Gaius Publius: Obama’s Flawed Cap-and-Trade, Um, Pay-to-Pollute, Emissions Plan

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By Gaius Publius, a professional writer living on the West Coast of the United States and contributing editor at AmericaBlog. Follow him on Twitter @Gaius_Publius and Facebook. Cross posted from AmericaBlog/strong>

We recently mentioned that we expected Obama’s new carbon emission rules to allow a lot of flexibility to carbon companies, include the implementation of “cap-and-trade” as a market-based “enforcement” mechanism.

I put “enforcement” in quotes above, because there’s little force in most market-based systems for carbon emissions. Cap-and-trade works better (depending on the implementation) if the goal is to reduce pollution (like sulphur) by an industry you want to preserve (like coal-burning energy facilities). Cap-and-trade works terribly for an industry you want to destroy — like coal-burning energy facilities.

Cap-and-trade is a let-you-down-easy way to regulate, and it generally lets the regulated industry decide how easy. In most places where it’s used to limit CO2 emissions, cap-and-trade is an industry enabler. What are the odds, in today’s carbon-captured governmental system, that will work?

Cap-and-trade only works when it’s brutal, not when it’s kind. And it only works when the regulators control the rules, not the participants. Obama’s plan is neither brutal nor controlled entirely by the regulators.

How Does Cap-and-Trade Work?

Here’s a good description of cap-and-trade in general, as applied to CO2 emissions, from a truly valuable webpage on both cap-and-trade and carbon-tax methods of emission reduction. The source is the League of Women Voters (my paragraphing and emphasis throughout):


CO2 emissions from U.S. power plants, animated (source)

With this approach, a regulatory body (e.g., the federal government) sets a cap on emissions of a particular pollutant (e.g., CO2) from a designated group of polluters (e.g., power plants). The total emissions allowed under the cap are divided into individual permits, each representing the right to emit a certain quantity of the pollutant (e.g., one ton of CO2). The permits are then allocated to the sources covered by the program. (There are a variety of allocation methods, including free distribution to the capped entities, an auction, or some combination of the two.) At the end of the compliance period (e.g., one year), each regulated source must report all emissions and surrender an equivalent number of permits, to be retired from the system.

Since the total number of permits is limited by the cap [except under some systems, like Obama’s], the permits take on financial value and can be traded on the open market. Companies that are able to reduce their emissions at low cost can sell their surplus permits to companies for whom the cost of reducing emissions is high. Each company has the flexibility to choose how to meet its emissions target, but market incentives encourage companies to invest in new technologies or employ conservation measures to lower the cost of reducing emissions. Over time, the emissions cap is tightened to achieve more aggressive pollution-reduction targets, requiring companies to adjust their strategies to comply with the new levels.

Several things to notice when looking for holes in a regulation scheme like this:

First, the overall number of permits determines the amount of reduction. Offer too many permits, and you get very little reduction. (In the worse cap-and-trade systems, there’s a way for participants to create new permits on their own. Obama’s has this feature, called “offsets,” as well. See below.)

Second, the allocation method can favor some emitters — for example, those with the highest cost to reduce emissions. Let’s create an extreme case. Say you were implementing a cap-and-trade system that included just Kentucky (a coal-burning high-emissions state) and Oregon (a non-coal low-emissions state). Then you gave 95% of the permits to Kentucky, enough to force only small changes there for the next 10 years, and put most of the burden (but not all) of reduction on Oregon.

You’d get the opposite of the result you wanted — if your goal was to eliminate emissions from coal plants. On the other hand, you’d get exactly the result you wanted — if you wanted to appear to reduce emissions from coal plants while making sure that coal profits weren’t terribly impacted. (In the latter case, you want to be careful to force some changes on Kentucky; otherwise, you couldn’t point to them later and claim credit.)

Third, as the example above shows (regulating just Kentucky and Oregon), your plan could fail by regulating only some entities involved in causing a problem and letting others off the hook. You couldn’t meaningfully reduce carbon dioxide emissions, even in just the energy sector, by regulating only certain plants, for example, or by letting each state regulate by applying different rules to their own favored industries, such as letting Kentucky and other coal states coddle their home industries. Obama’s new EPA rules allow each state to design its regulation regime.

Fourth, the scheme could fail by regulating the wrong “measurable.” In the case of carbon emissions from electricity plants, the measureable could be either “carbon dioxide” or “all hydrocarbon emissions.” Using the former would prevent you from counting leakage from methane-burning (natural gas) plants. You could also measure either “total emissions” or “emissions per gigawatt hour generated.” Measuring the latter also favors methane-burning plants, since methane plants already generate more power per unit of emission.

