Energy and Climate Policy | Council on Foreign Relations

Climate Change

The Total Cost of Climate Policy Isn’t What Matters Most

The Intergovernmental Panel on Climate Change (IPCC) is out with its synthesis report and the coverage, beyond warning of the consequences from unfettered emissions, has emphasized that tackling the problem would shave only 0.06 percentage points off annual global growth. That’s almost certainly wrong – realistic models would predict higher figures – but, when it comes to the cost of climate policy, not what really matters. The problem with the models is that they assume idealized climate policies. Countries encourage emissions reductions through efficient carbon taxes and well-functioning cap-and-trade systems rather than by using hodgepodges of costlier and more opaque regulations, mandates, subsidies, and tax measures that would make Rube Goldberg blush. But it’s these messy policies that characterize the actual world. A colleague of mine once summed up the essence of climate policy by asking: “How much will people pay to not know how much they’re paying?”. The answer appears to be a lot – which means that climate policy is likely to be costlier than IPCC estimates. And that’s just the domestic policy problem. The models imagine that global emissions reductions are pursued (PDF) wherever they’re cheapest – which happens to be predominantly in the developing world – rather than in the wealthy countries where they’re most politically practical. In principle, rich countries could pay massive sums for emissions cuts in poor ones, squaring economic efficiency with capacity to pay. That used to be the focus of international climate talks. But that has its own forbidding political barriers, which is why, rhetoric aside, today’s global climate talks essentially focus elsewhere. One upshot is that real-world climate policy is likely to feature emissions cuts in countries where they are relatively costlier than where the models assume rational policymakers would select. That’s all bad news, but it isn’t as devastating as it might seem at first blush. Suppose that curbing climate change is twice as expensive as the IPCC projects. By fifty years from now that would amount to a loss of six percent of annual output. This is a massive sum of money but less than two years of global growth. The real thing that matters about the cost of climate policy isn’t its aggregate impact – it’s how it affects individuals, groups, and countries. No country lives the global average GDP and no person lives their country’s average economic performance. Climate policy could be costless on average, and various individuals and groups would still be big winners and losers. Their support for the policies necessary to curb emissions will hinge not on average outcomes but on how climate policy affects them. Think about trade. Well-designed trade agreements benefit both the world and individual countries on average. But that’s politically near-irrelevant: what matters is that there are lots of big winners and losers that the averages wipe out. In the face of unfounded claims that serious climate policy will inevitably exact crippling economic costs, it’s understandable for advocates and analysts to push back with arguments that the macroeconomic costs of climate policy are much smaller. They shouldn’t forget, though, that keeping costs anywhere close to the IPCC estimates requires a commitment to sensible policies, and that getting the political economy of the whole thing right is an entirely different challenge.

Blog Post by Michael Levi November 3, 2014 Energy, Security, and Climate
Climate Change

New Nobel Economics Winner Jean Tirole on Energy, Climate, and Environment

Jean Tirole was awarded the Nobel Memorial Prize in Economic Sciences today “for his analysis of market power and regulation”. It shouldn’t come as a surprise, then, that he’s written a lot about energy, climate change, and environmental issues. Here’s a quick selection of his relevant papers. I’d like to try an experiment: Lots of this blog’s readers are experts in the areas covered by these papers. I invite you to read a paper from this list and either summarize or riff on it in the comments, so that everyone who reads this can benefit. Climate Change “Some Economics of Global Warming” “Some Political Economy of Global Warming” “Regional Initiatives and Cost of Delaying Binding Climate Change Agreements” “Climate change negotiations: Time to reconsider” Environment “Pollution Permits and Environmental Innovation” “Pollution Permits and Compliance Strategies” (paywall) “Environmental policy, compliance, and innovation” (paywall) “From Pigou to Extended Liability: On the Optimal Taxation of Externalities under Imperfect Financial Markets” Electricity “Reliability and Competitive Electricity Markets” “Retail Electricity Competition” “Merchant Transmission Investment” “Transmission rights and market power on electric power networks I: Financial Rights” “Transmission rights and market power on electric power networks II: Physical Rights”

Blog Post by Michael Levi October 13, 2014 Energy, Security, and Climate
United States

Energy Secretary Ernest Moniz on U.S. Energy Policy

U.S. Energy Secretary Ernest Moniz joins Matthew Winkler, editor in chief at Bloomberg News, to discuss the "all-of-the-above" energy strategy of the United States.

