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Climate Change Is Important: Energy Conservation is the First Step


June 27, 2009

Explain Cap and Trade (How ACES Will Work)

Category: Climate Change,Policy – Tom Harrison – 5:31 pm

Cap and trade seems incredibly complex, counter-intuitive, unfair, and misguided — if that’s your view, you have it about right, but the funny thing is, it will work — here’s why. The recent passage of the American Clean Energy Security act (ACES) in the House is a big milestone for cap and trade, but it will only pass the Senate if people understand what it is, and why it’s a good thing.

The first thing to know, is that the main part of cap and trade is the cap. The cap says: no more than a certain amount of CO2 can be released in a given year — major polluters are given a limit. Every year the cap gets tightened according to a predictable schedule. We are aiming for a target, and know what we have to do to get there.

The trade part is what makes things seem complicate and strange. So if I am an electricity utility executive, and I have a bunch of coal plants, I may find that I am releasing more CO2 than my limit. What makes trade cool is that if I don’t want to lay off my work force, I can decide to buy credits from another company — I can pay to pollute. Sure, it makes my costs go up, but now I have more incentive to clean up my act.

And no, it doesn’t mean we have more pollution, just more flexibility. My competitor, who had the foresight to start a wind, solar or conservation project a few years ago is the only one I can get the credits from. And if there’s anything that makes me madder than paying to pollute, it’s paying my competitor. In the first few years, all industries combined will release as much as is allowed by the cap. And that’s a lot, but overall, it’s less CO2 than before.

So, still being that electricity utility executive, I could stick my head in the sand. Or I could do what American business has done so well: I could respond to this new market. Suddenly those crackpot wind turbines start looking like a good deal, and it makes more sense for me to encourage households to conserve, or better yet, make their own power with solar panels. I am still in the business of delivering electricity to my customers, but the clean kind makes more sense now than the dirty kind. And next year, the cap is going to get tighter, so there will be fewer credits to buy, and they’ll cost a little more. Time to get with the program.

Now I’ll change hats. I am an executive at a clean energy producer. I get credits, too, but I don’t really need them, so I can sell them to the highest bidder. In 2009, my business was growing, but at a significant disadvantage compared to the established utilities — I had to invest a lot into research, development and new construction — all of this costs money, for the employees, products I need to install, and the labor needed to make it all work. I’m happy to be employing all those people, but it makes my challenge a bit easier when I am able to sell my credits to the existing companies.

And like any new technology, it becomes more efficient as it matures and scales up. New advances in technology make it possible for me to sell my clean energy cheaply, and there’s a lot of incentive for me to do so.

That’s the heart of cap and trade: a way of making CO2 more expensive that encourages businesses to take on the risk and additional cost (read: jobs) of developing and implementing new, clean technologies.

Cap and trade may increase the cost of electricity and other products a little. The current high estimate of the cost of the ACES bill is less than $1 a day for most Americans. But if it were $2 a day, would that really matter?

Now I’ll pretend that I am not sure about this whole thing, and it seems complicated and messy — why couldn’t we just tax the CO2 emitters? We could indeed, and it’s not just a bad idea. But nobody like taxes, and more important, it’s not that predictable, and if the regulators get it wrong, there’s a lot of room for cheating. In the end, the government has a simpler job in issuing and managing the permits than it does collecting taxes.

Now I’ll pretend that I am not so sure this climate change thing is something we caused, or something we can fix. I sure hate to be spending an extra dollar a day when it’s going to change so much. Ok, I’ll admit I have a hard time doing justice to this position, except to say: what if they’re right and the CO2 we’re emitting is the cause, and the fires, floods, droughts, storms and so on that we’re already suffering a little from become worse? And what if Europe, or Japan, or China gets a jump on us — won’t we find ourselves a fading country much like Britain found themselves after they ran out of wood?

The ACES bill is far from perfect. I would like to see it set tighter caps, and aim higher than it has. But this is a big change, and one that’s hard for people to get a handle on — at present, it’s hard to see how it’s the most important thing for us to be doing. But while our economy and health care issues are clear and evident problems, climate change is the far, far more important issue to begin solving.

If you’re not sure that this bill is right, please read all that you can to help understand it. Climate change is a serious problem indeed. Cap and trade is a good solution to help us move to a new system of energy that will not continue to cause climate change. Many industries will have to change, and most companies hate change, so will fight strong and hard against this bill. But it is our voices that will get heard.

