Climate and energy

On Wednesday the Kansas Energy Council sponsored a presentation on cap and trade by Dr. Robert Repetto. Repetto is an environmental economist recently retired from Yale University, who currently works for the UN Foundation. He holds degrees from Harvard University and the London School of Economics.

In his coverage of the event, reporter David Klepper for the KC Star captured the presentation’s main message: “Addressing the carbon emissions blamed for climate change won’t be easy, but there’s no reason it should cripple the economy.” Quotable:

(Repetto) told the Kansas Energy Council that cooperation, political courage and a good grasp of economics will be essential if the state and nation are to enact measures to reduce carbon emissions. But he said such measures could actually benefit the economy by spurring innovation while reducing the risks of climate havoc. And he said the costs passed on to consumers and businesses are likely to be smaller than if the nation does nothing at all….

… He offered this ray of hope: Society has wrestled with big changes in energy before. And some companies and governments will actually find themselves better off.

But the cost of doing nothing? “Just having a policy of waiting and hoping, I don’t think is adequate to the challenge,” he said.

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For additional detail on the presentation, see below, and keep reading (and reading. and reading). For the Cliff’s Notes, just read the next bit:

The big takeaway messages:

1 - To prepare for a federal cap and trade system, Kansas needs to reduce its vulnerabilities (ie, the amount of electricity we generate from coal) and maximize its assets (energy efficiency potential, renewable energy resources, and soil carbon sequestration thru agriculture - also methane capture, biomass, etc.)

2 - Energy transitions have happened many times in the past 100 years - from water power to steam power, from steam to electric, etc. There was always disruption, and there will always be winners and losers. However, in the transition to a clean energy economy, Kansas can be a winner. We are situated much better than many states, if we just plan ahead.

3 - Even with assuming the worst case scenarios, economic models of the financial impacts of cap and trade show that the U.S. economy will still grow at least .5% per year over the next 20 years. In the best case, cap and trade will help the U.S. economy grow faster, due to stimulating new technology development. Carbon regulation can be designed to not have negative economic impacts.

4 - Don’t forget what lies beyond cap and trade (or even before. or around it, for that matter). Not every emissions reduction strategy fits under the cap and trade scheme. There are many other ways to reduce emissions - even improving transmission infrastructure is one example.

BACKGROUND: Dr. Repetto began with a quick re-cap of why cap and trade is even on the table. Cap and trade is one scheme of carbon regulation (a carbon tax is another option). Carbon regulation is an issue because of climate concerns, and the desire to manage and prevent the risks associated with climate change.

The U.S. is considering carbon regulation in part because we (and 191 other countries) have signed the United Nations framework treaty on climate change. This says that by 2012, these nations will come up with a treaty to regulate the greenhouse gas emissions.

Carbon regulation (of whatever version) has to walk a crucial line: (1) the economy must keep growing, while (2) emissions must decrease. Major improvements in efficiency must occur, as well as a shift away from dependence on fossil fuels.

Repetto favors market-friendly approaches, where incentives encourage businesses to become more efficient in their operations, to develop new technologies, etc. Studies show that this approach could mean tremendous cost savings, up to 1-2% of GDP per year.

Cap and trade policies can be designed in a number of ways (ie, where the cap goes, on what industries and at what point in the emissions cycle, how permits are issued, whether they are auctioned or given away, etc.), but they basically all involve a cap on total national emissions. Then the government issues permits to emit. Those permits can then be traded.

Companies that don’t emit much will have extra credits to trade. Companies that do emit a lot will need to buy extra.

SUCCESSFUL CAP AND TRADE PROGRAMS ALREADY EXIST IN THE U.S. He discussed the success story of the sulfur dioxide cap and trade program. It achieved 100% compliance, reduced emissions ahead of schedule, and was achieved at a fraction of projected costs.

FINANCIAL IMPACT OF CAP AND TRADE. Economists have done a lot of modeling on how cap and trade will affect U.S. businesses. According to Repetto, those models do have some severe limitations.

First, they assume that the economy is already operating efficiently. (Not true. Does every business you know install CFLs and pursue aggressive energy efficiency measures? Nope.) Second, the models ignore the cost of doing nothing. In effect, they assume that there will be no economic impact from rising average global temperatures (ie, agriculture will not change at all, increased severe weather won’t stress the economy, etc.)