Event with Ernest Moniz and Matthew A. Winkler October 6, 2014

United States

Energy Secretary Ernest Moniz on U.S. Energy Policy

Ernest Moniz, secretary at the U.S. Department of Energy, joins Matthew Winkler, editor in chief at Bloomberg News, to discuss the "all-of-the-above" energy strategy of the United States.

Event October 6, 2014
Energy and Climate Policy

U.S. Energy Exports

Calls for lifting U.S. controls on energy exports are mounting as production nears a forty-five-year high.

Backgrounder by Mohammed Aly Sergie September 30, 2014
China

Climate Change: What Is China Doing and Not Doing?

Chinese Vice Premier Zhang Gaoli made news on Tuesday with his speech on climate change at the United Nations. My colleague and co-author Elizabeth Economy has an enlightening post on her blog, Asia Unbound, drilling down on the headlines. I’ve reposted it here. At the UN Climate Summit this week in New York, Chinese Vice Premier Zhang Gaoli said it all: “China will make greater effort to more effectively address climate change;” announce further actions “as soon as we can;” and achieve “the peaking of total carbon dioxide emissions as early as possible.” According to one Western environmental NGO official, “China’s remarks at the Climate Summit go further than ever before. Vice Premier Zhang Gaoli’s announcements to strive to peak emissions ‘as early as possible’ is a welcome signal for the cooperative action we need for the Paris Agreement.” Other media outlets trumpeted: “China pledges to cut emissions at UN climate summit” and “China shifts stance on climate change.” Really? In the face of such facts as China now emits more tonnes of carbon than the United States and European Union combined (not surprising since it consumes more coal than the entire world put together and its population is greater than that of the United States and EU combined) and, more surprisingly and less understandably, posts higher per capita emissions than the EU, Zhang’s statement seems to be an understatement. Indeed, it amounts to little more than Beijing will do as much as it can whenever it can, without providing any indication of what or when that might be. As Diplomat writer Shannon Tiezzi has noted, China’s biggest actual commitment was to pledge $6 million to promote south-south cooperation on climate change, by any measure a drop in the bucket. How is it that such a vague statement of intent can provoke such positive assessments? Without delving into the reasons that some observers are prone to jump the gun when it comes to applauding China for statements of intent as opposed to observable measures, the real question is whether there are any facts to back up such an optimistic outlook for China’s contribution to meeting the global climate change challenge. There are indeed some positive signs. As journalist Matt Sheehan has pointed out, both Chinese coal imports and consumption dropped for the first time in a decade, and the country continues to increase the weight of nuclear, solar, wind, and natural gas in the country’s energy mix. The bad news is it isn’t clear whether the drop in coal is primarily from environmental measures to reduce coal consumption domestically (from setting coal caps and deploying tough new fines for coal miners that exceed national production levels) or from slowing Chinese economic growth; if the latter, coal consumption may well rebound if and when the Chinese economy does. Moreover, as Sheehan has reported, the drop in consumption was so slight that some analysts are reluctant to attribute any staying power to it. Also, as China shuts down power plants and coal mining in the eastern provinces, they are planning to move the plants and mines to the country’s western regions. Thus, while some of China’s major coal-related initiatives will do much to improve domestic air pollution in the coastal provinces, they won’t produce the same benefits for climate change. More good news can be found in China’s efforts to launch a carbon trading exchange in four major cities and two provinces. In fact, Beijing has pledged that it will have a national emissions trading scheme twice the size that of the EU by 2020. Yet as a Stockholm Environment Institute study of China’s carbon emission trading plans detailed in 2012, many obstacles to a well-functioning system remain: measuring emissions more accurately, a legal infrastructure with clearly defined emission rights, permit allocation systems, trading rules, monitoring, and enforcement and accountability. The authors ask the fundamental question: “whether a carbon trading scheme—meant to be a strong market-based instrument—can function well without a mature free market economy.” Or as Australian National University climate expert Frank Jotzo has noted in reference to the Chinese system, “…an emissions trading scheme will be effective only if markets are allowed to work.” Already, concerns have been raised about the functioning of the pilot trading systems. Transparency over historic emissions data on which caps are based; the number of allowances granted; and even the names of companies getting the allowances are not always clear. As one carbon trading expert commented to the Financial Times about China’s carbon market: “It’s a black hole.” Given the opacity and the complexity of China’s political economy, it is impossible to draw a straight line from Zhang Gaoli’s relatively weak call to climate action and anything that is occurring on the ground in China today. There are three stages to understanding Chinese policy on climate change—or on anything else for that matter: statement of intent, policy design, and policy implementation. The important thing to remember, however, is that in the end, only the last matters. - Elizabeth Economy

