Climate Policy, Auctions, and Economic Justice: Part Two

In my last post I described a carbon cap-and-trade system and raised the basic question of who pays and who benefits. Here I'll review some of the arguments in favor of auctioning, rather than giving away, emission permits under such a system.

Economic justice

A cap-and-trade system with no auctions -- call it "cap-and-giveaway" (PDF) -- amounts to a highly regressive tax. Poor and working class families spend a greater portion of their income on energy and will be hardest hit when energy providers raise prices.

The regressivity can be reduced and even eliminated if the feds auction the permits and use the revenue wisely. One way to do so is to straight up buy people off. (A proposal called "cap-and-dividend" would simply divide up the auction revenue equally among every citizen, along the lines of Alaska's oil fund.) Another way is to reduce other regressive taxes (like the payroll tax). There are other options as well.

You might argue, as the coal industry does, that if permits are given away to utilities, they will pass the profits along to consumers in the form of lower prices. You might claim, in that sense, that giving away permits is more progressive.

You would, however, be wrong. The fact is that utilities are going to raise energy prices regardless.

It has to do with features of the electricity market -- for more on this, see Congressional testimony from Ian Bowles, Mass. Secretary of Energy & Environmental Affairs, and Dallas Burtraw, Senior Fellow at Resources for the Future. Said Bowles:

It is tempting to think that, if you make generators pay for the emissions they produce, it will drive electricity prices up, but if you give allowances away for free, it won't. But it's not true. The price impact is the same either way. (my emphasis)

This isn't a theoretical concern -- the experiment has already been run, in the European carbon trading system, and sure enough corporations profited and prices rose anyway.

To repeat: Under any system that puts a price on carbon, energy bills are going to go up. The difference is that in a system with auctions, gov't will have the resources to cushion the blow to the most vulnerable.

That is as simple and urgent a question of economic justice as you're likely to find.

Coalition building

Some folks treat permit allocation as if it's a side issue, tangential to the success of the core emission reduction system. That is extremely short-sighted. The success of a climate system depends as much on social support as it does on proper technocratic design.

If people at the low end of the income scale feel like they're getting screwed, the middle class sees their bills go up with no tangible benefit, and big corporations make out like bandits, the public will turn on the program and punish the politicians who passed or supported it.

The only way to build a broad, sustainable base of support for the climate fight is to insure that both the costs and the benefits are distributed equitably. We've got to play the long game.

Macroeconomic impact

According to the non-partisan Congressional Budget Office, in a report called "Approaches to Reducing Carbon Dioxide Emissions" (PDF), not only would auctioning permits serve economic justice, it would also reduce the total aggregate economic cost of meeting emission targets. Here's what CBO head Peter Orszag said in his testimony to Congress:

Selling allowances could also significantly lessen the macroeconomic impact of a CO2 cap. Evidence suggests that the macroeconomic cost of a 15 percent cut in U.S. emissions (not counting any benefits from mitigating climate change) might be more than twice as large if policymakers gave allowances away than if they sold the allowances and used the revenue to lower current taxes on labor or capital that discourage economic activity, such as income or payroll taxes. (my emphasis)

The CBO, along with many energy wonks on the left and right alike (see: Pigou Club), says that a carbon tax would be the most efficient, lowest total cost option for reducing emissions. At least for the time being, a carbon tax is politically impossible, so it's worth noting that a cap-and-trade system with 100% auctions is functionally identical to a carbon tax (at least in a perfect world -- one of the arguments for a tax is its simplicity and transparency, which a complicated system like cap-and-trade is unlikely to match).

In short: Given a cap-and-trade system, 100% auction is the most socially just and economically efficient option.

The political playing field

Now we leave wonkville and enter the grubby, eternally disappointing realm of politics. Let's take a look at the political state of play on the auction question.