Fifth, the tightening of the emissions cap “over time” can be a fast process or a painfully slow one. In that case, you’d get credit up front for putting into place a self-described “strong, market-based reduction plan” that, ten years down the road, did more than your predecessors did, but far less than was needed.

Finally, by not relying on force to begin with — but “encouragement” — you’re inviting industry lobbyists to help you “improve” the plan in the interest of making it more “practical” — all behind the scenes, after the fact, and away from the legacy-damaging TV lights.

This League of Women Voters page has much good information; we’ll be returning to it often. But I want to turn to just one of its sub-topics — “offsetting,” a process by which cap-and-trade–regulated entities can create new permits on their own. Obama’s plan includes offsetting.

Obama’s Cap-and-Trade Proposal is Flawed, Allows “Offsets”

Not only do cap-and-trade plans in general have problems, but Obama’s cap-and-trade plan has additional problems. The following is from a press release by Institute for Policy Studies, Climate Policy Program Director Janet Redman:

EPA’s Carbon Rule Falls Short of Real Emissions Reduction

Cap-and-trade, offsets allow power plants to pay to pollute

On the heels of two telling reports from the Intergovernmental Panel of Climate Change (IPCC) and the National Climate Assessment detailing the substantial negative impacts from climate change around the world, the U.S. Environmental Protection Agency’s (EPA’s) decision to incorporate emissions trading and offsetting in their new carbon dioxide rule undermines its ability to deliver the real reductions in carbon emissions so urgently needed. …

In addition to problems inherent in cap-and-trade, Obama’s plan allows “offsets”:

Proponents claim the U.S. can design cap-and-trade better than the Europeans, but they’re already importing one of the worst aspects – offsetting. Offsets allow regulated power plants to pay farmers, foresters and others outside the cap to reduce their emissions, and then claim those cuts for themselves. Power plants keep polluting, and the families living in their shadow continue to breathe toxic emissions. Communities near the polluters don’t see any benefits from the supposed reduction in pollution taking place elsewhere.

To top it off, it is nearly impossible for the supplier of an offset to guarantee that the offsetting action will be in place for the duration of a power plant’s life. Given the 50-year lifespan of carbon in the atmosphere after is it released, offsetting poses a real risk to long-term climate stability.

Even the U.S. Government Accountability Office points out that, ‘offsets allow regulated entities to emit more while maintaining the emissions levels set by a cap and trade program or other program to limit emissions.’

The League of Women Voters on “offsets”:

Offsets. These are GHG reductions from sources not covered by the cap-and-trade program and that regulated entities can use to meet their compliance obligations. Firms could cover some of their emissions by purchasing credits created through offset projects, such as methane capture at a landfill or avoided deforestation. An offset program can significantly reduce compliance costs by providing access to lower-cost emissions reduction options. …

Care must be taken to ensure that only high-quality offset projects are included—lest the environmental goals of the cap-and-trade program be compromised [my emphases in this paragraph]. Emissions reductions must be real, additional (beyond what would have occurred anyway), verifiable by an independent third party, permanent, and enforceable.

Given Obama’s proven track record of not matching deeds to words, I suspect that every problem identified above — that the offsets must be real, additional, verifiable, permanent, enforceable — will be found to be a problem with the current plan. If for no other reason, lobbyists.

Obama’s Plan “Moves the Goalpost” for Measuring Reductions

There are other problems with Obama’s program not detailed here. For example, it arbitrarily moves the goalpost, the point from which emission reductions are measured, from the international benchmark year of 1990 — when U.S. CO2 emissions were about 5100 million tons — to 2005, when U.S. emissions were 6100 million tons. (See page 27 of this EPA report.)

Obama wants to reduce emissions by 30%, and if he measures down from 2005, he’s already halfway there before he starts. Magic. If he measures from 1990, however, he’s got nothing. Actually he’s got less than nothing. CO2 emissions in 2013 were about 5400 million tons (pdf; see Table 12.1). He’d have to lose 3 million tons off last year’s number just to break even by 1990 standards.

And that doesn’t take into account that he moved the target year as well for these reductions, the year by which the reductions are due. IPCC set the goal for developed nations at the year 2020. Obama’s goal — 2030, ten years too late.

I’ll have more on this aspect of Obama’s plan — what does it attempt to achieve — soon, but these new standards don’t begin to meet even the conservative IPCC reduction recommendations.

Points for Trying?

