Climate Change

On Monday at the National Press Club, I attended an event put together by the U.S. Climate Task Force, which is chaired by Dr. Robert J. Shapiro, also Chair of NDN’s Globalization Initiative. At this event, Dr. Shapiro released his paper entitled, Addressing Climate Change without Impairing the U.S. Economy: The Economics and Environmental Science of Combining a Carbon-Based Tax and Tax Relief, which details a strategy for implementing a carbon tax and using 90 percent of the revenue to cut the payroll tax. (The remaining 10 percent would be used to fund research, development, and deployment of clean technology). The end effect would be to combat climate change while limiting the economic burden and increasing the political salability of such a solution to climate change.

The proposal is fascinating, and the event, which featured a panel of climate change experts, was equally so. The take-away from the event was that putting a price on carbon is obviously crucial to combating climate change, and that returning the money collected by a carbon-pricing scheme through a reduction in the payroll tax is an innovative and progressive idea. Internationally, it is crucial for the U.S. to lead in the effort to combat climate change, especially because any agreement will need to bring the developing world on board. China’s carbon emissions have already surpassed America’s, and will only continue to grow. Tackling the prevalent use of coal and providing consumers with alternative forms of energy, in large part through increased investment in research, development, and deployment of low-carbon sources, must also be central to confronting climate change.

Climate Wire (subscription req’d), had this to say about Dr. Shapiro’s proposal:

As energy prices climb higher, even the most environmentally minded politicians have shied away from the tax, deeming it to be too much of a political landmine.

The tax would start out at $14 per ton in 2010 and rise to $50 per ton in 2030. Most of the revenue generated -- projected to be about $4 trillion over 20 years -- would cycle back into the economy, primarily through a cut in the payroll tax.

"We are reducing one tax and applying a second tax. The reason is, we want to encourage one kind of behavior and discourage another kind of behavior," explained Robert Shapiro, chairman of the U.S. Climate Task Force and a co-author of the new report. "This is not the imposition of a tax -- this is a tax shift."

Here is NDN’s press release endorsing Dr. Shapiro’s paper:

NDN ENDORSES SHAPIRO PAPER ON CARBON
TAX/PAYROLL TAX TRADEOFF

The U.S. Climate Task Force yesterday released an important paper in the debate over how to address climate change and global warming entitled, Addressing Climate Change without Impairing the U.S. Economy:The Economics and Environmental Science of Combining a Carbon-Based Tax and Tax Relief.

Authored by Dr. Robert Shapiro, former Under Secretary of Commerce for Economic Affairs in the second Clinton Administration and Chairman of NDN’s Globalization Initiative, and economists Dr. Nam Pham and Dr. Arun Malik, the paper represents a valuable addition to the literature on potential policy solutions to the problem of carbon emissions.

NDN strongly endorses the report’s bold recommendation to put a price on carbon and supports the report's central idea that a well-crafted carbon tax, combined with a reduction in the payroll tax, has the potential to staunch the release of greenhouse gases without harming the economy and will promote job creation. In endorsing this carbon tax proposal, NDN remains committed to the effort to develop comprehensive climate change legislation that accomplishes the goal of reducing carbon emissions through a tax on carbon, a cap and trade system, a cap and dividend system, or some combination of the above.

A number of countries and localities have adopted a carbon tax to help stem greenhouse gas emissions. Such a tax, however, can increase costs to energy or industrial consumers and potentially impose a drag on economic growth. Using computer simulations that employ the U.S. Department of Energy’s energy consumption and pricing model, Dr. Shapiro’s paper makes the important point that how this tax revenue is recycled through the economy is critical to the effect of the tax on the American people.

Using carbon tax revenue to reduce the payroll tax helps to mitigate the impact on the economy by increasing disposable incomes of working families and reducing what is, in effect, currently a disincentive to employment. While the payroll tax has historically played a critical role in funding Social Security, it is levied as a tax on wages. So, reducing the tax and any future increases likely required to accommodate an aging workforce helps to promote employment. And by tying the payroll tax deduction to the revenue to be gained from putting a price on carbon, Dr. Shapiro’s proposal offers a way to limit carbon emissions without lowering economic growth.

“The idea of balancing a carbon tax with a reduction in the payroll tax is appealing because it has the potential to put a price on carbon without lowering economic growth,” said NDN Green Project Director Michael Moynihan.

Moynihan added that NDN will continue to work with the U.S. Congress, the presidential campaigns, the U.S. Climate Task Force, the clean technology community, the environmental community, industry and other interested stakeholders in meeting the important challenge of climate change.

A Gallup Poll released today shows that energy and gas prices are considered by more Americans to be extremely important than any other issue in the Presidential election.

Additionally, 19 percent more Americans believe that Barack Obama would be better able to handle energy issues. He leads John McCain 47 - 28. For more of NDN's Green Project work on energy security and climate change, click here.

