Thursday, April 30, 2009

A Case for Free Carbon Allowances

The notion that carbon credits need to be auctioned-off is counterproductive to the effort to reduce greenhouse gas emissions (GHGs). A free allowance system will produce a more acceptable, more efficient, cheaper and deeper GHGs reductions quicker.

Do you remember the childhood story of Stone Soup? The story is reproduced below. To extrapolate, it is a story of how a community will perform a collectively beneficial act if it is approached in a gradual non-threatening way. There is no doubt that a carbon constraining regime will be like the weary soldiers in the story: an uncertain threat to the community. That threat is both economic and philosophical and no one knows how the villagers will react. I fear an auction will play out negatively. By contrast, allocating allowances for free poses little threat allowing the villagers to gradually adjust to the carbon-constraints and then contribute as they can, because they want to…not because they have to. Why risk the policy equivalent of organ rejection? In the end, policymakers and politicians would rather be eating the community-developed soup, than wearing it.

I reject the premise espoused by auction advocates that evil “windfalls” might occur if carbon allowances are given away for free. In fact, I embrace that concept…it is what will spur carbon reductions. The best way to reduce GHGs is to allow people to make money doing it. The financial incentive to cash in on GHGs reductions will inspire tremendous innovation since every emitter (and consultant and inventor) will be thinking about how they can make money so the only windfall will be in the gold rush of GHGs reductions.

Following on this thought, a free allowance approach will result in quicker and deeper GHGs reductions than an auction approach. Under either an auction or free allowance approach there will be a rush of immediate reductions. However, the rush will peter out in the auction setting as the market (or non-market market as I called it last week) begins to settle in and everyone adjusts to the new carbon costs. They will either absorb the costs or pass them along as a cost of doing business like they do with inflation or increased health care costs. Thus, the pressure to further reduce GHGs will come only from the declining cap. But in the free allowance world, every GHGs reduction becomes revenue, and since making money is a stronger incentive than reducing costs (which is why energy efficiency is such a hard sell) the free allowance system and its money-making aspects will lead to greater reductions sooner, deeper and cheaper than the auction system.

The auction approach will inevitably increase energy costs. By contrast, free allowances will not increase costs very much, if at all. There would be no upfront costs and the costs of reducing the emissions, even to meet a declining cap, would be only the cost of the delta of the initial free allocation and the subsequent allocation…a much smaller cost than if they were allocated by auction.

If GHGs allowances were given away for free we wouldn’t have to figure out who is in or out of the program…everyone could be in. This means we can get a GHGs-reducing system up and running quickly. It may not be a perfect system but it could be a good one and then improved over time. Allocating allowances in any other way triggers complicated and politically-driven machinations that cause delay and weakens the final program. It will create undeserving losers and undeserving winners, either economically or from a business position. We should not let perfection be the enemy of the good.

I have already debunked the “anti-windfall” rationale for an auction. There are two other arguments that auction advocates make in favor of that approach. One is to set a carbon price. While there is some merit to this argument, it is not as strong as the advocates would have you believe. Things get priced in the marketplace all the time without an auction…generally cost plus profit. For carbon it doesn’t matter what the starting price is…we could draw a price out of a hat and announce it as the opening market cost…by days end the sellers and buyers would do what they do every day on the New York Stock Exchange or the local Target: haggle until market-clearing price is established. In the alternative, the government could allocate 98% of the carbon credits for free and then auction off the remaining 2% to set a market price. The money could go to the entity running the carbon market to audit an expansive offset program.

This leads me to the second reason advocates argue for an auction: to raise revenue. This is both a bad and wrong reason. Increasing the cost of energy so that money can be raised to offset those increased costs is ridiculous. It is also inherently unfair, since clearly not everyone adversely affected by the higher costs can be made whole. Nor should the revenue be used to subsidize non-GHG emitting technologies. Such subsidies will inherently stymie market-driven innovation.

In sum, instead of pursing a carbon auction, policy makers should pursue a free allowance approach since it is much more likely to yield a carbon-reducing program sooner that will actually get GHGs reductions in the most sustainable, efficient and least costly way.

The Story of Stone Soup
A fable which was written down by Marcia Brown in 1947; the story exists in many variations throughout the world. This one is said to be an old French story (sometimes it is said to be Russian), and is therefore not copyrighted.

