Climate & Health Care: When Solutions Become the Problems

My dad had a saying, “Don’t let today’s solutions become tomorrow’s problems.” His point: know what you’re doing and don’t do anything to make matters worse.

As Congress sputters on the President’s health care and climate initiatives, I thought about dad’s advice but concluded that to be applicable to the President’s situation there needs to be a corollary: “don’t let the solution become today’s problem.”

There are a lot of similarities between health care and climate initiatives. Both are major, “changing-life-as-we-know-it” initiatives affecting all Americans with a lot of very complicated moving pieces and competing interests.

Candidly, I agree with President Obama that America should do something to address greenhouse gas emissions (GHGs) and the rising costs of health care.

The problem is that the President’s solutions have become problems and, perhaps, even bigger problems then the problems they are designed to solve. One reason is that the President and Democratic Congressional leaders are trying to convince us that their solutions are cost-free and easy. This just doesn’t pass the laugh test. Americans are used to their political leaders stretching reality, but that stretch has to be within the realm of common sense credibility. And, it’s just not credible to say that we can reduce GHGs without increasing the cost of energy or that health care coverage can be expanded without increasing the amount of money government takes from us.

Another reason the President’s solutions have become the problem is their complexity. The President’s climate and health care initiatives are both mammoth pieces of legislation that most people haven’t read, let alone understand what they do or how they will do it. Obviously, some will lose; some will win; and some will win and lose at the same time. Americans don’t need to know everything about every piece of legislation and are used to (and willing to) make these kinds of trade-offs. But, we need to understand the broad themes and how they are likely to affect us. Unfortunately, the size and complexity of the initiatives prevent such understanding, leaving him unacceptably saying, “trust us, we’re the government, we know what we’re doing and we’re here to help.” No wonder the thinking, swing members of the Congress are balking.

The third reason his solutions have become the problem is the speed he is pushing them. Again, I turn to one of dad’s sayings: “If you don’t have time to do it right the first time, why do you think you’ll have time to fix it the second time?” It was his version of “haste makes waste.” The President wants to make major changes to three of the biggest sectors of the economy (energy, health care and financial services) in less than 12 months. That’s fast; too fast…it’s turned the solution into the problem.

For many, most, the President has won the argument that climate and health care are problems that deserve solutions. But his solutions have become problems. His best course is to slow things down, skinny the bills and focus on improving one or two high leverage elements in each topic and make sure the substance of the efforts match the low-cost rhetoric. For energy, that means focusing on promoting more renewables, enhancing our energy efficiency efforts, and growing the nuclear industry. As for climate? These first items will make a big dent in emissions. In the meantime, spend the intervening time getting an international GHGs reduction agreement and think through how to implement a cap-and-trade program and the other regulatory tools…perhaps a Blue Ribbon Task Force could be convened.

Climate Bill Uneconomic & Costly: Failing the Good Lawmaking Test, Part II. Let’s Start Over on Climate Legislation

The test of good lawmaking is whether it 1) achieves the desired goals, 2) in the most economic and cost-effective manner, 3) with the fewest unintended consequences, and 4) enlists strong bipartisan support. My last blog posting argued the Waxman-Markey climate bill failed the first element of this “good lawmaking” test because it relies on carbon credit concoctions at the expense of achieving reductions on GHGs.

This posting explains one of many reasons why the House bill fails the second uneconomic element of the good lawmaking test, and why Congress would be wise to start over rather than keep moving forward on the current path.

Economic models can make the climate bill’s cost a wash or impose a very small per person cost. And, this is without factoring the unknowable affects of a changing climate. But no-cost outcomes only happen in Washington, which isn’t very good lawmaking and seems to be disingenuous, naive, or from a flawed belief that there is no cost in massive wealth redistribution.

The underpinning of Waxman-Markey is to impose a cost for emitting GHGs into the atmosphere. Supposedly, such a cost will encourage the emitter to either stop emitting GHGs completely if they can, or reduce its GHGs to a level where the costs of further reductions exceed the costs of emitting. Or, since Waxman-Markey uses the “cap and trade” methodology, an emitter may buy offsets from someone who has reduced their GHGs emissions more than they were required to. In theory, this cap and trade approach would yield the most economic GHG reductions.

However, as mentioned in my previous posting the Democratic majority distorted the offset program. Besides undermining the potential for actual GHG reductions, these distortions make figuring out how much it will cost to comply with the bill impossible. A host of dueling economic models are trying to figure out what the macro and micro costs of the Waxman-Markey bill will be. But, given its complexity, on-the-fly amendments and competing glass half-full versus half-empty assumptions…makes accurate cost estimates impossible, even if you agreed with the models. Thus, there is no way to know what the bill will cost. Unknown costs are more costly than known costs because they create risk and uncertainty. If you can’t ascertain the risk, your only rational course is to assume the worst thereby increasing the costs and uneconomic actions.

The unknown risk from the Waxman-Markey bill is one, failing; the other comes from what I call the “uneconomic averaging” of costs and benefits. Take, for example, a person with his head in the oven and feet in the refrigerator, so his average temperature is a normal 98 degrees. Clearly, the extremes are unpleasant but if one only looks at the average, one can incorrectly assume no harm. Or, take another more realistic example: my smart daughters will soon be going off to college; they will do well, get good jobs, and become valued taxpayers. Their taxpaying value to society will soon exceed what I paid for their college. Thus, society will clearly be economically better off; they will be happy so I’ll be happy…but I won’t be economically better off, in fact, I may be worse off since the opportunity cost of that money was investment in my retirement fund.

Advocates of the Waxman-Markey bill cite climate models that say the bill will have little costs. But, I doubt it and that can only be correct if viewed from this averaging approach. From a lawmaking perspective, such results are uneconomic short-term outcomes with the costs unfairly borne by just a few. If the models looked at the entities that actually have to pay the cost of the carbon reductions, those folks won’t get their money back (despite government redistributive promises). They won’t even be the happy but impoverished father whose girls visit him in the nursing home!

Thus, because of the unknown risks and the uneconomic “averaging” of the costs at the expense of those who will have to pay them, the Waxman-Markey bill fails the second element of the good lawmaking test. And, Congress should start over and simplify the bill so the American people know the direct and indirect costs…it is this simplicity that has people supporting a carbon tax.

