The End of Doom

by Ronald Bailey

  Carbon Market Follies

  Unfortunately, as noted earlier, the current model for controlling the global emissions of greenhouse gases like carbon dioxide is a cap-and-trade scheme devised under the Kyoto Protocol. To comply with its obligations under the Kyoto Protocol, the European Union implemented its Emissions Trading Scheme (ETS) back in 2005. The ETS covers the output of about 12,000 big emitters, whose CO2 amounts to roughly half of the European Union’s total emissions.

  Under cap-and-trade schemes, governments set a limit on how much of a pollutant—in the case of man-made global warming, chiefly carbon dioxide—utilities and other enterprises can emit and then allocate permits to them. The permits can then be bought and sold on an open market. Manufacturers, for example, who can cheaply abate their emissions will have some permits left over. The cheap abaters can sell their extra permits to other enterprises that find it more expensive to reduce their emissions. In this way, a market in pollution permits is supposed to find the cheapest way to cut emissions.

  That is the ideal, but implementing the ETS has been far from ideal. For example, in May 2006, an audit showed that several EU governments had issued permits for 66 million tons more CO2 than was actually being emitted. Traders immediately realized that the supply of permits was not scarce, so the price of carbon dioxide allowances promptly collapsed to less than 9 euros per ton. By February 2007, an allowance to emit a ton of CO2 could be had for less than a euro. European governments later tightened limits on carbon dioxide emissions and permit prices recovered in the second trading period until the advent of the financial crisis in 2008 forced a dramatic economic slowdown.

  The steep decline in economic activity has lowered CO2 emissions, producing a surplus of carbon permits among companies in the EU’s emissions trading scheme. Consequently, by April 2014, the prices of carbon permits had fallen to a record low 2.46 euros per ton. Due to tinkering by European lawmakers, permit prices had risen to around 7 euros in January 2015. This is far under the price of 25 euros per ton that most analysts believe is necessary to drive energy producers to seek lower carbon sources of power.

  The main point is that such price volatility means that companies have great difficulty in planning their infrastructure investments. There is very little evidence that the ETS has driven large-scale capital investments in energy production aimed at reducing the emissions of greenhouse gases among firms and facilities subject to the system. If carbon dioxide trading does not induce those kinds of investments, then it clearly has failed.

  Windfall Profits for Corporations—Higher Prices for Consumers

  In addition to being ineffective at encouraging investment in low-carbon energy technologies, permits have been distributed in such a way that they have provided billions of euros in windfall profits to polluters. How does this work? Beginning in 2005, the ETS cap-and-trade scheme handed out nearly all of its emissions permits gratis. Hold on, you might say: If the emitters are getting permits for free, why don’t they pass along the lower costs to their customers?

  Think of it in terms of an analogy put forward by left-leaning economists James Barrett and Kristen Sheeran: Tickets from scalpers for the last World Cup Soccer championship games were going for more than 200 euros, about double their face value. Would the price have been lower if a scalper had found them on the ground? No. “The supply and demand for tickets is the same no matter how much the scalper paid for them, and so the price he charges you will also be the same no matter how he got them,” note Sheeran and Barrett. Or think of it this way, if someone gave you a bundle of cash worth a thousand euros, you would not be inclined to sell them to another person for less than a thousand, would you? The same thing is true of carbon dioxide emissions permits.

  Giving away permits for free to industry is largely equivalent to a carbon tax in which the tax revenues are given to energy company stockholders, not spent on behalf of consumers and taxpayers. Before the carbon market’s initial collapse in April 2006, the consultancy IPA Energy estimated that permits granted to British and German utilities fattened their bottom lines by 1 billion euros and 6 to 8 billion euros, respectively. And British and German consumers paid more for their electricity on top of that.