Three soldiers trudged down a road in a strange country. They were on their way home from the wars. Besides being tired, they were hungry. In fact, they had eaten nothing for two days.

"How I would like a good dinner tonight," said the first. "And a bed to sleep in," added the second. "But that is impossible," said the third.

On they marched, until suddenly, ahead of them, they saw the lights of a village. "Maybe we'll find a bite to eat and a bed to sleep in," they thought.

Now the peasants of the place feared strangers. When they heard that three soldiers were coming down the road, they talked among themselves. "Here come three soldiers," they said. "Soldiers are always hungry. But we have so little for ourselves." And they hurried to hide their food. They hid the barley in hay lofts, carrots under quilts, and buckets of milk down the wells. They hid all they had to eat. Then they waited.

The soldiers stopped at the first house. "Good evening to you," they said. "Could you spare a bit of food for three hungry soldiers?" "We have no food for ourselves," the residents lied. "It has been a poor harvest."

The soldiers went to the next house. "Could you spare a bit of food?" they asked. "And do you have a corner where we could sleep for the night?" "Oh, no," the man said. "We gave all we could spare to the soldiers who came before you." "And our beds are full," lied the woman.

At each house, the response was the same -- no one had food or a place for the soldiers to stay. The peasants had very good reasons, like feeding the sick and children. The villagers stood in the street and sighed. They looked as hungry as they could.

The soldiers talked together. The first soldier called out, "Good people! We are three hungry soldiers in a strange land. We have asked you for food and you have no food. Well, we will have to make stone soup." The peasants stared.

The soldiers asked for a big iron pot, water to fill it, and a fire to heat it. "And now, if you please, three round smooth stones." The soldiers dropped the stones into the pot.

"Any soup needs salt and pepper," the first soldier said, so children ran to fetch salt and pepper.

"Stones make good soup, but carrots would make it so much better," the second soldier added. One woman said, "Why, I think I have a carrot or two!" She ran to get the carrots.

"A good stone soup should have some cabbage, but no use asking for what we don't have!" said the third soldier. Another woman said, "I think I can probably find some cabbage," and off she scurried.

"If only we had a bit of beef and some potatoes, this soup would be fit for a rich man's table." The peasants thought it over, then ran to fetch what they had hidden in their cellars. A rich man's soup, and all from a few stones! It seemed like magic!

The soldiers said, "If only we had a bit of barley and some milk, this soup would be fit for a king!" And so the peasants managed to retrieve some barley and milk.

"The soup is ready," said the cooks, "and all will taste it, but first we need to set the tables." Tables and torches were set up in the square, and all sat down to eat. Some of the peasants said, "Such a great soup would be better with bread and cider," so they brought forth the last two items and the banquet was enjoyed by all. Never had there been such a feast. Never had the peasants tasted such delicious soup, and all made from stones! They ate and drank and danced well into the night.

In the morning, the villagers gathered to say goodbye. "Many thanks to you," the people said, "for we shall never go hungry now that you have taught us how to make soup from stones."

See also ... for a discussion of the history of The Story of Stone Soup.

Friday, April 24, 2009

The Cost of Cap-and-Trade

On Tuesday, the House Energy & Commerce Committee began hearing testimony on the Congress's newest attempt to deepen the recession -- the Waxman-Markey energy and climate change legislation, which would establish a federal cap-and-trade program.

As we have discussed here previously, this Administration has estimated that a cap-and-trade program could generate over $646 billion for the federal government over the next ten years (some Administration officials have said that number could go as high as $2 trillion). All that money has to come from somewhere -- our pockets.

So what does that mean for the average consumer? A number of government agencies and non-government actors have been trying to sort that out. Estimates for the cost of a federal cap-and-trade program have been consistently burdensome on the average family.

• The Congressional Budget Office estimated that a 15 percent cut in CO2 emissions could cost the average household roughly $1,600 (in 2006 dollars)

• EPA estimated that the Lieberman-Warner cap-and-trade bill would decrease household consumption by $1,375 in 2030

• The National Association of Manufacturers found that nationally household disposable income could decrease between $4,022 to $6,752 by 2030 under a cap-and-trade program

The President’s budget would give some of the money raised by the cap-and-trade program back to consumers through a tax credit. However, it is only $800 for families earning less than $150,000 per year. This is roughly half of the lowest projection above, so the tax cut would be wiped away by a new energy tax.