Waxman-Markey Won’t Achieve Goals Failing the Good Lawmaking Test, Part I: Let’s Start Over on Climate Legislation

A couple weeks ago the U.S. House of Representatives barely passed a 1,200-page bill designed to address the nation’s greenhouse gas emissions. The “golf clap” applause for the bill comes only from those who believe passing something, anything, is better than passing nothing at all.

While I am among those who believe addressing GHGs is important, I am not praising the House’s achievement. Passing an ineffective, costly bill is worse than doing nothing. In fact, what the House’s “accomplishment” offers is more an example of a failed legislating experiment than good lawmaking.

There are four criteria for good lawmaking: the law will 1) achieve the desired goals 2) in the most economic and cost-effective manner 3) with the fewest unintended consequences and 4) has strong bipartisan support.

In this and subsequent blog postings, I’ll explain why the House bill fails all four good lawmaking criteria and that starting over is the best course of action.

I believe the Waxman-Markey bill is unlikely to achieve the desired goal of reducing GHG emissions.

Many in the environmental community share this concern due to the last minute provisions added to the bill that undermine its GHG-reducing elements. These last minute provisions were designed to garner Democratic votes to pass the bill. Many dealt with the use of agricultural offsets for carbon credits designed to enlist the support of Democrats from rural agricultural districts. Terrestrial sequestration of carbon can come from changing farming practices, converting cultivated lands to prairie, planting trees, and preserving forests. I’m not so sure the environmentalists concerns are correct; but they may be. Such approaches, like all lifecycle calculations, need more analysis.

But, I have a more concrete reason to question the effectiveness of the bill: it turns GHG reductions into a carbon credit accounting board game, sort of like Monopoly. Who can get the credits? How do they get them? How can we make the credits cheaper? What can be done with the credits? etc. This emphasis on the credits instead of GHG reductions creates a disconnect that assures that actual GHG reductions are unlikely to occur and certainly not to the levels desired by the bill’s authors and supporters.

Notice how the compromises made on behalf of agricultural interests took the form of allocating carbon credits for offsets? And, that is just one industry sector where “credits for offset” political trade-offs were made to curry favor or to allegedly lower economic costs of the bill. I fear that by focusing on credits instead of actual GHGs reductions no reductions will occur, leaving the worst of all worlds: higher energy costs, a fool’s gold carbon market created and increasing atmospheric concentrations of GHGs. How does that achieve the bill’s goals? It doesn’t; failing the first test of good lawmaking.

Accordingly, Congress should start over. The legislation should focus on getting actual reductions, even if they are small at first. That would put them on the good lawmaking path.

Goldilocks, Climate Legislation and Republican Engagement

In the story of Goldilocks and the Three Bears, Goldilocks, lost in the woods, comes across a cabin. In that cabin are three bowls of porridge, three rocking chairs, and three beds. She tests each of them and concludes that two of each is unacceptable; they are either too hot or too cold, too big or too small, too hard or too soft…but one bed, one bowl of porridge, and one rocking chair was “just right” and she enjoyed them.

I thought of this story as I read reports that the House Republicans were finally offering a climate bill of their own last week. From what I have heard, their proposal is no more “just right” than the Waxman-Markey bill, appearing to be too little, too late, (as opposed to the Waxman-Markey bill’s too much, too soon). Nonetheless, I am very glad that the Republicans are finally engaging on the climate issue.

Under the guise of addressing GHGs, the two bills do different things. The Democratic bill wrongly tries to re-engineer the economy through energy policy; while the Republican bill fittingly tries to achieve energy independence. Unfortunately, neither bill is likely to reduce GHGs.

But, just as Goldilocks had to pursue a trial-and-error process, so does Congress in its search for that “just right” climate bill that will set in motion GHG reductions at the lowest cost. They obviously haven’t found it yet but having the Republicans constructively engaged in this testing is heartening.

Republican engagement on climate is important for five reasons. First, I believe that climate change is real and this is not whether we do something but that the nations of the world do that “something” in a thoughtful, economic and deliberative way. I believe that Republicans can craft such a plan better than Democrats. Second, barring some dramatic change in the political landscape, eventually there will be legislation addressing GHGs and Republicans would be better off being a part of that parade then run over by it. Third, legislating, and politics in general, is a contact blood sport, and while it appears that victory stems more from numerically superior coalitions of disparate special interest constituencies, victory ultimately comes from superior ideas. So, if Republicans stay in the Uecker seats booing and not fielding a team of climate ideas, there’s no way to win either politically or legislatively.

Another reason for Republican engagement is that key constituency groups, especially businesses with national and international scope, need us. Whether we like it our not, in the absence of national climate legislation, states are undertaking their own climate initiatives - can you say “California?” This trend puts businesses in a growing box of mixed, competing and potentially very costly state-by-state regulation. Preemptive national legislation is their only pathway to rationality and if Republicans aren’t there to help them, then out of desperation they’ll turn to Democrats. That’s not good for them, the nation, or Republicans.

Finally, there are some very important, constructive ideas (like encouraging nuclear power) that will be orphaned if not championed by Republicans.

In sum, constructive Republican engagement and even leadership on the climate issue with our superior ideas, traditional skepticism of governmental solutions, and cautious fiscal sensibilities is what America needs on the climate issue. Hopefully, the recent proposal by House Republicans signals my team’s entrance onto the playing field to bravely test the options…but only settling for the yet-to-be-developed “just right” one.

Prediction--No Climate Bill in 2009: Blame Game Obscures Lessons

It may be premature to predict the demise of federal climate legislation for the year, but I’ll take the risk and do so anyway: the overwhelmingly Democratic Congress will not pass climate legislation this year. This prediction seems to fly in the face of President Obama’s desires, words of congressional leaders, the deceptive “progress” in the U.S. House of Representatives, and candidly, my personal desires.

This makes the blame game for the defeat the next big thing.

Obviously, the Democratic leaders will blame Republicans, business interests who didn’t agree with them, and conservative anti-climate naysayers. Some of this will be accurately placed, but most will simply be political blame game trash-talk. Unfortunately, this blame game and political posturing will obscure the real reasons of the failure and the lessons that could be learned that would result in a bill in 2010 or more likely 2011.

Real reason #1 of congressional failure on climate is that the President’s driving motivation for pursuing climate legislation is to raise revenue. His secondary motive appears to appease his environmental constituencies. The next motivation seems to be to have something, (anything?) for when the world’s climate negotiators meet in Copenhagen in December. Achieving significant GHGs in a low cost way is a distant fourth. These mixed up priorities doomed climate legislation from the beginning.