Yesterday, Saudi Arabia did what everyone--including George W. Bush on bended knee--has been asking it to do for months: agree to increase production.  Prices closed up a dollar.  The Saudi move and its non-impact on the market shows just how tight supplies remain.  While it was designed in large part to offset declines in Nigerian production due to rebel violence in the oil rich, poverty stricken Niger Delta, it might have sent a psychological signal of easing supplies but it did not.

Meanwhile, back in Washington, another panel of oil traders told Chairman Dingell's House Energy and Commerce oversight subcommittee that speculation is driving up oil prices and tighter oversight of commodities futures markets could lower prices. Staffers released data to the effect that 70% of trades are now speculative, up from 30% not long ago.

While Congress should act to shore up oversight of markets, the resistance of prices to downard signals shows just how difficult the problem of soaring commodity prices has become.  In related news yesterday, China which renegotiates major price deals annually, agreed to pay twice as much next year for iron as last.  As many commentators have written, soring oil and other commodities prices partially reflect the weak dollar.  But to a far greater degree they reflect real shortages created by the white hot growth of India, China and other developing countries that Fareed Zakaris has dubbed the "rise of the rest".

So what can we expect?  With oil supplies this tight, the markets remain hostage to any sudden supply disruption.  For example, an air strike on Iran's nuclear facilities--hinted at by recent Israeli exercises--if it affected Iran's supply of oil--could send prices higher.  So could more attacks in Nigeria.  Indeed, a disuption anywhere could have outsized effects.

Amid all the suggestions that America can drill it's way out of the crisis offshore or in Alaska, no one has mentioned the fact that Iraqi oil production--as a result of the war--is still about 400,000 barrels below what it was before the invasion--close to what the Arctic National Wildlife Refuge could be expected to produce at its peak in about 20 years.  The fact is, it is far easier to disrupt oil production than create it.

For all these reasons, the long term answer to hair trigger oil markets is to get off of oil.  As Tom Friedman wrote in a recent much-emailed column, increasing the addict's supply does not break the addiction.  Only a sensible, comprehensive energy policy to break the addition and exchange fossil fuels for a distributed network of renewables can end our dependence on this most interruption-prone and volatile of commodities.

While news about high fuel prices this past week centered on disingenous calls by President Bush and others to drill our way out of the crisis, perhaps the most significant--and ominous event--was the barely publicized action by Standard and Poors yesterday to place the Big Three US automakers on a credit watch.  In taking the action, S&P cited "renewed concerns about the three carmakers future cash flows".

Given Ford's pre-existing troubles--accentuated by its announcement last week as well that it is postponing relaunch of its star vehicle, the F150 truck, Chrysler's undertain future under private equity management and GM's plummeting market share the announcement raises real questions about the survival of the US auto industry. 

Domestic car sales were already down about 2 million vecicles this year from their high in 2006 before the current fuel crisis.  Plummeting sales and oceans of red ink--as customers struggling under the weight of sky high consumer debt payments and declining wages, eschew the gas guzzling stars of only two years ago--threaten its very existence.  The potential collapse of the once great US auto industry--still the second largest employer in the country after the government--calls into question--as I have written on this blog before--the very essence of the American way of life.

What can be done?  One proposal raised by Jack Hidary at a recent conference on plug-in hybrids--is to offer incentives to retire old gas guzzling cars.  Brazil and Japan, among others, have done this with succsss, incidentally strenthening their domestic car markets which benefits local carmakers.  Another measure that would prove greatly helpful to the industry is health care reform since America's disproportionately high healthcare costs create a major cost disadvantage relative to countries with public health care.  Finally, Congress needs to address the crisis in consumer debt where the steady erosion of consumer protections over the last decade, boosted bank profits but left consumers struggling under an unsustainable load of debt. However, this is only the beginning.  Carmakers must understand the enormity of the shift underway--possibly from an oil based car industry to one that will run on electricity--and the government must be ready to help in this massive transition.

If the auto industry and government get it wrong, the cost could be devastating in terms of lost equity, jobs and ultimately US industrial strength.  Cars are just too important to the US economy to allow them to go the way of steel, ships, electronics and so many once great US industries.

While numerous people from Paul Krugman to Barack Obama have stepped forward to dash water on President Bush's call this week to try to drill our way out of the oil crisis, perhaps no more effective rebuttal came than one, not from environmentalists or economists, but from Red Caveney, CEO of the American Petroleum Institute.

In an oped in yesterday's Wall Street Journal, Caveney laid out the reasons that America can not drill its way out of the current crisis. Explaining to non-oil specialists, the uncertainty inherent to oil exploration, Caveney writes: "Exploration is time consuming, very costly and involves a great deal of risk. Importantly, you see neither a drop of usable oil nor a cubic fot of natural gas while it is going on." Oil exploration, Caveney argues, is a long term project, not a next quarter solution.