It should be no surprise, then, that this week, the President's "new and improved" EPA came out with a quick analysis of the Waxman-Markey proposal. EPA concluded it would cost consumers less than $150 per year, significantly less than just about every other economic analysis of the impact of a cap-and-trade program.

One of the ways it accomplishes this feat is by assuming that the "bulk of the revenues" will be returned to consumers through the President's tax credit. Failure to do so, EPA says, would result in "substantially larger losses in consumption." So EPA's estimate relies on the assumption that once the government gets our money, it will be sure to give it back to us. Considering the amount of red ink in Washington, how many of you believe we'll see the "bulk" of that money again?

Also, we should take note that this analysis did not include the cost of the renewable energy and energy efficiency mandates in Waxman-Markey. EPA also cites a number of other uncertainties that could affect the economic impacts, including the availability of international offsets. In light of the number of issues not evaluated by EPA in its haste to get these numbers out for Earth Day, I will not be shocked when other agencies and groups find that the costs are expected to be much higher.

Thursday, April 23, 2009

The Proposed Carbon Market: A Non-Market Market

I was standing in the checkout line at my local Kowalski’s Market and asked myself if this is what a carbon market would look like? While the grocery market has lots of fine foods for me to select from, they set the price, no haggling or negotiation. If, after physically examining the product, I like it, I can buy it at their price. Candidly, this is the way I buy most things: stuff from Target, gasoline, meals at Chipotle, etc. Sellers set the price and I decide to buy it if I think it’s a good value.

Ever explored eBay? You can get just about everything and anything there. It’s a different type of market than Kowalski’s. Sellers offer their goods and buyers buy them, either at an offered price or some mutually agreed price between the seller and buyer. I pick up unique floaty pens to expand my collection (see

Over the years, I’ve invested in the stock market. A market different from Kowalski’s and eBay…enough said.

So, what would a carbon market look like? Would it be like Kowalski’s where I was a price taker but could directly assess the value of the item I was buying? Or, would it be like eBay where the product would be more uncertain but I might find a price that met the value I placed on the product? Or, would it be like the stock market where too many people have no idea how to value things or what the “market” is doing, yet participate anyway.

But I’ve gotten ahead of myself. For there to be markets there needs to be sellers of something that would-be buyers value. No sellers, no market; no valued-product, no market; no buyers, no market. Therefore, for there to be a carbon market there needs to be sellers of carbon, the carbon needs to be of value to potential buyers, and there needs to be those buyers. As of yet, these elements are just beginning…but people are trying, like the European Union, the Chicago Climate Exchange and the members of the RGGI.

Economists love markets, believing they are the best way to set the value for a product, as well as providing incentives for positive behavior (reducing GHGs) and disincentives for undesirable behavior (emitting GHGs). I share the economists’ love for markets and actually believe that there should be a GHG-reducing market, but as I have already established there are many variations of markets, each having their own set of strengths and weaknesses depending on how they are designed.

This is why I am concerned about the designs for the proposed carbon market. It appears the “market” design has the seller being the government, their product being credits for GHGs which has value because the government “owns” all the GHGs credits requiring would-be emitters to purchase the GHGs credits. Additional twists to this proposed market design are that emitters have no choice but to purchase the credits since at least in the near term they either pay or go out of business. And, the price they pay is set by an unpredictable auction. Finally, the only entity to benefit financially is the government. It’s as if when I get my milk at Kowalski’s, the store took my clothes and made me buy them back or risk citation for indecent exposure. This may make them money since I need to buy milk. It may also prevent me from wearing too many clothes when I go to the grocery store (a thought that should scare you very much!) but it doesn’t sound like a very efficient or effective market. In fact, it doesn’t sound like a market at’s just a way to make money off my clothes.

Instead of creating this non-market market, a true carbon market should be created. Cap emissions, decline the cap over time, then let carbon buyers and sellers use markets like Kowalski’s, eBay or the NASDAQ to value the ability of reducing GHGs. Let these buyers and sellers get the benefit of the exchange, not the government. The government should need nothing more than the satisfaction of the reduced GHGs. This is how I buy my milk at Kowalski’s, how I expand my floaty pen collection using eBay, and how I invest in mutual funds. It’s how a real carbon market should work.