Blog Post by Michael Levi September 25, 2014 Energy, Security, and Climate

France

French Foreign Minister Fabius Looks Ahead to a Universal Climate Agreement in Paris, 2015

French Foreign Affairs Minister Laurent Fabius joins Daniel H. Yergin, vice chairman of IHS Cambridge Energy Research Associates, to discuss climate change negotiations and the United Nations Climate Change Conference in Paris in 2015.

Event with Daniel H. Yergin and Laurent Fabius September 22, 2014
France

French Foreign Minister Fabius Looks Ahead to a Universal Climate Agreement in Paris, 2015

French Foreign Affairs Minister Laurent Fabius joins Daniel H. Yergin, vice chairman of IHS Cambridge Energy Research Associates, to discuss climate change negotiations and the United Nations Climate Change Conference in Paris in 2015.

Event September 22, 2014
Fossil Fuels

How to Make Fuel Subsidy Reform Succeed

Fossil fuel subsidies are a global scourge. They distort markets, strain government budgets, encourage overconsumption, foster corruption, and harm the environment while doing little to remedy inequality or stimulate development. Yet despite compelling arguments for reform, fossil fuel subsidies remain deeply entrenched. Citizens have yet to be convinced that fuel subsidies can and should be replaced with more efficient poverty alleviation programs. As a result, governments refrain from phasing out fuel subsidies for fear of triggering a public backlash, and even civil unrest. To bolster the prospects for subsidy reform, the United States should support the creation of a new public-private partnership within the World Bank, the Global Subsidy Elimination Campaign (GSEC), to work with governments to execute country-specific communication programs that would build the case for fossil fuel subsidy reform among citizens. The GSEC would start with pilot programs in select countries, and on the basis of these efforts, expand its work to other countries interested in fuel subsidy reform. If the GSEC helps generate just a 5 percent reduction in the more than half a trillion dollars that governments now spend on fossil fuel subsidies, it would free up billions of dollars for more effective anti-poverty initiatives. Subsidies Undermine Development Fuel subsidies impose a particularly significant fiscal toll on developing countries. Uzbekistan, the world's heaviest fuel subsidizer, spends 25 percent of its gross domestic production (GDP) on fossil fuel subsidies, seven times more than on health and education combined. Fuel subsidies are particularly burdensome in the Middle East and North Africa (MENA) region, which accounts for half of all fuel subsidy spending. Yemen, for example, spends 6 percent of its GDP on fuel subsidies, more than its budget for much-needed infrastructure and social spending. Egypt spends over 10 percent of its GDP on fossil fuel subsidies, contributing significantly to the country's budget problems. Subsidies stretch limited state budgets in developing countries, inhibiting governments' abilities to invest in development and growth. Fuel subsidies also inadequately address inequality. Touted as poverty-alleviation mechanisms, fuel subsidies primarily benefit middle- and upper-income groups. The richest 20 percent of households in low- and middle-income countries use six times more subsidized fuel than the poorest 20 percent. Why Technical Expertise Is Not Enough Some governments and international organizations have made fuel subsidy reform a priority. Yet, cases of failed attempts continue to outweigh success stories. One of the main barriers to reform is lack of public awareness about the costs of fuel subsidies. A 2012 World Bank study found that 70 percent of the population in Morocco did not know their fuel was subsidized. Without understanding how much their government spends to subsidize fuel, citizens are unlikely to agree to replace them with better alternatives such as cash transfers, which are widely recognized as far more efficient and effective at poverty alleviation. Instead, they will only see the elimination of a tangible good (lower-cost energy). The public needs to be convinced of the near-term benefit of more targeted income support for the poor and the longer-term benefit for all of additional government resources for productive investments. In Indonesia, Yemen, Egypt, and Nigeria, public resistance and mass protests at the prospect of subsidy removal have alarmed leaders and encouraged policymakers to abandon reform efforts. Without public support, leaders cannot implement the subsidy reforms they know are critical. International organizations—the World Bank and International Monetary Fund (IMF) in particular—have impressive expertise on subsidy reform and have helped countries to evaluate existing subsidies and craft policies to shift to better alternatives. As the few success stories demonstrate, subsidy reform hinges on an effective communications strategy that builds domestic support by clearly articulating the goals and benefits of reform. Iran, which reformed its subsidy program in 2010, conducted a broad public relations campaign before the reforms took effect to explain their purpose, how people would be compensated for higher energy prices, and the benefits to the country. Ghana's efforts to phase out fuel subsidies were helped by commissioning and publicizing an independent assessment that showed poor people would benefit from the elimination of fuel subsidies. Going Directly to the People Although such success stories are heartening, too few governments recognize the value of laying the groundwork for reform by communicating with citizens about the costs of existing programs and the benefits of alternatives. And there is no place for them to turn for a full-service solution that combines technical expertise with marketing capabilities. The GSEC would fill that gap by developing