Details matter: Small sticks and no carrots

Lieberman-Warner criticism, Part 2

Posted by Sean Casten (Guest Contributor) at 2:03 PM on 25 Apr 2008

This is the second in a five-part series exploring the details of the Lieberman-Warner Climate Security Act. See part 1 here.

With atmospheric GHG concentrations rising at a frightening rate, we need a full court press to change directions, using every possible tool at our disposal. From an economic perspective, this means that we not only need to impose financial penalties on polluters, but also provide financial incentives for those who act to lower GHG emissions. We need a market mechanism in place so that the costs of GHG emission -- or the revenue associated with GHG reduction -- factors into individual investment decisions immediately. In short, we need big sticks and big carrots. The Climate Stabilization Act (CSA), as the Lieberman-Warner Bill is known, is a small stick with no carrot. This post explains why.

Small sticks

Grist has had a rich discussion on the pros of auctioning (as opposed to allocating) emissions credits, which I will not repeat here, except to note that an auction is a stick. An allocation is a gift given to someone who deserves a stick. And yes, it's politically much easier to allocate than to auction, since the latter necessarily imposes costs on powerful special interest groups that will lobby hard to protect their interests.

The CSA effectively tries to split this difference. It starts with an allocation to pollute based on historic levels and then does two things to gradually build a small stick:

It reduces the total allocation by 106 million tons/year (1.8 percent/year)
It begins auctioning some of the permits, starting with 21.5 percent of all permits in 2012, and then increasing gradually to 69.5 percent by 2031, at which point the auctioned quantity remains fixed through the end of the bill's lifetime (2050).

This is not as bad as 100 percent allocation, but not as good as 100 percent auction -- and note that in all cases, at least 30 percent of the pollution permits are structured as gifts. But with some auctions and a declining cap, it is best characterized as a small stick. It will slowly raise the cost of GHG emission. But slowly. And the physics of our atmosphere demands must faster action than this political compromise delivers.

No carrots, just pork

Now let's look at the other side of the ledger, where things get really political, really wonky and, frankly, a tad confusing. As we've seen above, the CSA will slowly penalize the bad guys for polluting. But if you're a regular Grist reader, you're probably among the good guys. What's in it for you? Will you have any added incentive to invest in capital projects or technologies to lower GHG emissions? It's not at all clear.

So before you read further, imagine that you have a way to lower GHG emissions. Think very broadly about what that might entail, since these regulations will be in place until 2050 -- any technology that you or anyone else might come up with in the next 42 years ought to be incentivized under this plan if the CSA is going to ensure that we bring as many resources to bear on cooling the planet. The central problem of the CSA is that all of society's creative ideas for the next four decades are effectively pre-stipulated. If you're included in the list of winners below, you might have a carrot, albeit an indirect one. If you're not, too bad. Go to Washington and lobby to be included. Get in line with everyone else who'd also like to be included in the Winner List. You might succeed, you might not, but at the core, you as an inventor of a great, save-the-world technology circa 2015 have no incentive to deploy that technology that doesn't involve a big lobbying budget.

Pork details

The CSA essentially has two incentives it can give away:

The right to pollute for free, via free allowances.
The proceeds from the auction.

The first is given primarily to polluters, creating problems of its own, which I will discuss in a later post -- but by design, it's a gift to the dirty guys rather than a carrot to the clean ones. Let's look then at how the financial incentives get allocated.

The first use of the proceeds is to fund EPA and other federal agencies who have responsibilities to fulfill under the CSA.

The second use of proceeds is to ensure adequate funding for firefighting at the Bureau of Land Management and the Forest Service. This certainly seems reasonable, although one might wonder how we know that over the next 42 years, this will be more important than any other climate-related funding need.