  One way to correct the most egregious flaws in current cap-and-trade schemes would be to adopt cap-and-auction instead. Auctioning permits is very much like imposing a carbon tax. In this case, the government sets an overall emissions limit and emitters have to buy allowances from the government every year. The chief difference between a cap-and-auction scheme and a carbon tax is that the price of the allowances will vary from year to year. Once again, this variability in permit prices introduces uncertainty in the infrastructure planning of firms.

  A 2011 report by the Swiss bank UBS concluded that the Emissions Trading Scheme will cost European consumers $277 billion for “almost zero impact.” If the European Union, which has a relatively robust governmental institutions and the rule of law, couldn’t effectively implement a cap-and-trade carbon market, there is no chance that the entire world encompassing China, Russia, India, Nigeria, Brazil, Iran, Mexico, Indonesia, and Saudi Arabia can do so.

  Why Not a Carbon Tax?

  Many economists think that a better option for rationing carbon would be a gradually rising tax on fuels that emit carbon dioxide. As the tax increases, industries and consumers would cut back on their use of more expensive fossil fuel energy and switch to using energy produced by low-carbon and no-carbon technologies. This process would lead to lower carbon dioxide emissions over time.

  For instance, economists such as Harvard University’s Gregory Mankiw and Yale University’s William Nordhaus advocate imposing a tax on all kinds of carbon-based fuels at the wholesale stage, at the point where they emerge from under the ground. Thus, utilities and refiners who take raw coal, oil, and natural gas as inputs would pay a tax on these fuels. The extra cost would get passed downstream to all subsequent consumers. Thus carbon taxes would encourage conservation and low-carbon energy innovation. Since the tax is levied on how much carbon a fuel contains, it would make fuels like coal less attractive compared with low-carbon fuels like natural gas or even renewable energy like solar and wind power. Ideally, carbon tax revenues would be used to cut domestic taxes such as the payroll tax or the individual income tax, thus offsetting some of the pain of higher energy prices.

  Internationally, one of the big advantages of a carbon tax is that it avoids the baseline quandary that bedevils carbon markets. For example, signatories to the Kyoto Protocol are supposed to cut their emissions of greenhouse gases by 5 percent below what they emitted in 1990. Why? That goal has no relationship to any specific environmental policy objective. In fact, achieving the cuts specified by the Kyoto Protocol goals would reduce projected average global temperatures by only a minuscule 0.07°C by 2050.

  As the now-moribund international negotiations about what to do after the Kyoto Protocol show, it is very difficult to get many countries to agree to new global emissions baselines. Also, where should baselines be established for rapidly growing economies like China, India, and Brazil, whose energy use and emissions are expected to more than double by 2030? Under the Kyoto Protocol, the natural baseline is what emissions would be without any restraints. However, calculating or predicting what a country’s emissions will be twenty to thirty years in the future is impossible to do with accuracy.

  Under a pollution tax scheme, argues Yale economist William Nordhaus, “The natural baseline is a zero-carbon-tax level of emissions, which is a straightforward calculation for old and new countries. Countries’ efforts are then judged relative to that baseline.”

  Another advantage is that the tax could be phased in as the average incomes of poor countries reach a certain threshold. For example, carbon taxes might start to kick in when national income reaches $10,000 per capita, which is slightly higher than China’s current level. More generally, having a defined tax rate makes it easy for firms in developed and developing economies alik
e to predict the future impact of climate policy on their bottom line—something that is considerably harder to do when the government is handing out permits every year.

  A tax avoids the messy and contentious process of allocating allowances to countries internationally and among companies domestically. For example, nations could negotiate a much more transparent treaty than the Kyoto Protocol and establish a system of globally harmonized domestic carbon taxes. Harmonized taxes offer relative price stability, and taxes on carbon emissions can be raised gradually and predictably over time so that governments, industries, and consumers can all see what the price of carbon-based fuels will be over future decades and can make investment and purchase decisions accordingly.

  Nordhaus further argues that carbon markets are “much more susceptible to corruption” than are tax schemes. “An emissions-trading system creates valuable tradable assets in the form of tradable emissions permits and allocates these to different countries,” writes Nordhaus. “Limiting emissions creates a scarcity where none previously existed and in essence prints money for those in control of the permits.”