the following initiatives: Public awareness campaigns targeted to specific markets in conjunction with local media, marketing experts, and government officials. Such campaigns would communicate information about the negative consequences of fuel subsidies including: exacerbating income inequality, consuming a large portion of the national budget, contributing to corruption, and undermining the environment and public health. The campaign would also underscore how subsidies constrain a government's ability to make important investments in human capital and social safety nets. It would leverage research conducted by local governments, nongovernmental organizations (NGOs), the World Bank, and the IMF on who benefits and who loses from fuel subsidies. If credible research does not exist, it would commission it from an independent third party. A communications campaign that informs citizens of the advantages of replacing subsidies with more effective alternatives such as cash transfers to the poor and a targeted social welfare mechanism that reaches societies' neediest with far greater efficiency and lower corruption. Informing citizens of alternatives creates the conditions for a viable bargain: citizens will support subsidy reform if governments commit to replacing them with tangible alternative benefits. In Iran, this was a cash transfer; in Ghana, the government raised the daily minimum wage and eliminated school fees. The campaign would disseminate information through radio, television, print, text messages, and social networks. Technical solutions for implementing alternatives to subsides such as cash transfers. The World Bank is already implementing mobile money and smart card payment systems, but the GSEC could help tailor such applications as specific end-to-end replacements for fuel subsidies. The Global Subsidy Elimination Campaign would be beneficial for several reasons. Working in cooperation with local and international marketing agencies, it would leverage best practices from different country cases to devise innovative public-awareness campaigns. Being housed at the World Bank with its own board and budget (following a model similar to that of the Consultative Group to Assist the Poor), the GSEC would have access to the Bank's considerable research capabilities while being able to act nimbly and independently. For example, the partnership could take an active role on subsidy reform, in countries where the issue has not been a focus of the World Bank. The GSEC would also push the World Bank itself to prioritize subsidy reform. Over time, its marketing campaigns could be instigated by the World Bank in consultation with client governments or commissioned on a fee-for-service basis by wealthy countries. The GSEC should be seeded with an initial budget of $100 million over three years: 10 percent allocated to finance internal operations and 90 percent to develop messaging and purchase media in three countries that agree to work with the GSEC as demonstration cases. Countries should be selected based on the relative magnitude of their subsidy problem and their willingness to implement a sound reform program. Yemen and Egypt are possible candidates. Yemen has begun to chip away at fuel subsidies that currently account for about 20 percent of government spending. Prospects for reform there will be enhanced by a well-communicated program that commits the government to reallocate savings to productive infrastructure investments and poverty alleviation programs; subsidy reform is also critical to relieving Egypt's fiscal crisis and freeing up funds for health and education spending. Nigeria, which abandoned a fuel price hike in January 2012 that it implemented with almost no prior communication and only vague promises of investing more in infrastructure, is another candidate. Subsidy reform will not succeed there unless the government is able to build trust that consumers will be compensated for higher energy prices. Spending $30 million in each of these markets on sophisticated, targeted media—including billboards, community radio, text messaging, and social media—would raise awareness that can be measured and evaluated through public opinion polls. Based on results, GSEC's work could expand to countries undergoing reform, which stand to benefit from a campaign that galvanizes support and decreases public hostility, and to those with an interest in undertaking reform, which would benefit from a campaign that lays the foundation for future policy. The United States should jump-start the establishment of the GSEC by providing half its initial funding, with a challenge to raise the remaining half from others interested in the enormous potential of fuel subsidy reform. Such donors—including other countries, NGOs, the World Bank itself, and private foundations—should be motivated by an interest in poverty reduction and economic development, environmental concerns, and strategic considerations. Host countries should be required to contribute at least 10 percent of their specific marketing campaigns as buy-in to the process. Conclusion The success of efforts to curtail fuel subsidies is strategically important to the United States: geopolitically critical countries such as Yemen and Egypt will not see robust economic growth and political stability in the absence of successful fuel subsidy reform. The GSEC could play a pivotal role in communicating the harms of fuel subsidies and building support for shifting to more equitable and productive alternatives. Of course, public awareness campaigns will work only if matched by credible government action to replace subsidies with other, more effective investments, such as targeted cash transfers and productive health and education spending. But the potential upside of fossil fuel subsidy reform is so significant that it demands the funding of the GSEC concept.

