How Whac-A-Gas Ruins Everything and Why Only Carbon Pricing Can Fix It

Because this is a long (but peppy…absorbing…nay bewitching) post, here’s a synopsis:

There are a schmillion people addressing climate change in a schmillion ways, most of which won’t work without Carbon Pricing thanks to a horror I call Whac-a-Gas (if you don’t know what Carbon Pricing is, by Hera and Zeus and all the Gods of Olympus please keep reading). Climateers would be more effective if we briefly put aside our scattershot efforts and collectively pushed for Carbon Pricing. But beware: there’s smart Carbon Pricing and dumb Carbon Pricing, and you should know the difference or I’m coming after you with this:

Note: I discuss some caveats in a section at the end. Don’t give me any lip until you’ve read that part.

We begin with the following picture:

(click the pic to embiggen it)

It shows where our greenhouse gases come from. It’s misleading though, because it’s static, while reality changes. Carbon flows shift, grow, sometimes shrink, and the economy evolves. Keep this in your head for a minute.

Perhaps because the problem is so beastly, many Climateers focus on just one slice of the picture. Some are dedicated wholly to stopping deforestation, or making buildings efficient, or cutting transport emissions. I argue that this domain-specific effort is mostly wasted, not because it’s unnecessary, but because it won’t work without Carbon Pricing. Carbon Pricing means making the gassiest activities more expensive at once so that economies will move away from them – usually through a tax or by selling permits for the right to emit greenhouse gases. Without Carbon Pricing, something I call Whac-a-Gas gets in the way.

Whac-A-Gas refers to the way economies negate carbon cuts by shifting carbon flows. An example is the Keystone XL Pipeline. Many Climateers spent the last months trying to block it, and I agree it shouldn’t be built, but I don’t think fighting it will yield a good return on our effort. Why? Because blocking it may not limit emissions as we assume.

If the Pipeline’s blocked, TransCanada might instead build a line to Canada’s west coast (a contingency plan already in the works). In that case, Climateers’ efforts will have been wasted. There are other alternative plans besides, and any of one of them could neuter our efforts.

But imagine the best-case scenario, in which the oil stays put. Less oil will flow on the world market and it’ll cost more. If the story ended there then I’d go chain myself to a TransCanada front-loader, but it doesn’t because oil isn’t the only fossil fuel. As a result, with higher oil prices, some activity which would have been powered by oil will end up powered by coal, which is a potent contributor to climate change. Like electric cars: they’ll become more viable as gas prices rise, but much of the electricity to power them will come from coal. This substitution effect will at least partly cancel the effect of blocking the pipeline. Whac-A-Gas.

Another example of Whac-a-Gas is the Rebound Effect, which thwarts energy efficiency. It refers to our habit of doing more stuff as stuff gets more efficient. Example: a person who switches from a Hummer to a Prius might drive more miles because it costs less, and the extra driving cancels the benefit of efficiency.

An example from my own life: I bought an electric kettle, which boils water more efficiently than stovetop or microwave. But since it’s also faster, I not only make more tea now, but also warm up my drinking water because I like warm water (I know this is weird). I probably use more energy now than before I got the kettle. Damn that kettle to hell.

I could cite a slew of other examples, but they all amount to the same thing: when you discourage folks from doing one thing, they’ll do something else, which is probably also gassy. 

But even if there were no such thing as Whac-a-Gas, wouldn’t it make more sense to address all emissions at once, if possible, rather than focus one domain or another? If folks dedicated to, for example, greater building efficiency are 100% successful, they will only have fixed a sliver of the overall problem.

So these are the reasons Carbon Pricing is A-Number-One-First-Priority-Mission-Critical:

  1. It’s the only way to prevent Whac-a-Gas.
  2. It’s the only way to limit all emissions at once, by incentivizing the whole economy.

How does it do these things? Again, Carbon Pricing means making economic activities more expensive in proportion to their emissions, to make gassy activities less attractive. Since all activities will be covered at once, there won’t be wiggle room for Whac-a-Gas. Oil will be more expensive no matter which pipeline it comes from. Also, every sector of the economy will have an incentive to innovate and reduce emissions, which beats the limited efforts now driving attempts to address Climate Change.

