Climate

The history of the ‘safety valve’ debate

safety-smallthumbnail.jpgSo the new publication from E&E News, ClimateWire (subs. req’d), has a long article on the “safety valve” debate and its history. I will reprint it in its entirety below because

  1. The issue is important and not going away
  2. It is the most thorough piece I’ve seen
  3. I was interviewed at length for it
  4. One of the quotes they excerpted from me is not something I would have said in a short interview.

First, some background: I have blogged repeatedly on why a safety valve is a bad idea [see links at the end]. The reporter, however, called me because he said that a number of people in the Clinton administration said I was a key player in the discussions leading up to Kyoto, in which the administration ultimately rejected a safety valve (or price ceiling on carbon emissions permits).

The #1 highlight of my time in the administration was at an October 6, 1997 “White House Conference on Climate Change,” when I was still in the middle of my brief tenure as Acting Assistant Secretary of Energy for Energy Efficiency and Renewable Energy. At 12:40 pm [I kept the ticket and wrote the time and the quote on the back], the President said, “I’m convinced the people in my Energy Department Labs are absolutely right.” He was talking about the 5-Lab study that I oversaw, which found that the United States could return to 1990 levels of carbon dioxide emissions by 2010 without raising the nation’s overall energy bill — if we had an aggressive technology deployment effort.

Rather than my solipsistically explaining what happened, you can read an account by Art Rosenfeld [the first article, his autobio] now California Energy Commissioner — then science adviser to the assistant secretary. Or not.

I was certainly proud of my role in the administration. Economic agencies like the Treasury Department and Council of Economic Advisers rarely lose policy debates. But they did this time. That said, I was hardly the main reason they lost.

In fact, as I recall, President Clinton explained at the Georgetown conference the main reason he didn’t believe his economic agencies’ gloomy predictions for the economic impact of Kyoto: They had made similarly gloomy predictions about the impact of his balanced budget bill, which, rather than causing an economic slowdown as predicted, instead created millions and millions of jobs.

That said, the subsequent incident described in the ClimateWire article is the #2 highlight of my time in the administration, although I foolishly didn’t keep the piece of paper. Anyway, here is the article (for ease of reading, I won’t bother indenting it):

CONGRESS: Behind ‘safety valve’ debate resides 30+ years of history (03/11/2008)

Darren Samuelsohn, ClimateWire senior reporter

Congress’ effort to pass passing global warming legislation faces many sticking points, but few are as sticky — or as wonky — as the battle over whether a cap-and-trade system for greenhouse gas emissions should include what is called a “safety valve.”

What started as an obscure, almost monastic dispute among economists three decades ago has now emerged as a potential make-or-break point for the proposed legislation. Tracking its tangled history may now be essential to outsiders who want to understand this issue — and the huge economic stakes involved — as champions on both sides of the political arena saddle up to do battle over it.

In recent years, New Mexico Democratic Sen. Jeff Bingaman has become the lawmaker most linked to this cause. His version of the safety valve emerged in 2005 in a legislative proposal that created a price cap on carbon. It would guarantee that American companies pay no more than $12 for every ton of carbon dioxide they release into the atmosphere. This rate would go up five percent annually beyond inflation.

Sen. Jeff Bingaman
Sen. Jeff Bingaman from a May 15, 2007, episode of E&ETV’s OnPoint.

Rallying against him are environmental groups and commodity traders who are concerned his plan would stifle investment in new low- and zero- carbon energy technologies. Meanwhile industry and labor unions are forming up their ranks behind Bingaman.

Finding a compromise to settle this feud won’t be easy. It has been brewing since 1974 when Martin Weitzman, then an economist at Massachusetts Institute of Technology, lit the fuse for the first salvo. An expert on how socialist governments distributed goods, Weitzman published “Prices vs. Quantities.” In it, he examined the best way to set a government policy where there is considerable uncertainty over a potential regulation’s costs and benefits.

Weitzman’s work didn’t have global warming specifically in mind. In fact, it touched only tangentially on environmental issues.

But as many other academics have since noted, his findings helped to trigger the debate over how to minimize costs while reducing heat-trapping emissions.

Essentially, Weitzman found that government is best positioned to regulate by stepping in to manipulate prices when there is uncertainty about the net environmental benefits of taking action. But when the chances for an environmental catastrophe are high, Weitzman said, it’s better to tackle a problem with a quantity-based target.

“It’s without a doubt one of the most heavily cited papers in environmental economics,” said Joseph Aldy, a former White House economist now working as a fellow at the Washington-based Resources for the Future think tank. “And one of the most widely cited in economics.”