Policy Innovation Memorandum by Isobel Coleman August 11, 2014
United States

Fracking Revolution Transforming the Global Energy Landscape

Increased petroleum production in the United States, fueled largely by recent technological advances in hydraulic fracturing and horizontal drilling, has had a profound effect on the U.S. economy and global energy markets. CFR's Robert D. Blackwill sits down with Admiral Dennis C. Blair and former BP CEO John Browne to outline both the economic and geopolitcal implications of the current U.S. energy boom.

Event with Robert D. Blackwill March 3, 2014
United States

Fracking Revolution Transforming the Global Energy Landscape

Increased petroleum production in the United States, fueled largely by recent technological advances in hydraulic fracturing and horizontal drilling, has had a profound effect on the U.S. economy and global energy markets. CFR's Robert Blackwill sits down with Admiral Dennis Blair and former BP CEO John Browne to outline both the economic and geopolitcal implications of the current U.S. energy boom.

Event March 3, 2014
China

Is China’s Resource Strategy Changing Radically?

“China’s leading think tank has outlined a revamped energy strategy,” Xinhua reports today, highlighting a long article published yesterday in People’s Daily. This comes on the heels of a wonderfully titled FT article – “China scythes grain self-sufficiency policy” – claiming that China has given up on its long-standing goal of producing its own food. Chinese resource strategy, it seems, is changing rapidly and radically. But is it really? In a new book published last week, my colleague Elizabeth Economy and I tackle the full sweep of China’s resource quest, from energy and minerals to food and land. By All Means Necessary: How China’s Resource Quest is Changing the World explores the roots of Chinese strategy and its consequences for trade, investment, governance, politics, and security. Two themes that bear on this week’s news emerge: Chinese strategy has deep roots at home that make change slow to unfold – but, as China pursues its resource quest, it is indeed learning and changing. Take the article by Li Wei outlining a new energy strategy. The first thing to note is that this is just one view, albeit from a powerful perch, that feeds into the usual messy process of formulating policy. Western reporting too often assumes that any publication from a prominent government or government-connected Chinese official is effectively law. That’s wrong: China may not have the open politics that the United States does, but there’s still a lot of diversity within the ranks, and any changes that are advocated are sure to be fought over before they’re pursued. The reporting on grain self sufficiency – which is about a new policy rather than a mere study – reflects the slow-to-change nature of Chinese strategy in another way. The actual changes the FT reports are far less revolutionary than the paper’s headline suggests. Chinese leaders appear to remain fixed on self-sufficiency in grain – a goal that, we show in the book, goes back hundreds of years – but are adjusting the way they define that. Is ninety-five percent self-sufficiency enough for security? Eighty-percent? Those are the sorts of evolutionary rather than revolutionary questions that Chinese leaders are grappling with as they confront the reality of feeding a billion people in the face of myriad pressures on Chinese land. The new energy study reflects gradual Chinese change in another way. A decade ago one expected to see “going out” – investing in upstream energy resources abroad – at the heart of most prominent Chinese writing on energy strategy. But there’s essentially no mention of “going out” in the new paper published today. (I’m hedging my bets because I’m using Google Translate so can’t be completely sure; I’d welcome any pointers either way from people who read Chinese on whether there’s mention of outward upstream investment in the study.) Many Chinese strategists have learned over time that overseas upstream investment doesn’t result in security of Chinese energy supplies. This study isn’t the first to reflect that – and the evolved view isn’t universally shared – but it appears to be another piece of evidence that Chinese leaders are learning from experience and becoming more comfortable with markets. Therein is perhaps the biggest lesson from the two reports. It’s the collision of two forces– the deep political, historical, and institutional roots of Chinese strategy at home, juxtaposed with the learning and evolution that happens through experience, good and bad – that has and will continue to shape Chinese resource strategy. Looking at just one while ignoring the other will invariably lead to a distorted view.

Blog Post by Michael Levi February 13, 2014 Energy, Security, and Climate
Fossil Fuels

