James Hansen's Story About His NY Times Op-Ed That Was Submitted with the Title of "Sack Goldman Sachs’ Cap‐and‐Trade"
The more I read his work, the more I respect James Hansen’s intellect and passion. I am reading his recently published book titled Storms of My Grandchildren and learning more than I ever knew before about his work as an atmospheric scientist studying the earth for the past 30 years.
Dr. Hansen and I share a distaste of the proposed “cap and trade” method of reducing greenhouse gas emissions for similar reasons. The primary reason is a near certainty that it not it would even work to reduce emissions, then we move on to questions about the complexity of structuring a market, the enormous financial rewards for people who are not actually doing anything to reduce emissions, and the vast potential for influence peddling and fraud in the market.
Here is a link to an extensive story about Dr. Hansen’s effort to get his thoughts out to a wider audience via an op-ed piece in the New York Times and how that effort got sabotaged by editorial decisions. The People vs. Cap and Tax. It is highly recommended reading. I personally like the fee and dividend approach because I believe that the overall effects on the world economy would be beneficial. It would put money into the hands of consumers who are careful about their energy use and give them a greater amount to spend on products and services as diverse as restaurant meals and tuition payments. It would increase the cost of wasting precious fossil fuels that should be used judiciously so we pass some of earth’s capital onto distant generations. It would also increase the value of energy production methods that do not use hydrocarbon combustion and do not release any greenhouse gases to the atmosphere.
Disclosure – of course, I expect to benefit from that last item. I honestly believe that the rest of the world will also benefit, but a guy who writes and talks about the growth of the nuclear industry stands to benefit more than most. Oh well, I guess we all have a bit of self-interest.
Update: There is a postscript to Hansen’s The People vs. Cap and Tax that provides some economic arguments against Krugman’s defense of the “cap and trade” concept. It is a good read.
This is some excellent commentary. Really excellent. Hansen sums up what I’ve always felt about these “infusion of markets into everything” sorts of deals where you have a market, but you have inelastic supply (of carbon credits) and relatively inelastic demand (of carbon credits). The idea that markets with trading are the antidote to every problem of resource allocation is one, that just like Marxism-Leninism, works very well in theory…but in reality, it produces predictably inefficient results and inequitable outcomes when applied to the paradigm of excess carbon.
The reason for this is that the right to pollute is not scarce, like grain is, or cattle are, or widgets are, or gold is – instead, the right to pollute causes harm. Should the right to pollute be traded amongst market participants? Or should, instead, the polluter pay for the damages they cause?
Let’s think about the problem of excess carbon emissions – or even the problem of foreign energy. Who is ostensibly being harmed? In the case of excess carbon, it is ostensibly everyone, the present and the future. In the case of foreign energy, it is ostensibly everyone in the nation who suffers from decreased national security. Who should pay for the harm? Should everyone pay? Should the public pay? Or should the polluter pay?
What cap-and-trade does is it privatizes the right to harm by allowing polluters to sell the right to pollute. If you favor cap and trade, I would argue you are in favor of allowing polluters to make money off of their pollution by selling their carbon credits. Instead, I would argue that the polluter should pay for their pollution, and when they stop polluting, they can stop paying. Cap and trade also allows for market managers – for instance, a firm involved in the technical aspects of trading of the commodity of carbon (such as our favorite bankster gang in New York) to make “Sachs” of money off of speculation and arbitrage of the right to pollute. And, say, if a market manager had technical skills in trading carbon rights, well, then there are all kinds of tricks they can do to make more money, using the veil of ignorance being pulled over the general public of the inner operations of markets – they could drive up prices so as to sell their carbon rights, or drive down prices so as to buy them. A la Enron – who made money by manipulating markets whose participants had far less than perfect information as to what was going on within them.
Whereas a tax and dividend on (foreign) carbon, on the contrary, increases the cost of harming, which, right now, has no cost at all, and distributes damages for the harms done to the population being harmed.
Also, of course, the bottom line is that carbon credits are a constructed commodity. They are legislated into existence. There are plenty of ways to make them up, as well. For instance, anything in Nigeria – you know those emails you get from the lads there, “I am the brother of the exiled dictator Sanaa Abacha – he has a $10 billion fortune in a Swiss bank! I will pay you $10 million of Sanaa’s fortune if you forward me $10,000 for clearing costs at the bank!”