Once these two uses are covered, the remaining funds are distributed as follows:

Fifty-two percent to the Energy Technology Deployment Fund, which is used for "financial incentive programs to accelerate the development and deployment of sustainable energy technologies, low-carbon electricity technologies, advanced biofuels such as cellulosic ethanol, CO2 capture and storage systems, electric and plug-in hybrid electric vehicles and high-efficiency consumer products." This all sounds noble, but it's getting awfully porky. Why are we stipulating paths instead of goals? Who has the hubris to claim knowledge of the optimal technology paths over the next 42 years? Why do we think that a government bureaucracy is ever the ideal way to specify technological solutions to the world's great challenges?
Two percent to the Energy Transformation Acceleration Fund, to be administered by the Advanced Research Projects Agency in the DOE. See criticism above.
Eighteen percent to the Energy Assistance Fund, which will then be distributed as follows: 50 percent to Low Income Home Energy Assistance Program, 25 percent to the Weatherization Assistance Program, and 25 percent to the Rural Energy Assistance Program.
Eighteen percent to the Adaptation Fund, which will then be distributed as follows: 59 percent to the Interior Department for wildlife conservation & restoration, endangered species, migratory bird and other fish & wildlife programs and adaptation activities carried out under cooperative grant programs; 1 percent to Indian tribes for tribal wildlife grant programs of the Fish & Wildlife service; 5 percent to the Secretary of Agriculture for activities on national forests & grasslands pursuant to the cooperative Wings Across America program, and 5 percent to the EPA for restoring freshwater and estuarine systems. I've got no beef with any of these goals, but I repeat my criticism in point 1 above. Who possibly has the hubris to know that this is the best use of funding over the next 42 years? And worse, some of this is getting several steps removed from GHG policy. What's it doing in a GHG bill?
Five percent to the Climate Change Worker Training fund, to be administered by the Department of Labor to fund a new workforce education, training and placement program.
Five percent to the Climate Change and National Security Fund, to be established by the State Department and administered by the U.S. Agency for International Development to protect national security interest of the U.S. where such interests could be compromised by destabilizing climate change impacts, to support the development of climate change programs in other countries, and to support the development of technologies that will help less developed countries reduce GHG emissions and/or respond to climate change.

Follow all that? If you're feeling a bit confused right now, you're not alone. But without quibbling over the details here, note the overarching assumption: that we know who climate change is going to affect, we know the technologies that we need to deploy to ameliorate those impacts (and, we know what the solutions are, at core technological, as opposed to simple matters of regulatory reform), we know how much money it will take to solve, we know who ought to receive that money and our we know what the answers to all those questions for the next 42 years. Come on.

This is pork, pure and simple. Some is admittedly rather progressive pork, but it's still pork (one can already see the companies lining up to receive R&D grants from all the various funds and agencies that are being created). And it's fairly obvious that the route the CSA is taking to try to secure Senate passage is to sprinkle the pork around as broadly as possible. But we should not confuse pork with carrots. And we should not presume that this dilution of impacts -- no matter how noble these other causes are -- will not slow our rate of GHG reduction, as dollars are allocated to other ends.

As I noted previously, Lieberman-Warner is the train upon which our climate change policy is going to be based. We are not going to change the train -- but we sure can make it better. We need to get rid of this pork allocation and replace it with a much simpler set of incentives that define the goal, put an incentive in place for anyone who can meet that goal, and get out of the way.

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18 Comments | Post a Comment

get busy

all help apprciated

but keep in mind where we are, and where we are headed

most assume that the bill moves left next year

the opposite is likely

Energy Committee is looking to take control of this bill

And Energy will sabotage the vote to bolster its claim to next year, if Energy can do so without fingerprints

Energy's top priority will be to protect fossil fuels and nuke energy, and to kill alternative energy with EXTREMELY small favors

A bad vote this year is probably a pit from which progressives never recover

fix L-W as best you can as fast as you can

there is a bear in the woods (Energy Committee) and it is a ferociious beast

most Grist fans have no idea what world they live in

by ce1907 at 4:57 PM on 26 Apr 2008

Sean

I have a couple of questions for you. I don't see the bill, specifically the provisions to which you allude, exactly the same way that you do, but it's also possible that I don't fully understand them either.