Both Obama and Clinton have come out in favor of 100% auctions, and include it in the plans released by their campaigns. This is one of the great and under-acknowledged acts of political chutzpah on the Democratic side of the aisle in this election, thanks largely to the trailblazing courage of John Edwards. (If you'd told me two years ago that every contender for the Democratic nomination would support 80% reductions by 2050 via 100% auctions, I would have laughed. Bitterly. It's worth pausing to note how far, how fast, the debate has moved.)

But campaign plans are not bills. In Congress, Obama and Clinton have been less coherent and less courageous. Both have signed on as co-sponsors, not only of Lieberman & Warner's relatively weak America's Climate Security Act (ACSA), but of the even weaker McCain-Lieberman bill, and simultaneously the much stronger, gold-standard Sanders-Boxer bill. They are sponsoring indiscriminately, playing all the angles.

The bill that actually has a chance of passing is ACSA, and it is at the center of a rather heated dispute in the green community. Congressional Dems, including the presidential candidates, have been virtually unanimous in their support for the bill. Sen. Sanders half-heartedly tried to strengthen the bill in committee, but expressed support for it even when his amendments were rejected. Sen. Barbara Boxer, chair of the Environment & Public Works Committee, called voting the bill out of committee "the greatest legislative accomplishment of my political career of thirty years." Given the brick wall of obstructionism the Dems have faced in the Senate, they are palpably hungry for a public victory going into campaign season. They want this bill, badly.

Greens aren't so excited, noting several serious flaws in the bill. The targets are on the low-end of acceptable and the bill doesn't cover the full economy, but the main objection is that it is frontloaded with grandfathered permits and would, according to an analysis by Friends of the Earth (PDF), offer some $1 trillion in giveaways to fossil fuel industries between now and 2050.

FoE has launched an ad campaign urging legislators to Fix It or Ditch It. The group was out on its own for a while -- it even got badmouthed by Boxer -- but has recently gotten some support from the Sierra Club. Most green groups are tepid at best on the bill, except for establishment-friendly Environmental Defense, which has staunchly supported the bill (and slagged FoE behind closed doors). As for the green netroots, it's fair to say most folks oppose the bill as currently constituted and expect it to be further weakened during floor debate.

Political tactics

Here are a few key tactical questions:

1. Could a better bill get through next year, when there will likely be a larger Dem majority in Congress and possibly a Dem president (or, failing that, a reasonably climate-friendly Republican)?
2. Would Bush sign anything that gets through Congress this session? (Don't laugh -- lots of his big corporate contributors are getting nervous, thinking this might be the best chance they'll ever have to shape climate legislation.)
3. If a weak bill is passed, what are the chances it will be revisited and revised in coming years?

Groups like ED think getting the process started is important. Legislative staffs need to study up on this stuff; the details need to be hashed out; supporters and detractors need to be sussed out and put on record. ED has argued that greens shouldn't let the perfect be the enemy of the good, that the political situation will be largely the same next year anyway, and that the price of waiting is too high (delaying the start of the program means faster, steeper cuts will be required).

Others emphasize the worst case scenario: the bill gets further weakened on the floor, to the point that Republicans are willing to pass it and Bush is willing to sign it into law. Suffice to say, it's virtually axiomatic that anything Bush would sign would be awful.

Then we'd be stuck with a crappy bill, and once climate is checked off the national priority list, it's going to be extremely difficult to work up the will to revisit it any time soon. That's why FoE and others are willing to hold the line this year and wait until next year to get a bill. It is vitally important that this bill be designed well -- we're rapidly running out of time for second chances.

One thing worth noting: Big Coal is gearing up to launch an enormous PR campaign to defeat climate legislation. The core of the campaign will be Harry & Louise-style fear mongering: a climate bill will raise your energy costs and put you out on the street, not to mention your sweet-faced elderly auntie. Meanwhile, behind closed doors coal executives -- and the legislators they own -- are lobbying heavily against auctions, the one policy mechanism that could prevent the hit to consumers. Classy.