The models do measure some positive aspects, however. For example, they can track the correlations between technological changes and economic development - ie, how increased demand for renewable energy will make these technologies cheaper, or more quickly reach a break even point.

RESULT: Even with assuming the worst case scenarios, economic models of the financial impacts of cap and trade show that the U.S. economy will still grow at least .5% per year over the next 20 years. When the models show increases or decreases as a result of cap and trade, the differences are all very slight.

In the best case, cap and trade will help the U.S. economy grow faster, due to stimulating new technology development. Carbon regulation can be designed to not have negative economic impacts.

As KEC Director Liz Brosius put it later in the Q&A session, the economic impact of cap and trade (if the price per ton of carbon were $30 per ton, say) would be much less drastic than we have seen with the sudden increases in gas prices this year.

Repetto’s closing note - Don’t forget what lies beyond cap and trade (or even before. or around it, for that matter). Not every emissions reduction strategy fits under the cap and trade scheme. There are many other ways to reduce emissions - even improving transmission infrastructure is one example.

Repetto also mentioned the importance of improving supply side management in power generation - two-thirds of fuel burned is lost in the form of waste heat, before the electricity ever makes it into the grid. Power plants can make energy efficiency improvements that drastically improve this ratio (note: but they are usually very capital-intensive).

There was more than I will (or can) recount here. Upstream or midstream caps. Issues of monopolies. Clean development mechanisms. Price caps. Issues of monopoly. Pros and cons from every conceivable angle, etc.

Always most interesting at the KEC, though, is the Q&A period.

First and foremost - a point brought up by Lt. Governor Mark Parkinson and others - in the event of a federal cap and trade system, how can Kansas prepare itself?

Repetto’s response: Reduce your vulnerability to high carbon costs, such as electricity generated from coal power. Maximize your assets for the new energy economy, such as energy efficiency and renewable energy. Position yourself in advance to take advantage of this economic transition, rather than react to it later. Also make sure there is a viable offset program (ie soil sequestration) because that would be beneficial for Kansas.

Another way this question was asked: Is there a way to fashion a cap and trade policy at the federal level, so that it does not have a disproportionate effects on rural states? Or on the Midwest as a whole, which depends so heavily on coal for its electrical supply?

Answer: Putting a price on carbon will remove coal (pulverized coal without carbon capture) as a viable market option. Wind power will become more valuable. A transition will probably occur from conventional coal to IGCC coal with carbon capture.

This also being Kansas, the audience also immediately brought back up carbon credits from soil sequestration, thru ag techniques like no till farming.

Repetto had mentioned that there was a great deal of potential for cap and trade to include these kind of offset programs, which would bring in additional income for farmers. Since he is the kind of scholar who mentions pros and cons equally, he also brought up the con concern, of additionality. Some policy designers for cap and trade want to make sure that farmers aren’t getting financially compensated for something they are already doing.

The following exchange was interesting. Kansas Secretary of Agriculture Adrian Polansky has clearly been doing a lot of homework on this issue, and as a farmer himself, he understands the complexity of the issue in a way that - and this is a total guess on my part - in a way that it seems to me cap and trade designers might be missing.

Are enough farmers involved in the policy design end for carbon offset programs? I ask because I simply don’t know, but the question seems well worth raising. I know there are a lot of ag soil scientists contributing, but my guess is that everyone who can chip in - now is probably the time.

I probably didn’t entirely grasp Sec. Polansky’s points, but he brought up counters to the additionality argument. (The point being that these pros of carbon offsets outweigh the cons of additionality.) First, you need to look at U.S. agricultural techniques in the global context - and there is a lot of landmass in the world where no till is simply not an option. American no-till farmers balance this picture.

Second, even no-till farmers don’t use the technique all the time. Some go with partial till, or plow it all up every three or four years, thus releasing all the carbon back into the carbon cycle.

Third, there are a LOT of price pressures to simply plow it all up, for various reasons.

Conclusion - without the incentive of offsets, there is no way to maximize the soil sequestration benefits of ag.

— Maril Hazlett, www.climateandenergy.org