If you are an inventor, and you come up with a fantastic idea for reducing carbon emissions via some new widget - you seem to imply above that you have no incentive to deploy your technology because it's not listed in the bill. OK, two questions:

Why not? Why wouldn't some company, XYZ Industries, who is facing a cap on their carbon emissions, buy the widget from you? Regardless of what the bill says, all they want to do is reduce emissions, and if they can do that cost effectively, well that's terrific. So if your idea is a good one, companies will come clamoring for it, won't they? Am I missing something? Isn't this the market at work?
I seem to read the bill a little differently, and it hinges on a few words. The first bucket of money you describe above, the Energy Technology Deployment Fund, seems to leave some pretty big windows. I completely agree re: goals instead of paths, but I don't think they are ruling anything out by saying "sustainable energy technologies" (that's a big category) and "low carbon electricity technologies" (another big category). Right there you cover most of what is out there, and it seems that you could tuck inventions into either one of those categories.

If I could add anything, it would be language on efficiency, which I should note many people are going to propose, and frankly is likely to be added. That, to me, would cover just about everything and leave room for the funding of innovation.

Please let me know if I'm missing something here.

by Capster at 7:25 PM on 26 Apr 2008

Apathy reigns

Sean- I'm sure your critique of LW is very insightful and I absolutely agree that the bill will represent a giant pile of pork handed out to political insiders and the fossil fuel industry. I also believe that it won't amount to a fart in a hurricane even if all the provisions work exactly as planned.

Judging by the level of "OH S#)T's" I'm seeing around the net lately I don''t think I'm alone. Many, many people are of the opinion that there really is no point in promoting the CSA until it comes up with some serious goals. A serious goal would be something like zero net-carbon emissions globally by 2030 with provision made to heavily subsidize soil sequestration through no-till planting of grains, rangeland management, forest management, biochar sequestration and anything else that looks like it will work.

If that's not politically feasible we can just wait until TSHTF; but we're doing that already.

Lieberman-Warner isn't even close to a effective proposal to check global warming. Why discuss it?

Put the Carbon Back

by Pangolin at 7:35 PM on 26 Apr 2008

Capster

Re 1: You have to follow where the incentives lie. If I'm an emitter and I'm given an allowance to pollute, I don't have any incentive to buy things from inventor X. And this is the case for the majority of the allowances in the early years, and in all cases is true for at least 30% of the allowances. Now look at what happens if I have to pay to pollute. Under LW, I either pay or reduce my emissions signature - but the allocation is based on my emissions. I'll get to some of this in a later post, but this is a key part of the problem - namely, that LW is structured so that the regulated sources don't have any good options. If I burn more than 5000 tons of carbon per year, I either get or buy allowances based on my net carbon consumption, net that which I sequester. Suppose your great invention lowers GHGs, but isn't retrofittable into my coal plant. In that case, the coal plant doesn't have any path to pay you to reduce their emissions. They just pay the feds... and the feds then allocate amongst the picked winners. So you end up with this extremely complicated regulatory model where the feds name all the losers, name all the winners and then play the role of choke point in the system allocating funds from one to the other. (And note that a significant fraction of the winners aren't actually GHG reducers - wildlife conservation, estuarine recovery, etc. All noble goals, but the result is that for every 100 cents of GHG pollution rights purchases, less than 100 cents goes to GHG pollution reduction.) The core issue is that this is socialist policy, in the classic sense of the term: it assumes that a couple smart regulators can allocate social good better than 1000 dumb actors. Except that at least the most die-hard communists limited their planning to 5 year horizons. This one goes for 42!