What you should do

Sorry if all this was a little complicated and discursive. To simplify matters, here's your Enviro-Blogger Expert Advice^©:

Support Friends of the Earth.

Call your legislators today and tell them you think 100% of the permits under a cap-and-trade system should be auctioned. If they don't know what that means, explain it (or send them to these posts). Tell them that if they cannot eliminate or at least substantially reduce the giveaways to big polluters in ACSA, they should be willing to let the bill go down to a Republican filibuster or a Bush veto. Congress can return to the issue next session, with a strengthened hand and a supportive president.

Some folks call this approach dippy idealism, willing to sacrifice tangible progress to dreams of the Perfect Bill. I admit this line of criticism confuses me. Take a step back and look at the bigger picture here: 100% auction in a cap-and-trade system is better for the working class, better for the general public, and, in a macroeconomic sense, cheaper. There is no substantive policy rationale for giving away permits. The only reason to do so is to buy the support of fossil fuel industries and the legislators who represent them.

Now, I get it: politics is politics. Some bribing of big corporate players will likely end up being necessary. Compromise is part of the job ... if you're a politician.

But concerned citizens are not politicians. It's not their job to compromise, certainly not before the battle is joined. It is the job of the grassroots to push, and keep pushing -- to speak up for constituencies that have no political voice, to defend those who don't have lobbyists in D.C.

As it stands, the details of climate legislation are being hashed out by lobbyists and legislators behind closed doors. In that unhealthy situation, yes, a lot of horse trading is inevitable.

But if a genuine public groundswell arises and publicizes the issue, pushing a simple message (100% auctions!), the dynamic can change.

This is crunch time -- time to call your friends, your neighbors, your legislators. Time to make noise. It is long past time for the progressive grassroots to take up this fight in earnest.

Comments (32)

1. I note that this year's record cold temperatures have cooled not a whit the ardor of the Enviro's for yet another job-killing, costly Statist intrusion into the nation's economy.

   Posted by pontificus at 02/29/2008 @ 11:59am

2. Ponti-So,changes in weather patterns have caused you to conclude that nothing has changed and nothing is going on..

   Posted by i'm nobody at 02/29/2008 @ 12:09pm

3. It's worth pausing to note how far, how fast, the debate has moved

   hmmmmm?

   any masked men hearing that?

   Posted by frosty zoom at 02/29/2008 @ 12:19pm

4. offer some $1 trillion in giveaways to fossil fuel industries between now and 2050.

   hmmmm?

   lieberman -- warner.

   how'd i guess?

   Posted by frosty zoom at 02/29/2008 @ 12:22pm

5. If a weak bill is passed, what are the chances it will be revisited and revised in coming years?

   i suppose that depends on how many february tornados happen...........

   Posted by frosty zoom at 02/29/2008 @ 12:24pm

6. Time to make noise.

   but it's american idol season........

   and then the playoffs

   and then the

   and then the

   and then the

   Posted by frosty zoom at 02/29/2008 @ 12:27pm

7. I note that this year's record cold temperatures have cooled not a whit the ardor of the Enviro's for yet another job-killing, costly Statist intrusion into the nation's economy.

   Posted by PONTIFICUS 02/29/2008 @ 11:59am

   your most moronic post ever.

   Posted by frosty zoom at 02/29/2008 @ 12:28pm

8. BC introduces carbon tax, but off-sets increased fuel costs with tax cuts

   Feb 19, 2008

   VICTORIA - Finance Minister Carole Taylor introduced an escalating carbon tax on most fossil fuels Tuesday, one she says recycles revenues back to taxpayers and businesses and is designed to ignite an environmental social movement in British Columbia and across Canada to fight climate change.

   http://canadianpress.google.com/article/ALeqM5jgHEtIZZYeVxdEQy1WWvRHUabA ww

   hurry up guys. your going to be left behind.................

