Peter Barnes’ Cap & Dividend plan is fatally incomplete

Andy Revkin at the NY Times has given a lot of ink to the Cap & Dividend plan (see here and here) by Peter Barnes a founder of Working Assets. Revkin says Barnes, “has long studied various bills and proposals for cutting emissions of carbon dioxide to limit global warming. He sees fatal flaws in every one.”

I don’t see any fatal flaws in either Obama’s plan or Mrs. Clinton’s — they are both terrific and comprehensive, unlike Barnes’. His goal is the same as theirs — to reduce emissions 80 percent by 2050. But his solution is fatally incomplete:

He proposes a “cap and dividend” system that charges a rising fee on sources of greenhouse-gas emissions (to propel a long-term shift away from such pollution) and returns the revenue to citizens, rich or poor, through a direct payment not unlike the checks that Alaska residents get every year from fees paid to the state by oil companies.

That’s pretty much it. What caught my attention in Revkin’s piece is Barnes’ answer to the last question posed:

What about laws such as better efficiency standards? (Nancy Anderson)N.Y. Times columnist Tom Friedman has made a crucial distinction between incremental policies and transformative ones. Cap-and-dividend is transformative. It will get us to 80% emission reductions and create a clean energy infrastructure in the process. Raising efficiency standards for autos, appliances and buildings is a good thing to do, but it won’t transform our economy or cut emissions 80%.

That is, ironically, almost exactly backwards. Barnes apparently thinks plans like Obama’s and Clinton’s are loaded up with things like much tougher fuel economy standards and utility decoupling and federal clean-clean tech programs because the senators just love regulations and government spending (I know many of you conservatives out there think that). In fact, trying to stabilize at 450 ppm only using a price for carbon, as Barnes proposes, is wildly impractical and a political non-starter.

That’s because, at its most basic level, a price for carbon most directly encourages fuel-switching (especially from coal), but does not particularly encourage efficiency. That’s why most traditional economic models require a very high (read “unduly brutal” and “politically unacceptable”) price for carbon to get deep reductions.

Indeed, in the months and years to come, you are going to see an unending stream of such models, some funded by fossil fuel companies, and some from credible-seeming places like the U.S. Energy Information Administration (EIA), all designed to scare the public into opposing serious action on climate. How bad will it be? In 1998, EIA concluded that merely meeting the Kyoto target, a 7% reduction below 1990 levels of GHGs by 2008–2012 would — if such a reduction were achieved strictly through domestic reductions in energy-related emissions through a price mechanism — require the price of carbon to reach $348 per metric ton, which, in their analysis, doubles the price for electricity! I kid you not.

The EIA analysis is dumb for many reasons, as I have testified [sadly I can’t find the hearing, “Kyoto and the Internet: the Energy Implications of the Digital Economy” online — I’ll probably blog on this when EIA does their hit job on whatever comes out of the Senate]. But it contains one essential truth: Price alone is a lousy way to cut emissions. Probably the best way to see this is by looking at the (meager) impact of carbon prices on gasoline prices.

The key facts to remember are that:

$50 per tonne of carbon corresponds to 12.5 cents per gallon of gasoline or 0.5 cents per kilowatthour for electricity produced from natural gas at 53% efficiency (or 1.3 cents per kilowatt-hour for coal at 34% efficiency).

That means a price of $400 a metric ton of carbon (whether achieved through a tax or a cap & trade system) would increase the price of gasoline a mere $1 a gallon. How much efficiency would that drive? Not bloody much! How do we know? How much efficiency did going from $2 a gallon to $3 a gallon drive? [Hint: Not bloody much.] Second, I was just in England, and they’re paying over $8 a gallon — how much more efficient are their cars than ours? [Hint: As of 2002, the average fuel economy of European Union vehicles was 37 miles per gallon, just a tad more than what the new energy bill requires, and their taxes are typically some $2 a gallon above ours.]

Note that $400 a metric ton of carbon would add over 10 cents per kwh for traditional coal. So obviously the electricity sector has the most straightforward emissions reductions opportunities — and gets whacked first and hardest if you only use price. But even if that were politically possible, and even if you go to near zero in the utility sector in four decades (no mean feat!), you still need to cut absolute transportation sector emissions at least 60% — and we’ll have some 50% more people in 2050 — so per car emissions will probably need to drop more than 70% (and that’s assuming we can get the same percentage reductions in air travel and big trucks). So I think you understand why I say that we aren’t going to meet a 450 ppm target by just raising carbon prices alone.

If you want efficiency, you need government standards and smart utility regulations. And absent efficiency policies, you need an absurdly high price for carbon that is politically untenable. [Note also that no country has ever successfully switched to an alternative fuel for consumer vehicles without a government mandate — Europe certainly hasn’t done it with even very, very high prices.]

Barnes, however, is a price-only guy:

How do you ensure that dividends get used towards carbon-reducing products and services, not more gas-guzzling SUVs? (Marguerite Manteau-Rao)It is higher prices for carbon, not restrictions on how dividends can be used, that will induce consumers to conserve.

But that raises the logical question, won’t high prices be politically untenable? Barnes’ answer is remarkable to say the least:

… under a tax, politicians set the prices, whereas under a cap, the market does. Politicians shouldn’t be in the business of setting prices. They’ll never get it right, and they have better things to do. If we want to cut emissions 80% through taxes, politicians will have to keep raising carbon taxes ever higher for half a century. This supposes unimaginable acts of political courage, year after year.

With cap-and-dividend, there’s no need for sustained political courage. Once the system is created, politicians are off the hook. If voters complain about higher fuel prices, politicians can truthfully say, “The market sets prices, and you determine by your own energy use whether you gain or lose. If you conserve, you come out ahead.”

As if! Just try doubling electricity prices for consumers and businesses by voting for Barnes’ plan — then not bothering to embrace a bunch of efforts to overcome the many barriers to energy efficiency — and finally saying “hey, it wasn’t me, blame that pesky market — and your own failure to conserve.” Two words: conservative landslide.

Honestly, we are way past the time when we can risk the climate on such politically na¯ve thinking. California has shown that amazing amounts of efficiency can be achieved with aggressive government programs, utility decoupling, and moderately higher electricity prices (but not higher electricity bills). That strategy makes much, much more economic sense — and is far more consumer- and business-friendly, hence much more politically sustainable — than trying to do everything with price, a strategy that is doomed to fail.

That’s what Obama and Clinton understand. In this political season, it’s good to know we can learn some things from the contending politicians.