Re 2: I think I can safely say that government does many things well, but flexibility isn't one of them. (As a former Senate staffer told me, the great frustration about Washington is that if everyone on the ship agrees you should shift your heading by 90 degrees, everyone gets together, pushes like hell and you end up shifting 3 degrees in the right direction.) This isn't a criticism of DC so much as of big bureaucracy, and it is true of every state and federal policy I've ever seen that stipulates technological incentives. Once an R&D/tech development program is in place at the DOE (not to single them out, of course), it creates all it's own inertia. And so no matter how quickly it becomes apparent that hydrogen/clean coal/etc. is a dumb idea, it will be many years before the program dies. So too, with these stipulated programs that start with lists of eligible technologies. Even if the relevant agency has the freedom to amend the list, they can't do it easily, as you immediately create fiefdoms (think of all the program managers for the Super Duper Technology Du Jour funding program, who lobby hard internally to keep their program in place, no matter what the politics say.)

I am perhaps not being as eloquent as I can, but having spent a lot of time in that world, trust me... it's a mess waiting to happen.

by Sean Casten at 7:21 AM on 27 Apr 2008
[ Parent ]

Pangolin

It's a political judgment. Many folks in DC are aware of the limitations of LW, but the general consensus is that this will be the structure within which GHG regs are developed. Many groups are bashing LW out of Inhofe-esque evil intent. Many folks are praising it out of what I can only describe as naive environmentalist fantasy. (e.g., they say they'll reduce GHGs! I love it! Never mind the details.) And frankly, many others are supporting it out of a belief that this is either the best we can do, or (more perniciously) because they have figured out a way for them to be set up as a pork recipient.

So... to your question of why talk about it: because I am not aware of any significant conversation going on in the middle. One can accept the political inevitability of LW with respect to the specific legislative bill number without conceding all the details in the present draft. And for now, it is only a draft, that can still be editted. So rather than saying the whole thing sucks (or the whole thing rocks), those of us in the responsible end of the environmental community really ought to be talking about the details that don't work, and how to fix them. And we need to do so before it really does become inevitable. Because once this is passed, it's going to be really hard to undo.

by Sean Casten at 7:28 AM on 27 Apr 2008
[ Parent ]

You got it ce

"most Grist fans have no idea what world they live in"

How much better would it be to simply divert the 10s of billions per year in corporate welfare for fossil, nuclear, and agribizz (ethanol, biodiesel farming) to direct subsidies? Checks for people who generate and sell GHG-free kwh into the grid. And save kwh through investment in conservation.

Industry will then meet the demand for the devices to produce and save energy. They will get there's, but will have to supply what consumers need to make their profits. Playing field leveled, free market restored.

Legislators need millions of letters from millions of green voters with 5 or 10 buck campaign contributions a piece in them sending this message. Otherwise the voices and PCs of industry lobbyists, on which this bill was written, will prevail.

The green voters are there, the few bucks a piece are there. So how to get this going? Time is growing short into this election. Now is the time when legislators will listen. Once they are reelected it will be too late.

http://amazngdrx.blogharbor.com/blog

by amazingdrx at 8:00 AM on 27 Apr 2008

Impressive, Sean

Just a note: "...becomes apparent that hydrogen/clean coal/~~etc~~ food based biofuels is a dumb idea, it will be many years before the program dies..."

You obviously also have a good understanding of how bureaucracies behave. People often confuse a critique of bureaucracy with a critique of government. They are not synonyms and a critique of bureaucracies is not a critique of government per se.

In the end, it all comes down to biodiversity. Poison Darts--Protecting the biodiversity of our world

by biodiversivist at 10:49 AM on 27 Apr 2008

I get your point..

..and understand what you're saying about both the allocation and the selection of winners. I would suggest, however, that it's not quite as "black and white" as you make it seem. There are some technologies that will not get gov't funding that will still be successful. Will it help to get gov't funding? Absolutely. But a good idea is a good idea, and VCs and other folks out there are scouring the marketplace for good ideas in which to invest. So I think that there will be some support for clever inventors, just not always from the big gov't pool.