I can imagine “If you send me 10,000 advanced solar panels, instead of kerosene lanterns for light during the night, 500,000 villagers will now use electricity! This will be worth 300,000,000 tons of carbon!” 10,000 advanced solar panels are shipped to Nigeria to the “Kerosene to Solar” NGO, which immediately after the foreign dignitaries are gone, containerizes the panels, and ships them to Germany for resale. The German importer swears by the high quality solar panels he gets that are made in Nigeria – and the cost – cheap! While the Americans who sent the solar panels – they get the carbon credits, permanently.
Just think of the money-making opportunities.
I personally like the fee and dividend approach because I believe that the overall effects on the world economy would be beneficial. It would put money into the hands of consumers who are careful about their energy use and give them a greater amount to spend on products and services as diverse as restaurant meals and tuition payments.
This is a totally orthogonal issue from carbon taxing. This is purely an argument for cutting taxes – arguing that money is more useful in the hands of individuals than the government (at least marginally), therefore tax rebates are beneficent. This has nothing to do with the carbon revenue. There’s so much wrong with using this as an argument for carbon tax:
* Most obviously, it has nothing to do with carbon. Any economic benefit of redistributing money in some way can be equally done with ordinary tax policy. There is benefit from giving people money? Lower taxes. There is benefit from government spending money to invest? Raise taxes. There is benefit from moving money from the poor to the rich, or the rich to the poor, or some other permutation? Change the tax brackets to be more progressive/regressive/flat. Whatever benefit you ascribe to a carbon tax that isn’t directly related to carbon or climate change or energy supply, is really an benefit of a pure tax policy – no carbon involved. Please, keep these issues cleanly separate as they are – don’t conflate them!
* Second, a carbon tax-and-dividend does none of these things. It provides no net income revenue, nor puts any net extra money in individuals’ pockets. When everyone says “100% dividend”, that means the tax revenue equals the dividend, so there is no net flow of money between people and government. (There is net flow of money between people, and it is actually very regressive. If you have lower income, you will lose money on average, since your energy spending is a larger proportion of your total income hence you see a higher effective tax.)
When carbon taxes are advertised has have some other effect, it is because they are coupled with some unrelated tax instrument and they are talking about their combined effects. For example, Gilbert Metcalf’s proposal is revenue- and distributionally-neutral (i.e. flat), because it combines a regressive carbon tax with a progressive income-tax rebate. It could go farther, depending on your economics: it could be a progressive carbon tax, in which working families get a net tax rebate (more money for spending, like your argument). But this is really the rebate in action, not the carbon tax, and would function equally well (or better) without any carbon tax attached.
* Third, there is no essential difference between a tax and a cap in this respect – it can’t be an argument for a tax being better than cap. Here’s a carbon-cap analogue: it would have carbon credits sold by the government by auction, and the revenue rebated from income taxes. Anything you could to with carbon tax + tax rebate policy, you could implement something very similar with carbon cap + tax rebate.
What cap-and-trade does is it privatizes the right to harm by allowing polluters to sell the right to pollute. If you favor cap and trade, I would argue you are in favor of allowing polluters to make money off of their pollution by selling their carbon credits. Instead, I would argue that the polluter should pay for their pollution, and when they stop polluting, they can stop paying.
This is exactly backwards. To emit CO2, you must buy carbon credits – you are paying for the external cost of CO2. When you sell carbon credits you already have, you have reduced your CO2 emissions and are being rewarded for it. In this most basic point, it is the same as the tax.
uvdiv – I had come to pretty much the same conclusions that you do the last time that Rod was going on about a carbon tax. (However, you have explained them much better than I probably would have.) I’m afraid that you won’t be able to convince Rod of another possibility unless you can somehow figure out a way to slip in a mechanism to “stick it to The Man,” a goal that pervades much of Rod’s writings on this subject. 😉
I would like to add that higher energy prices resulting from some sort of price on carbon emissions will drive energy-intensive industry overseas. This isn’t hypothetical or speculative; all we have to do is look at California to see what to expect. Heavy industry has fled the state for cheaper pastures. Of course, there were other issues at play, but California’s high energy prices were effective at driving out energy-intensive industries fairly early.
Some sort of carbon trading scheme would have a better chance of avoiding much of this, since it would give carbon-intensive/energy-intensive industries some leeway to trade their way to a better position, particularly in the short term. With a tax, the only way out is to get away from the tax — i.e., move out of the country.
@Brian – I know you were joking a bit, but your comment made me realize that I have not yet made my view as clear as it should be.
I am not an anti-establishment kind of guy or against people accomplishing and gaining significant prosperity. After all, I am an upper middle class guy with a good job and a significant level of responsibility. I attended a competitive school and expect to be compensated for my work.