Wednesday, April 22, 2009

Priorities Matter...New Research: Aerosols are Back: Black Carbon and Other Short-Term Pollutants Matter

Last week in NATURE GEOSCIENCES, NASA Climate Modeler Drew Shindell published “Climate Change Cool Ozone” research modeling global warming over the past half century and concluded that aerosols are responsible for half or more of the warming in the Arctic!

He and other scientists say that reducing emissions of black carbon and other short-lived pollutants that contribute to global warming could buy the world crucial time while governments begin the slow overhaul of global energy systems that will be required to reduce emissions of CO2, which comprise 77% of all greenhouse gas emissions.

He also makes a very logical, compelling and understandable argument on anthropogenic global warming.

“The large-scale vertical structure of temperature change in the atmosphere is an important characteristic of the forces driving climate change. Increases in greenhouse gases cause warming in the troposphere but cool the stratosphere. Greater output from the sun similarly warms the troposphere, but causes even greater warming in the stratosphere. Observations show that the troposphere has warmed in recent decades whereas the stratosphere has cooled markedly; this is clear evidence for anthropogenic warming rather than natural warming from the sun.”

In a speech given last week, Secretary of State Hillary Clinton made the following statement:

“Short-term carbon forcers like methane, black carbon, and tropospheric ozone contribute significantly to the warming of the Arctic. Because they are short-lived, they also give us an opportunity to make rapid progress if we limit them.”

For a copy of the complete article:

Thursday, April 16, 2009

An Overheard Conversation On Climate

I was at a coffee shop the other day catching up with an old friend. At a table nearby were some twenty-somethings, obviously old friends themselves, talking about their jobs, careers, politics, and loves. I didn’t pay any attention to them and certainly didn’t want to eavesdrop nor allow their conversation to interfere with my own. Yet, when the topic of climate change came up I couldn’t help but catch snippets.

It started when one said, “Can you believe that Obama’s science advisor says that we should think about shooting particles into the atmosphere to prevent global warming? That’s the dumbest thing I’ve ever heard.”

And, another responded, “Yeah it seems dumb, but the climate change threat is real. Everything’s melting: the polar ice caps, glaciers and lake ice up by Bayfield, everything so we had better do something or we’ll be in a world of hurt and if that’s what it takes then let’s try.”

“You can’t be serious! Yes, the threat is real, but that’s no answer. That’s giving up. We can stop it by eliminating greenhouse gas emissions, using more renewables, efficiency and stuff like that. Obama is already working on plan,” said another.

“Do you really believe it’s a threat?”

“Yes I do. Most scientists do too. Sure, there are uncertainties from the unknowns and unknowable nature of such a complex thing as global climate. But it just makes sense that when you emit a lot of stuff it eventually builds up.”

“I’m not so sure.”

“Even if it’s real, do you think it will be as bad as all that?”

“Not sure, but it seems every news story says we're beyond the tipping point and that we need radical action to prevent a catastrophe.”

“No, seriously, do you really think we’re at a climate tipping point?”

“Do you think that’s possible?”

“Who knows for sure if we’re at a tipping point or not. Maybe we are; maybe we aren’t. I hope we’re not.”

“And, if we are at or beyond the tipping point?”

“All this tipping point stuff is talk from the radical environmentalists wanting to scare people into action. But I think it’s back firing…”

“If we’re tipping, forget about stopping emissions, we should spend our time figuring out how to mitigate the affects and fast.”

“We’re doomed. No more polar bears; starvation; wars over water; It’ll be Mad Max stuff. I’m going to be rich because I’m going to plant corn up in Hudson Bay.”

“Come on. We’re having a serious conversation here.”

“Real or not, I’ll tell you I have no confidence in the Obama plan.”

“Yeah, it seems too little too late.”

“I’m excited about the Obama plan…it means lots of money for renewables and I want to get a piece of that action.”

“Nice: we’re doomed and all you can think about is yourself. We’ve already ruined the planet; the planet’s warming and there’s nothing we can do to stop it. So, I’m glad the Obama-guy is thinking about that kind of stuff. It’s the only thing that might save us.”

“No way! Even if it was a good plan, other countries like China won’t take any action…so it doesn’t matter what we do. So why should we take that pain if no one else will?”