But you make a very good point about the selection of technology. If I had my way, like you, I would have the bill focus on goals, not the path to the goals. The use of collected funding for things other than R&D is, my guess, some sort of political math. I would bet that to get someone's support, they needed to throw in some funding for good ideas like those you outline even if they are not tied to GHG reductions directly. I have no way of knowing if this is true, it's just my guess. I suppose I should be pleased that at least the things they chose seem reasonably worthy to me, but you are right - 42 years is a looong time.

In the end, I think the bill will be edited, at least somewhat, finally passed in 2010, and be in effect in 2012. And then there will be constant efforts to reshape it over the years. I tend to be a "don't let the perfect be the enemy of the good" kind of person on these issues, so I'll be pleased to finally get something in the books. I'm more than willing to keep taking runs at it in the ensuing years.

by Capster at 2:57 PM on 27 Apr 2008

Capster - I mostly agree

Note that the first post in this series though pointed out exactly the point you raise vis a vis the perfect and the good. My point in this series of posts is to make sure everyone understands exactly how wide a gap there is between the perfect and this bill. We can then have an informed conversation about whether this bill is good, bad or so-so. Personally, I think we can do a lot better than this and still not be perfect.j

Also, re: VC funding, you're right that VCs will invest in good technologies. But they will invest in more of those good technologies if the beneficial GHG impacts of those technologies are factored into their value proposition. There is no reason L-W cannot be structured to reward these players-to-be-named-later. But as it is, it does not. And so the calculus with respect to those VC investments in green technologies remains essentially unchanged with the passage of L-W. And that, in my mind is about as harsh a criticism as one can make of a bill designed to lower our GHG emissions!

by Sean Casten at 3:29 PM on 27 Apr 2008
[ Parent ]

uh, Sean

what?

We need to get rid of this pork allocation and replace it with a much simpler set of incentives that define the goal, put an incentive in place for anyone who can meet that goal, and get out of the way.

good idea

but how are you going to get the votes?

by ce1907 at 7:13 PM on 27 Apr 2008

Choosing technology

That's the beauty of a per kwh subsidy. Scientists at NREL, for instance, determine the GHG canceling effectiveness of a specific technology, the utility counts the kwhs generated or saved, and the government issues a check for the subsidy.

Investors decide which devices or systems to invest in. They will know how big a subsidy check to expect when they buy the solar system, wind machine, geo heating/cooling system, farm biogas power system, and/or plugin hybrid vehicle.

And so will the bank lending them the money.

Lobbyists will be shut out of the game.

http://amazngdrx.blogharbor.com/blog

by amazingdrx at 10:36 PM on 27 Apr 2008

ce1907

That's simply a question of politics. I'm not a politician, but don't think it's that hard. It is not particularly difficult to set up a mechanism like this one that has no net fiscal cost. You get votes on that by defanging everyone who's opposed to GHG control on economic grounds.

I'd also point out that we do pass bills all the time that are pork free (witness the Clean Air Act), so we shouldn't assume that the only way to get votes is to buy off senators. There is a place for good policy in DC, believe it or not!

I'd also point out that the pork-purchasing works a bit better in the Senate than in the House, for the simple reason that there are only 60 districts that need to be pork-fortified. That's part of the reason that I don't think this approach is going to get through both houses...

by Sean Casten at 5:52 AM on 28 Apr 2008
[ Parent ]

Dr. X

I agree, but for the NREL bit. As soon as you put a gov't body in the approval process, you open up the door to inefficiency, and the odd shenanigan. (For example, EPA struggles mightily with how to factor in emissions impacts that happen "beyond the battery limits" of a regulated source, not because they're bad scientists, but because their science is limited by their jurisdiction and regulatory mandate.) The beauty of an output-based standard is that you get per kWh payments without any complicated bureaucracy to figure out how to allocate.

by Sean Casten at 5:59 AM on 28 Apr 2008
[ Parent ]

Thanks Sean!