Engaging President Clinton

Building off Weitzman’s work, Mark Roberts and Michael Spence, who would go on to win a Nobel prize in 2001 for his work on information flows and market development, came up in 1976 with a “hybrid” system for reducing pollution. The Harvard economists premised their paper on the concept that a government could set up a cap-and-trade program to control pollution in the most cost-effective manner.

But because of uncertainty over those costs, Roberts and Spence suggested regulators could withhold some of the credits in this system and only release them if compliance prices exceeded a fixed trigger point.

Several more economists followed with their own complex formulas, but it wasn’t until the 1990s that the safety valve idea blossomed in government policy circles. In this case, it was the Clinton administration preparing for the 1997 United Nations climate negotiations in Kyoto, Japan.

Australian economist Warwick McKibbin and Peter Wilcoxen, then based at the University of Texas-Austin, published a paper in 1997 suggesting a ceiling price on carbon dioxide emissions permits.

Their work was followed by Billy Pizer, Raymond Kopp and Richard Morgenstern of RFF. The trio argued a few months later that climate change can’t be regulated with any specificity to prevent damage to the environment. Building off Weitzman’s work, they suggested a “safety valve” that provides a price guarantee for industry.

Among some members of the Clinton administration, the RFF paper sounded like a perfect fit. Clinton was still bruised from Congress’ rejection of his proposed energy tax on the carbon content of fossil fuels. Officials from the Treasury Department and Clinton’s own Council on Economic Advisers pushed for the cost containment measure. They said it was the best method for dealing with climate change absent an outright tax on carbon emissions.

Others in the administration urged Clinton not to meddle with future carbon prices. They insisted there would be an “announcement effect”: once the government revealed its climate plans, companies would undertake new technological innovations.

This debate entered the public arena two months before the Kyoto negotiations, when Vice President Al Gore asked about the price ceilings during a daylong forum that Clinton hosted at Georgetown University.

Alarmed by Gore’s question, environmental groups quickly pounced. Seventeen nonprofit groups, led by Environmental Defense Fund and the Sierra Club, sent Clinton a letter warning him against using what they dubbed a “relief mechanism.”

“This proposal would weaken, if not eliminate, any incentive for private sector innovation and investment in clean technologies that … is the key to successfully addressing the global warming problem,” they wrote.

Clinton decided to leave the safety valve out of the U.S. position going into Kyoto.

“The ED letter had a big effect,” recalled Rafe Pomerance, a top State Department official at the time. “It was basically dropped.”

Joseph Romm, a safety valve opponent who ran the Energy Department’s renewable lab office during the Clinton administration, said Aldy, then working for the White House, handed him a note after one high-level meeting following Clinton’s decision. It read: “Economists 0, Romm 1.”

[True story, though I honestly can’t remember if it was Aldy, maybe the reporter checked. In any case, much as I don’t like economists, I was not the main reason they lost.]

But neither side could claim victory. John “Skip” Laitner, a top U.S. EPA economist from 1996-2006, explained: “They didn’t take the safety valve, but we didn’t win either. Because to win meant we had to come in with some really good domestic policies that would allow the market to be given a clear signal about the slow transition needed and to give the market greater capacity to respond.” Laitner is now director of economic analysis at the American Council for an Energy-Efficient Economy.

Courting Bush, McCain, Bingaman

Proponents of the safety valve pushed on. As President Bush arrived in Washington, Pizer shifted to the White House Council of Economic Advisers, where he served as a fellow under Chairman Glenn Hubbard. “He had a significant insider role,” said Pomerance.

There, Pizer recommended Bush use a safety valve as he advanced a campaign pledge to regulate carbon dioxide emissions from power plants. Bush, however, soon backed away from his pledge.

Attention turned next to Sens. John McCain (R-Ariz.) and Joe Lieberman (I-Conn.), who emerged in the fall of 2001 as lead authors of an economy-wide bill to cap U.S. greenhouse gas emissions.

After he left the Bush administration for a job on the Columbia University faculty, Hubbard sent McCain a letter urging him to consider the safety valve in his climate legislation. He was joined by fellow Columbia colleague Joseph Stiglitz, a top Clinton administration economist who had also won the Nobel Prize with Spence.

“Our support for the safety valve stems from the underlying science and economics surrounding the problem of global climate change, and is something that virtually all economists — even two with as politically diverse views as ourselves — can agree upon,” they wrote in their 2003 letter. “The climate change problem is a marathon, not a sprint, and there is little environmental justification for heroic efforts to meet a short-term target.”

McCain, no fan of Hubbard, threw the brief in his waste basket.