“It doesn’t have to be painful. If we do it right…and I’m not saying Obama is doing it right…but I am saying that it can be done and done in a way that we all don’t have to go Amish.”

“You’re right we can’t wreck our economy to save it…look at what’s been going on over the last year. I can tell you, I care more about keeping my job than the climate right now.”

“Me too.”

“It may be that; but I’m more concerned that it seems to be more about raising money than reducing emissions. And, worse, it seems very partisan or more importantly it doesn’t seem to have widespread political support.”

“Amen, if anyone thinks that we can address greenhouse gas emissions without everyone on board is kidding themselves.”

“See, we’re doomed. Maybe I can play the Mel Gibson role.”

“You’re more likely to play Sponge-Bob.”

“You can’t be serious about expecting a climate bill to be bipartisan? The Republicans don’t even believe climate change is real, let alone are willing to do anything about it.”

“Yes, I’m serious, addressing climate change not only needs to be bipartisan but international too. Unlike anything else we’ve ever dealt with climate and greenhouse gas emissions touches all of us and if we’re all not in it together we’ll fail. Besides, there are a number of Republicans who are willing to thoughtfully address climate: McCain, Crist, Pawlenty, Pataki and Arnold.”

“See we’re doomed. The last frog should turn off the stove!”

“Don’t be so negative. We can solve this if we do it right.”

“I hope so.”

Of course, I’ve taken a little literary license (OK a lot of literary license) in telling this conversation. But, it is the kind of conversation that seems to be occurring more and more in coffee shops, in grocery aisles, across dinner tables, in newspapers' op-ed pages and even in committee hearings. It’s also the kind of discussion that we need to have.

Friday, April 10, 2009

Corn Ethanol's Unforeseen Externalities: Land Use Impacts

A new Congressional Budget Office report released April 9th says the long-term implications of ethanol are not certain in part because of uncertainties regarding land-use impacts and technology breakthroughs in cellulosic biofuels. Both the University of California at Davis and Berkeley researchers concluded the same findings over a year ago. The report was requested by Congressmen concerned that increased demand for corn-based ethanol could drive up food prices.

“If increases in the production of ethanol led to a large amount of forests or grasslands being converted into new cropland, those changes in land use could more than offset any reduction in greenhouse gas emissions--because forests and grasslands naturally absorb more carbon from the atmosphere than cropland absorbs,” the CBO study says. Cellulosic ethanol could reduce emissions from the transportation sector about 6 percent, but the study notes that the technology needed to produce cellulosic ethanol is not commercially available and adds that the reductions “would be realized only if cellulosic ethanol could be produced on a large scale and if the effects of changes in land use did not offset the reduction that producing, distributing, and consuming ethanol could make in greenhouse gas emissions.” According to the study, use of corn for fuel would also add 15% to the price of food, higher in developing countries than developed countries.

Once again, it is imperative that we understand the consequences of "good ideas" before we implement them. Once an interest group forms around government money it is almost impossible to take them off the dole.

Cap-and-Trade: Round Two

When Congress returns from Easter recess, the debate on climate change legislation, and cap-and-trade in particular, will begin again. Last summer, the Senate briefly debated the Lieberman-Warner bill which would have established a cap-and-trade program to reduce greenhouse gas emissions. That bill died in the Senate.

Now, the debate will take place in the House of Representatives. Last week, Representatives Henry Waxman (D-CA) and Edward Markey (D-MA) introduced a climate change bill that will be the focus of the debate (a link to a summary of the bill is provided below).

While many people are skeptical that a bill can pass both the House and Senate this year, this is a debate worth watching and engaging in, particularly for Midwest businesses. Some people see the legislation as a transfer of wealth from Midwest states - that use coal and are manufacturing centers - to West and East Coast states. In the Senate, Indiana Democrat Evan Bayh has formed a coalition of moderate Democrats who are very concerned about the cost to consumers and the loss of manufacturing jobs in their states that would result from a cap-and-trade program.

Those costs could be staggering. As noted in other posts, the Obama Administration budget projects a cap-and-trade program will raise $646 billion over 10 years. Administration officials have been quoted as saying that the initial estimate may be low and that the program could raise as much as $2 trillion over 10 years. $2 trillion! And as the Wall Street Journal editorial below notes, the Waxman-Markey bill could impact everything in your home from lamps to light bulbs to appliances.