On the other hand, Obama’s getting points from the left for trying, and those he deserves. He’s also getting points for being the first of his ilk (presidents are definitely an ilk) to take on this issue without going through Congress. He deserves those too.

I’d love to say he gets points for going all out. Can’t do that. Maybe the next of his ilk will actually go full FDR on the carbon industry … or maybe not.

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  1. pretzelattack

    he’s waffled on the keystone pipeline for years, and his state department produced a very flawed study of the environmental impact it would have. sorry, i’m just not inclined to give him many points.

  2. docg

    Better a flawed policy than an effective one. Because a truly effective policy that would in fact shut down the coal industry and decommission all the coal fired power plants would be the sort of unmitigated disaster few of its critics have bothered to contemplate.

    I’m not a climate science denier, and certainly not a conservative or libertarian, but I’m not a pie in the sky liberal dreamer either. We really can’t have our cake and eat it too, it’s just not possible. What is needed in face of the threat that we can actually do something about, i.e, the inevitable exhaustion of fossil fuels (as opposed to climate change which we can do almost nothing about), is a major investment in sustainable power research and development. And until these industries can emerge as viable, cost effective alternatives to fossil fuels, the latter are going to be essential during the transition period. That, as I see it, is the true “inconvenient truth” of our time.

    The only alternative is nuclear power, and in the wake of the ongoing disaster at Fukushima it’s hard to believe that any responsible person would advocate the vast increase in nuclear power plants that would be needed if we shut down the coal industry. It does pay to look ahead, folks, at the consequences of our decisions. Coal is the lifeline for hundreds of millions of the most vulnerable, both in the third world AND the USA. To shut it down would be to deprive many millions of heat, food, jobs.

    1. Vatch

      Docg, you are correct that it would be extremely disruptive to abruptly eliminate the use of coal, and it would ruin people’s lives. Of course, Obama can’t eliminate the use of coal outside the United States. China alone uses nearly as much coal as the rest of the world combined, according to the U.S. Energy Administration.

      The demand for energy will continue to grow as the world’s population rises, and coal will be a huge part of that demand for years to come. Any serious plan to reduce greenhouse gas emissions must include the major investment in sustainable power research and development to which you refer. But that’s not enough. We need to stop creating so many new humans — people need to have fewer babies. This is required in both the relatively prosperous industrial world, and in the poorer parts of the world.

      1. docg

        “We need to stop creating so many new humans — people need to have fewer babies.”
        On that point I completely agree. To counter the inevitable effects of climate change we need to adapt, which is what we’ve always done. And population control has to be part of that, no question.

    2. susan the other

      And because we blindly insist on gradual solutions, we fail to address any other. For now the obvious solution is natural gas, but it pollutes as well. Everybody sitting around the table has an excuse but nobody has a solution. Nobody has analyzed the millions of people that will suffer for an abrupt lack of energy. That’s where the analysis should start. Not at the top where coal execs can be welfare queens for decades while they continue to pollute the atmosphere. That’s not even blackmail. Why should we help the corporation’s balance sheet? That literally has nothing to do with the problem and is nonsense at best. If shutting down the coal industry causes such abrupt displacement and misery, the welfare should go into transition industries – renewables, thorium maybe, geothermal, and above all conservation. Can somebody please design a house that doesn’t need any more heat than passive solar? The human race lived that way for about 3 million years, or so. And electricity itself should be looked at. Let’s replace it too where we can use better technology. Why allow all these excuses to paralyze us? Cap n Trade is just another awful excuse.

      1. Thor's Hammer

        “nobody has a solution”
        Actually that is not the case. Kirk Sorensen has a solution. It may not be the right one, but a nuclear power plant design that produces 5% of the waste volume (and that in short-lived isotopes), requires no high pressure water cooling, cannot melt down, automatically shuts down to a safe and long term stable state with no human intervention, uses a nearly inexhaustible fuel source, and could potentially be built on an assembly line at a fraction of the cost of dinosaur light water atomic reactors would certainly go a long way to consigning coal and natural gas to the dustbin of history.

    3. ifthethunderdontgetya™³²®©

      ” but I’m not a pie in the sky liberal dreamer either”

      Go die in a fire.

      This problem has been obvious since Jimmy Carter started wearing sweaters. And we’ve done nothing, thanks to greedy goopers and “sensible centrists”.

    4. sgt_doom

      Cap-and-trade was first proposed by the Reagan Administration back around 1983, where it was promptly laughed out of congress (still a few authentic democrats left in congress back then).