But wait. It’s easy to foresee problems with Carbon Pricing. Specifically:

  1. Many activities create emissions – to price them all could be a bureaucratic Waterloo.
  2. Price hikes risk economic damage.

Praise be, there are ways to avoid these problems. First: how to avoid Waterloo?

It turns out that you don’t have to explicitly price every activity. The reason is that about 90% of all carbon emissions have their ultimate origin in just five activities:

Environmental economists call these “upstream activities.” If we raise their costs, the extra costs will be distributed to the rest of the economy as well (see the Caveats section below for more about how it will happen). The cost of downstream activities most reliant on the 5 upstream activities will rise relative to everything else, and the economy will shift away from them.

But that’s the easy problem. The hard problem is avoiding economic damage. A Dividend system can ensure that we do.

Government will collect extra cash through carbon pricing. Where should it go? In a dividend system, each citizen receives a monthly dividend check and that check should be the same for everyone (another option is to cut income taxes). Here’s the reason:

This is fake data I made up to show how the dividend works. Citizens are arranged on the X-axis according to how much extra each spends yearly due to Carbon Pricing. Each blue bar represents the extra cost to one citizen. Because our lifestyles aren’t all equally gassy, the extra costs are spread unevenly – folks with gassier lives pay more.

The height of the pink line is the value of a year’s worth of dividends for one person, it’s the same for everyone, and it’s set so that all the cash that goes in comes right back out. I’ve chosen a value of $100 because that’s the EPA’s best guess about what it should be (but a wide range of other numbers would also work). Folks on the right, where the blue bars are higher than the pink line, put more money into the system than they get out. They live the gassiest lives, and their extra costs will prompt some to change, so they can move to the left. Most are wealthy, so the extra costs won’t be crippling.

Where’s their money going? Answer: to folks on the left, where the pink line is higher than the blue bars. Those folks are less gassy than average and get more money out of the system than they put in as a reward.

(I know these pictures are dumb, but I’ve got a ten-year old trapped inside of me and even the prospect of environmental cataclysm won’t dissuade him)

You might ask: by giving the folks on the left more money, will we make them gassier? No, because relative prices change for everyone. No matter who you are, when you go to the store you see that the price of beef is up compared to chicken, for example. Everyone’s incentivized to change. Some will choose not to, and that’s good; we’ll create a net carbon reduction while preserving freedom of choice. We can adjust the size of the reduction by adjusting the price on carbon.

Getting back to the risk of economic damage, the key point is that the system doesn’t affect citizens’ net buying power because all the money they pay in goes right back to them. It’s just redistributed to create incentives.

The price can increase over years on a schedule, so we can prepare. This is key for folks in the upstream industries. Their businesses will shrink as less-gassy alternatives grow, and we must help them deal with it. This includes retraining programs and help for businesses to remake themselves. I can’t emphasize enough how important this is. We can’t treat folks in upstream industries as enemies. Change can be scary and they’re going to bear more of it than anyone else. They should be honored for it and helped, because a) our future hangs on their willingness to change; and b) it’s the right thing to do. We have experience providing this kind of help. For example we helped Tobacco farmers transition to other crops when we shrank the Tobacco industry. We’ll need to use what we learned there and improve on it.

Finally, note that the US has participated in pollution-pricing systems thrice before: for Lead in gasoline, Sulfur Dioxide from coal plants, and Chlorofluorocarbons to prevent ozone depletion. In each case, these systems were effective beyond expectations, because companies are profit machines and cost-cut like bosses. The arc of events was the same in each case: industry grumbled that pollution-pricing would be trouble, and then after it took effect they kicked ass and fixed the problem. We always underestimate ourselves. Now we’re healthier than we would have been without these systems and we’ve saved mountains of shekels on avoided-healthcare costs: the savings has been far greater than the setup cost in each case, according to the economists who study this stuff. Pricing carbon will be harder than all of these because it’s more pervasive, but if we do it right, it’ll work.

