Climate scientist James Hansen has gone on the warpath against cap and trade. (See this op-ed in the NYT, among other recent examples.) Perhaps what’s most weird is that, for all his intelligence, Hansen doesn’t appear to grasp even the basic elements of cap-and-trade systems.
In a blog post last weekend, economist Paul Krugman took him to task:
…today’s op-ed article suggests that he really hasn’t made any effort to understand the economics of emissions control. And that’s not a small matter, because he’s now engaged in a misguided crusade against cap and trade…
What the basic economic analysis says is that an emissions tax of the form Hansen wants and a system of tradable emission permits, aka cap and trade, are essentially equivalent in their effects.
Krugman’s dissection of Hansen is smart and thorough. (If you’re swayed by Hansen, please be sure to read the entire thing.) While Krugman offers a more credible rebuttal than I can, there are three elements of Hansen’s op-ed that I think deserve more treatment.
First, Hansen alleges that the US cap-and-trade program for acid rain pollution hasn’t been successful:
Sulfur emissions have been reduced by 43 percent in the two decades since. Great success? Hardly.
Because cap and trade is enforced through the selling and trading of permits, it actually perpetuates the pollution it is supposed to eliminate.
Okay, part of this is right: the cap-and-trade program did successfully reduced sulfur-dioxide faster and cheaper than anyone expected. (I think most people would call that a success.) But the rest is just wrong. The program was not designed to “eliminate” sulfur-dioxide emissions, just reduce them to the level specified by the cap. So the program did exactly what it set out to do. If Hansen thinks SO2 should be eliminated, he should be calling for a tighter cap — but that’s a question of policymaking, not a failure of the policy tool.
Hansen dings the SO2 program for not doing enough for public health because it continues to allow mercury and other pollutants. But the program wasn’t designed to reduce these things! So this is a little like criticizing cap and trade for failing to provide universal health care or free ham sandwiches. It’s just irrelevant. Hansen seems to wish that the US had different policies than it actually has, but that’s hardly the fault of the policy instrument.
It’s also worth noting that Hansen ignores the other US cap and trade programs, all of which have also been successful. Like, for instance, the program to reduce nitrogen oxides (a contributor to smog and threat to public health) as well as the other regional cap-and-trade programs designed specifically to mitigate health impacts. As it turns out, when cap and trade is directed at reducing health threats, it does so quite effectively.
For more on how the SO2 and NOx programs have worked, see my blog post, “How Cap-and-Trade Markets Work For Acid Rain and Smog.”
Second, Hansen alleges that “Wall Street traders” will “fleece the public out of billions of dollars.” But this appears to ignore reality. To begin with, there are already two carbon cap-and-trade markets in existence. Neither has exhibited any form of market manipulation. And neither have any of the air pollution cap-and-trade programs.
For more on this topic, see my blog posts “How Carbon Markets Work in Europe” and “How Carbon Markets Work in RGGI.”
Krugman’s response really gets to the heart of the matter:
Oh, and the argument that if you create a market, you’re opening the door for Wall Street evildoers, is bizarre. Emissions permits aren’t subprime mortgages, let alone complex derivatives based on subprime; they’re straightforward rights to do a specific thing…
Things like this often happen when economists deal with physical scientists; the hard-science guys tend to assume that we’re witch doctors with nothing to tell them, so they can’t be bothered to listen at all to what the economists have to say, and the result is that they end up reinventing old errors in the belief that they’re deep insights. Most of the time not much harm is done. But this time is different.
Indeed, this inchoate fear of market-oriented climate solutions has given rise to a whole new genus of policy debate, much of which I believe is misguided. There’s more to say on the subject, of course, but for now I’ll simply point folks to the blog series I’ve been writing, “Cap and Trade and the Gaming Question.”
Third, Hansen indulges in an astonishing exercise of wishful thinking. He attacks cap and trade for being influenced by lobbyists, for allowing offsets, and for not directing enough monetary benefit to the public. Of course, there’s a very good reason for these weaknesses: it’s because cap and trade is a real policy with a genuine chance of becoming law.
In this sense, cap and trade can be usefully contrasted with Hansen’s policy alternative (a fee-and-dividend system), which has essentially zero significant political support.
Quick tangent. Hansen has a rather peculiar perspective on how his idea might work:
Say you decide to buy a small, high-efficiency car… Indeed, knowing that you were saving money by buying a small car might inspire your neighbor to follow suit. Popular demand for efficient vehicles could drive gas guzzlers off the market.
Riiiight. My vehicle-buying frugality will inspire others to stop driving SUVs? I don’t even really know how to respond except to point out that it’s already much, much cheaper to buy a small, high-efficiency car. And I sincerely hope that our climate policy does not hinge on more of the same kinds of personal behavior incentives that we have today — because they are totally inadequate to the task before us. End of tangent.
Anyway, let’s imagine for a moment that Hansen’s idea did have support. Does anybody seriously think that an alternative policy would somehow be immune from politics? That lobbyists would hear Hansen’s policy idea and decide to stay home? That offset providers—little guys like the farm lobby — wouldn’t try to influence the bill? That polluting industries wouldn’t angle for loopholes?