Real reason #2 of congressional failure on climate is that dealing with GHGs if done wrong can be very, very, very expensive. And, wrong and expensive is how the U.S. House bill seems to be going. Thus, while some banks may be too big to fail, some legislation is too big to not fail. It tries too much, too quickly at too great an expense.

Real reason #3 of congressional failure on climate is that GHGs are a global problem that requires a global solution. An international solution is needed before national solutions will be environmentally effective. Just as it is unwise for a single state or region to unilaterally address their GHGs, no nation (even one as big as the USA) can tackle this issue by itself.

Real reason #4 of congressional failure on climate is that successfully tackling the issue is very, very hard and needs the Congress’ undivided attention. And, that’s just not happening. Besides energy and climate issues, the President is asking the Congress to deal with health care, banking, education, the closing of Gitmo, budget bills, and of course, the nomination of Judge Sotomayer to the Supreme Court. These issues will distract the Congress, preventing it from focusing on the climate.

Real reason #4 of congressional failure on climate is that there are just too many substantive and political balances that need to be achieved. For example, Congressmen Peterson and Walz have already expressed their concerns with the House climate bill because of how it treats ethanol and agriculture. Then there are the balances between the House and Senate.

These are the real reasons that there will be no climate bill this year. Political gamesmanship and special interests may exacerbate these fissures, but they do not cause them. And, there are some lessons to be learned from them:

Lesson #1. The climate bill has to be about reducing GHGs in the easiest, cheapest manner. It cannot be about revenue-raising, appeasing constituents, or “punishing” emitters.

Lesson #2. The Congress should consider taking a deliberative and iterative approach to GHG reductions. First, promote more efficiency; then increase the use of renewables. Third, set a reduction goal; and then building upon these actions take the time to develop the lowest cost, simplest ways to achieve that reduction goal.

Lesson #3. Instead of rushing (and failing) to put together Potemkin climate legislation in advance of the Copenhagen meetings, our national leaders should focus on getting an effective international agreement that includes all the countries of the world. Once that is done, the USA will know what it needs to do and know that other countries will be doing what is necessary.

Lesson #4. If President Obama and the Congress need to recognize that they cannot and ought not do everything at once. They need to set priorities.

I could be wrong. The Congress could still pass climate legislation this year. In which taking credit (instead of blame) becomes the main game. But I doubt it.

Three MGA Surprises and the Achilles Heel

A couple weeks ago the Midwestern Greenhouse Gas Reduction Accord Advisory Group wrapped up its face-to-face meetings and submitted their cap and trade final draft design recommendations to the governors.

Candidly, this wrap-up surprised me in three ways. My first surprise was that they reached an agreement at all. It was only several months ago that I blogged that I didn’t think agreement was possible…so not only was I surprised but I was wrong. The Advisory Group did reach agreement. Five things forged this agreement: 1) creative compromises; 2) papering over differences of opinions by not forcing advisory group members to vote on the package or any of its sub-issues; 3) good facilitation; 4) belief from group members that “something should or will be done” about GHGs; and 5) most importantly, nearly everyone’s explicit understanding that the recommendations were more conceptual than a concrete implementation plan since their primary purpose was to influence the ongoing federal discussions.

My second surprise is that the agreement is not nearly as bad as it could have been. In fact, it offers some useful ideas, including:
1) More realistic GHGs reduction goals and timetables;
2) 90% of credits allocated to electric generators and 95% to industrial emitters at only a modest fee, with the fee and auction percentage phased in over the next 18 years;
3) Important cost containment mechanisms such as credit banking, early action crediting, and a mechanism to address credit price extremes and volatility; and
4) Use of carbon credit offsets.

These are very significant improvements over what the group had been discussing.

The very, very poor treatment of transportation fuels is my third surprise and a major disappointment. First, the Advisory Group recommends inclusion of transportation fuels under the cap despite evidence from their own modeling results showing such inclusion will do little to reduce greenhouse gas emissions.

The Advisory Group further recommends that the point where transportation fuels will be regulated under the cap program is “where the fuels enter the market in the participating jurisdictions; generally at the terminal rack, final blender, or distributor.” The problem with using this as the point-of-regulation is that nearly all of the greenhouse gas emissions from transportation fuels occur when the fuel is combusted in the consumers’ cars and trucks, not at the terminal rack, final blender, or distributor. Thus, and perhaps more to the point, the operator of the terminal rack, final blender, or distributor has no way to reduce the fuel’s greenhouse gas emissions, other than to reduce the amount sold. This means either fuel gets rationed or the cost of buying the emissions credits is directly passed through to consumers with no reduction in emissions.

But the unkindest cut is that the Advisory Group recommends that those who it deems responsible for greenhouse gas emissions from transportation fuels must obtain emission credits for 100% of their emissions through an auction. As I just mentioned, this is very different from how the group deals with the electricity sector.

Treating transportation fuels like this is unfair, unreasonable and inappropriate and worse will not reduce greenhouse gas emissions while increasing the costs to consumers. For example, economic analysis provided to the Advisory Group by their facilitators concludes that “the price of gasoline and diesel are expected to increase by 9 and 10 cents per gallon, respectively, for each $10 per metric ton of CO2e increase in the carbon price, assuming 100 percent cost pass through.” (See page 13 of Insights from Prior Climate Policy Modeling Analyses, dated May 4, 2009.) Such cost increases for little or no gain cannot be what the Governors want and should be rejected. It is the recommendations’ Achilles heel.

Cap & Trade for Body Fat?

I was spinning at the gym the other day reading an article in The New York Times about a British study on body fat and climate change (see below). Obviously, my annual six-week springtime ritual to lose weight, get into better shape, and buff my beer-keg belly into six-pack abs (note to self: stop thinking in beer metaphors!) has climate implications.

As I moved to the weight machines I had an epiphany: if cap and trade is the tool of choice to reduce everyone’s global greenhouse gas emissions, why not use it to reduce everyone’s body fat? Both body fat and GHGs are rising, threatening our well-being and causing leading scientists and medical doctors to tell us to reduce them.

How would a Body Fat Cap and Trade (BFCT for short) work, I pondered during my reps of medicine ball crunches? Just like a GHGs cap-and-trade program:

• Set a scientifically established national target on aggregate body fat and then reduce the target over time, say an 80% reduction of the nation’s body fat by 2050.

• Divvy the allowable body fat credits to the various sectors of the country based on their respective share of the body fat total.