That said, I am very much opposed to people gaining enormous wealth by gambling with other people’s money and then expecting those other people to bail them out when their risk models fail. In my opinion the banksters have violated every trust they were given and made it worse when they then bragged to their stockholders about their recent financial performance. ANYONE can make a ton of money if given tens of billions in zero interest loans! That does not require any kind of brains or hard work and certainly does not deserve a bonus that is 10 or more times as much as I make in a year.
That is why I am adamantly opposed to the “trade” part of cap and trade.
With regard to driving energy intensive industry overseas, I do not think you have read Dr. Hansen’s proposal thoroughly. He includes a mechanism for that; one of his serious reservations with the whole Kyoto protocol was that it did probably resulted in increased emissions for exactly that reason. Energy intensive industry moved overseas to less efficient production methods using cheap and dirty power sources and then the products were transported back to the nations that exported the jobs, resulting in even more emissions as a result of the transportation.
I disagree with your assertion that the only way out of a tax is to move; you can also invest in energy sources that do not pollute and would not be subject to the tax. Dr. Hansen suggests a reasonable approach – start the tax relatively low, but with predicted increases that gives industry time to make those investments.
With smaller nuclear plants coming on line in a reasonably near future of <10 years, an energy intensive industry could even buy their own generators.
Rod – Just giving you a little helpful feedback. Of course, I was mostly joking, but some of your writing definitely has a populist slant to it. I assume that you already realize this.
BTW, as it has been proposed, I believe that the current scheme for “cap and trade” is fundamentally flawed, so I agree with many of your criticisms of it. Nevertheless, that doesn’t mean that the concept itself is inherently flawed, nor does it mean that a carbon tax is a perfect solution that is incorruptible. On the contrary, experience has shown that a carbon tax can be corrupted in much the same way that current “cap and trade” policies have been gamed.
As for the incremental increase in the carbon tax, I’ll just point out that, like Rome, California’s high energy prices were not built in a day. They gradually increased, as Sacramento decided that they wanted to create an environment that was hostile to anything but new natural gas plants. The result? Heavy industry fled. Do we really want to repeat this nationwide?
When it comes to a carbon tax, the consequences are obvious, in my humble opinion. Electrical utilities will switch to natural gas. We already have more than enough natural gas capacity that has already been built and just sits idle today. Why not use it? The US has more natural gas nameplate capacity than both coal and nuclear combined.
So the rest of the country will end up looking like California (which today gets roughly half of its electricity from natural gas), and I’ve already covered the consequences of the “California plan.”
With cap and trade, the existing polluters get the carbon credits, do they not? And then they can sell them, say, if they decrease their carbon output?
Was this in reply to my comment?
With cap and trade, the existing polluters get the carbon credits, do they not?
In one particular implementation of cap-and-trade (Waxman-Markey), existing polluters get carbon credits initially, before transitioning to an auction. This is absurd, but it has nothing to do with cap-and-trade in general. The other cap-and-trade bill in the US, Cantwell-Collins, does not give away carbon credits to existing polluters: it auctions all credits from the start. (What’s more, just like carbon-tax-and-dividend it rebates 75% of revenue. See how similar they can be?)
[Reuters] FACTBOX-Comparison of U.S. plans to cap carbon
You are right to attack this has a fatal flaw of Waxman-Markey, but Hansen exceeds the strength of his facts when he uses this as a flaw of cap-and-trade. It is only a flaw of implementation: any tax system can be implemented in a corrupt and ineffective way. (Some would say they all are.) A carbon tax could be corrupted exactly the same way: instead of giving away free credits, it would be exempting taxes, or setting industry-specific thresholds below which taxes are exempt.
Think this is crazy, that carbon taxes can’t be corrupted like this? Well it’s exactly what happened with France’s carbon tax. It was full of targeted “exemptions”, so that the tax — which Hansen bizarrely argues is too simple to screw up and has no room for loopholes — was a patchwork of special cases and uneven coverage, to the point that, incredibly, only 7% of CO2 emissions would actually be taxed! Just like Waxman-Markey awards free credits to existing polluters, the French carbon tax exempted taxes to polluting industries. It’s actually thrown out now; the French equivalent of the supreme court ruled its massive system of exemptions unconstitutional.
[Bloomberg] French Constitutional Court Rejects Carbon Tax
“Most obviously, it has nothing to do with carbon.”
This is, IMHO, incorrect. It would have nothing to do with carbon if all energy sources involved carbon. Since not all energy sources involve carbon, some will not have to pay tax. In a competitive market, consumers will choose energy sources that cost less, as cost of energy is the deciding factor in choosing a power provider. Therefore, sources of energy that do not emit carbon, if they have a similar cost of production to carbon emitting energy sources, will be able to make superior profits than the carbon emitting energy source, because they will not have to pay tax. As their margins are better, they will be constructed more often, as they generate better profits.