As Promised, Caveats

  1. Is it really that easy? No. The difficulty is the politics, which can have this effect: Carbon Pricing systems are now going live around the world (I count at least 14 at the moment) but they’re not always smartly done: sometimes big emitters successfully lobby for exemptions, sometimes governments don’t include dividends, or they may regulate downstream emitters instead of upstream ones. The only fix for that is for concerned citizens to push for unstupid policies. Important stuff is often hard but you press on anyway.
  2. What if upstream businesses can’t pass the extra costs on to their customers? Will the system still work? Sometimes businesses won’t be able to pass on the extra cost, as it should be. A business can’t pass on costs when it’ll lose customers by doing so, and that only happens when customers either have a cheaper alternative or the product isn’t important enough to them to justify the extra cost. In the first case, the alternatives will tend to be less gassy (or else their costs would have risen by the same amount), and in the second, it means that the product isn’t important enough to people to justify its carbon footprint. Either way the result will be lower emissions. But again, businesses that can’t pass on costs will suffer as alternatives thrive, and we have to be ready to help their people transition to other things.
  3. What about imports? Ideally, the whole world would collectively implement carbon pricing everywhere, but that’s unlikely for now, so what to do instead? A partial answer is import taxes: we impose taxes on imports from countries lacking Carbon Pricing systems. Because the US is a massive consumer, an import tax would give an advantage to countries that price carbon and pressure others to follow suit. It’s not a complete solution, but it should be said that no system for regulating carbon will avoid this problem unless it’s a worldwide system.
  4. What’s better? Cap and Trade or Tax? A difficult question. The arguments against a cap are that it’s more complicated and expensive to implement, it’s hard to install upstream, and it’s prone to loopholes (example: see the disastrous offset program in the EU’s cap and trade system). The arguments against a tax are that it’s untested, it’s politically harder, it’s not clear how high the tax should be, and it doesn’t give companies as much incentive to innovate, because it doesn’t allow them to profit by cutting emissions and selling unneeded permits like a cap system does. There other complications besides, too many to discuss here. I refer you to this article for a nice, multi-perspectived overview of the issue.
  5. Is it too late? Some scientists warn that we may already be past a climate tipping point condemning us to uncontrollable warming. See here for a hint that it might be happening. If so, then we should focus on adapting to climate change rather than preventing it, paying special attention to our food and water systems, which may be greatly compromised. I don’t know how to deal with this question. But note that carbon pricing will, beyond cutting carbon, stimulate energy diversification, which is a great and valuable thing in any case. Diversification will safeguard us against problems in the world energy market, which is especially important now with peak oil on the horizon. In practice, we have to work on prevention and adaptation at the same time to cover our bases, because we don’t know where we stand in relation to a tipping point.

 

Posted July 25, 2012 in Smashing Ideas | 11 Comments

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  1. mike says:

    Great article! Well written and well researched! It’ll put American ingenuity to work for us.

  2. Nick Bentley says:

    Many thanks. You’re terribly good looking.

  3. Judy says:

    I agree that choosing a single objective and directing all our energy (bad pun, I know) toward a single objective makes consummate sense. The thorn is the politics, though. If we can’t even get simple things done, how are we going to effect big change? The biggest hurdle seems to be that the electorate wants SIMPLE platitudes and is unwilling to grapple with complexity and nuance. Climate change will never to a simple issue, as your well-reasoned piece demonstrates all too well.

  4. Nick Bentley says:

    Right. it’s a complicated issue and there’s no way around it. Nonetheless I’d rather fight through that difficulty than fold, the stakes being what they are. Since, to me, not fighting amounts to abandoning my nephews (for example) to suffering later in life, the difficulty hardly matters. I don’t even care if it’s a lost cause. It’s more honorable (and a more interesting way to spend my time on Earth) to work at it than sit and wait for the worst. I take some solace in that social change can be very nonlinear. Things can seem bad one day and much better the next. It’s heartening to read about other unlikely and sudden changes for the better. For example, the Berlin Wall: do you know the story behind it’s fall? The reunification of Germany happened by accident. A low-level East German official said something in a radio broadcast which inadvertently suggested that East Germany would let some people through the partition, even though the East German government had no such plans and had no policy changes in the works. It got everyone excited and 24 hours later the wall was down. Nobody saw it coming. One similarity between the East German situation and ours is that there’s mammoth number of people who wish strongly for change who don’t act because they feel small and hopeless. It’s the kind of situation where the right spark of hope could get everyone on their feet and acting, and if that happens everything could change. So a central question for me is: how to convince people not to feel so small and hopeless?

