiming they have a way of reducing greenhouse gases that will "stick it to the corporations" but not "ordinary, hard-working people." 

Why do sympathy entrepreneurs manage to successfully play on fears of regressiveness of a carbon tax? My explanation in the book is that the way policies are framed consciously or unconsciously favor policies that are opaque with their costs. And so government subsidies and command-and-control regulation fare better, and so does cap-and-trade, although opponents of climate regulation have, not altogether inaccurately, succeeded in framing cap-and-trade as a tax. If it works, it is a tax. That's the good news, not the bad news! In terms of choosing climate policies, we have to work at framing all climate policies in terms of costs and benefits, and cost-effectiveness (dollars per ton of carbon dioxide-equivalent reduced), a little more carefully. Climate policies should be judged mostly by these criteria, whether they are obvious or not, whether these aspects are transparent or opaque. If they are opaque, then we need to work at making them less so, so that more informed decision-making can be made about climate policies.

For a working paper synopsis of some of the arguments I make in my book, see my 23-page draft paper Nine Reasons to Adopt a Carbon Tax.


Friday, 1 April 2011

The Lawsuit Against California's AB32 -- Why EJ Advocates Are Right for All the Wrong Reasons

Environmental justice advocates filed suit against AB32, California's landmark cap-and-trade emissions law, claiming that the California Air Resources Board erred by not considering alternatives more carefully. Sidestepping the administrative law matters, it seems to me that as a substantive matter, EJ advocates are worried about all the wrong things. EJ advocates are worried that cap-and-trade could allow "hotspots" of pollution. Carbon dioxide emissions are, of course, not harmful, but EJ advocates are worried about the co-pollutant hotspots that would be allowed by a cap-and-trade scheme.

But I don't get it. If hotspots are what EJ advocates are worried about, why is a carbon tax (as they favor) better? Why can't hotspots form in a carbon tax regime?

In fact, the real reason that people should be unhappy with a cap-and-trade scheme, and especially poverty advocates that often overlap with EJ advocates, is that cap-and-trade is *often* regressive because of the way that emissions permits are allocated -- usually by grandfathering, essentially a freebie to shareholders of emitting firms. The revenues of a carbon tax might or might not be recycled to addressed the perceived regressiveness of carbon taxes, but in no case is it worse than simply giving emitters a free pass. Incidentally, recent research seems to suggest that because some of the poorest derive much of their income from government programs, and because some of these programs are indexed to inflation, a carbon tax may not be regressive after all.