Of course not. It’s nonsense to think that cap and trade is
somehow uniquely susceptible to political influence. (I mean, holy smokes, has anyone seen the federal tax code?!) Ultimately, what we have with Hansen’s position is a failure to understand policymaking.
Look, I too wish that the Congressional climate legislation were purer, more skeptical of offsets, and more equity-enchancing. But mostly, I wish we had a policy platform that, even if imperfect, would mark a fundamental transition away from fossil energy while it allowed for improvements in the future. In other words, I wish we had a carbon cap in place.
Paul W. Birkeland
Eric – You (and Krugman) are right. Good rebuttal. But I think we do ourselves a disservice if we don’t examine the roots of Hansen’s position.At its heart, Hansen’s vision is a Populist one. Populism is neither Republican nor Democrat. It is based on the belief (or feeling) that “we,” the producers and wage-earners, are taxed by the Government to provide handouts to “Big Business” and to the “underclass” of non-workers, whoever they are seen as being at the time (immigrants, minorities, etc.). I think we all sense that a little bit at various times.Cap-and-trade plays into this Populist paranoia. It sets up a situation where, to the Populist, it appears that I, the wage-earner, will be on the hook for higher energy prices to heat my house, drive my car, and mow my lawn. But the game-players on Wall Street get a new business and revenue stream! And it seems that the “underclass” of non-workers will get a tax credit of some sort, or will simply pay less because they don’t have to drive to work.The Populist viewpoint, which is where I think Hansen is coming from, is that we should be able to incentivize us as individuals so that I, the wage-earner, gets the breaks and keeps the money. A few months ago, Sightline had a piece discussing a carbon tax that was levied per gallon, but was then distributed per capita. (I think Clark wrote it.) Hansen recommends such a program now. It is the perfect Populist answer. Individuals who drive less, actually make money. Those who can’t ‘discipline’ themselves to drive less have a net financial loss. But it’s up to the individual, and there are no ‘parasites’ in the system sucking away money they don’t deserve.I’m not sure how to do this, but if we were able to find a way to position cap-and-trade as a Populist program, or put some Populist features into it, we would get a lot further a lot faster.
Oregon Michelle
Great point, Paul.Two commenters of Krugman’s post, John D. and Breuckelen, also bring up Hansen’s point about “dividends.”I wonder if Hansen would be happy with a “cap and dividend” approach, also known by the more attention-grabbing name “Cap-and-Cashback”. This concept sounds like a terrific Populist program to me.
Oregon Michelle
P.S. To avoid any confusion, since there are two Pauls, and to give full credit to whom it’s due, in my above comment, I’m first referring to Paul BIRKELAND…
ray benish
Jim Hansen is correct in opposing cap and trade. C has failed in Europe, created a large and fraudulent offset industry and brought windfall profits to large scale polluters. Why would rational people support a measure that turns over the most critical element of our social, commercial, econonmic and cultural life, that it our energy sector, to a group of Wall Street Traders?The proposed cap and trade climate bills will be the first step towards the commoditization of energy, air and water. Within 10 to 15 years the financial and corporate interests will have average U.S. citizens appealing (begging)Goldman Sachs for the right to access energy, the privledge to breath air and consume water. Energy, air, and water will be tradeable commodities all flowing across the desk of money center traders. I am troubled by the continued references to the “success” of C in reducing sulfur dioxide emissions. Even a cursory examination of the facts does not support the case that C for SOx reductions are a good example of what to expect for C for CO2 emission reductions. Passage of C climate bills will set back GHG emission reductions by ten years or more; not only will CO2 emission cuts lag but costs for all goods and services will increase as we feed large polluters, pay for fraudulent offsets and channel lots of our money to the trading firms.
Paul W. Birkeland
Here’s an interesting development from Maria Cantwell as reported in The Olympian. This is the kind of feature that gets us where we’re going on carbon emissions, while getting the broader population on board.What do you think, Eric?”Cantwell’s approach is called “cap and rebate” or “cap and dividend.”Under her bill, the federal government would auction off carbon shares to the nation’s 2,000 or so fuel producers, such as coal and oil companies. Every two years, the shares would expire and, over the years, the U.S. government would offer fewer and fewer shares for sale as a way to reduce carbon consumption.Three-fourths of the money raised would be rebated directly to legal U.S. citizens. Cantwell’s office estimated that an average family of four would receive a total of about $1,100 a year in the form of tax-free monthly checks.”We will give everyone a dividend check,” Cantwell said. “We will keep consumers whole and that is important.”The other 25 percent of the money raised would be used exclusively for clean-energy research and development, energy efficiency programs and for assistance to communities and workers transitioning to a clean energy economy.”http://www.theolympian.com/environment/story/1067041.html
Jan Steinman
I’m sorta with James Hansen (and Annie Leonard) on this one. Let’s call it what it is: cap-n-giveaway.What is missing from cap-n-trade is any relevance to individuals and small carbon sinks. It’s a stick without a carrot.We planted 250 trees last year, and will plant at least that many more in the spring. I work at home, but when I go out, it’s on biodiesel I make myself. We grow much of our own food, using organic techniques. We purposely limit our income, as a way of limiting our carbon-emitting consumption. Where’s my “carbon dividend?”We’re a net carbon sink, but besides not paying higher prices by driving 1/4 as much as most people, there’s no incentive for us to continue being a carbon sink.Among the flaws Annie Leonard points out, cap-n-trade is nothing but a negative incentive for individuals and small groups—it’s all stick; where’s the carrot?