Learn the facts, and put your support behind this bill. It’s our best chance to start solving this problem.

And call, fax, write, or meet your senator, local and state reps, skeptical family, friends and neighbors.

16 Comments

  1. “What makes trade cool is that if I don’t want to lay off my work force, I can decide to buy credits from another company — I can pay to pollute. Sure, it makes my costs go up, but now I have more incentive to clean up my act.”

    Choices given here:
    1. Lay off workers.
    2. Divert money from payroll to buy credits (lay off workers).
    3. Divert money from payroll to clean up (lay off workers).
    These are not real choices.

    The clean energy company that has already spent a lot in R & D did so with huge government subsidies already. This whole thing stinks of political favoritism.

    By the way, the climate hasn’t changed *yet*. And I agree, climate change will be a serious problem.

    Comment by Kurt — June 28, 2009 @ 2:49 am

  2. The option considered most likely is that the companies producing CO2 will pass on their incremental costs to customers.

    The clean energy company that invested would disagree. Up until very recently, very little was given to companies in the way of incentives (compared, for example, to what was given to oil companies). It is true that now, and also as part of the ACES bill the government is working to encourage businesses to take the risks of developing new ways to produce energy cleanly.

    Look, the entire point of this thing is to add the cost of CO2 to the equation; until we do, CO2 is “free” and no company has an incentive to change. Of course changing this equation will affect our economy — the purpose of a plan like ACES is to find a way that lets that change happen predictably, over time, and with adequate support to allow businesses to adapt (as many utilities are), and displaced workers to have a chance to find a reasonable alternative line of work. At least with ACES, companies have some choices about how to evolve.

    On your second point regarding whether the climate has changed yet, I think you should take a look at the reports issued last year by the department of agriculture and about a week ago by numerous US agencies working together. The effects are very real and they are here now. The climate has changed (and it has been changing for decades) — it’s a big system, so the impacts have largely been buffered. Not any more.

    The most recent report had sufficient data to make realistic projections of how this change would continue, by region, and what impacts would be felt. Some are trivial, others will require us to adapt to the new environment. Those changes are far from costless — left unchecked, the continued progression of climate change are projected to have major impacts on agriculture and most of our food sources, water availability, and so on. These are real costs — one we’re bearing a little tiny bit of now. They won’t get smaller unless we act now; ACES is a way to respond.

    I hope you find the time to read as much as you can, and understand. We have a chance to reverse our course, if we act now. It’s real, it’s now, and it’s going to be far, far more costly than the planned solutions offered by ACES and many other responses we can make.

    Comment by Tom Harrison — June 28, 2009 @ 9:47 am

  3. Tom,

    I find it hard to believe that we could return to a carbon footprint vis a vis Plymouth Rock in 1620. If you wonder where I got that figure I offer this recent newsletter sent to me on the subject, on a talk given on ‘Energy Myths and Realities’ at Utah Valley University in April, 2009.

    The Newsletter begins…..First off, the stated objective of cutting carbon emissions by 83% by 2050 will go down in history as outrageous – akin to when Who drummer Keith Moon drove his Lincoln Continental into a pool at the Holiday Inn. I think that embers of Congress must be smoking the same thing Moon was.

    [from Tom: remaining of copied article removed as it is a copyright violation: here’s the link http://www.nuwireinvestor.com/blogs/investorcentric/2009/06/how-cap-and-trade-bill-will-affect.html

    Comment by Jean — June 28, 2009 @ 11:38 am

  4. Jean –

    I had to edit your comment; it’s a copyright violation to copy someone else’s work in its entirety — I found the original article and put in a link. Please do the same in future comments.

    To address only the first point, the language being used takes some numbers and severely misstates them.

    ACES applies caps on carbon emissions, not atmospheric CO2 concentrations. Emissions come from electricity plants, oil and gas sectors, and heavy manufacturing. If a plant produced 100 units of CO2 in 2005, they would be required to produce 17% less, or 83 units by 2020, with increasing reductions year over year.

    The language is confusing, to be sure. But the goal is actually very modest, and would, on its own, only slow the increase in CO2 concentrations. This is one of the reasons many environmentalists want the bill to be stronger.