  So a carbon tax offers less opportunity for corruption because it does not create artificial scarcities and monopolies. Of course, governments can engage in chicanery by dispensing tax breaks and subsidies to favored companies and industries. But Nordhaus analogizes carbon allowances to quotas in international trade and carbon taxes to tariffs: overall, it’s been a lot easier to manage tariffs than quotas.

  Save the Climate: Cut Subsidies

  The first rule for getting out of a hole is to stop digging. In this case, it’s crazy to pay people to burn more fossil fuels if one is concerned about man-made global warming. The International Energy Agency estimates that government consumption subsidies for fossil fuels amounted to $544 billion in 2012. Ending subsidies would encourage consumers and producers to cut back on the use of fossil fuels, which in turn would reduce carbon dioxide emissions. And that would save taxpayers a great deal of money.

  Nitrous oxide exists naturally in the atmosphere, but as a result of human activities, its concentration has increased by 20 percent over preindustrial levels, making it the third most important greenhouse gas after carbon dioxide and methane. Nitrous oxide is a long-lived gas that has a global warming potential of 310, meaning one molecule traps over 310 times more heat than a molecule of carbon dioxide. The amount of nitrous oxide put into the atmosphere is equivalent to about 3 gigatonnes of carbon dioxide, which approximates the emissions of half of the world’s entire vehicle fleet. In addition, nitrous oxide depletes the stratospheric ozone layer that shields the earth’s surface from damaging ultraviolet light. So reducing nitrous oxide emissions is a twofer—cutting it lowers the temperature and protects the ozone layer.

  Two-thirds of human nitrous oxide emissions come from agricultural activities—for example, using nitrogen fertilizer or livestock waste management. It is not an exaggeration to say that the invention of a process to synthesize nitrogen fertilizer made the modern world possible, as fertilizers boost crop yields as much as 50 percent. Nitrogen fertilizer that isn’t taken up by plants boosts input costs to farmers. However, farmers have to make trade-offs between a number of different costs for fuel, equipment, seed, labor, fertilizer, and so forth in order to make a profit, and managing nitrogen fertilizer is usually not at the top of the list for improving the bottom line.

  That being said, if it’s economic and ecological madness to subsidize the burning of fossil fuels, it’s just as barmy to subsidize agriculture in the amount of $300 billion annually. The World Bank reported in 2012 that fertilizer subsidies in India amounted to 2 percent of that country’s GDP. Agricultural subsidies clearly encourage farmers to overuse fertilizer, which in turn produces nitrous oxide emissions that harm the ozone layer and raise global temperature.

  Real Intergenerational Equity

  Comedian Groucho Marx once famously quipped, “Why should I do anything for posterity? What has posterity ever done for me?” Many people are worried about “intergenerational equity” with regard to how global warming will affect future generations. But perhaps Marx had the right question.

  Consider that University of Groningen economist Angus Maddison calculates that annual per capita income in real dollars in 1900 in Western Europe was $3,200. Today Western European average incomes average $21,800. Per capita income averaged $4,000 in the United States in 1900. Currently, average American income is $30,500 per capita, according to Maddison’s figures. In other words, contemporary Europeans and Americans are around seven times richer than their great-grandparents were three generations ago. The true intergenerational equity question becomes: How much would you have demanded that your much poorer ancestors give up in order to prevent the climate change we are now experiencing? We stand in exactly that same relation to people who will be living in 2100.

  Total global GDP in 1900 in real dollars was about $2 trillion. The World Bank calculates that in 2012, global GDP stood at $72 trillion. In other words, global GDP increased by thirty-six times over the past century. Average per capita global real income in 1900 was about $1,300. Dividing the World Bank figure up by the world’s population of 7.2 billion, one finds that global average per capita income is around $10,000. Of course, it is not equally distributed among people.