• Auction off the body fat credits so that all those possessing body fat pay money (directly or indirectly) to the government for their body fat so as to:
o Send market signals of the true societal, environmental and health costs of body fat;
o Offer incentives to reduce our body fat; and most importantly
o Raise money to fund body fat reducing programs. For example, my gym membership would be paid for…what a great result for the YMCA and me! Billions could go to body fat reducing medical research and development. Low income people with high body fat who can’t afford their body fat credits would get financial help.

• Establish a body fat trading market so those who exceed their body fat credits could get more credits from those who reduced their body fat. I’m sure a secondary market of body fat credits would develop as fitness experts and dieticians helped people reduce their body fat to get saleable credits. I certainly would stop my post-workout habit of having a Peanut Buster Parfait if I could sell my body fat credits.

• Establish body fat offset criteria so that people could get body fat credit by helping others avoid increasing their body fat.

• Establish “early loser” credits so the new program does not penalize those of us already working out.

Clearly, like in a GHGs cap-and-trade program, a body fat cap-and-trade program has to resolve a lot of difficult issues like:
1. How to deal with growth…more people means more body fat…
2. How to handle new body fat entrants?
3. How to deal with direct and indirect body fat increases?
4. What is the body fat point of regulation? Clearly it should be the individual, but that’s so direct so I bet we’d avoid that like we’re doing with GHGs from the transportation sector, so we’d have to find some ineffective, indirect body fat surrogate whose only impact would be to raise the cost of food.
5. How to fairly account for historic regional body fat differences?
6. What if a country with growing body fat doesn’t participate in the program?
7. How do we assure compliance?
8. What are the body fat enforcement mechanisms?

Certainly these are difficult issues, but if they can be resolved for a GHGs cap-and-trade program, they can be resolved for body fat.

Think about how much money the government would raise and what they could do with it? Imagine all the body fat reducing jobs that would be created; they would probably exceed the number of promised green jobs. This could unite the President’s health care reform, climate change, and budget initiatives.

Clearly, I’m not serious about this “body fat cap and trade” idea. It must stem from exercise-induced endorphins. But, the potential parallels of body fat and GHGs cap-and-trade programs are eerie. And, it was fun to think about it as I was pushing myself through the five-minute barrier on the Elliptical.

The New York Times
April 27, 2009
Green Inc. Column
Climate Research That Might Not Help
By TOM ZELLER Jr.

Phil Edwards, a statistician and the head of the Nutrition and Public Health Intervention Research Unit at the London School of Hygiene & Tropical Medicine, told me last week that he was receiving a lot of hate mail.

“I got a lot of nasty stuff from your side of the globe,” he said.

The reason for the opprobrium is this: “Population Adiposity and Climate Change.” That’s the title of a paper that Mr. Edwards and a colleague, Ian Roberts, published this month in the International Journal of Epidemiology.

For those unsure of the term “adiposity,” just think “body fat.”

Yes, Mr. Edwards and Mr. Roberts published a statistical model (not the first of its kind, Mr. Edwards was eager to point out) that examined the relationship between increasing rates of obesity and climate change.

“What a stupid correlation,” wrote one reader at our Green Inc. blog, where we took note of the research last Wednesday. “This study is yet another confirmation of our fat-phobic society.”

“I would like to see a fat tax,” wrote another. “I am sick of paying for these big medical bills because someone wants to eat everything in sight.”

And from a reader identified as Hentrain: “Tall people are also using up more of our precious resources than short people are, and men consume more calories than women. We should strive for an all-female society of tiny, thin vegetarians.”

To be sure, the study touched a nerve — not least, one might reckon, because so much of the Western world is getting fatter. It is no secret, for instance, that more than 30 percent of adults in the United States have a body mass index, or B.M.I., of 30 or higher — the clinical definition of obesity. In Britain, about a quarter of the population qualifies. Same for Canada.

And the burden of all this extra weight — on individual health and on the health care resources of society — is indisputable.

But in a world hard-pressed to find priorities in the battle to curb greenhouse gas emissions, a reasonable response to Mr. Roberts’s and Mr. Edwards’s mathematical exercise, however accurate, might be: so what?

It is hard, admittedly, to argue with their findings. Taking two hypothetical populations of one billion people each — one with a 3 percent obesity rate (roughly the rate in Britain during the 1970s) and the other with a 40 percent obesity rate (as Britain’s is estimated to be by 2010) — the researchers simply did some modeling.

Food production, for instance, accounts for a substantial amount of the globe’s greenhouse gases — 20 percent from animal agriculture alone (read: meat and dairy), according to the United Nation’s Food and Agriculture Organization. Using this metric, along with established formulas for calculating the food energy needed to maintain a certain B.M.I., and a typical level of daily activity (sleep, office work, driving, and so forth) the researchers reckoned that the heavier of their two populations would require 19 percent more food energy than the slimmer one.

They also crunched some transport data, including the energy-use differential between a Ford Galaxy (assigned to their larger population) and the smaller Ford Fiesta (for the trimmer folks), as well as the added energy needed to move big bodies around in general, whether walking, driving or flying.

All told, the study concluded, the increased body size of the larger population accounted for between 0.4 and 1.0 gigatons of additional carbon dioxide equivalents per year. (For scale, global greenhouse gas emissions for 2000 were estimated to be roughly 42 giga-tons of CO2 equivalent.)

Among their conclusions: “The maintenance of a healthy B.M.I. has important environmental benefits in terms of lower GHG emissions,” they wrote, referring to greenhouse gas emissions.

It is a fairly straightforward point, and one that, according to Mr. Edwards, many of his angry correspondents were taking a little too personally.

“I just think it’s important that we all realize that we’re all gaining weight, which isn’t good for us,” said Mr. Edwards, who admitted in a phone call last week that he would consider himself overweight. “And if food production is an antecedent of climate change,” he said, “then we’re also harming the planet.”

That would seem to be true as far as it goes. But Brenda Ekwurzel, a climate scientist with the Union of Concerned Scientists, an advocacy group in Washington that researches energy and climate issues, cautioned that while a global focus on carbon footprints was a good thing, “we need to keep a focus on the big stuff.”

In an e-mail message, Ms. Ekwurzel, who quibbled a bit with the methodology of Mr. Edwards’s paper, suggested that, even allowing for its conclusions, preventing obesity rates from increasing ought not be considered a priority for cutting emissions — for individuals or policy makers.