    Here’s a link to an article that might help clarify what this law would and would not do: http://www.wri.org/stories/2009/05/american-clean-energy-and-security-act-key-elements-and-next-steps

    Comment by Tom Harrison — June 28, 2009 @ 3:21 pm

  5. I think that your statement that Cap and Trade will work is a little strong… I’d certainly agree that the paradigm as a whole, in theory, can work, but it’s far from clear to me that this legislation constitutes a viable system, which will have the desired effects. As we’ve all seen with the global financial mess, it’s possible for complex markets to fail in a variety of ways, and this is one market which we cannot afford to see blow up. “Nature doesn’t do bailouts”. That means getting this market right is important, and it’s easy to hide devils in the details, especially if you have those who will be participating in the mediation of those parkets participating in the drafting of the legislation enabling the markets in the first place. Goldman Sachs, for instance, has apparently been an advocate of Cap and Trade, and is interested in the potential for a new trillion dollar derivatives market. Rolling Stone (that bastion of investigative journalism…) recently published an article entitled The Great American Bubble Machine, criticizing Goldman Sachs’ role in the recent string of bubbles, and suggesting that they are eager to “participate” in the coming carbon markets. It would be painful to watch them repeat their past behaviors in a market upon which more than just our financial fortunes depend.

    Comment by Zane Selvans — June 28, 2009 @ 4:41 pm

  6. Zane –

    I think you have hit on an important issue. On the one hand the US and world feels completely burned by markets these days; yet we’re heading down a path to create a market-based system to help address one of the most serious issues of our time. It seems odd.

    But markets on their own do tend to work. In our super-capitalist world, we Americans tend to look at the government as an instrument of inefficiency, or constraint, or ineptitude. This is a view that is probably reasonable. To a degree.

    Ample evidence exist that markets work to encourage innovation, reduce inefficiencies, increase wealth and generally make the world a better place. And there’s a lot of evidence that too much (or complete) control by government leads to a pretty bad outcome. To a degree.

    It’s not a binary problem, though: neither black nor white, although we may be one one end of that spectrum now.

    In the 80′s, we saw the communist (central control) model fail spectacularly — perhaps this gave rise to the anti-regulatory movement. But before that, in the 1930′s we had seen the capitalist model fail spectacularly — perhaps that gave rise to a regulatory movement.

    The US has vacillated between extremes, usually as a result of some shock. But the cool thing is, in the middle, which is by far the majority of the time, we’re pretty stable. In this view of things, I would say markets work. To a degree.

    So will cap and trade work? If the goal is to find a way to make our CO2 producing industries reduce, then nearly eliminate CO2 output, then cap and trade creates what is actually a fairly simple market.

    Here’s one (probably over-simplified) way to look at it. A new currency, the permit, is created and controlled by the government. The government decides how much of it there is. Companies buy and sell using this currency. They report periodically and need to make sure their bill is paid. The government checks the basis of the currency (CO2 emissions) against records provided, and has the authority to verify.

    In a lot of ways, this is like how our tax code works today, and that’s a good thing, actually, because much though everything about taxes is messed up, it works. To a degree.

    Obviously people and companies cheat on taxes, and no one likes the tax man who is taking away the money we earned. But the good thing is that the similarity, as well as the experiments using the same method from the past, give us clues about what works and what doesn’t. We have things like “the audit”, and “penalties” and “jail” which help dissuade the more honest players to play mostly by the rules.

    I don’t expect perfection in ACES. I expect that most of the problems opponents are touting will not happen, neither do I expect that it will be an incredible success — it has become too watered down by the legislative process for that.

    I think by far the more important thing is to do something about right, that points us in the right direction, gives us a lot of information about what works, should make a difference, and, importantly sends a lot of good signals to many sectors.

    Over a few years, we’ll see how jobs are impacted, we’ll learn more about the need to reduce CO2 more quickly, we’ll have innovations in all sorts of areas, and we’ll have some idea of how this first pass at cap and trade is working. Perhaps it will have worked great, or not. More likely somewhere in the middle.

    But we will be trying something that has a good chance of accomplishing the goal of decreasing CO2 emissions (or actually, slowing the increase).

    And then, we’ll adjust. That’s one of the cool things about laws, and about markets, and about the United States. I wish more people could see that we’re not jumping off a cliff, here, we’re just trying something … actually something pretty modest, that will work, to a degree.

    Comment by Tom Harrison — June 29, 2009 @ 5:32 pm

  7. Oh, don’t get me wrong — I’m a huge fan of markets, and I think they’re absolutely wonderful tools for allocating scarce resources in just about any kind situation. I’ve just been very disappointed at how spineless the government reaction to the banking industry’s business failures has been. See e.g. former IMF economist Simon Johnson’s running commentary at The Baseline Scenario and this article in the Atlantic.