  What about the future? If global economic growth continues at around 3 percent per year, total GDP in real dollars would reach $888 trillion in 2100. Many scenarios, including those used by the UN Intergovernmental Panel on Climate Change (IPCC), suggest that world population will stabilize or even fall below 8.5 billion people by 2100. This yields an average income of over $104,000 per person in three generations. So should people living now and making a global average of $10,000 per year be forced to lower their incomes in order to boost the incomes of future generations that in some IPCC scenarios will have incomes in 2100 over $107,000 per capita in developed countries and over $66,000 in developing countries?

  Let’s take the worst-case scenario devised by British economist Nicholas Stern, in which global warming is so bad that it reduces the incomes of people living in 2100 by 20 percent below what it would otherwise have been without climate change. That implies that global GDP would rise to only $710 trillion by 2100. That would reduce average incomes in 2100 to only $84,000 per person. In other words, people living three generations hence with the worst consequences of climate change would still be more than eight times richer than people living today. Another way to think of that much future climate damage is that it is equivalent to reducing global economic growth from 3 percent to 2.7 percent over the next ninety years.

  An Emergency Backup Plan to Cool the Planet

  Say that the world has adopted measures that will lead to the massive deployment of low- and no-carbon energy technologies, but it turns out that global warming starts to occur at a much faster pace than climate models had projected. To prepare for just such a situation, some researchers have suggested various geoengineering techniques that could be deployed to slow the rise in temperatures until the low-carbon economy can take hold.

  “Prudence demands that we consider what we might do if cuts in carbon dioxide emissions prove too little or too late to avoid unacceptable climate damage,” asserted climatologist Ken Caldeira in a 2008 roundtable on geoengineering in The Bulletin of the Atomic Scientists. What should we do? “We need a climate engineering research and development plan,” declared Caldeira. He added, “We cannot afford a new period of Lysenkoism and allow political correctness to pollute our scientific judgment. Scientific research and engineering development should be divorced from moral posturing and policy prescription.” The National Academy of Sciences released two reports in February 2015 endorsing research into geoengineering strategies that could be deployed to counteract man-made global warming. One is Climate Intervention: Reflecting Sunlight to Cool the Earth and the other is Climate Intervention: Carbon Dioxide Removal and Reliable Sequestration. The NAS reports argue that
both should be pursued.

  One proposal involves injecting sulfur particles into the stratosphere, where they would reflect sunlight back into space, thus cooling the planet. There has already been one recent natural experiment that proved this idea could work. In 1991, the Mount Pinatubo volcano in the Philippines cooled the planet when it blasted millions of tons of sulfur particles into the stratosphere; the particulates formed a global haze that lowered average temperatures by about 0.5°C for more than a year.

  Researchers and entrepreneurs at Intellectual Ventures have devised a “garden hose to the sky” method for cooling the planet. The firm, founded by polymath and former Microsoft executive Nathan Myhrvold, proposes to hoist an eighteen-mile hose using helium balloons attached every few hundred yards to pump liquefied sulfur dioxide into the stratosphere as a way to mimic the cooling produced by the Pinatubo eruption. The group estimates that setting up five sulfur injection base stations would cost a mere $150 million and cost $100 million per year to operate. If particular areas of the globe—say, the Arctic Ocean and Greenland—are warming up too fast, it might be possible to lower regional temperatures by this means.

  Another proposal involves marine cloud whitening, in which hundreds of ships cruise the world’s oceans spewing salt water as a mist into the atmosphere. The salt particles would function as cloud condensation nuclei, which would increase the extent and brightness of low level clouds over the oceans. These whitened clouds would reflect sunlight back into space, thus cooling the earth’s surface. By one estimate, a fleet of 284 ships spewing salt water into the air at a cost of $1 billion per year would offset about 0.6°C of warming. To reduce future temperatures by 1.9°C, 1,881 vessels would have to be deployed at a cost of $5.8 billion annually.