But ideas are hard to kill. The safety valve idea emerged again in a widely publicized 2004 report from the bipartisan National Commission on Energy Policy. The commission, a collection of industry officials, politicians and environmentalists, was asked to offer solutions that could help end the stalemate over U.S. energy and environmental policy. Their study recommended Congress pass legislation with a cap-and-trade system and a safety valve that didn’t allow CO2 prices in the first year to go beyond $7 per ton.

Such a price “reflects a judgment about the political feasibility of establishing a federal framework for reducing greenhouse gas emissions in the near term,” the NCEP report said.

[This was, I think, the biggest mistake NCEP made at the time.]

A year later, Bingaman, then the ranking member of the Senate Energy and Natural Resources Committee, floated draft legislation with the safety valve as a centerpiece. Last summer, Bingaman introduced a formal version of his bill with a trio of high-profile Republican cosponsors: Pennsylvania Sen. Arlen Specter and Alaska Sens. Ted Stevens and Lisa Murkowski.

The legislation captured attention because he had won over three GOP senators who previously had not supported mandatory limits on greenhouse gas emissions. Major labor groups and the chairmen and CEOs of PNM Resources, Exelon, American Electric Power and Duke Energy Corp. also appeared at Bingaman’s press conference when he introduced the bill.

‘The worst case is X’

Safety valve advocates base their argument on one of Weitzman’s principle theories: that a price mechanism is best when there’s uncertainty over environmental benefits. Global warming is a byproduct of greenhouse gas concentrations built up over decades and centuries, and any one year’s emissions won’t push the climate over the tipping point.

Also, they claim a price limit will guarantee the new U.S. climate program won’t lead to a volatile market in the short-term. They also like being able to tell cost-conscious senators and congressmen exactly what the bottom line is.

“Ph.D.s, all of them, can make very reasoned-sounding presentations that reach shockingly different conclusions,” said Jason Grumet, executive director of the National Commission on Energy Policy. “Legislators don’t have the ability to differentiate among those.”

If he’s asked the worst-case scenario for energy or coal prices, Grumet said he can turn to the safety valve for a simple answer. “We didn’t have to start our response with, ‘Well, we think’ or ‘Our models project.’ We could simply say, ‘The worst case is X.'”

Labor groups, including the AFL-CIO, see the safety valve as a must have, though they’ve recently signalled a willingness to negotiate. So too do many industries.

“The way [Bingaman’s] come at it is the only way you can do this,” said Fred Palmer, senior vice president for governmental affairs at Peabody Coal. “There’s a big group in Congress who thinks we’re paying enough for energy now.”

“If you think that cap-and-trade is the best way to go, then the safety valve is your insurance policy,” said Aldy. “The reason you buy insurance is because the future is uncertain. We want to protect against the things we can’t currently imagine. This is a way to do it.”

Weitzman, who moved to Harvard in 1990, said he would prefer Congress impose a carbon tax of $50 per ton on the fossil-fuel content of energy sources.

But he also acknowledged that the political reality suggests lawmakers will go with cap-and-trade legislation. He’s open to that too, but said it must include a safety valve. “A very strong safety valve is equal to a tax,” he said. “If you don’t allow the price to vary very much, it’s the equivalent to taxing it.”

Counterattacks

Opponents say a safety valve would undermine the very nature of a cap-and-trade program. “Those who have taken global warming seriously have never supported something like a safety valve,” said Romm, now a senior fellow at the liberal Center for American Progress.

[Last month I emailed Weitzman, whom I don’t know, “Do you still believe in a “safety valve, given what you’ve written about the economics of catastrophic climate change — which imply that there is a threshold beyond which damage is catastrophic and irreversible, which in turn implies that environmental certainty is much more important than economic certainty in a cap & trade system.” He never replied, but I can’t see how he would still believe in it given how he has now trashed all traditional economic cost-benefit analyses of global warming impacts. If anybody knows him….]

Indeed, the safety valve’s critics have lined up a number of political players to reject the idea, including Clinton, Gore, 2004 Democratic presidential nominee Sen. John Kerry and Sen. Barbara Boxer (D-Calif.), the chairwoman of the Senate Environment and Public Works Committee.

“There are a number of no-gos and poison pills, and safety valve would be among those,” explains Brent Blackwelder, president of Friends of the Earth. He added that any effort to add a safety valve would lead sponsors of the Lieberman-Warner bill to pull it off the floor.

Jonathan Pershing, director of the Climate, Energy and Pollution Program at the World Resources Institute, cautioned that none of the major U.S. environmental trading programs — for nitrogen oxides and sulfur dioxide — include a safety valve. The European system for greenhouse gases also avoided it.

Pershing said the safety valve doesn’t fit with the growing scientific warnings associated with global warming that call for near-term actions.