Energy, Industry, and the Countryside

I’ve argued frequently that shale gas and tight oil development can be done safely, given the right practices and the right rules to ensure that those are followed. Over the past month, as I’ve traveled and talked to people about The Power Surge, I’ve heard one powerful countervailing sentiment several times: Even if fracking is done right, aren’t we talking about the industrialization of the countryside? And is that really something we should accept? That line of thinking makes me wary for a couple of reasons. But there’s a third way in which it’s compelling -- and that points to some gaps in our knowledge that are overdue for serious attention. The first problem with the “industrialization of the countryside” line is that much of the countryside where development is happening is already industrialized. In some cases, we aren’t talking about countryside at all: on the outskirts of Pittsburgh, for example, we are really talking about the industrialization of exurbia. In other cases, the countryside is already industrialized by factory farming and ranching that bears little resemblance to the pastoral ideal that people fear fracking will wipe out. To be clear, not all cases fall in one of these categories, but many do. My second source of skepticism has to do with who “we” are. There is something unsettling about relatively wealthy city dwellers (who live in the most industrialized former countryside in the country) insisting that “we” preserve the countryside without (in many if not most cases) much regard for the people who actually live there. A lot of the land that’s being developed for shale gas and tight oil is in places that have experienced economic decay for decades. Farms are underwater; towns are blighted by the decline of traditional industry and an accompanying rise in drugs and crime. Many people in these areas want to allow shale gas and tight oil development. It seems offensive for prosperous elites debating policy from afar to insist that they remain in glorious poverty so that we can experience vistas unmarred by rigs and roads unspoiled by trucks when we take our vacations. But one can sensibly turn that argument around: Shouldn’t people in areas potentially affected by development also be able to say no if they’d rather leave things as-is? Why should my and others’ concerns about climate change or national security or U.S. economic growth trump their worries about the transformation of their communities? My strong inclination is to say that they shouldn’t – that communities should indeed have a lot of control. What that would mean, in practice, is something along the lines of what Governor Cuomo floated a while back for New York State: communities could opt in or out of development with a certain threshold vote. Many in industry have argued that such a scheme would kill development not only in places that said “no” but more broadly: by creating a messy and unpredictable checkerboard of areas on and off limits to development, it would wreck the industry’s economics, stopping development. Indeed there might be something unjust in allowing one community to effectively deny an economic opportunity to its neighbors through its own parochial decisions. It seems to me that resolving this requires thinking carefully about scale. At some scale a “checkerboard” is clearly fine: no one is warning that the moratorium in New York has endangered development in Pennsylvania. There may be another extreme at which intensely dotting the map with off-limits areas makes even most technically in-bounds areas uneconomic to develop. This should all be at least somewhat amenable to technical analysis. How would a checkerboard of bans and approvals at the township level actually affect the economics of development? What about at the county level? Is there another geographic scale that would allow people some degree of control over what happens in their communities without giving them effective veto power over development in others? Some will say, of course, that no bans or moratoria are appropriate, on more fundamental grounds: people who own private mineral rights should be allowed to do with them what they will. But communities restrict peoples’ ability to exercise their private property rights all the time without much objection: it’s called zoning. The typical farmer isn’t allowed to build a multiplex or a casino on his property; it’s not crazy to imagine his community deciding that he can’t drill oil or gas wells either. In the end, striking the right balance on these sorts of matters is going to be as important to managing shale gas and tight oil production as traditional air and water issues will be. Ultimately, this is for the political process to sort out, not for technocrats (or analysts) to pronounce definitively on. But some more analysis could certainly help.

