THE VINE JANUARY 21, 2009
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First, a quick recap: The whole idea behind a cap-and-trade regime is that the government sets a nationwide cap on greenhouse-gas emissions and then auctions off (or hands out) tradable pollution permits to companies. The price of the permits depends on supply and demand, and, as in all markets, there's not necessarily a "correct" price. Countries generally prefer that the price of carbon doesn't rise too sharply and crush the economy, but other than that, there's no reason to fix prices. As long as the cap is set at scientifically sound levels and keeps ratcheting down each year, then prices should adjust accordingly, emissions should go down, and the system should work.
So I'm not sure I entirely agree with James Kanter of The New York Times that it's a problem that, in Europe, permit prices for carbon have collapsed. Back in 2005, prices dropped to zero because the EU set the cap too loosely and handed out more permits than companies even needed—that was a real flaw, and it still hasn't been totally patched up. This time around, though, permit prices are plummeting mainly because a global recession has scuppered economic activity across Europe, and companies are polluting less. They're also using more natural gas and less coal. None of that is a concern per se. Carbon emissions are, after all, still going down.
Indeed, this might even be an advantage of having a cap-and-trade regime instead of a carbon tax: During recessions, emitting carbon becomes cheaper under a cap (because fewer people are doing it), so companies can postpone decarbonization projects until the economy starts booming again and they can spare the extra funds to do so. On the downside, however, falling permit prices do cause investments in renewable energy to shrivel up, something less likely to happen under a steady carbon tax. It's not immediately obvious which would be a better outcome. This might bolster the case for a price floor in a cap regime—a sort of hybrid approach.
Ezra Klein also delved into the price issue recently when he wrote: "Cap and Trade makes dirty energy more expensive. The better the bill, the pricier dirty energy becomes." That's not quite right, either. Granted, a tighter cap will typically lead to pricier permits (as supply gets restricted), but the relationship isn't ironclad. Again, from an environmental perspective, what mainly matters is that the cap is set correctly—ideally, a U.S. cap would follow the recommendations of the IPCC and follow a path to reduce emissions 80-90 percent below 1990 levels by 2050. But it also helps if Congress finds ways to make it cheaper for companies and households to meet those targets—by, say, upgrading the electric grid or rejiggering utility rules to make waste-heat capture and efficiency upgrades more viable. Both of those things would lower permit prices, but so what? Cranking up the price of dirty energy isn't an end in itself.
Incidentally, this is the main thing that differentiates a carbon tax from cap-and-trade. With a tax, we know in advance how much it will cost, but aren't sure what emissions level will result. With a well-enforced cap-and-trade regime, we know the maximum level of emissions we'll get, but aren't positive how much it will cost to get there (that's one rationale for well-designed safety valves to create a bit more price certainty, though open up too many valves and you've eviscerated your cap). Both can have unexpected side-effects, as we're seeing in Europe, but that doesn't mean the problems are fatal.
(Graph credit goes to Nature News.)
--Bradford Plumer
4 comments
Given that lots of things in Europe are collapsing-- sterling's crashing, the eastern states are melting down, Greece and Italy will probably crash out of the eurozone in the not too distant future (and who knows about how solid Spain and Ireland are), the idea of a common energy policy vs Putin's gas-gangsterism is in shambles-- I'd guess this says more about the EU than about the wisdom of a carbon market.
- teplukhin2you
January 21, 2009 at 3:24pm
Brad - curious to hear your take on this: www.csmonitor.com/.../p06s01-wogn.html
Milan, Italy - Europe's natural gas crisis is causing a nuclear fallout of sorts.
With the squabble between Russia and Ukraine leaving much of the continent with uncertain gas supplies, some governments seem to be getting over their "Chernobyl complexes" and are returning to nuclear energy, hoping it will provide a form of reliable, domestically produced energy.
Slovakia and Bulgaria, among the worst hit by the gas cutoff, announced this week that they may reopen Soviet-era reactors that had been dismantled in recent years, before the countries joined the European Union....
"What just happened made the Italians understand the importance of energy security [and that] we must go back to nuclear power if we want to become less dependent on others' moods," Claudio Scajola, Italy's minister for economic development, said Monday.
In 1987, a year after the Chernobyl disaster dusted much of Europe with radiation, Italians voted in a national referendum to cancel the country's nuclear energy program. Now, even the organizer of the antinuclear campaign has changed his mind, saying Italy must give nuclear another chance.
"The crisis clearly shows how vulnerable we are to geopolitical instabilities. We need to diversify our resources and that means also opening up to nuclear energy," says Chicco Testa, the referendum's organizer and one of Italy's leading environmentalists. "It's like playing a piano with many keys. Unfortunately ... we have been playing just two keys: oil and natural gas."
Environmentalists continue to debate the issue, but a desire to reduce the carbon footprint of energy suppliers is renewing interest in nuclear energy.
Mr. Testa first admitted six months ago that the referendum [to cancel nuckes in 1987] was a mistake. In a recent book, he promoted the idea of both renewable and nuclear energy. Now, he says his "opinion is really strengthened."
- teplukhin2you
January 21, 2009 at 3:44pm
That's fascinating, I'll take a look.
- Brad Plumer
January 21, 2009 at 4:03pm
Always interesting to hear your perspective Tep. With respect to carbon reduction, the EPA set industry standards for sufur and nitrogen oxide limits, while giving some leeway for small companies to have more time to comply. With some grumbling by industry, the system has worked just fine. In principal, I do not see any problem with this working for CO2.
Unfortunately, the government has taken a different tack that will take us to the wrong result. They have mandated ethanol and biodiesel, two disastrous products, to be blended into our transportation fuel. And, even worse, they are now proposing a "Low Carbon Fuel Standard" that would reduce the amount of carbon emitted per unit energy delivered by 10% by 2020. Such a fuel does not even exist yet. It is now universally accepted that ethanol from corn produces more GHG's than gasoline. So ethanol from corn does not even qualify for LCFS and cellulosic ethanol does not yet exist. If and when it does, nobody really knows how practical or expensive it will be to produce.
Also, as you suggest Brad, EPA New Source rules actually discourage coal burning power plants to increase energy efficiency by capturing waste heat. In other words, the government is doing everything wrong and getting away with it because they have convinced the public that they are fighting to avert a disaster of major proportions thereby silencing any opposition. Much like Bush did after 9-11.
- r-ennis
January 22, 2009 at 9:48am