That agreement means a lot, after ranting on this point for months! Hehey.

I was reffering to NREL, much underfunded as it is, because of their excellent testing of various solar and wind devices. But I agree some way of keeping the problematic aspects of standard government confusion and corruption, out of the equation, needs to be found.

I suggested NREL because they seem to be able to rise above it so far. Maybe with more funding and power they would be corrupted?

Can some way of fair arbitration on which systems are rated scientifically in quantifiable numbers be developed? I think that NREL has shown it is no EPA (yep EPA is messed up alright!) so far.

I will try to find some examples from their site for you, if you would want to check them out, thanks again.

http://amazngdrx.blogharbor.com/blog

by amazingdrx at 7:26 AM on 28 Apr 2008

I know NREL well

And it's not really about them per se. My point is the generic one that if you need to stick a government body in the way to quantify your GHG impacts, you're too complicated. I liken GHG policy (and indeed, most public policy) to incentive compensation plans. (It's the CEO in me.) Good plans are really simple. Bad plans have layers of complexity where some well-meaning CEO/HR director tried to pre-guess every possible way employees would game the plan and stick in oodles of complexity... and then truly learn how innovative their employees are when they watch them quickly identify all the loopholes in their genius plan.

(A friend in the biofuels group at NREL, interestingly enough was the first to make the link for me between public policy and incentive plans. As he put it to me, "the great thing about making laws is that you immediately see behavior change. The bad thing about making laws is that until you see the behavior change, you don't really know what it was that you were encouraging people to do.)

This argues for simplicity, and the biggest problem with all our GHG plans is that they start hideously complicated, and you can smell the gaming coming - and this is no less true if the administration is done by NREL, ORNL, INEEL, any other national lab, or indeed any other branch of the government.

The heck of it is, it doesn't have to be complicated. It is really easy to install a meter that quantifies how many kWh, Btus or any other useful energy output you made in a given month. It's also really easy to put a meter on and figure out how much fuel you burned during the same period. Presto, we know how much GHG you emitted per MWh. The only thing we need government oversight for at that point is to provide sufficient oversight & audit to verify those meters & reports. After that point, government doesn't have to be involved, and we can simply leave polluters free to buy offsets from cleaners wherever they may be. This is the crux of the output based standard.

by Sean Casten at 7:56 AM on 28 Apr 2008
[ Parent ]

There it is

Random quality control spot checks to make sure it's not being gamed. That should be government's part. (And of course issuing subsidy checks).

I'm going to cogitate on your comments on the trail Sean.

There has to be a way to get honest science applied to this. Quantify the GHG freeing aspect of a given device or system. Can you ask your friend at NREL his opinion on this?

http://amazngdrx.blogharbor.com/blog

by amazingdrx at 8:44 AM on 28 Apr 2008

controversy rather than progress

ce1907: good idea, but how are you going to get the votes

Sean: That's simply a question of politics. I'm not a politician, but don't think it's that hard.

Sean: we need a full court press to change directions

Sean:It is sad but true that there is no such thing as perfect legislation, for the simple reason that the democratic process demands compromise.

I'm sorry Sean, but you're all over the place. This might be why you take so many posts to preach the controversy.

by greenfire8 at 1:58 PM on 29 Apr 2008

Academic vs. Realistic

From Sean's company's website: Turbosteam (a wholly owned subsidiary) believes successful power projects have a single point of coordination, someone responsible for everything from conceptual design to system commissioning. Turbosteam, therefore, combines the expertise of a consulting engineer, banker, manufacturer, and general contractor to ensure that our projects deliver the optimal value to our customers.

Academically, I see your point where efficiency is concerned. Realistically, I dont think anyone would argue for this more than Enron, one of the original energy traders.

by greenfire8 at 2:01 PM on 29 Apr 2008

ADVERTISING POLICY

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