NewEnergyNews: CAP&DIVIDEND, CAP&TRADE OR CAP THE DEBATE?/

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YESTERDAY

THINGS-TO-THINK-ABOUT WEDNESDAY, August 23:

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    Founding Editor Herman K. Trabish

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    Tuesday, February 09, 2010

    CAP&DIVIDEND, CAP&TRADE OR CAP THE DEBATE?

    Cap&Dividend, Cap&Trade or Cap the Debate?
    Herman K. Trabish, February 9, 2010 (for NewEnergyNews)

    If global climate change was named Adolph Saddam Stalin the Hun Warming, the entire contingent of climate deniers and New Energy naysayers would surely call for a full scale military response – or at least sanctions – against this dastardly evil doer perpetrating sea level rise, habitat compromise, starvation-inducing crop decimation and the propagation of deadly diseases.

    Climate change is, alas, still popularly if inaccurately named global warming and the easily distracted and uninformed dismiss it, though what could potentially be a worse cataclysm than those inflicted by Adolph, Saddam, Stalin, or Attila is gathering.

    Senator Maria Cantwell (D-Wash), seeing both (1) the need for urgent action to halt the proliferation of greenhouse gas emissions (GhGs) generated from burning fossil fuels that are causing rapidly worsening worldwide flux and (2) the Congressional stalemate on energy and climate legislation that is blocking U.S. action while the world awaits its leadership, has another idea. She wants to rename the U.S. effort against climate change.

    In A refreshing dose of honesty; Maria Cantwell and the politics of global warming, The Economist describes Senator Cantwell’s effort to rename and reframe Cap&Trade as Cap&Dividend, something she and many others believe will be more politically viable as well as more equitable for the nation’s taxpayers.

    click to enlarge

    Demonstrating what climate change activists and Cantwell are up against, influential Illinois Republican Congressman John Shimkus explained why there is no need to deal with climate change legislatively. “Never again,” Shimkus quoted from the Biblical passage about the Lord’s promise to Noah after the flood, “will I curse the ground because of man...And never again will I destroy all living creatures.”

    The current administration seems more sympathetic to the idea expressed by President John F. Kennedy in his 1961 inaugural address: “…here on earth God's work must truly be our own.” Despite Congressional deadlock, the administration honored the pledge it made at the December UN summit on climate change in Copenhagen by formally committing the U.S., at the end of January, to cut greenhouse gas (GhG) emissions 17% below 2005 levels by 2020.

    That is unlikely to happen through voluntary cuts. It will require a law enacted by Congress requiring utilities and other big GhG emitters to reduce their emissions. The House of Representatives passed such a law in June 2009. Progress halted on comparable Senate energy and climate legislation due to fundamental objections to its Cap&Trade provision, a provision very similar to the one in the House bill which was similarly highly disputed.

    Polls show an increasing number of U.S. voters doubt, whether for religious, scientific or economic reasons, the urgency of acting on climate change. Such doubt adds momentum and passion to a vocal minority of populists at the far ends of the political spectrum who disdain Cap&Trade as “cap and tax” and mistrust its financial complexities. One denier’s quoted T-shirt read: “My Carbon Footprint Will Fit Nicely in Your Liberal Ass.” 85% of those polled by Gallup think the economy is the priority, not climate change.

    click to enlarge

    Senator Cantwell thinks Cap&Dividend is the solution. A populist variation of Cap&Trade, it places hard caps on GhG emissions but it is simpler, avoids bringing big business and investment markets into the matter and promises to put money directly into voters pockets.

    Unlike the House Cap&Trade system, which fills 279 pages of the 1,428-page Waxman-Markey energy and climate legislation (H.R. 2454, American Clean Energy and Security (ACES) Act) cataloguing a multitude of regulatory details, the Cantwell-Collins bill (S.2877 Carbon Limits and Energy for America’s Renewal (CLEAR) Act) details Cap&Dividend in 39 pages.

    In a Cap&Dividend system, big emitters (utilities, power plants, heavy industry, oil and gas importers, etc.) would be required to purchase auctioned allowances for the GhGs they generate. The auction would create a price competition that would force them to pay for emissions but also drive them to seek the cleanest possible practices so as to get the edge on their competitors.