Zach Klotovich
Jan,I applaud you for going to the effort of planting trees to offset your carbon footprint. I think you may be better off under cap-n-trade. I just wouldn’t plant the rest of those trees until the legislation is passed. Assuming cap-n-trade allows energy companies to purchase some carbon offsets, you might get paid for planting trees. 🙂
Matt H
I have a lot of respect for the Sightline Institute and the work you do, but I think you are dead wrong on this one. Dr. Hansen, Friends of the Earth, and many others have very serious reservations about Cap and Trade that we ignore at our peril.There are several reasons why we should be very, very worried about Cap and Trade. First, that it is not likely to accomplish the environmental goals that it sets out to achieve. Second, that it is a major giveaway to hedge funds and investment banks that will make carbon the next toxic asset.http://www.foe.org/subprimecarbon/http://storyofstuff.com/capandtrade/http://www.rollingstone.com/politics/story/29127316/the_great_american_bubble_machine/7
Tom Osdoba
There’s far too much effort being spent drawing false dichotomies in order to argue one point versus the other. Either approach COULD be made to work, and there are legitimate trade-offs between the two.I am quite suspect of the impact cap-and-trade will have in the near- to mid-term, but that’s not a system critique. It’s one of poor application. By pointing to Europe as a rationale for cap-and-trade, it must also be stated that the establishment of that system effectively crashed the carbon market for about three years. That’s not a fatal flaw, because the market has seemed to clear and carbon prices are rising. Our expectation in the U.S., based on all so-called pragmatic legislative proposals should be expected to do the same thing in the short term, because political deals are being made on something that very few understand and about which policymakers are very cautious about enacting (all rhetoric aside).Attempting to demonize Prof. Hansen’s POV about the potential for some financial malfeasance doesn’t eliminate the very valid point that the institutional considerations in implementation any cap-and-trade/auction/dividend system are of critical importance. It’s a blind spot for too many people. I think Hansen and others make too much of the populist braying about corruption in the finance sector, but I don’t have great confidence that we’ll implement cap-and-trade with great effect.One contribution I’d suggest we add to any discussion of these policies is whether either one, in its application (not theory), is well suited to system-level change. We’ve long since passed the point where incentivizing individual behavior change could be expected to satisfy our need for mitigating climate change. That doesn’t mean we shouldn’t incentivize individual behavior change, only that we be honest about its impacts. Cap-and-trade is quite unlikely to drive systemic change, because of its exclusive reliance on market dynamics. The same is true for a carbon tax UNLESS an explicit investment program is created for directing the revenues. A carbon tax that rebates payroll taxes (Friedman’s current favorite) won’t be any more successful than c-n-t. For an example, look to British Columbia, which is in it’s second year of a carbon tax. In year one, at $10/ton tax yielded $440 Million, which was rebated on a per capita basis. The tax rate is too small to seriously change behavior (2-3 cents per liter of gas, or 2-3% increase in energy bills), but $100/person doesn’t lead to anything. This year, it’s $15/ton or roughly $700 Million per year. If you invested that kind of money with a clear strategy toward transforming infrastructure, buildings, technology (including vehicles), you might just have a chance of system-level changes in a meaningful timeframe. For instance, Vancouver could turn its share into nearly $750 Million in leveraged capital, to retrofit buildings, upgrade transit and deploy clean technologies, not including potential for leveraging private capital.Let’s stop berating each other over the wrong conversation. Neither approach, as currently being discussed by policymakers, gets us what is needed.
Eric Hess
Notice: We just removed a couple posts that were disrespectful to the authors and commentors. Sightline encourages thoughtful and spirited discussions and opinions, but please keep it civil.
Bryden Atwater
Hanson has manipulated his data, and his climate models do not take into account all factors relating to global climate. His model is the basis for the U.N. and other’s “proof of mam-made global climate crisis. It is just a bid to change the way the world is governed. CO2 levels are close to the lowest levels in earths history. The levels peaked at 7000 parts per million. During the late Ordivician period they were at 4400ppm and it was an ICE AGE. There has been a steady decline in CO2 levels over millions of years yet the temp has fluctuated from cold to warm back to cold. Furthermore the trend of CO2 levels change come after a temp change not before. There is absolutely NO evidence that CO2 causes a temperature change. Since 2006 according to satellite data, the Earth has cooled since Gore’s film was released, Antarctic sea ice extent has grown to record levels, sea level rise has slowed, ocean temperatures have failed to warm, and more and more scientists have publicly declared their dissent from man-made climate fears as peer-reviewed studies continue to man-made counter warming fears.