Blog Post by Michael Levi July 17, 2013 Energy, Security, and Climate
Europe and Eurasia

Cap-and-Trade is Faltering in Europe, But the Problem Isn’t What You Think It Is

The last couple weeks have seen a steady stream of news articles heralding the near-death of Europe’s cap-and-trade system. The basic story is straightforward. After the European Parliament declined to effectively tighten the emissions cap in the continent’s Emissions Trading System (ETS), prices for emissions permits plunged. Since high permit prices are required to drive serious energy-system transformation, many people have concluded that the ETS – and by association cap-and-trade more broadly – is bust. Some analysts have responded by pointing out that low prices don’t signify failure per se. They’re correct up to a point. The goal of a cap-and-trade system is supposed to be to drive emissions down to preset levels at the lowest possible cost. If achieving those goals turns out not to require much effort, then carbon prices are supposed to fall, signaling to the energy system that it ought not work too hard. That’s what’s happened in Europe: a weak economy has reduced emissions already; the cap-and-trade market is telling power producers not to push too much more. Indeed this is a great feature of cap-and-trade, because it makes the system countercyclical, lowering costs when the economy is it its weakest. But this analysis alone shouldn’t be satisfactory. The European experience is revealing (or, depending on your previous beliefs, reinforcing) a basic problem with cap-and-trade. The problem underlying the European predicament is that politicians apparently don’t want to do all that much about climate change, at least not if they’re going to pay a price with voters. Alas cap-and-trade makes climate-change curbing effort highly visible: the more you’re trying, the higher the price of permits is, and the higher electricity prices rise as a result. Roger Pielke has pointed out repeatedly that consumers really don’t like this sort of thing. And as David Victor has argued, that makes politicians inclined to pursue policies whose costs are hidden rather than clear. The current experience with the ETS gives both of their arguments some reinforcement. The fundamental problem in Europe right now isn’t that cap-and-trade is a technically flawed mechanism; it’s that politicians don’t want to act strongly on climate change. And the fact that acting strongly through cap-and-trade is likely to inflame political opposition means that the centrality of the ETS to European policy doesn’t help if implementing an ambitious policy is your goal. Would the same thing that’s happening in Europe have happened had cap-and-trade been implemented in the United States? The Waxman-Markey bill mandated a 3 percent emissions cut from 2005 levels by 2012; that would have been met with a zero carbon price. And it is extremely unlikely that U.S. policymakers would have stepped into push up carbon prices. In principle, though, this would have been mitigated by two features of the U.S. system: a long time horizon (targets were set through 2050) and permit banking that should have created an incentive to hoard permits today for use later, pushing up near-term carbon prices and driving near-term investments. Whether that dynamic would have actually happened the way I’ve described would have depended strongly on how credible people thought that system was; any threat that it would be weakened or scrapped would have reduced the incentive to hoard and kept carbon prices low. What should all this teach us? One thing it should do is reinforce that a serious and transparent carbon price may be much tougher to pursue that clumsy and less cost-effective carbon policies. It also suggests, though, that in crafting a carbon policy, it may make sense to make lots of the tough decisions at once -- a la Waxman-Markey with its targets through 2050 -- rather than forcing politicians to repeatedly do things that voters dislike (e.g. tighten or extend emissions targets, as the European scheme ultimately requires). Alas these two lessons work against each other, since forcing larger numbers of difficult decisions to be made up front makes a policy less likely to be adopted in the first place. All of this suggests that, if we’re going to get serious about climate change, it will likely take considerably more than just carbon pricing in order to succeed.