      Because it is, in today’s vernacular, an extension of shadow banking, which is why the parent holding company of the various global exchanges is Global Exchange plc, registered in the Isle of Man, financed by Goldman Sachs, Morgan Stanley, BP, Royal Dutch/Shell, Total and minority stake holder Deutsche Bank.

      It’s simply, as explained in this blog post, another free money creation scheme with no oversight.

  3. diptherio

    “Obama’s getting points from the left for trying, and those he deserves. He’s also getting points for being the first of his ilk (presidents are definitely an ilk) to take on this issue without going through Congress. He deserves those too.

    I’d love to say he gets points for going all out. Can’t do that.”

    I’m not a fan of this political point-scoring system. You do the right thing–you go “all out”–or you are a failure, period. We shouldn’t be handing out points for merely paying lip sevice (“trying”) or for implementing ineffective half-measures. If we do that, our politicians will be able to keep adding to their W columns just by scoring enough of these type of points, without ever doing anything substantive. That’s sure enough been their game-plan so far.

    Obama is like a baseball player who never gets a hit, but takes lots of “good swings” and spends a lot of time at batting practice. Despite never once making it to base, the die-hard Democratic apologists think he should get a few points just for putting in the effort–but that ain’t how the game works.

    You get a hit or you don’t–no points for “trying.”

    1. hunkerdown

      That would be telling.

      That they haven’t is a different tell, and my first thought is that it has something to do with more cleanly wedging environmental radicals from environmental quislings. Then, gosh, what are we going to do about all these landlocked hydrocarbons we can’t “afford” to burn? Maybe someone else should burn them, so we really do need That Pipeline after all… *sad trombone*

  4. Deloss

    I have the temerity to think that some of the posts on here are a little unreasonable. Whatever you may think of the inadequacies of President Obama’s CO2-reduction program–and I probably will agree with you–you must admit that he used the only tool available to him–the EPA–and there will no doubt now be a lawsuit arguing that the EPA has no power to enforce CO2 standards. No program could have been gotten through Congress, and everybody knows it–even the Democrat Alison Lundergan Grimes, running against Mitch McConnell, made a big speech yesterday expressing her support for “clean coal,” as if there were such a thing. Yet I will continue to send money to Ms. Grimes.

    One thing I think Obama’s move has done: he has flipped the discussion from “there’s no such thing as global warming” to “what do we do about global warming?” This is progress.

    And while NC readers, who tend to be leftish, may oppose Obama for not going far enough, there is a large, ugly percentage of the population that hates him for personal as well as political reasons, and will virulently oppose any action he takes. You probably saw that an effigy of Obama was found hanging from a bridge in Missouri over the weekend. No? It’s here:

    1. ifthethunderdontgetya™³²®©

      No. You don’t get to use the “Congress is too conservative” excuse when you and your people do everything possible to make sure that it is conservative.

      What did Obama do when he massive majorities in the House and Senate?

      As much as he could for the banks and other large corporations. As little as he could for the people who voted for him.

      And here’s Steve Israel, following in Rahm Emanuel’s footsteps.

      Which two Democratic Presidents campaigned for the Connecticut for Lieberman Party’s candidate? How about anti-labor Senator Blanche Lincoln, when she was going to lose in the general election anyways? What happened to Howard Dean’s 50 State Strategy?

      Obama is going to make $100 million from big corporations after he’s out of office, just like Bill Clinton did. And for the same reason: selling out his voters on behalf of those same big corporations.

    2. francis

      I virulently oppose any action he takes, and I voted for him. Just the once though. As far as I’m concerned the lamer a duck he is the better.

  5. Yancey Ward

    Cap and trade is essentially nothing more than a rent-seeking arrangement unless the sources of the controlled pollution are limited (like in the case of SO2 and their origin in power plants). Given the wide variety of ways to produce “carbon credits”, you are literally guaranteed to end up with a never-ending series of scams. Far better to simply tax carbon and remit the revenue on an equal per capita basis. Politicians don’t do this because it makes it harder to sell favors.

    1. francis

      Here’s that excellent Harpers article.

  6. jfleni

    As the slickest triangulator/buttkisser/liar since Herr Goebbels himself, poison-dwarf-bros and all the other climate poisoners have nothing to worry about from Barry-bubba; he will create the illusion of action and problem-solving, puctuated by eloquent speeches, without actually doing anything.

    His riches to come are still safe. Thus it always is with him.

    1. Gaius Publius

      > when the last consumer burns the last carbon atom, then we can talk

      Jay, this comment is brilliant. Thanks. That’s Exxon and the Kochs to a T.


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