I attended a talk given by Waxman climate bill critic economist Steve Stoft at the UW Madison on Friday. Stoft has written a book on global carbon management, Carbonomics, and he is working with Dr. James Hansen. The event was hosted by the Wisconsn Public Utility Institute.
Stofts’ slides.
Carbonomics summary here.
KEY POINTS:
*The Waxman bill is less than ½ as effective at carbon capture as it claims due to foreign offsets,
*Capping carbon renders standards such as renewable energy standards ineffective,
and,
*The Waxman bill does not mean electricity rates increase and it does not spur on radically improved energy efficiency.
I think we were all a bit disturbed to hear Stoft say that standards have no additional impact on carbon output under either carbon cap because no matter how few miles I drive, or how efficient my new appliance is, or how many windmills I put up, the market will allow for more carbon to be output by somebody else in the carbon market as long as it is under the cap. For example, if I and 100,000 other Madisonians purchase less gas because we all ride our bikes, there will be less demand for fuel and then the price of carbon permits attached to that fuel we did not use will be cheaper. That reduced permit price will make the fuel cheaper and more attractive to others who will consume more of it. I replied that I found it difficult to believe that the green culture we have developed around conservation will dissolve so easily and he replied that we saw a gradual disappearance of conservation of energy following the 70’s OPEC-related shortages. He theorizes that this erosion of conservation mindset takes a few years and even less time after a price spike such as the $4.00/gallon gas spike we saw recently.
He also noted that carbon offsets are a cheaper way to save on carbon output than renewable energy standards applied on top of a cap and this is doubly true when RES comes on top of production subsidies and a cap.
Stoft said, also, that in the carbon capped world we know of, renewable energy is not effectively reducing carbon output right now. To illustrate this point, he pointed to Germany, where windmills make more clean energy, German coal power plants burn less coal, Germany then sells its offsets to Poland and Slovakia, and following, Poland and Slovakia in turn can burn more coal.
Link to article on this here.
Stoft admits that a cap on carbon is a cap on carbon whether it is put into place via a tax and dividend plan – or through a cap and trade system. However, Stoft says the cap as stated in the Waxman bill is not in truth cutting carbon emissions by 80% as it claims, but instead will cut emissions by about 39% by 2050, citing an EPA study. He faults sale of overseas offsets primarily, and to some degree, the banking of carbon permits that is required by a carbon trade scheme. (He uses “permits” when talking about offsets and allowances together. ). When the EPA projected that the Waxman bill would be ½ as effective as it said it would be, the bill allowed for 1,000 foreign permits to be sold per year. In its current draft, the bill allows yet another 500 foreign permits yearly: 1,500.
When I asked him to give an example of a counter-productive offshore offset, he described capture and destruction of a refrigerant called HFC-23 or trifluoromethane. If I manufacture HFC-23 in a foreign country, I have the right to allow this greenhouse gas roughly 11,700 times worse than CO2 to go up in the atmosphere, as I have been doing. But if I instead burn it off at a high temperature, the United Nations will allow me to sell 11,700 offsets to a European company for roughly $15 each.
Almost all of this is pure profit. It is feared that manufacturers of dirty products like HFC-23 are currently making more of the stuff to take advantage of this lucrative situation. More on offsets here.
The banking of carbon permits, Stoft says, must be put in place to reduce the volatility of their market. So by “banking” I mean I could buy a number of permits for my dirty coal plants when they are cheap and hold on to them to expend them when needed or I may sell them when I see their value has gone up. Banking helps to avoid an end-of-the-year shortage
or surplus in permits. Stoft gave us an example: In Europe they suddenly realized they had a surplus of phase 1 permits,
which could not be banked, and the price went from $30.00 to $0.30 in a few months. With banking, the value would
stay up because the permits would be good for future years.
Stoft says if we look at what has happened in the EU, we’ll see that carbon permit banking has proven only partly effective: the EU does allow for banking and Stoft claims their carbon market is still 3 times more volatile than the S&P 500.
Another potentially unsettling aspect of the Waxman bill (or reassuring depending upon your industry): as proposed, utilities get 30% of the carbon permits for free for years with conditions in place to ensure that residential and business customers get some monthly refunds on their electric bills. This is done to assist the states that are more dependent upon coal who complain they are unfairly penalized by cap and trade. Stoft says that the goal of helping coal states is achievable, but that he fears that electricity will stay too cheap for businesses to put aggressive efficiency measures into place. He has some hope that we will continue to see residential customers adopt more efficient practices – but overall, the price of electricity will stay too cheap for rapid change.
When I revisited his slides on the Sunday following the talk he had added some information – most hopefully: “How can Wisconsin go beyond the cap? Save GHG emissions in a way not covered by the cap. This really will reduce total emissions. *Save carbon at a net cost less than the price of allowances in a way the private sector would not. This will save the nation money, and it will save Wisconsin money. ” [By email Stoft gave the example of "land use changes" when I asked for an example of a GHG emissions savings not covered by the cap.]
He also added that under Waxman, Wisconsin does not face a carbon constraint but instead a fluctuating carbon tax. Wisconsin can do things to reduce carbon output that are cheaper than the taxation/permit at hand but that the state should not do measures that are more costly than the tax/permit because somebody else will likely do it more cheaply. He predicts that the fluctuations in the carbon permit pricing will delay some green investments as investors wait long enough to allow new carbon permit pricing trends to establish: not in his opinion a fatal flaw of a carbon cap plan.
Many thanks to Sam Mahany Braithwait of WPUI for organizing this event.
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