    That, in combination with the degree to which ACES has been scaled back from its initial form, I have to assume that it’s been well worked over and re-written by a host of lobbying interests, including what remains of the finance sector.

    I think one of the worst possible outcomes would be a system which is both unambitious enough to make very little difference if it works, and confirms the fears of both the market-phobic and the anti-regulatory crowds if it blows up.

    I guess we’ll just have to see what happens in the Senate.

    Comment by Zane Selvans — June 29, 2009 @ 5:46 pm

  8. All of this is great for those who can afford it. I make $8.00 an hour (before paying taxes to spread the wealth). If you don’t think think just $2.00 a day ($60.00/month) is going to hurt our family your wrong. I am not poor enough to qualify for any assistance (you have to be making less than $8.00 for that). Perhaps I can purchase candles for my family to heat and light my house. I guess they cost less than $2.00 a day.
    This is another power grab by government disguised as an environmental issue. No one is really fooled by this. As for reading the bill… why? Our governement officiials and Obama didn’t seem to think that was necessary. YOu might be the only person of the face of the earth who DID read it.

    Comment by sherise — June 30, 2009 @ 9:14 am

  9. Sherise — actually, while the congressional budget office (CBO) has estimated that the effect of the ACES bill will cost the average American family an additional $175 per year, but families with lower incomes will actually have reduced costs of $40/year. The CBO estimates were the most conservative of those prepared by the government.

    I certainly don’t think it’s right how much lower income families spend in taxes — several members of my family fall into this category, and it seems like they’re getting the short end of the stick at just about every turn.

    As for reading the bill, I have read preliminary versions and government prepared summaries of the main features. The bill didn’t exist in its final form until a few moments before it was signed; everyone is trying to catch up to see what kinds of compromises and special provisions were added in the last minutes.

    I hope you can focus on the larger picture. I can see why people are feeling pissed off at what’s going on in government. It’s not pretty. But it’s what we’ve got, I guess.

    Comment by Tom Harrison — June 30, 2009 @ 2:06 pm

  10. I’m not convinced. The whole fungible things doesn’t work for me. It will be taxation without representation as it morphs illusively among special interests and untrustworthy politicians who don’t even read the bills they sign. There is little incentive for energy producers since the cost will be passed on to consumers. We could put the names of major polluters out there without taxing people and have better results. I am currently reading the bill and it is alarming. I see my freedoms flying out the window.

    We’ll have to ship more from China under this bill and they are a major polluter. A similar cap and trade bill is ballooning quickly in Great Britain. The CBO’s prediction of an annual cost of $175 a year is based on the initial costs and neglects to mention that it is a balloon tax.

    We know how these emission standards work in Cali – they import from China.

    In a perfect world, cap and trade might have some merit, but it isn’t a perfect world and it won’t work without China and India on board.

    Comment by Maureen — July 9, 2009 @ 6:01 pm

  11. Maureen –

    Thanks for your comment. I think it’s safe to say that any proponent of pretty much any (first pass) legislation to regulate carbon emissions would admit that there’s a significant chance that the regulation will not “work”.

    I have three comments on your points. I cannot argue over the freedom issue, as I suppose I have a rather different viewpoint. However, your comment “There is little incentive for energy producers since the cost will be passed on to consumers.” seems a contradiction in itself — indeed, the producers will pass on the costs to consumers, which is the expectation. Two things have happened: 1) the producer has paid for credits from a producer of renewable energy (whose costs go down), and 2) the producer passes along their increased costs of fossil fuel energy to you, the consumer.

    Wind and solar electricity, which are in many places about the same cost as coal or gas now become less expensive than coal or gas. This tends to magnify the incentives we have seen working already as new clean energy options come online. In the not-too-long run, economies of scale (and the cost of carbon) seal the deal — clean energy can be produced at scale, and quite likely at a lower (potentially far lower) price than fossil fuels, even at today’s very inexpensive prices.

    As for China and India, it seems likely (confirmed yesterday at the G-8 summit) that they are going to wait for the US to do something about climate before they do. While this is not the ideal outcome for the world, it is certainly “reasonable” — the US has availed itself of the benefits of nearly free energy for a century, and reaped many benefits, which only now China and India are beginning to gain. The US has been the main contributor to climate change, and even if China has caught up in overall emissions, their population is still five times ours — we (Americans) are, by any standard, profligate carbon emitters. Should we not lead the world, as we have in many other cases, in finding a solution?