We get all these added costs with no guarantee that greenhouse gas emissions will be reduced as U.S. businesses are driven out of the country to unregulated developed countries which will only drive global greenhouse gas emissions higher.

Get ready for round 2.

The American Clean Energy and Security Act Of 2009

Wall Street Journal: “Henry Waxman Has a Plan … for your living room, showerhead, jacuzzi….”

Moderate Democrat Group

Thursday, April 9, 2009

A Better Transportation & Climate Idea

When I was a staffer involved in the development of the MGA Climate Accord during the summer of 2007, I had considerable faith in the expansive potential of the cap and trade concept to reduce GHGs in a cost effective and efficient way. Today, while I still believe that a cap and trade approach can and should be developed and used in certain circumstances, I no longer believe in its universal applicability.

Applying a cap and trade regime on the owners and operators of the nation’s cars and trucks is just not practical, since unlike electricity generators and even industrial emitters, there are tens of millions of fuel-burning transportation vehicles. The next best idea seems to be to apply the cap and trade at the refinery level, i.e. the level where the crude oil is converted into gasoline or diesel. On it’s surface this sounds like a good and simple solution. However, a refinery produces a product: gasoline, diesel, jet fuel. The refining of the oil into these products emits relatively little GHGs. Rather, it is the combustion of that fuel in our cars, trucks and airplanes that creates GHGs. Thus, if a refinery is held responsible for the GHGs from the fuel it creates under a cap and trade, it must either produce less fuel or purchase GHG offset credits. Neither should be acceptable. One is a form of rationing, the other an indirect cost increase to consumers; both undermining the cost containment and economy efficiency principles that led us to embrace the cap and trade approach in the first place.

It is this new appreciation of the cap and trade’s limitations that led me to conclude that addressing GHGs is more like golf than tennis. While both are great sports (which I play poorly), addressing GHGs is more like golf than tennis. Every tennis court in the world is the same…except for the surface: clay, grass and hard…but they have the same dimensions. While in golf each hole is different and each course is different…posing different challenges to the golfer…like the emissions of GHGs.

A tennis player uses the racquet to hit every shot on the court; while a golfer selects the right club for the specific situation. For example, when teeing off, most people use a driver. But, one rarely uses a driver for a tee shot on a par 3; a different club is needed. One wouldn’t think of teeing off with a tennis racquet or serving with a driver.

What could these other clubs be for addressing GHGs from the transportation sector? Here are some possibilities:

1. Drive less through increased public transit, better, more efficient land use or even walking;
2. Drive more efficiently;
3. Drive vehicles that replace the internal combustion engine with electricity or hydrogen;
4. Use more biofuels…Minnesota is already leading the nation.
5. Make driving or its inputs really expensive through a direct tax or entry tolls a la London’s congestion tax.

These ideas aren’t particularly creative, aren’t my own, have significant drawbacks and are probably very expensive. But, there is a sixth idea, an idea that Bill Ford the executive chairman and chairman of the board of Ford Motor Company supports, that does appeal to me: encouraging people to replace their old cars for new, more efficient vehicles. Below is an op-ed by Mr. Ford published in the USA Today newspaper on March 31, 2009.

Imagine if instead of going through the convoluted political machinations of increasing the cost of travel or reshaping our inherently mobile society, we just encouraged everyone to replace their old, inefficient vehicles with new, cleaner, more efficient vehicles? Use the market carrot of incentives to achieve the GHG-reducing results we want and not the market stick of artificially raising costs. Ratepayers contribute millions of dollars each year for home and building efficiency efforts…why not do something similar for new cars and trucks?

Cash in old cars for new ones: Economy, consumers, automakers would all benefit
By Bill Ford
Executive Chairman and Chairman of the Board
Ford Motor Company
USA Today 3/31/09

In spite of the many challenges our country faces, I strongly believe the government stimulus and other steps to thaw credit markets will be effective in driving economic growth over time.

But we still face an immediate and serious challenge. Last week, President Obama observed that U.S. auto sales have seen a huge drop-off, starkly noting "every automaker is getting killed right now." In just one year, U.S. auto sales have fallen by nearly 50%. And March's sales numbers promise to be sobering for foreign and domestic automakers.