What prompted his oped was the "use it or lose it" proposal by Democrats to incent oil companies to drill on the 68 million acres of federal land they already lease. But the argument also neatly dispenses with the idea that drilling today has anything to do with oil prices in the near term or even over the next decade.

Adding mere "blocks on the map" as Caveney calls them to the millions of acres already open to exploration--including millions in the Gulf of Mexico at best might have a minor psychological effect on the market. However, in a business dominated by an oil cartel, the issue quickly comes down to real supply and more blocks on the map would have no impact on that. Nor will they reduce our dependence on foreign oil, wean us off fossil fuels or improve the climate.

Ironically, what now seems to be accomplishing all three of those goals is the market. But these are not the type of market forces that get votes.

Of the various false solutions being proposed to the current oil shock perhaps none is more disingenous than the idea that it can be solved by drilling in the Alaskan wilderness and along the continental shelf. This is the idea that the right wing media, recently, John McCain and now President Bush have been pushing as a cureall for soaring oil prices. Since many Democrats oppose this drilling, the next false step of logic is to say Democrats are to blame. This was the thrust of President Bush's energy proposal yesterday, one that only highlights the intellectual dishonesty and partisanship of this failed Administration.

Is more drilling the answer? No for three reasons.

First, the amount of potential oil in the Arctic National Wildlife Refuge or ANWR is simply not enough to make a dent in global world consumption. The entire estimated reserves of ANWR are estimated to equal current US consumption in one year. The mere increase in China's consumption in the next few years will exceed the entire Alaskan reserves. Since the reserves would be harvested over decades, the quantity of oil they would produce each year would amount at most to a few drops in the global oil bucket.

Second, oil exploration and drilling takes years. Even if exploration began tomorrow, we would probably not see significant quantities of oil from Alaska or offshore for close to a decade.

Third, the oil companies already have millions of acres allocated to them that they have not gotten around to exploring let alone drilling in. When asked the delicate question, as some have been recently, why they have not explored these millions of acres to which the federal government has granted them rights, oil companies typically respond that the public should understand that oil exploration takes time.

There may be some opportunities for targeted, ecologically sensistive drilling off of America's shores that would make economic sense. But more drilling will not address either the current oil shock shock or the long term situation. And of course, it will worsen, not mitigate the climate.

What is it about our need to develop alternative sources of energy given sky high oil prices, global warming and political instability in oil producing regions that our elected officals don't understand?  This was the question that would seem to flow naturally out of today's failure again of the Senate to obtain cloture to extend the solar tax credit.

It's not as though the solar investment tax credit is a novel or unproven idea that requires additional study.  The ITC is largely responsible for the rebirth of America's solar industry in recent years--as other flavors of credits are responsible for the growth of solar energy in other countries.  In order to bring down the cost of solar, scale is needed and to drive scale, incentives are the obvious solution. 

Congress probably wil renew the ITC eventually this year.  The problem is that delays create uncertainty and the long lead times of solar projects mean that many have already been canceled causing solar installers to lose business and lay off workers. It is time for the Senate and House to put differences over the paygo system aside and agree on legislation that both can pass.

Sen. John McCain has a new ad out today on climate change. Check it out:

Sounds great right? John McCain doesn’t follow the President on climate change and wants to curb greenhouse gasses.

Not so fast.

From the New York Times’ Elisabeth Bumiller:

Mr. McCain, the presumptive Republican nominee, is to provide an audience of Houston oil executives with more details of his proposal to lift the federal moratorium on offshore oil and gas exploration in states that want it. Mr. McCain’s position is welcome news for the oil industry, which has called for years for the ban to be lifted.

"With gasoline running at more than four bucks a gallon, many do not have the luxury of waiting on the far-off plans of futurists and politicians," Mr. McCain plans to say. "We have proven oil reserves of at least 21 billion barrels in the United States. But a broad federal moratorium stands in the way of energy exploration and production, and I believe it is time for the federal government to lift these restrictions and to put our own reserves to use." Mr. McCain first made public his position on the moratorium on Monday in Virginia.

Just so this is clear: On the same day that John McCain releases a new ad discussing his commitment to confronting climate change, he also proposes drilling for offshore oil and gas.

Politically, McCain may be seeking the energy security mantle, but he will have trouble claiming to care about climate at the same time, especially when it looks like he is just giving handouts to the oil industry. This move will not help in the short term as wells in these places will not come online tomorrow, and the amount of oil and natural gas extracted would not lower prices in any meaningful way.

Plus, offshore drilling is so unpopular in Florida, that even Jeb Bush opposed it as Governor. In fact, as First Read points out:

No Republicans in Florida have gotten elected statewide without endorsing the moratorium on off-shore oil drilling.

Between this drilling proposal and the gas tax holiday, it sounds like John McCain’s Straight Talk Express may be in bad need of a fill-up.