Europeans are weighing in too. “You can also pretty much forget about a global carbon market,” said Damien Meadows, a top climate official from the European Commission. “If Europe linked to America, and the price cap was reached, and we were just sending money across to the U.S. Treasury, that would be a major issue just as if American companies were paying Europe to do nothing because you reached our price cap.”

Meadows added, “Nobody has actually explained to me how that is overcome. And when people tend to think about, they tend to go ‘Oh yeah, I see.'”

Several proponents of the safety valve envision Europe adopting a cost ceiling to match up with the United States. “A cap sends the message that you really are prepared to wimp out of this,” counters Romm. “It sends the message to all the businesses that if they just whine enough that you can stop whatever it is you’re doing.”

[As I’ve said many times, we’ve run out of time to be experimenting with risky, delaying tactics like a safety valve.]

A ‘Fed’ compromise?

A bill from Lieberman and Sen. John Warner headed for the Senate floor doesn’t include Bingaman’s safety valve. But it has several provisions designed to dampen the costs to the economy. One piece supported by environmental groups would allow companies to bank away extra emission credits they haven’t used. Another lets them borrow against future years, with interest.

Duke University’s Nicholas School for Environmental Policy Solutions also came up with a program added to the Lieberman-Warner bill that establishes a Carbon Market Efficiency Board. It would monitor the new U.S. climate market and release carbon credits when the cost gets too high, much as the Federal Reserve uses its powers to influence interest rates.

Under the Lieberman-Warner bill, the president appoints the board’s seven members to 14-year terms. Tim Profeta, a former Lieberman aide and the Duke school’s director, acknowledged that the concept falls distinctly on one end of Weitzman’s equation. “I think the Fed itself is a middle ground,” he said.

Harvard economist Robert Stavins disputes any correlation between this plan and the Federal Reserve, which, he notes, carries “a tradition of political independence,” a research board staffed by 200 Ph.D.s in Washington and reserve banks across the country.

Sponsors of the Lieberman-Warner bill are now on the hunt for additional compromises — and House members are only beginning to grasp this slippery subject. To find a middle ground will require movement from all sides. Grumet thinks that’s not impossible. “I’ve never seen a number in Congress that’s non-negotiable,” he said.

[How about “$24 per ton of CO2 and 10% rise per year above inflation”?]

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5 Responses to The history of the ‘safety valve’ debate

  1. John Mashey says:

    Safety valves seem *really* stupid, and hardly anyone wants to talk about the elephant in the room, which is Peak Oil+Gas and relationship of energy to GDP.

    Stern [p.183] assumes IPCC A2, or GDP CAGR of about 1.9%/year, which means than in 2100, it’s 1.019^92 = 5.6X bigger than now. IPCC Emissions Scenarios p.196-197 seems slightly different, but almost everybody seems to assume “Everybody will be rich, so it won’t hurt too much to defer mitigation and let those rich future people pay for adaptation.” I just don’t see why economic growth rates based on a history of increasing fossil energy naturally get projected forward.

    On the other hand, economists like Charlie Hall and (Robert Ayres + Benjamin Warr) make pretty good cases (see * below)) that:

    The biggest factor in GDP growth is energy growth (or more precisely, exergy = energy * efficiency), and even with every bit of efficiency improvement we can get, in the presence of Peak Oil and Gas, and climate-necessary coal-restrictions mean a huge fossil energy-downturn that we have to work very hard to replace. And THAT means that it’s not obvious that the world’s GDP will be 5X bigger.

    Even if it did, goods are not arbitrarily substitutable. I.e., maybe you’ll buy a Terabyte iPod for nothing, but if you need to buy earthmoving for dikes (CA has 1000+ Miles of dikes), or steel+concrete for sea-walls, or rebuild New Orleans elsewhere in 2100, you’ll be doing it without much petroleum… and it will not be cheap. [Not impossible, just not cheap.]

    Now, if the population could get under control, and after we redo our whole energy infrastucture, maybe the exergy/person will start going up again. But Charlie Hall’s Balloon Chart shows how far we have to go:

    http://scitizen.com/screens/blogPage/viewBlog/sw_viewBlog.php?idTheme=14&idC
    ontribution=1305

    So, in worrying about this, am I missing something obvious? CA is already worried about how to pay for all the dikes and water infrastructure we’ll need just to stay even…. and CA is pretty wealthy.

    ===== (some refs, I’m sure Joe knows these, but other readers may not)===

    Peak Oil
    http://en.wikipedia.org/wiki/Peak_oil is actually not bad http://www.theoildrum.com/ best blog

    http://www.davidstrahan.com/blog/?p=40 an interview with Lord Ron Oxburgh, ex-rector of Imperial College, ex-Chairman of Shell, and a long-time friend of ours.

    http://www.davidstrahan.com/index.html , David Strahan’s book “The Last Oil Shock” is very good.