This unprecedented trend is sustainable for neither the industry nor the economy. We urgently need to draw reluctant consumers back into the marketplace. The good news is that there is a proven initiative, outlined by the president on Monday, that can help consumers overcome their fear. The plan also would help the environment and increase energy security. It has been called a "fleet modernization" or a "scrappage" program. Whatever the name it works.

In January, the German government enacted a consumer incentive equivalent to $3,200 to scrap automobiles that are at least 9 years old and buy new, more environmentally advanced vehicles. By February, sales of new vehicles jumped 21% over the same month a year before. Countries such as Japan, France, Italy, South Korea and others are considering or already have similar programs.

This model can work in the U.S., too. President Obama said that he would like to use parts of the economic stimulus package to fund a program that would give consumers a "generous credit" when they replace an older car with a new, more fuel-efficient car.
President Obama has rightly emphasized the importance of vehicle fuel-efficiency gains and expressed concern about shrinking U.S. auto sales and the risk it poses to the economy. This program could help the environment and jobs.

Here's how one bipartisan proposal before Congress would work to stimulate new vehicle purchases. The program would provide vouchers to consumers for vehicles at least 9 years old. The vouchers likely would be worth more than the current value of their vehicle. For example, a consumer who turns in an older car could get a voucher ranging from $4,000 to $5,000 to use as a down payment on a $20,000 car that exceeds 27 miles per gallon. Combined with current auto sales incentives, consumers likely will get unprecedented deals on more fuel-efficient cars.

An independent analyst, Barclays Capital, estimates that this proposal could boost sales by 2.5 million units if 2% of eligible vehicles were traded in. This surge in sales would help preserve American jobs in communities across the country.

Taxpayers are rightly concerned about the federal deficit given the significant spending on the economic stimulus. Let me clarify, Ford is in a different position and is not seeking emergency taxpayer assistance. Nonetheless, Congress needs to spur consumer demand for autos the largest purchase a family makes after a home.

This vehicle modernization idea would require additional investment by taxpayers. Its cost would be dependent on how Congress structures the incentive and its duration. The alternative, however, if sales do not rebound quickly, is more jobs losses, more home foreclosures, and less revenue for governments that must provide more jobless and health care benefits.

In addition to its consumer benefits, this initiative would help reduce our carbon footprint. Automakers are accelerating efforts to reduce greenhouse gases, but the latest fuel-economy rules apply only to new cars. This proposal would help America get greener faster by retiring a portion of the 240 million vehicles on the road. It could reduce our CO2 emissions by millions of metric tons per year.

The program also would help contribute to greater energy independence. Replacing an older car with a new, more fuel-efficient one drives down gas consumption. That helps consumers, too. In fact, the Department of Energy estimates a family could save $780 per year by moving from a vehicle with 18 miles per gallon to one with 30 mpg.

The auto industry, both foreign and domestic, needs to work together to do our part in turning the economy around. But we also need to use the tools that our government possesses, and routinely deploys in so many other ways, to help move the economy more swiftly to a better place.

Improved auto sales will be one of the key indicators that America is on the road to economic recovery. As Congress weighs a national energy policy, climate change or even more stimulus measures, we urge lawmakers to consider this market-based consumer incentive. This fleet modernization idea would be a win-win-win for the consumer, the economy, the environment.

Wednesday, April 8, 2009

How Future Consumer (Market)-Demanded New Housing Will Help Reduce GHG Emissions

According to the National Association of Home Builders Housing Facts, Figures and Trends, March 2006, the square footage of housing grew from 983 square feet in 1950 to 2,350 square feet in 2004. When the lethargic housing recovery comes (lethargic because interest rates will be rising due to national debt crowding out private and business borrowing and current homeowners will not be moving so fast), baby boom homebuyers will be downsizing from their McMansions toward smaller ranch houses, townhomes and condos.

This recession is sobering consumers like nothing else could other than aging. By 2020 or so, there will be more people over 65 than under 18. Not good for housing or consumables but great for health care and services. Older people consume services, younger people goods. Once again, the baby boom will change everything. Are you ready?

Over the next 10 years, large numbers of people will be stuck owning homes for which there will be few buyers. This return to rationality, “living within our collective means” will reduce consumer energy consumption and cut GHG output. All of this by market forces rather than government mandate.

By the way, the way to recapitalize the banks is to mandate all banks receiving TARP funds to pay 5% passbook savings. While this is not pure market, it does get the taxpayer something for their generous bailout of the irresponsible banks.

