Details matter: Small sticks and no carrots, Part 2

Posted by Sean Casten on April 25th, 2008 |

This is the second in a five-part series exploring the details of the Lieberman-Warner Climate Security Act. See Part 1 here.

With atmospheric GHG concentrations rising at a frightening rate, we need a full court press to change directions, using every possible tool at our disposal. From an economic perspective, this means that we not only need to impose financial penalties on polluters, but also provide financial incentives for those who act to lower GHG emissions. We need a market mechanism in place so that the costs of GHG emission — or the revenue associated with GHG reduction — factors into individual investment decisions immediately. In short, we need big sticks and big carrots. The Climate Stabilization Act (CSA), as the Lieberman-Warner Bill is known, is a small stick with no carrot. This post explains why.

Small sticks

Grist has had a rich discussion on the pros of auctioning (as opposed to allocating) emissions credits, which I will not repeat here, except to note that an auction is a stick. An allocation is a gift given to someone who deserves a stick. And yes, it’s politically much easier to allocate than to auction, since the latter necessarily imposes costs on powerful special interest groups that will lobby hard to protect their interests.

The CSA effectively tries to split this difference. It starts with an allocation to pollute based on historic levels and then does two things to gradually build a small stick:

1. It reduces the total allocation by 106 million tons/year (1.8 percent/year)
2. It begins auctioning some of the permits, starting with 21.5 percent of all permits in 2012, and then increasing gradually to 69.5 percent by 2031, at which point the auctioned quantity remains fixed through the end of the bill’s lifetime (2050).

This is not as bad as 100 percent allocation, but not as good as 100 percent auction — and note that in all cases, at least 30 percent of the pollution permits are structured as gifts. But with some auctions and a declining cap, it is best characterized as a small stick. It will slowly raise the cost of GHG emission. But slowly. And the physics of our atmosphere demands must faster action than this political compromise delivers.No carrots, just pork

Now let’s look at the other side of the ledger, where things get really political, really wonky and, frankly, a tad confusing. As we’ve seen above, the CSA will slowly penalize the bad guys for polluting. But if you’re a regular Grist reader, you’re probably among the good guys. What’s in it for you? Will you have any added incentive to invest in capital projects or technologies to lower GHG emissions? It’s not at all clear.

So before you read further, imagine that you have a way to lower GHG emissions. Think very broadly about what that might entail, since these regulations will be in place until 2050 — any technology that you or anyone else might come up with in the next 42 years ought to be incentivized under this plan if the CSA is going to ensure that we bring as many resources to bear on cooling the planet. The central problem of the CSA is that all of society’s creative ideas for the next four decades are effectively pre-stipulated. If you’re included in the list of winners below, you might have a carrot, albeit an indirect one. If you’re not, too bad. Go to Washington and lobby to be included. Get in line with everyone else who’d also like to be included in the Winner List. You might succeed, you might not, but at the core, you as an inventor of a great, save-the-world technology circa 2015 have no incentive to deploy that technology that doesn’t involve a big lobbying budget.

Pork details

The CSA essentially has two incentives it can give away:

1. The right to pollute for free, via free allowances.
2. The proceeds from the auction.

The first is given primarily to polluters, creating problems of its own, which I will discuss in a later post — but by design, it’s a gift to the dirty guys rather than a carrot to the clean ones. Let’s look then at how the financial incentives get allocated.

The first use of the proceeds is to fund EPA and other federal agencies who have responsibilities to fulfill under the CSA.

The second use of proceeds is to ensure adequate funding for firefighting at the Bureau of Land Management and the Forest Service. This certainly seems reasonable, although one might wonder how we know that over the next 42 years, this will be more important than any other climate-related funding need.

Once these two uses are covered, the remaining funds are distributed as follows:

1. Fifty-two percent to the Energy Technology Deployment Fund, which is used for “financial incentive programs to accelerate the development and deployment of sustainable energy technologies, low-carbon electricity technologies, advanced biofuels such as cellulosic ethanol, CO2 capture and storage systems, electric and plug-in hybrid electric vehicles and high-efficiency consumer products.” This all sounds noble, but it’s getting awfully porky. Why are we stipulating paths instead of goals? Who has the hubris to claim knowledge of the optimal technology paths over the next 42 years? Why do we think that a government bureaucracy is ever the ideal way to specify technological solutions to the world’s great challenges?
2. Two percent to the Energy Transformation Acceleration Fund, to be administered by the Advanced Research Projects Agency in the DOE. See criticism above.
3. Eighteen percent to the Energy Assistance Fund, which will then be distributed as follows: 50 percent to Low Income Home Energy Assistance Program, 25 percent to the Weatherization Assistance Program, and 25 percent to the Rural Energy Assistance Program.
4. Eighteen percent to the Adaptation Fund, which will then be distributed as follows: 59 percent to the Interior Department for wildlife conservation & restoration, endangered species, migratory bird and other fish & wildlife programs and adaptation activities carried out under cooperative grant programs; 1 percent to Indian tribes for tribal wildlife grant programs of the Fish & Wildlife service; 5 percent to the Secretary of Agriculture for activities on national forests & grasslands pursuant to the cooperative Wings Across America program, and 5 percent to the EPA for restoring freshwater and estuarine systems. I’ve got no beef with any of these goals, but I repeat my criticism in point 1 above. Who possibly has the hubris to know that this is the best use of funding over the next 42 years? And worse, some of this is getting several steps removed from GHG policy. What’s it doing in a GHG bill?
5. Five percent to the Climate Change Worker Training fund, to be administered by the Department of Labor to fund a new workforce education, training and placement program.
6. Five percent to the Climate Change and National Security Fund, to be established by the State Department and administered by the U.S. Agency for International Development to protect national security interest of the U.S. where such interests could be compromised by destabilizing climate change impacts, to support the development of climate change programs in other countries, and to support the development of technologies that will help less developed countries reduce GHG emissions and/or respond to climate change.

Follow all that? If you’re feeling a bit confused right now, you’re not alone. But without quibbling over the details here, note the overarching assumption: that we know who climate change is going to affect, we know the technologies that we need to deploy to ameliorate those impacts (and, we know what the solutions are, at core technological, as opposed to simple matters of regulatory reform), we know how much money it will take to solve, we know who ought to receive that money and our we know what the answers to all those questions for the next 42 years. Come on.

This is pork, pure and simple. Some is admittedly rather progressive pork, but it’s still pork (one can already see the companies lining up to receive R&D grants from all the various funds and agencies that are being created). And it’s fairly obvious that the route the CSA is taking to try to secure Senate passage is to sprinkle the pork around as broadly as possible. But we should not confuse pork with carrots. And we should not presume that this dilution of impacts — no matter how noble these other causes are — will not slow our rate of GHG reduction, as dollars are allocated to other ends.

As I noted previously, Lieberman-Warner is the train upon which our climate change policy is going to be based. We are not going to change the train — but we sure can make it better. We need to get rid of this pork allocation and replace it with a much simpler set of incentives that define the goal, put an incentive in place for anyone who can meet that goal, and get out of the way.

Note: This first appeared on Grist.