Cap and Trade

September 22, 2017 by Denis Pombriant

The Regional Greenhouse Gas Initiative (RGGI) is a consortium of 9 states including Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont that supports a mandatory market based program to lower CO2 pollution from the electric power sector. The states agreed in 2014 to cap CO2 pollution from power plants at 91 million short tons of CO2 . The RGGI cap then reduces allowable CO2 pollution by 2.5 percent each year from 2015 to 2020. States sell allowances, essentially the right to emit CO2 , in auctions and invest the proceeds into energy efficiency, renewables, and other activities to benefit the users.

Additionally, California is running a very similar program selling permits to pollute. Over time the permits in circulation are reduced and their prices will rise all of which it is hoped will inspire users of fossil fuels to use less polluting fuels (like moving from fuel oil to natural gas) or to replace their fossil fuel burning power plants with clean and green technology.

All of this is good but it’s a half loaf approach. For all the good intentions involved it must be repeated that there’s already too much CO2 in the air and oceans and that reducing the rate of increase is still an increase. That’s why it’s a half loaf approach but at least it’s good as a long term incentive to convert.

What could be better? A few things.

First, get off of fossil fuels all together as soon as possible. According to the US Department of Energy there are between 5 and 6 trillion tons of CO2 in the atmosphere contributing to global warming and we’re adding to that number at a rate of between 35 and 45 billion tons per year. Put into that perspective programs that reduce emissions by millions of tons are better than nothing but obviously they still leave us far from the goal line.

Second, institute carbon capture programs. Selling carbon credits or permits is a good approach to reducing emissions but not necessarily the best. To be repetitive, reducing the rate of increase is important but it has to be linked to efforts to capture atmospheric CO2. To be effective we need approaches that capture billions of tons of CO2 per year, and those solutions are out there. In “The Age of Sustainability” I discuss how this can be done and the best approach I can recommend is setting a goal to double the amount of photosynthesis that happens on earth. In the book, I discuss how to do this. I’ll write a post about that soon.

Third, remember that the quantity of fossil fuels in the earth’s crust is large but not inexhaustible. The most dangerous part of the current fossil fuel energy paradigm is the false sense of security it provides. Fossil fuels are a finite resource and we’ve been using them in some quantity ever since we quit using whale oil for illumination in the 19th century. Think of “Moby Dick” as your reference point that’s how long we’ve been using petroleum and we’ve been using coal longer. We’re going to need a new energy paradigm in place when the oil runs out and there are plenty of indications that it is very much doing so as you read this. For more on this topic go here xxx.

Fourth, raise the price. The latest RGGI auction raised $62.5 million on 14,371,585 CO2 allowances sold at auction at a clearing price of $4.35; the bids ranged from $2.15 to $6.66. One allowance is equivalent to a short ton of CO2 . But is this a good thing? The auction effectively priced a ton of CO2 at $4.35, which is not enough to modify behavior. We think a price around $40 per ton makes much more sense. At that price the allowances sold would bring in $574,863,400. You might think this is excessive but think more broadly. There are roughly 42 million people living in the 9 states covered by the RGGI and $62.5 million amounts to only about $1.50 per person. Admittedly, there are multiple auctions per year but even if there are quarterly auctions we’re looking at $6 per year per person, hardly enough to induce some amount of behavior modification. A family of four would not be able to dine out on that.

But using $40 per ton, the fee works out to $13.69 or about $55 per year per person. This is still not a great deal of money per person though it might inconvenience some and a form of abatement would need to be implemented for low-income people. But if we’re serious about removing carbon from the air and not just trying to reduce the rate of rise, then that kind of money could begin to fund serious removal programs and that’s what’s needed.

The cost of pollution has to pass from energy supplier to consumer in order to get the consumer to modify behavior. It also has to be felt to be effective. Remember, the RGGI is about pollution from power plants and has no effect on other pollution from cars and home heating or industry. A car getting 20 mpg will generate 7.5 tons of CO2 in a year (at 20 lbs. of CO2 per gallon) and a liability of $300. If we take all CO2 generated by a family of 4 in a year from cars as well as cooking, clothes drying, hot water, and such, we could get closer to $1,000 and that might be enough to get people’s attention.

No one likes higher prices for commodities but we also don’t like taxes or being told what to do. But somehow government and the economy need to provide signals back to consumers that enable conversion of good intentions into action. The current price of $4.35 per ton is good in that it establishes a foundation for charging for pollution but now we need to make it effective which means a much higher price.


2 NY Times editorial

3 California


Leave a Reply