Blog Post by Michael Levi May 6, 2013 Energy, Security, and Climate
Trade

Energy and Climate Issues Awaiting Mike Froman at USTR

With Mike Froman nominated to become U.S. Trade Representative (USTR), change in how the White House handles international energy is sure to follow. But Froman won’t be able to leave energy or climate behind as he moves across the street. I see at least five areas in the offing where the USTR is going to be drawn into energy and climate. Clean energy trade. The United States has adopted a strong stance against others’ restrictions against clean energy trade and investment. Most recently, it challenged local content requirements in India’s solar program. Several colleagues and I wrote a couple years ago about the pitfalls of taking too hard a line here: there’s a delicate balancing act to be played between capturing the benefits of open trade and letting countries create the political conditions required to boost clean energy use. Natural gas exports. This is Department of Energy territory: a host of companies have applied for permission to freely export natural gas, and DOE will say yes or no. But if permit applications start being rejected, there’s a real potential for WTO lawsuits against the United States, which would land the issue over at USTR. In any case, one can only hope that USTR will be involved up front, since a decision against exports would have broader reverberations for U.S. trade relationships. Carbon tariffs and U.S.-EU trade talks. Americans who have only focused on climate change in the last few years might be forgiven for believing that carbon tariffs are something that Congress considered using in conjunction with a cap-and-trade scheme to make sure that China wouldn’t get an unfair competitive advantage. But the idea originated more prominently in Brussels and Paris around 2008 as a way to protect Europe against the United States, and to prod Washington to impose its own carbon pricing. I wouldn’t be surprised to see this come back, perhaps in the context of ongoing U.S.-EU trade talks, which will undoubtedly see some in Europe ask for measures to make sure the United States doesn’t get an unfair edge. More natural gas exports – and the TPP. Japan is set to join talks on the Trans-Pacific Partnership (TPP) trade agreement. If you’ve visited Tokyo recently, there’s a decent chance you’ve been asked whether joining TPP would give Japan special access to U.S. exports of LNG. While decisions on applications to export LNG to countries with which the United States doesn’t have special free trade agreements is housed at the DOE, a decision on whether to give Japan special access as part of a trade deal will need to run through USTR. Europe’s aviation scheme. European efforts to expansively include foreign airlines in its Emissions Trading Scheme didn’t go down well in most of the world. Ongoing negotiations are aiming to find an alternative approach agreeable to all the major players. Froman and Todd Stern (at State) have been leading this for the United States. I have a tough time believing that a move to USTR will leave him less involved. Wildcards? Oil exports (again, not a USTR decision, but with consequences for trade relationships), potential NAFTA fallout from a Keystone XL decision, border adjustment measures accompanying a (highly unlikely) U.S. carbon tax, and I’m sure much more.

Blog Post by Michael Levi May 2, 2013 Energy, Security, and Climate