Obama’s Flawed Emissions Proposal: Cap-and-Trade, “Offsets” Allow Plants to Pay to Pollute

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):

Cap-and-trade

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.