As for redistribution, the carbon tax isn’t meant to be a social boon. It’s meant to reduce carbon emissions, and give a hand up to non-carbon generating energy. The dividend is just to make it revenue neutral so the government isn’t getting anything.
I am not arguing for income redistribution here, but I am in favor of the social change that will happen when people are charged for the harm they are causing to others by excessive consumption of polluting energy sources and other people are compensated for that harm by receiving at least a regular check as their share of the fees.
The benefits for all kinds of businesses are immense, but the benefits for society as a whole would be a sense of increased fairness. The folks flaunting their successes by driving extra large cars, living in extra large homes, or flying on extra large aircraft to extra exotic places would be paying a well recognized fee for those privileges while the people who choose to live more modestly and save a bit of valuable fossil fuel and oxygen for the people who will inherit the earth will get rewarded.
Those who come up with a way to provide lots of energy without polluting the atmosphere will also be able to compete on a more level playing field with the abundant fossil fuels that have been getting a free ride through the ability to use our common atmosphere as their waste dump.
You’re entirely right. I was addressing the argument that carbon prices have social and economic benefits besides those of CO2 emissions. I was replying to a paragraph in Rod’s post, but the carbon debate is full of such arguments.
uvdiv – I disagree. Poor people spend a lot less money on energy than people who live at mid to upper portions of the economic spectrum. City dwellers that live in apartments, ride public transportation or walk use less energy. Retired folks who do not drive around the country in RV’s or saddle up in their SUV’s to head off every day for a round of golf use less energy. People in temperate climates use less energy than average. People who live in modest homes and do not spent their days watching big screen TVs use less.
The dividend idea here is that ALL of us are born with an equal right to breathe – it is embodied in the phrase in the Declaration of Independence here in America in the right to “life, liberty and the pursuit of happiness”
Therefore, we all own an equal share of the atmosphere. If someone is dumping their waste into our property, we might not be able to stop that from happening, but we sure can charge them a fee for that action. That pollution dumping fee amount will be exactly equal for all of us, but a few thousand per year will make an enormous difference for people who are on fixed incomes, struggling to pay tuition bills, or living from paycheck to paycheck. It might even help folks who have little food change their diets and may even help to put a roof over the head of people who, often through no fault of their own, chose the wrong parents when they were waiting in line to be born.
We have run the experiment several times here in the US on the effect on energy consumption if prices go up. We all get a bit more careful and use less. As a commuter, I can tell you that the conversations around the water coolers got very intense during the summer after Katrina and other world events drove the price of gasoline up into the $4 per gallon range. However, it was not just conversation; Metro ridership skyrocketed, the traffic on the way to work every day eased, and lots of people joined carpools. Americans are some of the smartest consumers in the world – give them the right pricing signal that tells them that consuming polluting energy is an expensive choice and they will work to reduce their energy consumption.
Businesses in America are also quite cost conscious. Show them that dumping pollution into the atmosphere will have a predictable and increasing cost and they will begin investing in technologies that help them avoid that cost. Give them credits that can be turned into money based on the amount that they have polluted in the past simply rewards the biggest polluters with the most money. THAT would be bizarre, but it is essentially what the Waxman Markey bill does.
I’m taking the regressive nature of carbon pricing as a given – it’s very accepted by the economists (for example the Gilbert Metcalf article I linked to).
Although poor people pay less on energy, it is a far higher ratio of their income, so a carbon tax as an energy tax is a higher income percentage. Sure they use less energy on luxuries (large TVs), but the large share of energy is used on absolute necessities like driving and home heating. (Of course to some people driving may not be a necessity – if they both live and work in a city and have other forms of transportation. But there are very many people who have long commutes, who live in suburbs, small towns, or rural areas, for whom driving is essential, and for whom rising gas prices are extremely expensive (as a proportion of income). They have little choice in driving, and are forced to pay whatever the gas price is.) In addition to this, there is the indirect energy cost of consumer products (the energy intensity of making and moving them), which again is regressive.
uvdiv – just because something is “accepted” by the dismal scientists does not mean it passes the test of rationality. People who drive long distances to work DO have choices. I share the road with them every day. Almost every car is occupied by a single person. At this point, I am no different; my car pool buddies either retired or got transferred to Iraq or Bahrain and then got assigned to other work locations upon their return. However, I chose to purchase a car that averages about 45 miles per gallon, so I do not feel too bad or get too affected when the price of fuel increases. I do care, however, and would be working harder to find new car pool buddies if fuel cost much more than it currently does.