    It is fully expected the resultant added cost of doing business would be passed on to consumers. At the same time, the bulk of the revenues from the auction would be refunded, per capita, to anyone and everyone with a social security number. Senator Cantwell and the designers of Cap&Dividend believe most consumers would at least break even and, if they conserved on the things that would increase in price most (because they create the most GhGs), consumers would likely benefit. Only the richest 20% of U.S. consumers, those who use the most energy, would pay a penalty. The portion of the revenues not returned to consumers would be invested in New Energy and Energy Efficiency infrastructure as well as forest protection and GhG-cutting agricultural practices.

    click to enlarge

    Cantor CO2e is one of the world’s biggest and most experienced emissions trading houses. In business since 1992, it was instrumental in the success of at least 2 Cap&Trade systems now in place. Josh Margolis, co-CEO of the company, doesn’t think Cap&Dividend is workable. An outspoken advocate of Cap&Trade, Margolis believes Cap&Dividend leaves the fundamental impulses that drive U.S. business out of the equation.

    “Simply put, Cap&Dividend is designed to inflict pain on the emitters,” Margolis says. “But it doesn’t provide the emitters with a significant incentive to benefit from changing their behavior to avoid the pain or reduce GhGs beyond the basic cap requirement. Instead, emitters are incented to do just enough to minimize the pain,” Margolis explains. “Under Cap&Dividend, prudent managers will purchase just enough allowances to operate, pass on the cost to consumers (who in turn receive a rebate to minimize their own pain). While Cap&Dividend sources can sell odds and end allowances that were purchased at auction, these sources are prevented from selling allowances that are the result of game-changing modifications that free up previously granted allowances. In Cap&Dividend, an undesireable steady state is reached where excellence and ingenuity is replaced with calloused mediocrity.

    “The dividend process diverts money from the sources that need to retool and gives it instead to well-meaning bureaucrats and consumers,” Margolis goes on. “What consumers need is jobs. Under Cap&Dividend, as the cap tightens and the pain grows, these jobs will leak to uncapped countries or countries with free allocations. In a properly designed Cap&Trade program – one that gradually reduces allocations and allows emitters to turn their waste streams into profit streams – consumers will get a meaningful dividend – they get to keep their jobs.”

    click to enlarge

    Any Cap&Trade system that emerges, after the House proposal is reconciled with whatever survives the Senate, would be similar to the one used to control acid rain in the U.S. in the 1990s and to the one effectively being used at present to control GhGs (despite pioneering difficulties) in the EU. It would put a hard cap on industrial scale emitters and create a market where they could buy extra allowances to emit (if that was the only way they could keep doing business) and/or sell excess allowances (if they used efficiencies and New Energies to do business with fewer emissions).

    The first imperative of any effort against global climate change is to put a hard cap on emissions and ratchet it down without deviation over time. "A cap and trade program will produce results that are consistent with it’s design," Margolis says. "If it is designed with a gradual decline in allowed GhGs, it will produce a low price on carbon in the early years and a higher price in the later years.

    “A system which allows sources to over control and sell surplus emissions capacity," the CantorCO2e CEO explains, "is one that actually incentivizes sources to over comply so that they can sell surplus allowances. You want to see results? Tell the facility manager that he can sell what he doesn’t use. Then stand back (and enforce) and watch the profit motive at work. This worked in the acid rain program. It will work with GhGs.”

    A small portion of offsets would likely be included in a Cap&Trade system that allow companies to pay for GhG cuts in emerging economies rather than make cuts in their own operations because GhGs are, after all, a universal and not a local problem.

    The basic wisdom of Cap&Trade is that it gives business interests the opportunity to control their own destinies in the shift to an emissions-constrained New Energy economy. But there are several controversial aspects to it. First and foremost is the auction or allocation of allowances.

    Cap&Trade with an auction is working in the EU. (click to enlarge)

    The Cap&Trade system that successfully turned back acid rain in North America in the 1990s by driving big reductions in sulfur dioxide (SO2) auctioned only a small fraction of emissions allowances. “Instead of auctioning them,” Margolis recounted, “EPA gave power plants a declining check book of SO2 allowances. In exchange for accepting a hard cap, the utilities were allowed to make fuel and operational changes, some of which had the effect of reducing emissions for decades into the future. Those that failed to take proactive steps to reduce their emissions were forced to accept higher costs of doing business, inlcuding the need to purchase allowances from their cleaner brethren.”

    EPA gave allowances freely to the relatively small coterie of fossil fuel power plants responsible for the SO2. But it enforced a hard cap on the volumes the plants were allowed to emit and burdened them with a much higher ongoing cost of doing business if they did not make the necessary transition to cleaner practices and technology.

    The European Union (EU) Emissions Trading Scheme (ETS) is a Cap&Trade system implemented in 2005 that has effectively, if slowly, begun reducing GhGs there despite a series of beginners’ missteps and obstacles. “Early on,” Margolis says, “prices were low, in part, due to the fact that it gave away too many allowances and auctioned only a small portion.” This left the caps too loose and the price of emitting too low to affect the behavior of emitters.