“For most Americans, the most effective way to reduce one’s carbon footprint is to drive less, use more energy-efficient appliances and less electricity and reduce the amount of fossil-fuel energy intensive food you consume,” Ms. Ekwurzel said. “At the policy level, we need to concentrate on cleaner cars, cleaner fuels, smarter growth, cleaner, more efficient electricity and preventing tropical forests from being destroyed — not people’s waistlines.”

She added that, given the potential for expanded heat waves, increased smog, migrating pathogens and other ills associated with a warming planet, “It’s more important to focus on the effects global warming has on our bodies, rather than the effects that our bodies have on global warming emissions.”

For his part, Mr. Edwards said that he and his colleague never offered their analysis as a remedy for climate change — though he suggested that, under the circumstances, every little bit helps. “I’d hope that we’re not competing for ideas or solutions,” he said.

Nor, he added, should anyone interpret the paper — an academic exercise meant to highlight an interrelationship — as assigning blame to any particular individual.

“Population fatness is an environmental problem,” Mr. Edwards said, “But someone who has a B.M.I. over 30 is not somehow more to blame for global warming.”

If that was indeed the message of the paper, not everyone received it.

Wrote a commenter at Green Inc.: “The environmentally sensitive and rather rotund Al Gore should take note.”

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
http://www.stonesoupfolkcircle.com/stonesoup_story.html
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 http://en.wikipedia.org/wiki/Stone_soup ... for a discussion of the history of The Story of Stone Soup.

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 www.floaty.com).

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 all....it’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.

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.

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.

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 www.midwesternaccord.org). 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.

Applying Cap & Trade to Coal Plants Uses The Wrong Tool

I believe action needs to be taken to reduce GHGs. When designed well and used appropriately, a cap and trade regulatory approach has a lot of value and can effectively, efficiently and economically reduce GHGs. But it is also true that a poorly designed and inappropriately applied cap and trade program can be inefficient, uneconomic and ineffective.

It is this “flip side of the coin” concern that leads me to lament President Obama’s decision to address GHGs through an economy-wide cap and trade program using 100%-auction in his budget. First, I do not believe a cap and trade program is a suitable regulatory tool for dealing with GHGs from the transportation sector. Another concern is that implementing such a program where the government collects the credit auction money distorts market principles that underpin the cap and trade concept. And, finally a cap and trade program is unlikely to reduce emissions from installed coal plants. I will discuss the first two laments in future weeks; for today I will discuss my last concern.

Like any tool, cap and trade is a regulatory approach that works well in some settings and not so well in others. It works well where there are a manageable number of sources that can directly control, limit, replace or trade their emissions in response to increased cap-induced costs. This is why it worked for acid rain precursor emissions like sulfur dioxide from coal burning electric generating facilities. In the GHGs setting, I think cap and trade can work for manufacturing and industrial sectors that emit GHGs as an unfortunate by-product of their production. The participants in these sectors can and will make relatively quick economic analysis of whether reducing emissions through their industrial creativity or purchase GHG credits are in their best interests. The cap and trade approach may even work in the electricity sector when applied to future resource selections.

But as I reflect on a cap and trade approach and watched it’s use in the RGGI states or Europe, it becomes abundantly clear that such a program is a complicated tool crafted by humans with all our good intentions and frailties and inevitable political balances. As a result, I conclude that a cap and trade program is unlikely to reduce GHGs from the nation’s fleet of installed coal plants. This is an important shortcoming, since these sources emit somewhere north of a quarter of the country’s GHGs.

Although there are relatively few coal plants in the country (about 600 or so), unlike SO2, their GHG emissions are integral to their operations. Their GHGs cannot yet be scrubbed or economically captured. Just as important to my analysis, these installed coal plants produce electricity very cheaply and it is very unlikely that the cap will impose GHGs costs so high that newer or cleaner (in the case of natural gas) but more expensive alternatives would be an economic replacement…an alternative to new coal plants, possibly; but not as a replacement of the installed coal plants which produce electricity at under 5cents per kilowatt-hour versus over 10 cents for new. In short, for a cap and trade program to affect the GHGs from these installed coal plants, the imposed very, very high costs; costs so high that closing down is cheaper than buying credits from elsewhere. I doubt the political balancing process will impose such a high cost…it hasn’t yet in the other places that are pushing forward on cap and trade programs.

Thus, what is likely to occur is that the cap and trade program will impose higher costs on the generator that will be passed on to consumers…which of course may affect overall demand but not the emissions from the facility. The result: higher energy costs but minimal reductions in GHGs.

To make matters worse, the cap and trade program may actually encourage the generators to extend the coal plants lives since there would be little incentive to shut them down because the GHG costs will have been internalized or passed through to consumers. Thus, and to repeat for emphasis, the most likely result of a GHG cap and trade program will be higher electricity costs with little GHGs reductions….at least from the electricity generating sector. This should not be an acceptable outcome.

Since the cap and trade is an unsuitable tool for reducing GHGs from installed coal plants, there is a need to think of an alternative. The idea I have is that the installed coal plants should have their own program and certainly be exempted from any cap and trade program as a result. In my program, when a coal plant turns 50 years old it would be decommissioned, and between now and then the owner/operator of the exempted coal plant will work with their utility commissions to begin collecting money and putting it in escrow on the utility’s books for the sole purpose of replacing the energy from that facility (sort of like a pension fund) when it is decommissioned.

The result of this cap and trade alternative would be an orderly and economic phase out of the installed coal plants and replacement with inevitably cleaner facilities a significant environmental improvement…even if they are replaced with new coal plants. Ratepayers would be no worse off than if they were included in the cap and trade program and are likely to be much better off because the escrow collection would be equal to or less than the associated carbon costs a cap. Plus, that money will become down payments for the replacement facilities, reducing their costs and lowering the rate impacts instead of being “redistributed” through government programs. Knowing the end-of-life timing for their electricity generating facilities will prevent very expensive life extending improvements. The result: manageable electricity costs and significant GHGs reductions from the electricity sector…something that probably will not happen under a cap and trade.

Shared Goal; Differences of Approach.

Below is a statement I presented over 10 years ago. While I would make some editorial nods towards recent achievements, (the RPS, increases in biofuels and greater emphasis on energy efficiency), I still firmly agree with this statement. Climate change is real; human emissions are the cause; and we need a fair and comprehensive approach that will actually reduce GHGs. Any criticism offered in these postings should not be interpreted as changes to my long-held beliefs or a wavering of my commitment to address GHGs; rather they stem from legitimate differences of opinion for how to craft a fair comprehensive approach that will effectively, efficiently and economically reduce GHGs around the world, across the nation and here in Minnesota.