   Posted by frosty zoom at 02/29/2008 @ 12:32pm

9. instead, become a regular fixture, David Roberts -

   Posted by ZERO 02/29/2008 @ 12:30pm

   agreed.

   hey dave, how about a post about cruises?

   Posted by frosty zoom at 02/29/2008 @ 12:32pm

10. damn good piece, DAVE! they should keep you.

    i'm still slippin a tack in zero's chair, though...heehee...

    Posted by ibbleblibble at 02/29/2008 @ 3:46pm

11. Posted by FROSTY ZOOM 02/29/2008 @ 12:28pm

    Naw FZ, I've seen Pointy say w-a-y stupider stuff than that!

    Way to go Canada! Guess they're wearing their "Leader of the Free World" toque now, eh?

    Posted by leftofcenter at 02/29/2008 @ 4:03pm

12. I would like to be the first to volunteer that all you lefties move back to the Mother Ship, aka California. You deserve each other!

    January 11, 2008 California Seeks Thermostat Control By FELICITY BARRINGER

    SAN FRANCISCO -- The conceit in the 1960s show "The Outer Limits" was that outside forces had taken control of your television set.

    Next year in California, state regulators are likely to have the emergency power to control individual thermostats, sending temperatures up or down through a radio-controlled device that will be required in new or substantially modified houses and buildings to manage electricity shortages.

    The proposed rules are contained in a document circulated by the California Energy Commission, which for more than three decades has set state energy efficiency standards for home appliances, like water heaters, air conditioners and refrigerators. The changes would allow utilities to adjust customers' preset temperatures when the price of electricity is soaring. Customers could override the utilities' suggested temperatures. But in emergencies, the utilities could override customers' wishes.

    Final approval is expected next month.

    Posted by pontificus at 02/29/2008 @ 8:53pm

13. Posted by LVLIBERTY1 02/29/2008 @ 4:12pm

    First off, most renewables don't generate more energy than they take to produce. This is reflected in the cost of things like windmills and solar panels, which make them uneconomical except in niche applications and where the economics are warped by tax breaks. Thus the State of California, despite all of their blather about these technologies, is chronically short of energy, and now it comes down to the bureaucrats' wet dream, State control of peoples' thermostats.

    And using ethanol derived from food as a motor fuel is one of the stupidest economic and energy policy decisions a country can make. Needless to say, the scientifically and economically illiterate that congregate on the left are all for it, which makes the argument against State planning pretty clear cut.

    Posted by pontificus at 02/29/2008 @ 8:59pm

14. Posted by FROSTY ZOOM 02/29/2008 @ 12:22pm

    offer some $1 trillion in giveaways to fossil fuel industries between now and 2050.

    Can you 'giveaway' something you never owned?

    Posted by pontificus at 02/29/2008 @ 9:08pm

15. Posted by FROSTY ZOOM 02/29/2008 @ 12:28pm

    your most moronic post ever.

    Well argued, FROSTY. I'm sure that works quite well in your circle of jerks or some combination thereof.

    Posted by pontificus at 02/29/2008 @ 9:09pm

16. And while we're at it...lets give a hearty round of applause to the libs in Congress for voting to raise taxes on the oil companies because they were making too much profit. Congratulations on a plan that will make energy more expensive and less affordable for everyone...particularly the poor!!! I keep forgetting...aren't libs supposed to be FOR the little guy?

    Posted by usc1 at 02/29/2008 @ 10:45pm

17. It's an interesting presumption on the left that anything you've earned that the government let's you keep is a 'giveaway'...isn't it?

    Posted by pontificus at 02/29/2008 @ 11:53pm

18. Posted by USC1 02/29/2008 @ 10:45pm

    It's another interesting presumption among the 'intellectuals' on the left that higher taxes on businesses and high earners are basically 'free' money that the munificent government gets to spend for the benefit of all. As if those higher costs don't get passed directly on to the consumer! The greatest shell game in history.