    Finally, I encourage you to consider what many believe to be a major opportunity for the US — ours to take, or lose. Our size and power still gives us the opportunity to set the new standards for what will eventually be the new power sources of this new century. All change has cost, and even if the costs are higher than estimated, very few have made the point that massive increases in wealth could accrue to those who lead the new energy revolution. There is room for several winners, but the laggards will be losers.

    So if you don’t like seeing your freedoms disappear, consider what happens when China leads the world to a clean energy future (and yes, that’s the direction things are going now).

    We can get China and India on board by leading and demonstrating that we know how to solve problems and make things that look costly for us turn out to be major windfalls.

    Read some energy history to see how this worked in the past when old forms of energy were supplanted by new.

    Comment by Tom Harrison — July 10, 2009 @ 2:36 am

  12. I appreciate your comments Tom and you sound like you sincerely believe what you are saying. Yes, the whole idea is to make energy expensive so we’ll use less. I personally cannot use less energy and I don’t want the government coming in and telling me how much I can use or how I have to spend more to make my house efficient before I can sell. We are in a depressed economy and the timing is terrible.

    A plan that does not use nuclear energy will NOT work, ever. The Chinese and Indians are not going to follow our lead – the Chinese are stepping up their building of coal plants. We will destroy our standard of living for nothing. The goals are noteworthy. Who couldn’t agree with these goals? When they add nuclear power; when they get rid of the ballooning aspect of the tax; when they get rid of the massive increase in government agencies and workers; when they get rid of the special interests who have taken charge of this bill; maybe it will have a chance. Until then, it is just another controlling, massive tax on the middle class that we will never get rid of.

    I looked into a photovoltaic roof for myself – very expensive for very little gain. My town won’t let me put geothermal in and I can’t afford it anyway. No room for a windmill. No plan will work without nuclear, at least we need nuclear for business.

    I know my history quite well and I am a big supporter of new sources of energy, but taxing us to death becomes ripe for corruption. We’ll be paying off government inspectors, the crooks on Wall St. will be corrupting energy, and so on.

    A tax on the air we exhale – it’s wrong, just plain wrong.

    Comment by Maureen — July 10, 2009 @ 8:11 am

  13. It’s wrong to suggest that nuclear somehow represents a cost-effective silver bullet here. It’s certainly an option, but at scale, and in the long term, it faces significant technical hurdles and costs. I just read David Bodansky’s book Nuclear Energy, and wrote up some thoughts on it, if you’re interested.

    As far as the morality of the Breath Tax… the atmosphere has no sense of right or wrong. It’s just physics. And it’s not our personal exhalations that are the problem. They amount to only on the order of 100 kg of CO2 per year, compared to the 20,000 kg each American causes to be released through industry.

    Comment by Zane Selvans — July 10, 2009 @ 12:28 pm

  14. Thank you for the information Zane. I read it, but I don’t agree. There hasn’t been a nuclear accident in this country since 1979, no one died, and Chernobyl was a third world country’s incompetence. I don’t agree about the costs at all, but, full disclosure, my husband is a nuclear engineer. Our planet is very important but it is not necessary to destroy our standard of living to rush into something so we can be the lead nation when no one is following as the recent G-8 summit demonstrated. The climate bill is so botched by special interests, I find it to be a mess as I read it.

    Comment by Maureen — July 10, 2009 @ 7:34 pm

  15. Regarding the threat to our standard of living, I would suggest reading “Energy at the Crossroads” by Vaclav Smil. It has a lot of interesting information about how energy use correlates with various measures of standard of living: per-capita GDP, literacy rates, life expectancy, etc. For all of them, there are examples of nations in which people are living high quality lives and using much less energy than we are, and in general, quality of life does not continue increasing on average beyond a certainly amount of energy use. I suspect that the two are not as tightly linked as you think.

    For some examples of ways in which we could be using a lot less energy, without decreasing our standards of living, I suggest watching Amory Lovins’ lecture series at Stanford from last year. You can also download the talks from iTunes (just search the iTunes store for advanced energy efficiency stanford amory lovins)

    Comment by Zane Selvans — July 10, 2009 @ 8:29 pm

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