  5. Linda Kenoyer says:

    Nice argument, Nick. Swell pictures, too. I like to giggle when I’m reading about truly depressing topics like stopping the runaway supertanker that is global carbon output. It keeps me sane. Or keeps me from going more insane.

    I have been arguing for a carbon tax for a long time. It is amazing how even my allies don’t ever hear it – it seems abstract to them. It will take a long time, and many impassioned essays like yours to get momentum going toward that. But I think you’re right, that at some point the spark will ignite the kindling, and then – watch out!

    In the meantime, I believe we have to keep plugging the holes in the dike where they appear. So I will fight the tar sands, I will fight mountaintop removal, and I will fight fracking and any other extreme energy production technique. Mostly because they are ALREADY outrageously expensive and would never have been considered back at a time when fossil fuels were cheaper and easier to get to. And once they’re online, there is a huge investment to recover, so they make the economic effect of taxes less. If we’re all junkies who can’t really afford a fix, so we rob and steal and plunder and do whatever it takes and spend whatever it costs to get our fix, then the cost can be passed on to us and we’ll just wreck our economies trying to pay it. So at some point maybe we need to stop new supplies, then talk to the junkies about rehab programs.

    And having something concrete and fight-able to fight works really well as a spark to get people committed to the fight for change. The battle over the Keystone XL pipeline has done that incredibly well. The sense of actually making a difference is hugely empowering and makes people willing to look around and say, “What can we do to actually stop the whole system of outrageous profit from fossil fuels?” And then maybe they will rise up for a carbon tax.

    So I don’t agree that we should not put our energy into those battles and only fight for carbon taxes. I think we have to put our energy into both, and channel the new energy that each individual battle brings in toward the end goal.

    And, by the way, where exactly to you see coal replacing oil? There is minimal use of oil to produce electricity in this country (less than 1% of oil use in the US is for electrical generation) and it is going down all the time. Are you talking about steam locomotives? Coal fired trucks? Coal-based plastics? I’m not sure where coal will replace oil. But that is splitting hairs. I’m with you on the tax. I just don’t trust simple one-off solutions.

  6. Matt says:

    Overall, some fantastic ideas. I’m so glad that you’ve embraced the idea of taking the taxes as far upstream as possible. Trust me, the market economy is the most efficient system you’ve discussed, and it will find a way to push prices downstream…quickly. But – as always – I have a couple nits to pick. I’m still not sure I see the value in your dividend proposal. You’re suggesting that we tax and redistribute, and I think there are issues there.

    One, you’re suggesting that we focus our efforts into a single point of remediation, but then that we collect and then simly give the money away. Apart from political considerations (which would prevent most of this anyway), why wouldn’t you want to use that capital to further develop green technology? Like the positive feedback loop we see in melting lichens, but less deadly.

    Two, I wonder where the majority of emissions can be traced downstream to; the rich or the poor? If it’s the poor, then your redistribution would have an effect. If it’s the rich, then it won’t matter. I have no data either way, just looking at possible holes.

    Also, how do you measure carbon consumption at a consumer level to create the ordered list? You create all kinds of personal liberty issues with a program like that (and we have enough of those issues already), to say nothing of enormous new government programs and inefficiencies. If you’re going to track consumption at a consumer level, why not just tax there? Have the expense at one end ot the other but not both.

    My suggestion would be a tax at the producer level in the form of the closure of existing loopholes. Shift those loopholes to greener technologies (they may already be there, but that gets way beyond what I know about tax code) and let the efficient market economy do its thing. The big players – those who actually have the capital to put real projects together – are already investing in those technologies, and will shift resources to those projects as it helps the corporate botton line.

    Finally, I think the above proposal supports a multi-pronged approach to fixing the problem. The government absolutely should not, cannot be in the business of picking the ‘right solution.’ This is where you’re spot on in advocating for a producer tax, but it needs to be used to level the playing field, or tilt it toward lower-emission technologies. Letting the market work efficiently will result in a multiplicity of solutions, but that will get you the best solution in the end. Competition picks winners most of the time. Ok, betamax was a better format, but you get the picture.