Many of the people that I see on the road are commuting in pick-up trucks or large SUVs. There is also the option of moving closer to your job, telecommuting (in some enlightened work places), or getting a different job closer to home. Long distance commuting is a choice. Certainly it is a choice that has a slow rate of change – moving or getting a new job is not something that you do routinely or in response to an oscillating price of fuel. However, if you know that fuel is expensive and you know that it is going to get more expensive, you make a permanent change in your habits.
People at lower ends of the income scale also do not buy anywhere near as many consumer products as you might imagine. I know, I had an income small enough to qualify for an EIC not that long ago. (I did not qualify, however, because too much of that income came from selling appreciated stocks accumulated during a more prosperous period in my life. My low income period came as a result of attempting to start a business.)
The opinion of economists on this issue simply does not sway me because I have spent too much time with factory workers, sailors, and college students to believe it. People who do not have much money are very careful in the way that they spend it. They wear sweaters, walk, ride bicycles, work close to home, live in small spaces with shared walls, and buy few large consumer goods. They watch small TV’s, do not own computers, and drive small cars if they drive at all.
Rod – It sounds to me like it has been a long time since you’ve been really poor. When I was a student, energy costs (directly and indirectly) could easily take 30-40% of my income. If I were more careful in my accounting, I would probably reach an even higher value than that.
When energy prices change, the costs of many necessities change, and when these items take up a large part of your available wealth, then higher energy costs really hurt. They hurt a lot more when I was a student than they do today, now that I spend a much smaller fraction of my income on energy. I use more energy today, but I earn much more money.
You fail to understand (either intentionally or unintentionally) that uvdiv is talking about percentages — i.e., money spent on energy relative to wealth. Meanwhile, you’re still going on about TV’s and computers.
@Brian – I have never been really poor although we did manage to survive on less than $27,000 in income for a year when we had a house payment of more than $1000 per month and I had two children in the house. Sometimes being an entrepreneur is not as portrayed in Fast Company.
I have a hard time understanding how energy could possibly have been 30-40% of your income as a student. Who was paying your tuition bills? For most of the time that I was a student, energy was not even in my budget. I was not allowed to operate a car and Mother B provided heat. We did not have A/C.
I may have never been poor, but I have known a lot of poor people. I used to manage a factory that offered entry level jobs; some of the people that I hired had to borrow money from me in order to eat so they could make it to their first payday. (The factory owner would not allow me to advance that money, but he could not stop me from using my own in order to enable a good employment candidate to remain on the job.)
I also am not one who likes to play the percentage game. I recently received an annual pay raise that was fairly modest as a portion of my income, but the MAGNITUDE of that raise was nearly as much as some states pay for a month of AFDC. It costs my employer exactly as much to give me a modest raise as it does to feed a family.
Remember, the dividend part of the Hansen plan is divided equally by person, not by any kind of percentage. People who use less energy than average will see a net increase in their standard of living, not a decrease.
Rod – Tuition was never a problem, but when you have roughly three months to earn the entire amount of money that is going to cover your expenses for the next year, money gets tight. You should know that people don’t pay college students squat (even college students like me who were highly skilled in computer technology). At the time, I was sharing an apartment with several other students, and unlike most college students today, I was doubling up in a room in some of the less expensive student apartments in town.
When I consider electricity, gas, etc., that’s where most of my money went. I wasn’t driving a gas-guzzler, mind you. My car regularly got 40-50 mpg. Even part of my rent can be considered to be energy costs, since I lived in an apartment with gas heat/cooking, where the gas was “too cheap to meter” — i.e., it was implicitly included in the monthly rent. When gas prices went up next year, guess what? Rent prices went up as well.
By the way, I wonder about something that you have written. You claim that “the Hansen plan is divided equally by person” whereas Hansen has put forward a plan for “an equal amount to each household.” So which is it? As a college student, do I get a check from the government because I’m a “person”? Or do I get counted as part of my parents’ “household” (because they pay all of my expenses, as is the case for many college students)? What about students that pay their own way? What about students that have the government pay their way (i.e., the military academies)? What about graduate students?
There are a lot of holes in this plan.
This is a quote from the Hansen document that I linked to in the post:
But 100 percent of the fee is distributed monthly to the public as electronic deposits to the bank account or debit card of all legal residents, with half shares for children, up to two children per family.
Kyoto failed, not because there was a provision in the Kyoto agreement to implement cap and trade but because nations representing more than half of global emissions weren
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