CLIMATE CHANGE STATEMENT BY
EDWARD A. GARVEY, CHAIR
MINNESOTA PUBLIC UTILITIES COMMISSION
BEFORE THE
MINNESOTA ENVIRONMENTAL QUALITY BOARD

Thursday, December 17, 1998

Although there are uncertainties, climate change poses a real environmental threat and raises very important long-range public policy issues for Minnesota that will not go away. Therefore, it is in Minnesota’s best interest to develop a thoughtful and comprehensive plan to proactively address the issue.

Before I proceed, I have to make two disclaimers. First, although I am Chair of the Minnesota Public Utilities Commission, the opinions I express today are my own. They do not reflect the views or opinions of the Commission or anyone else for that matter. Second, nothing I say today should be construed in any way and by any party as an indication of how I may decide any matter that is before or could come before the Commission.

I accept conventional scientific thinking that the climate change issue is a real environmental threat. The concentration of atmospheric CO2 is increasing. Increased concentrations of atmospheric CO2 is likely to change the world’s climate posing a significant threat to Minnesota, the United States and the global community. Having said that, I recognize that there are many important unanswered questions: How much will the climate change? How fast could such change occur? What will be the impact of that change? Can we see such change today? How significant are human actions in causing such change?

Although no one can answer these questions with great certainty, there does appear to be a correlation between increased CO2 concentrations and human industrialization. This correlation by itself leads me to conclude that the responsible thing to do is to find ways to reduce CO2 emissions. Minnesotans contribute to the problem and will be adversely affected by a changing climate. Therefore, it is in our best interest to thoughtfully and proactively reduce our CO2 emissions in ways that do not unilaterally disadvantage us.

Besides the environmental threat posed by increased atmospheric CO2 concentrations, there is another reason for Minnesota to be proactive on this issue: it is likely that Minnesota will face the imposition of international and national CO2 reduction regulations in the not too distant future. In 1992, at the Earth Summit in Rio de Janeiro, Brazil, 154 countries, including the United States, recognized (and now 175 countries recognize) the threat posed by increasing atmospheric concentrations of CO2 to the Earth’s climate. They agreed to pursue voluntary reductions of CO2 emissions. After several intervening meetings, they went a step further a year ago in Kyoto, Japan. The Kyoto Protocol, which the US signed during the Buenos Aires Convention this past November, creates an international framework for mandatory CO2 emission reductions for developed countries. Under this framework, the United States agreed to reduce its CO2 emissions by 7% from 1990 levels during the 2008 to 2012 time period.

I attended last month’s Buenos Aires Convention representing the National Association of Regulatory Utility Commissioners. The primary agenda of that convention was to address the Kyoto Protocol’s flaws and resolve its many implementation issues. The lack of CO2 reduction commitments by developing countries, like China, is a major flaw of the Kyoto Protocol. The diplomats tried to address this issue but achieved little if any direct progress. However, there was a lot of maneuvering and discussion between the countries, led by Argentina, giving me hope that the stalemate can be broken.

As for implementation, the diplomats spent many hours trying to agree on how to implement CO2 trading and other flexibility measures. Such flexibility is needed to minimize the costs of CO2 reductions. Again, due to international politics there was little direct progress. However, the conferees did agree on a workplan with results to be brought forward in October 2000.

Although there was little formal progress in Buenos Aires, we should take note that the on-going international stalemate is over how to develop and implement CO2 reduction efforts, not whether we need to do so. The science of climate change was not questioned.

This observation makes clear to me that we Minnesotans ought not be ostriches hiding our head in the sand hoping that the climate change issue will go away. It will not; the issue and its ramifications will only grow. Therefore, it makes sense for Minnesota to get ahead of the curve and control our future by developing a thoughtful and comprehensive plan to proactively address the climate change issue. New Jersey and Oregon have done so. So have a number of major Minnesota companies. We should too.

In making this recommendation, I do not believe that Minnesota can solve this global problem by itself. Nor do I think that we should try and thereby shoot ourselves in the foot economically. But, in small ways, we can lessen the environmental threat and prepare ourselves for what is to come.

In developing a proactive plan, it ought to be comprehensive, thoughtful and deliberative. Because everyone uses energy and thereby contributes to the problem, everyone must be made part of the solution. Accordingly, an inclusive process that assures that all interested people can and do participate is needed. Also, no one industry or economic sector should bear the costs of addressing this threat by themselves. The costs of CO2 reduction should to be borne fairly by all.

We need to be mindful of the uncertainties and make sure that whatever steps we take do not unilaterally disadvantage us. We cannot solve this problem overnight and it is counterproductive to try. Today’s solutions should not become tomorrow’s problems. Similarly, we must think creatively. It will probably take new and different ways of doing things to address this issue.

Finally, we must be proactive. We must set goals and take action by pursuing the low hanging fruit while simultaneously planting trees--both figuratively and literally speaking--so we can reap them as they mature in the future. Here are just a few ideas that come to my mind: devising ways to assure that companies that reduce their CO2 emissions receive credit for their good work; striving to achieve even more energy efficiencies; examining our tax structure to find ways to promote capital stock turnover; continuing to use and promote low or no-CO2 emitting energy sources; managing our forest and agricultural lands for carbon sink potential; and finally examining our regulations to make sure that they do not work at cross purposes or unnecessarily add costs.

Although reducing CO2 emissions is key, the cure must not be worse than the illness. We must not take actions that would unilaterally disadvantage our citizenry or industries. Instead, we should focus on flexible market-based measures that strengthens the state’s economy both today and tomorrow.

To conclude, climate change is a real environmental threat posing difficult public policy choices. The sooner we develop a thoughtful comprehensive plan that identifies those policy choices and proactively implements them, the better off Minnesota will be. Thank you for this opportunity to address you today.

The MGA Conundrum & Successful Journey

It seemed like a good idea at the time: Get the states of the Midwest to work together on increasing the region’s renewable energy and energy efficiency. And, while doing that why not think about reducing greenhouse gas emissions? So, about two years ago Governor Pawlenty and Wisconsin Governor Doyle used the auspices of the Midwestern Governors Association (which Doyle was chairing) to do just that. The result was the Energy Security and Climate Stewardship Platform and Midwestern Greenhouse Gas Reduction Accord signed by most of the governors of the Midwest in Milwaukee, Wisconsin in November 2007.