    It is important to understand that over allocation was only part of the early ETS difficulties, Margolis insists. Another important factor was a failure of adequate regulation of the notoriously oligarchic European electricity sector. Careful regulation, Margolis says, is a vital part of a good Cap&Trade design.

    The kind of Cap&Trade system Margolis advocates reversed the acid rain problem. (bclick to enlarge)

    The House bill’s Cap&Trade program is designed similarly to the ETS, with a slightly larger portion of its allowances (15%) to be auctioned in its opening phase. The rational for this, as it was in the EU, is to make participation in the system affordable to the big GhG generators.

    The Obama administration came to office campaigning on a commitment to auction 100% of Cap&Trade allowances. This would simplify the system and create an enormous cost for emitting. It would also raise huge revenues that could be rebated to compensate consumers and invested in New Energy and Energy Efficiency infrastructure. But those huge revenues would expand government coffers. That looks like a tax to voters already angry about enormous government programs to cope the financial crisis, the recession and health insurance. reforms

    Cap&Trade advocate Margolis objects to any auction of emissions allowances, whether in a Cap&Trade or a Cap&Dividend system. Auctioning allowances impedes and discourages business and industry from building and participating in a New Energy economy. “With an auction, the government weilds the stick, collects the auction proceeds, and leaves the sources to fend for themselves,” Margolis says. To the extent that Margolis is right, the absence of a comprehensive effort from the private sector would leave nothing but a big government program and a diminished number of emitters.

    Advocates of Cap&Dividend are selling it as a people’s program, the antithesis of big government and new taxes. In Maine's Senator Susan Collins, Cap&Dividend has found a Republican co-sponsor. And Collins reports support from other Republicans, including Alaska’s Senator Lisa Murkowski, the leader in a growing Senate effort to take the ability to regulate GhGs away from the Environmental Protection Agency (EPA).

    Cap&Trade is not unpopular when it comes with jobs. (click to enlarge)

    Republicans and populists see Cap&Dividend as a less bureaucratic and more honest system than Cap&Trade. Challenging insider assumptions, the Cap&Dividend alliance says capping emissions does not have to be complicated. It admits there will be costs but emphasizes that the system compensates consumers.

    In response, Democratic leaders have shifted their emphasis on climate and energy legislation away from the urgency of dealing with climate change. In an effort to recapture popularity, they now stress the urgency of climate and energy legislation for its job-creating potential.

    From capanddividend.org

    CantorCO2e’s Margolis sees Cap&Dividend as a “well-meaning but, ultimately, misguided” effort. It does not, he believes, have incentives that will adequately drive changes in consumer behavior and it completely ignores incentives that could change the behavior of the emitters. It simply expects and allows them to pass their costs on to consumers, if they choose to remain in a system which subjects them to much higher costs of doing business.

    “Cap and trade and freely allocate,” Margolis says, “will achieve the emission-reduction goal. And it rewards proactive sources that turn their waste streams into profit streams.” It allows them to sell their unused allowances if they are smart and farsighted enough to move to low-emitting practices. Americans would be better served, Margolis insists, if policy makers would implement a system that harnesses both the desire to save and make money. Give business a framework where it can alter its actions in a fashion that allows it to reduce costs as well as generate revenues. “Make no mistake, as the cap tightens, the price of carbon will increase,” Margolis predicts. “Sources will compete and figure out ways to reduce emissions in order to supply surplus allowances to sources that are on the high side of the market clearing price.”

    From NationalWildlife via YouTube

    With Washington, D.C., immersed in issues that will impact the November 2010 mid-term election, the urgency of an issue like global climate change remains as veiled as if it were incognito. Recent polls suggest voters are not yet ready to realize the guy who looks no more threatening than Old Man Winter is actually Adolph Saddam Stalin the Hun Warming in disguise.

    A professor at the California Institute of Technology often remarks that the American people are not stupid; they are slow, but they are not stupid. Sooner or later, it is likely they will realize who the real evil doer is. When they do, it will be quite interesting to see how they judge the leaders who are now guiding them.

    1 Comments:

    At 7:30 PM, Anonymous Anonymous said...

    I think you should ask Mr. Margolis how much his company would lose if a Cap & Dividend system was put in place, instead of a Cap & Trade. It seems clear he has a profit motive.

    A good follow-up would be to ask why he thinks we need to create a false market (carbon trading) when we have, you know, an actual real life market that can be moved by placing a true price on carbon.

    Those would be my follow-up questions.

    Obvious point, but once you price carbon every company will have an incentive for reducing & innovating.

     

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