    ASPO: http://www.peakoil.net/

    Kenneth S. Deffeyes, “Beyond Oil, the View from Hubbert’s Peak”, Princeton Emeritus Prof, used to work with Hubbert @ Shell research. Much is actually about other energy sources.

    Matthew R. Simmons, “Twilight in the Desert” or why there’s not as much extractable oil in Saudi Arabia as people think.

    The Hirsch Report for the DOE, or the economic consequences of not starting conversion 20 years pre-Peak http://en.wikipedia.org/wiki/Hirsch_report

    Nobel Physicist Burton Richter gave a talk locally on climate & energy:
    http://www-group.slac.stanford.edu/do/brichter/presentations/2004_10_05.htm
    When Nobel physicists talk, I tend to listen to them.

    Charlie Hall:
    http://www.esf.edu/EFB/hall/
    http://www.esf.edu/efb/hall/talks/EROI6a.ppt

    Two related papers on economics that are very important: neoclassical economics is broken. Bottom Line: wealth ~ exergy = energy*efficiency, plus some help from technology, capital, and labor.

    *Hall, et al, “The Need to Reintegrate the Natural Sciences with Economics”
    http://www.ker.co.nz/pdf/Need_to_reintegrate.pdf

    *Ayres & Warr, “Accounting for Growth: the Role of Physical Work”
    http://www.iea.org/Textbase/work/2004/eewp/Ayres-paper1.pdf

    Jeff Rubin and Benjamin Tal, “Soaring Oil Prices Will Make The World Rounder”, http://research.cibcwm.com/economic_public/download/occ_55.pdf

    Forget about these worldwide JIT supply chains. Fuel prices have already eaten tariff reductions. Maybe relocalization is good, but doing it is going to require $$ investment.

    Nicholas SAtern, “The Economics of Climate Change.”

  2. Ronald says:

    Wow. I suppose the best safety valve would be to make it voluntary. Or as McCain would tell you, he is for Cap and Trade, but nothing mandatory.

    We should no longer say ‘Nero fiddled while Rome burned,’ the saying ought to be ‘they negotiated while the planet heated up.’

    Argue, debate and negotiate until the planet is burned to a crisp. My property taxes went up 9 percent this year with not much negotiation at all. What we should have is a freeze on any tax increases in America except for government only being able to raise money by increasing a carbon tax. If my property taxes are raised to only bring in more money fro government, then how much better would it be to raise a carbon tax that brings in money into the government and helps save the planet and future generations at the same time.

  3. Joe says:

    Thanks for these commentss.
    I’m working on a big article on peak oil.

  4. Peter Wood says:

    Roughly speaking, there are two types of hybrid schemes which combine a tax (regulating price) with cap-and-trade (regulating quantities). One (the safety valve approach) has a cap-and-trade scheme with a ceiling on the price. The other approach is to have a cap-and-trade scheme with a price floor. Having a ceiling and a floor is also a possibility. All of these approaches attempt to have a carbon price that approximates the social cost of carbon in the presence of uncertainty.

    The idea of a safety valve in theory is that it should be higher than the social cost of carbon and hence the carbon price will be closer to the social cost of carbon. It seems to me that Weitzman’s recent work on the role of “long tails” when estimating the expected loss of utility from climate change means that the expected social cost of carbon will be significantly higher that carbon prices in existing emission trading schemes or existing proposals for a safety valve (such as McKibbin and Wilcoxen’s proposal). The effect of long tails suggests that the expected social cost of carbon is a function of Weitzman’s “Value of Statistical Life” parameter (roughly based on the value of life on Earth or civilization as we know it) which is a weird idea but seems better than truncating long tails at some arbitrary value. Because of this I am not concerned about a carbon price exceeding the expected social cost of carbon.

    Having a floor on the price of carbon seems like a much better idea. That way if abatement turns out to be cheap, or some sort of event like an aluminium smelter closing down leads to the cap being achieved and the short term carbon permit price collapsing, there will still be more possibilities for climate change mitigation. A floor would also provide greater certainty for investment decisions in low emissions technologies.

    I have seen some proposals for a floor implemented by governments buying back permits, but it seems to me that a better way of achieving a floor would be to have a cap-and-trade scheme and a tax. That would meet the ‘polluter pays’ principle. It would also make it easier to budget for how to spend the money raised from auctioning permits.

  5. valve says:

    good, The history of the ’safety valve’ debate