    Posted by pontificus at 03/01/2008 @ 12:28am

19. Pointy, LL & USC

    If you guys are done slapping each other on the ass, maybe you might try a bit of reading material SUBSIDIES You see, big energy (among certain other industries) receives massive subsidies from the Fed, a practice which has only increased under the "Dubya years" - and have made record profits along the way. So sure, I suppose they would want to see their corporate tax rates remain lower than many other industries. However, that sure doesn't make a level playing field for other, "greener" technologies. Yet you and yours seems to have the need to decry an occasional tax incentive for those ...makes me a bit curious.

    "...between 5 and 10 billion dollars a year of taxpayers' money goes to the petroleum industry. Less than 500 million a year goes to renewables. For example, in 1994, the government of Japan introduced incentives for solar energy. This program has resulted in a 72 percent reduction in the average cost of solar energy systems, due to the expanded market availability and increased efficiency of distribution. Solar energy is now competitive in Japan, and the need for incentives is being reduced." (Solarguide.com)

    Amazing what a bit of focussed subsidies can accomplish, huh?

    Posted by leftofcenter at 03/01/2008 @ 09:22am

20. ROBERTS: If people at the low end of the income scale feel like they're getting screwed, the middle class sees their bills go up with no tangible benefit....

    "if"? Any time complexities go up and government imposes more costs, which economic group is LEAST capable of minimizing the `bad' or maximizing the `good' to themselves?

    Will the middle class see tangible benefits in exchange for higher bills? Just make sure some Liberal publication keeps a counter, like the national deficit clock in NY, that tells folks that:

    - The projected future rise in sea level has been reduced form Gore's 20 ft., to 19.9999999999999999 ft, for every $billion in increased bills;

    - The concentration of CO2 is increasing daily by .0000000001 parts per trillion rather than .0000000002 ppt;

    - The glaciers are thinning slower by .000000000000004384 milimeters per winter.

    Come on, today's climate science is so indisputable, there should be no problem in convincing folks of "tangible benefits"! Who can argue, right?

    Posted by Happy at 03/01/2008 @ 2:36pm

21. The silent sound of a waterfall.

    Near the bush where singing blackbirds describe a signal of care I see the beautiful darkness, and also that sunset, when my sound fades away, discovers a dream and a tender idea.

    Francesco Sinibaldi

    Posted by Sinibaldi at 03/01/2008 @ 3:04pm

22. Posted by LEFTOFCENTER 03/01/2008 @ 09:22am

    LoC, tax incentives to oil companies have the effect of subsidizing the production of oil which translates directly to lower costs at the pump. Which class do you think benefits most from that? And which class do you think will be penalized most if the price of oil doubles or triples? Hint: said class does not include Al Gore, Nancy Pelosi, Bono, and any others with Gulfstream II's.

    Of course we would all like to see solar panels, windmills, pyramid energy, or whatever else you have be successful. But the fact is, they are not there yet. And contrary to your post, a) the government and private industry have spent many, many tens if not hundreds of billions on solar power tech, not the 500 million you mention. Plus, your point about Japanese solar power advances doesn't hold water, if solar power is economical there, it's just as economical here in the US.

    Posted by pontificus at 03/01/2008 @ 4:15pm

23. Ponti

    You sidestep your own point I think ... if subsides are good for oil, then what about solar, wind, etc?

    The figure (500 million) is a "per year" of federal (yours and my) money. It is the figure I found - if you have other referenced figures, please post them and not just say "I'm sure", ok?

    Posted by leftofcenter at 03/01/2008 @ 5:58pm

24. Posted by LEFTOFCENTER 03/01/2008 @ 5:58pm

    You sidestep your own point I think ... if subsides are good for oil, then what about solar, wind, etc?

    I support subsidies for them both, and anything else that helps to make energy cheaper for the average American. And I am against policies that make energy more expensive for us, especially when these policies are pushed by a wealthy elite, regardless of what they claim to be the purpose.