Thursday, April 2, 2009

Lessons learned from MGA

I returned yesterday from the Midwestern Governors Association’s GHG Advisory Group meeting in Traverse City, Michigan. It was the eighth meeting for the group since last March. They have been struggling to fulfill the wishes of the Governors of Iowa, Illinois, Kansas, Michigan, Minnesota, and Wisconsin and the Premier of Manitoba, who, on November 15, 2007 sought to “develop a market-based and multi-sector cap-and-trade mechanism to help achieve GHG reduction targets.” (See Midwestern Greenhouse Gas Reduction Accord at It was also the second to last meeting; the last meeting of the group will be in six weeks on May 11-12 in Minneapolis.

It is less than entirely clear what will occur at that last meeting. While much of the design modeling will have been completed, the group has yet to resolve some key design components. And, even more troublesome, none of the modeling of the economic impacts of those designs will have been completed. Thus, I’m not sure how the group can make any final conclusions let alone recommendations to the Governors.

I certainly did not envision this situation when I, and others serving their governors, embarked on this regional effort in the Spring of 2007. We were so confident and optimistic. What happened?

No blame can be placed on the advisory group members, facilitators or the Governors’ representatives. They all worked very hard, committing hundreds if not thousands of hours to this effort. No, I think the cause stems from the complexity of the issues involved, the need to thoughtfully balance the inherently competing interests and from an overly optimistic goal.

What would I do over I asked myself? Here are some of the things that occurred to me:

One thing I’d do over again is to be more realistic about the timetable. The Accord the Governors signed called for agreement to be reached within 12 months (that would be by last November) with all the states adopting of the model rule 30 months later. Well that’s not going to happen.

Another thing I’d have done over is to be more conscious of how big a task we were undertaking. If the Accord were to be implemented, it would be one of the largest carbon markets in the world. That’s huge on a lot of levels; size matters and in this case that size magnifies the difficulties of achieving the goal.

But size is only one complicating factor that I did not appreciate. I did not appreciate the difficulties trying to create a carbon market in the heart of the country with so many national interconnections that do not lend themselves to easy boundaries. A flawed policy costs jobs as entities move outside of the region.

Another blind spot for me was my faith in the cap and trade concept. I believed that, like a tennis racquet, cap and trade would be the tool that could solve all problems (or make every shot) when properly used. Not only do I no longer have that faith; I believe it to be dangerously wrong. Instead of playing tennis, addressing GHGs is more like golf: we need a whole bag full of clubs, each used when and where it is best suited. For example, applying a cap and trade to transportation fuels reduces GHGs very little if at all, raise gasoline & diesel costs and there is no way to compensate every fuel user for those higher costs through the redistributing of any collected revenues. It is like using a sandwedge off the tee: just not the right club.

Another thing I would do over is expand the membership of the advisory group. There are no people of color or representatives of low-income; there is no member who drives truck or manufactures cars or mines ore or builds engines…these are important perspectives that need to be heard.

I contributed to these shortcomings and regret them. While it’s too late to do things over, it's not to late to learn their lessons and take the appropriate corrections.

Politicians Continue to Demonstrate What Really Matters to Them--Keep their Jobs!

Senate Vote De-Fangs Cap and Trade Approach To Climate Change

The Senate has voted to impose a super-majority requirement on future passage of any bill – including carbon cap-and-trade legislation – that would increase the tax burden on the middle class or boost overall federal revenues, a move that will likely shape the upcoming climate change debate expected later this year. The provision, sponsored by Republican Sen. John Ensign (NV), was unanimously approved April 1. The Senate also overwhelmingly approved a measure blocking the use of a fast-track budget procedure known as reconciliation as a means of passing climate legislation with a simple majority.

On March 31, the Senate approved an amendment from Sen. John Thune (R-SD) declaring that any climate legislation considered by the body must decrease GHG emissions “without increasing electricity or gasoline prices.” A “clarifying” amendment offered by Environment & Public Works Committee Chairwoman Barbara Boxer (D-CA) softens the language somewhat by suggesting the Senate may consider legislation that doesn’t increase the economic burden on consumers “through the use of revenues and policies provided in such legislation.”

I do not know why I waste my time railing against Cap and Trade and other foolish government ideas when I know they have no courage to do anything controversial.