It did seem like a good idea at the time. Recall 2007. The economy was riding high. That October the stock market set an all-time high. Most states were on renewables bandwagon. Also, remember the frustration on the Federal government’s inaction on climate. Moving thoughtfully, collectively and certainly very ambitiously forward seemed like the correct thing to do.

How the times have changed. The economy is on the ropes; the stock market is tanking, and for better or worse, the Federal government has awoken from its inactive slumber. Thus, what seemed like a good idea once has now turned into a conundrum for the Governors.

Countless hours by hundreds of stakeholders continue to work on the cap and trade analysis and all the other MGA energy activities which are suppose to culminate at a big energy and green jobs summit in September…most likely in Michigan since Michigan Gov. Granholm is the current MGA chair. Yet, as the economy and the President’s actions make clear both achieving the ambitious goals is unlikely and unneeded.

What to do? My answer is to keep plowing ahead, get as far as possible (knowing that it will not be very far) and declare victory! As a great philosopher said: It’s the journey not the destination that matters.”

Another facet of that journey is about to start with the MGA consultants doing two types of model runs. The first set of model runs will be a core policy case, i.e. cap-and-trade plus the complementary action estimates like energy efficiency gains, low carbon fuels, etc. and a pure cap-and-trade case, i.e. no complementary policies/goals. These first policy model runs should be done prior to the next MGA advisory group meeting scheduled for Traverse City, Michigan on March 31/April 1st.

The second set of runs will test sensitivity of various cap-and-trade design parameters like changing offset limits, sectoral coverage, geographic coverage, targets and transportation fuels in or out of the cap & trade. These runs will be done in mid-April.

Despite all this work, will the Governors be able to declare success in September? The answer is “yes, sort of, and no.”

Yes, the MGA climate and energy efforts will be a success; they already are. They have policy leaders, key agency staffers and stakeholders from across the region working together, thinking through issues and learning important things. This cooperation, coordination and communication should not be discounted. It will pay important dividends.

The MGA effort will only be “sort of” a success to the extent that beyond the coordination the groups have not reached agreement on many critical issues. Yet, one should not discount the learning that has occurred on what it takes to create a regulatory regime to reduce GHGs. Understanding issues like offset implications, leakage and boundaries, impacts of including or excluding transportation fuels and the cost impacts of these variations are, while not tangible, successes of a sort that ought not be discounted. While cohesive regional action is unlikely it also puts our region at risk of aggressive Federal action dominated by decisions made in California and New England. These are not regions that have a very different industry, agricultural and energy production profile than our Midwest.

If success is defined as the actual implementation of a regional cap and trade program, then the answer will be “no.” However, this may not be a bad thing given everything that’s going on. In fact, in many respects even in “failure” the MGA energy security and climate effort can be a success. The MGA governors need to keep moving forward; keep working through the issues even if they are intractable. Keep communicating; keep coordinating and keep cooperating. And, throw a big victory party in September because as country singer Rodney Atkins sings--“If you're going through hell, keep on going, don't slow down. If you're scared, don't show it. You might get out…before the devil even knows you're there!”

President Obama’s Unfortunate Cap & Trade Proposal

Last week President Obama announced his budget proposal. (http://www.whitehouse.gov/omb/). On page 21 of the 120-page budget summary, it announces the President’s plan to reduce greenhouse gas emissions through a “cap and trade” program:

After enactment of the Budget, the Administration will work expeditiously with key stakeholders and the Congress to develop an economy-wide emissions reduction program to reduce greenhouse gas emissions approximately 14 percent below 2005 levels by 2020, and approximately 83 percent below 2005 levels by 2050. This program will be implemented through a cap-and-trade system, a policy approach that dramatically reduced acid rain at much lower costs than the traditional government regulations and mandates of the past. Through a 100 percent auction to ensure that the biggest polluters do not enjoy windfall profits, this program will fund vital investments in a clean energy future totaling $150 billion over 10 years, starting in FY 2012. The balance of the auction revenues will be returned to the people, especially vulnerable families, communities, and businesses to help the transition to a clean energy economy.

Since this program is in a budget bill, it appears that President Obama wants to make the climate debate more about how to raise and spend money than actually reducing GHGs. This is very unfortunate; hold on to your purse or wallet!

Using the phrase “biggest polluters” is also unfortunate. In fact, I think it is both inaccurate and counter-productive. Everyone emits greenhouse gas emissions…we all contribute to the problem when we turn on a light, heat our homes or drive our cars. It’s an “all of us polluters” problem, not just a “big polluter” problem. So, to use such a phase sends the wrong message and undermines the need for everyone to collectively take action. And, without this collective action there will be no solution.

There are several things I can say about the “100 percent auction” approach, but let me focus on one thought: the only thing a 100% auction assures is that all traditional energy sources will be made more expensive. It is also likely to be unfair and economically distorting. Rich entities or entities that can pass the costs along that need GHG credits will pay any price; but poor entities may not be able to afford the price and will be forced out of business regardless of their value to society. Such economic unfairness and distortion in the marketplace is unfortunate.

The proposal says an auction is needed so the biggest polluters “do not enjoy windfall profits.” This is government-speak for saying what you were doing yesterday had no value but now it does and we don’t want you to benefit from the new value so we (the government) will take it from you. This adds insult to injury. And, I find it ironic that at a time when the Federal government is pouring billions of dollars to bail out banks, they are worried about windfall profits of energy producers and users.

While a cap and trade approach may be an effective way of reducing GHG emissions in some situations…it is not effective for every situation. It doesn’t work for transportation and I am doubtful that it will result in reduced GHG emissions from established coal plants, the two largest sector sources of GHG emissions.

The President’s plan is silent on the role of the states. So, since it doesn’t say, “working with the states...,” I assume President Obama’s message is that the Federal government will impose the cap and trade, run the auction, collect the resulting money and then dole it out. But there are states, including Minnesota, that also have their eye on that money for themselves.

Similarly, I wonder whether states will have a role independent of the Federal government in reducing GHG emissions. There are five options for states. The simplest options are pre-emption (which I favor) or grandfathering. Another option is for the Federal government to delegate some controlling authority to certain states that meet a minimum set of conditions. A fourth option is to grandfather a more aggressive lead state (can you say California?) and then allow other states to adopt that state’s standard or accept the Federal standard. Finally, there could be “cooperative Federalism” where the Federal government and states jointly implement a set of standards. It is unclear which option the President wants.