    The figure (500 million) is a "per year" of federal (yours and my) money. It is the figure I found - if you have other referenced figures, please post them and not just say "I'm sure", ok?

    I don't have any figures. If it is actually only $500 million, I think that's too little. But clearly, there's only so much sunlight hitting the Earth, and so much wind. The potential of these technologies to provide for an ever-expanding population is limited.

    Posted by pontificus at 03/01/2008 @ 9:10pm

25. Hopefully in the next 10-15 years we will get a technology breakthrough on the means of storing energy produced by renewables that is sufficient to reduce the use of our more traditional resources.

    Posted by LVLIBERTY1 02/29/2008 @ 4:07pm |

    why?

    Posted by frosty zoom at 03/01/2008 @ 9:44pm

26. And using ethanol derived from food as a motor fuel is one of the stupidest economic and energy policy decisions a country can make.

    Posted by PONTIFICUS 02/29/2008 @ 8:59pm

    oh my god!

    i agree with you!

    Posted by frosty zoom at 03/01/2008 @ 9:46pm

27. Of course we would all like to see solar panels, windmills, pyramid energy, or whatever else you have be successful.

    Posted by PONTIFICUS 03/01/2008 @ 4:15pm

    why?

    Posted by frosty zoom at 03/01/2008 @ 9:48pm

28. The potential of these technologies to provide for an ever-expanding population is limited.

    Posted by PONTIFICUS 03/01/2008 @ 9:10pm

    so you think they'll find oil on neptune?

    Posted by frosty zoom at 03/01/2008 @ 9:50pm

29. The potential of these technologies to provide for an ever-expanding population is limited.

    Posted by PONTIFICUS 03/01/2008 @ 9:10pm

    And that is the crux of it, the fight of many for fewer and fewer resources. The real solutions are A) learn to live with less "stuff" because more and more for all is not do-able, and B) globally we need to decrease our numbers (or at least the rate of increase of those numbers) or we will never find a steady-state, sustainable point.

    Posted by leftofcenter at 03/01/2008 @ 10:11pm

30. LOC

    Pretty much agree with what Pontificus said, but one thing needs to be cleared up. YOu said

    (oil companies) have made record profits along the way. You're leaving out the part about oil companies' profit margins being one of the lowest in business...last time I checked a couple of years ago it was 9 cents on the dollar vs. 15 cents for the average US company...which means they aren't gouging us as your statment would lead us to believe. It means that despite the higher prices we keep using more and more of their product.

    Posted by usc1 at 03/02/2008 @ 04:49am

31. Posted by LEFTOFCENTER 03/01/2008 @ 10:11pm

    The real solutions are A) learn to live with less "stuff" because more and more for all is not do-able,

    I agree that waste is bad, and reasonable attempts at conservation are always going to be needed. But I don't agree that the human species is unable to find additional sources of energy.

    The movement against nuclear power is a quasi-religious offshoot of the Luddite movement, and it needs to be overcome. Oil will last for many more decades if not a century, and there is no question that various forms of nuclear power, most especially fusion power, will provide more than enough energy to the world going forward.

    and B) globally we need to decrease our numbers (or at least the rate of increase of those numbers) or we will never find a steady-state, sustainable point.

    This sentiment has been expressed by various people for centuries, and they have always been proven wrong. I feel utterly confident it is as wrong now as it was centuries ago. And the entire movement of people who believe this has been hijacked by others whose aim is power over their fellow human beings.

    Posted by pontificus at 03/02/2008 @ 09:17am

32. Posted by FROSTY ZOOM 03/01/2008 @ 9:50pm

    so you think they'll find oil on neptune?

    Not that it's practical to get to, but the atmospheres and surfaces of many planets and moons in the solar system consist almost entirely of hydrocarbons.

    Posted by pontificus at 03/02/2008 @ 09:26am