  7. Nick Bentley says:

    @Matt lots of interesting points and questions.

    Giving the revenues back to citizens vs tech investing. There’s definitely an argument to be made for the cleantech investment. My preference for the dividend remains because I’m worried about what the policy will do to the underpriveledged. Australia may offer a good model: in their new carbon pricing system half the proceeds go back to the citizens (mostly to the poor) and the other half goes to cleantech, infrastructure, etc. Here’s a nice 2 minute video summarizing the Australian system.

    Another reason for preferring the dividend is that it may help to make the political case more palatable to those who worry about the problems of government overreach and tax hikes. Also the dividend idea originated on the right (just like much of the carbon pricing stuff) and there may be some residual sympathy for it as a result (but point taken about the political difficulty – it doesn’t seem feasible now – but there’s building international pressure for these systems and a bunch are going up in other countries right now)

    Next issue: as I understand it, the rich are responsible disproportionately for emissions (though this is just something I read without serious investigation, so could be wrong), for three primary reasons: they live in big houses, fly frequently, and buy lots of stuff. Your point that if the rich are the ones carrying the extra burden, they may just decide to carry it, seems a legitimate issue. Two thoughts about how the problem may be avoided:

    1. the price can always be raised until the wealthy decide to shed cost, so long as there is at least some dividend to insulate the poor (well, in theory – the politics rears it’s head here again)

    2. because the price will be set upstream, business may end up making many of the necessary changes, even if wealthy individuals don’t change their behavior, because businesses will be competing with a new group of green competitors who have become cost competitive. I don’t know how far that goes, but maybe some distance.

    About the ordered list: it was just a hypothetical example to illustrate pictorially how the dividend works. In the real system you wouldn’t actually track anything about individual citizens (for the record, I used an power law distribution in my hypothetical example because a carbon economist told me that that’s what it would be, but the distribution needn’t be that for the system to work. The only plausible cost distribution that wouldn’t work is a uniform one, but that’s for sure wouldn’t be the case.)

    Mostly it sounds like we’re in agreement about the general principle: letting the market do its thing under a new set of pressures is the way to go. Yes?

    Although it occurs to me that I don’t even know if you think Climate Change is a serious enough problem that such an ambitious program is warranted. Comment?

    Did I miss anything?

  8. Matt H says:

    I think you and I are fairly close on the seriousness of the situation, Nick, but I tend to take a somewhat more cynical view of the needed remedies. Market-based reforms are the only medium-term solution, but they’re not going to move the needle in any meaningful way over the long term (which for me means in the range of several hundred years). But candidly, I believe we may have already crossed an event horizon on climate change, and there’s really not much to do but drive the car right into the wall force changes. In the same way human nature dictates that we won’t fix our economy until we have a real, legitimate crisis to force action, we won’t do a thing about climate change until it kills a bunch of us or significantly changes our day-to-day lives. And by us I mean Americans – we’re not going to take our blinders off any time soon. There are far more ants than grasshoppers, and we’ll need a real winter to spur any legitimate action.

  9. Nick Bentley says:

    “But candidly, I believe we may have already crossed an event horizon on climate change, and there’s really not much to do but drive the car right into the wall force changes.”

    This thought rattles around in my head always. I’m committed to working on climate change, but do I get involved in setting the stage for adaptation, or do I remain focused on efforts at mitigation? If mitigation is still possible, this seems the more important effort, but I don’t know if it’s still possible. I don’t even have a guess. At some point I’ll switch and that moment is drawing nigh.

    [EDIT] here’s some really strong support for your point.

  10. Bart R says:

    Gents, not to worry about the one wall, but the many walls thereafter.

    For one thing, we don’t know the number, rank or order of the walls, or how they may set dominoes tumbling.

    To say it more plainly, every possible outcome of raising CO2E is a Risk with an associated and generally unknowable probability, sometimes acting as a step function (with a tipping point), sometimes with a pain threshold, but always at least with a diminishing return curve.

    There are countless such negative outcomes, and a mingling of benefits — neither of which most of us have considered nor consented to nor been asked, nor offered compensation.

    So Carbon Pricing in the Fee & Dividend proposal is simply a fairness and equity argument. Well, not simply, but at its core.

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