There will be an interesting intergovernmental skirmish and unfortunately, pretty soon everyone will forget that the goal is to reduce GHG emissions.

Thus, in this single paragraph, President Obama is proposing to change the nation’s energy marketplace, affect every Americans’ finances, and reshape the Federal-state relationship. And, would do all this in a way that probably will not even reduce GHG emissions. Very unfortunate and disappointing.

First Economic Triage, Then Pursue the Clean Energy Economy

America’s hurting. Patient USA is suffering a serious economic trauma and has for a while. And, instead of healing, it seems to be getting worse. The symptoms are obvious on every newspaper front page; with each new low of the stock market; at the top of every nightly news program; on streets with as many “for sale” signs as mailboxes. The less obvious pain is seen on monthly 401k statements, empty food shelves, lonely retail merchants and wrap-around lines at unemployment centers.

Our country needs economic triage more then ever. As a result, no matter how worthy, all the ideas and programs to promote the carbon-free, clean-energy economy of the future may be, they should be put on hold. They are hopeful luxuries that we cannot afford right now and that are distracting the nation from the triage that needs to occur.

I am not a medical expert, but I have extensive medical TV show watching experience going back decades to M*A*S*H, and more recently SCRUBS, ER, Grey’s Anatomy and, of course, House. And, what I have learned is that, when confronted by a medical trauma doctors pursue a three-step process: First, they stabilize the patient, addressing the trauma like stopping the gushing blood, restarting the heart, controlling the seizure or clearing airway passage, etc. If it is a big event with multiple traumas the doctors perform “triage,” where they sort out the injuries according to the severity of their trauma.

The next step is to identify and treat the cause of the trauma. Sometime this is easy like removing the bullet, fixing the fractures, sew-up the lacerations, etc. In other times it is very hard, as the symptoms point to conflicting or multiple causes…liver damage, cancer, diabetes, allergic reaction, bug bite or some very rare disease. It is this search for the mysterious cause that makes House and even PBS’s Medical Mysteries so interesting.

Once trauma causation is established the doctors then prescribe recuperative therapy to make sure the trauma doesn’t reoccur, repair the patient’s physical health, and restore their psychological well-being. Of course, these elements blur depending on the trauma….how doctors treat a car accident trauma is different from someone afflicted with a cancer, but the 3-step “stabilize-treat-recovering therapy” is the common approach.

Unfortunately, the nation’s economic doctors are not implementing the medical three-step process in reverse. Yes, the problem is so big, growing and has so many moving parts. But that’s why doctors work through the three steps. Instead, our economic doctors are skipping the first two steps and rushing forward with bailouts, policy plans, stimulus packages, lopsided budgets that claim the cure is a carbon-free economy, low carbon fuels, California car standards. But the problem grows more severe.

In the mean time people are being thrown out of work and retirement accounts are getting pummeled. This seems like treating a gun shot patient arriving at the ER with a visionary lecture of how great their life will be if they start eating better, get more sleep, doing yoga and begin taking Omega-3 for their heart.

Don’t get me wrong…just about everyone should probably eat better and get more sleep, and I do enjoy my yoga….and I truly do think we must pursue green jobs, renewables and reduce our carbon footprint…but that time is not now. It is not what the patient, the state or the economy needs at this moment. It’s time for real economic triage; its time to help people put food on their tables; its time to restore confidence in the financial systems. Only once we have done that can we return to implementing the needed carbon-free, clean-energy restorative therapies.

Three Hopes & A Trillion-Dollar Wind Commitment

I am a hopeful person. So, let me share three of my current hopes with you. My first hope is that, despite my skepticism, I truly am hopeful that President Obama’s stimulus package and the other stuff he’s doing pulls the nation out of our economic tailspin. Something needs to be done; this might not be it, but then again it might be. There are lots of times when I thought something would turn out badly, and they don’t….and my daughters always seem to remind me of those times. So I hope that my daughters are more correct than I feel on this issue and that the actions the Obama Administration is taking will work.

My second hope is that I can do my part for the economy and go on a spring break vacation, especially to some place warm, with sand and swaying palm trees and fresh guacamole. Implementing such a maneuver is a kaleidoscope of moving parts of money, intricate family scheduling, spousal agreement on location, just-a-little-too-late advanced planning and, oh did I say “money.” Perhaps, the stimulus package will solve at least a couple of these issues. I certainly hope so.

My third hope is that stimulus bill’s relatively small down payment on renewable energy and improving the nation’s transmission system spurs the very large investment needed to tap the potential of the nation’s wind resources and deliver it throughout the country. Like planning my family vacation, achieving this hope will require a lot of time, money and effort.

On Monday, February 9, 2009, a group of major transmission owners and operators in the Eastern US made up of the Midwest ISO, Southwest Power Pool, Inc., PJM Interconnection, the Tennessee Valley Authority, Mid-Continent Area Power Pool (MAPP), and participants within SERC Reliability Corporation (SERC), who have been working on the “Joint Coordinated System Plan (JCSP’08),” announced their initial analysis of how much it will cost to provide significant amounts of wind to the eastern two-thirds of the country…from the Rocky Mountains to the Atlantic coast.

The planners looked at two wind scenarios and examined the transmission and generation implications of them for the years between 2008 and 2024. One scenario assumes an increase in wind energy so that 5% of the region’s electricity comes from wind. The second scenario envisioned 20% of the region’s electricity coming from wind as proposed by legislation in the US Congress mandating a national renewable standard.

The analysis estimates that meeting the 5% wind scenario will require the addition of approximately 10,000 miles of new extra-high voltage transmission at a cost of approximately $50 billion, in addition to nearly $700 billion in total wind generation capital costs by 2024.

The other scenario, that of 20% wind, is estimated to require 15,000 miles of new extra-high voltage lines, at an estimated cost of $80 billion, in addition to $1.1 trillion in total generation capital costs by 2024.

So, $750 billion gets us 5% wind and $1.2 trillion gets us 20% wind….or, for comparison purposes, this is almost as much as we’ve spent on the stimulus bill and bailing out Wall Street. That’s a lot of money, no matter how you cut it. However, just as I hope the stimulus bill provides the needed economic elixir and that in a month or so I am completing my collection of drink umbrellas and listening to the gentle lapping of the Caribbean sea, I hope we can push forward to strengthen the country’s transmission grid and make wind a significant part of the entire nation’s electricity portfolio, not just Minnesota’s.