Econ-Utopia: The Northeast’s Regional Greenhouse Gas Initiative

Econ-Utopia: The Northeast’s Regional Greenhouse Gas Initiative
By Matthew Riddle, CPE Staff Economist

The Regional Greenhouse Gas Initiative, or RGGI, grabbed headlines in Massachusetts recently when Governor Deval Patrick signed onto it, committing Massachusetts to a cut in its emissions of greenhouse gasses from power plants, and reversing Mitt Romney’s decision to abandon the agreement. In addition to rejoining RGGI, Patrick also outlined some proposals for its implementation, which may prove to be even more significant than his decision to join.

But before going into the details, I should explain what RGGI is, how it came about, and why we should care. In 2003, the governors of nine northeastern states, from Delaware to Maine, got together to create a regional plan to reduce carbon dioxide emissions from power plants, in an effort to combat global climate change. They agreed on an approach often referred to as a ‘cap and trade’ system. Each state would set a cap on the total level of carbon emissions by releasing a fixed number of emission permits. Companies could then trade these permits to determine where the cuts would be made, but the total number of permits would not change.

This approach provides another solution to the problem raised in our last econ-utopia: that the market price of fossil fuels is too low because the costs of pollution and other ‘externalities’ are not taken into account. A cap and trade program would raise the cost of burning fossil fuels to bring it closer to its true level by forcing companies to pay for emission permits in addition to the price of the fuel.

The first use of a cap and trade system for controlling air pollution was introduced in the US as part of the Clean Air Act Amendments of 1990, where it was used to limit sulfur dioxide emissions from power plants. More recently, one of Europe’s key programs to meet its targets under the Kyoto Protocol is a cap and trade system for large emitters of carbon dioxide.

While these programs have been effective at cutting emissions, they suffer from one significant drawback: in the initial allocation, the emission permits were distributed to polluters at no cost. The result, which may sound surprising, is that electricity prices have been rising just as they would have if the emission permits were sold, and most of the additional revenue from these higher prices is captured by electricity generators as windfall profits. A recent study by IPA Energy Consulting found that under the European cap and trade system, companies in the UK would make £800 million ($1.4 billion) per year in additional profits beyond what they would have made with no restrictions. Meanwhile, consumers have to bear the cost, by paying higher prices for electricity.

On the other hand, if the permits were sold to polluters, this money could be collected for public use. It could support greater spending on energy efficiency and renewable energy, provide assistance to displaced workers, be redistributed to consumers, or any combination of these options. In one proposal, known as a ‘Sky Trust,’ the money would be evenly distributed to each person in the country. For the majority of the population, and especially for low income families, the payment would more than compensate for the higher energy prices.

The RGGI agreement among Northeastern states shows progress over these earlier programs: instead of giving all the permits away for free, the agreement requires that states auction at least 25% of the permits to polluters. In his announcement last month, Governor Patrick went farther, joining New York Governor Eliot Spitzer and the Vermont legislature in committing to auctioning not 25%, but 100% of the permits. The revenue from the auction in Massachusetts will be used to fund a new program promoting energy efficiency and the development of renewable energy, which would generate additional energy savings and help to reduce costs for consumers.

In addition to its direct benefit in the northeast, RGGI could also set an important precedent for the design of a nationwide system. If a nationwide cap and trade program were imposed that covered all US carbon emissions, the permits could be worth as much as $100 billion. If used effectively, this money could have an enormous positive impact. But if the permits are given away for free, the money would instead go to enhance the profits of polluters, and this opportunity would be lost.

Sources:

For an overview of RGGI, see

• Marc Breslow (2006), “The Northeast’s Global Warming Plan: a Primer,” as well as other summary information from MCAN’s RGGI page
• The official RGGI page at http://www.rggi.org/

For coverage of Governor Patrick’s recent announcement, see

• Boston Globe, “Patrick Signs Regional Greenhouse Gas Initiative” 1/18/07

For more on the importance of auctioning permits, see

• J. Andrew Hoerner, Redefining Progress, “Regional Initiatives to Reduce Greenhouse Gasses: The Crucial Importance of Auctioning Permits for Jobs, Competitiveness, and Equity” [pdf]
• IPA Energy Consulting (2005) “Implications of the EU Emissions Trading Scheme for the UK Power Generation Sector” [pdf]

For information about the Sky Trust proposal, see

• Peter Barnes (2001), “Who Owns the Sky? Our Common Assets and the Future of Capitalism,” Island Press.
• Peter Barnes and Marc Breslow (2001), “Pie in the Sky? The Battle for Atmospheric Scarcity Rent,” [pdf] Political Economy Research Institute

© 2007 Center for Popular Economics

Econ-Atrocities and Econ-Utopias are the work of their authors and reflect their author's opinions and analyses. CPE does not necessarily endorse any particular idea expressed in these articles.

Mutually assured hypocrisy w/r/t Iran's nuclear weapons

This morning's reports on French President Chirac's statement that, according to the NYTimes,

“what is dangerous about this situation [Iran acquiring a nuclear bomb] is not the fact of having a nuclear bomb,” he said. “Having one or perhaps a second bomb a little later, well, that’s not very dangerous.

“But what is very dangerous is proliferation. This means that if Iran continues in the direction it has taken and totally masters nuclear-generated electricity, the danger does not lie in the bomb it will have, and which will be of no use to it.”

Mr. Chirac said it would be an act of self-destruction for Iran to use a nuclear weapon against another country.

“Where will it drop it, this bomb? On Israel?” Mr. Chirac asked. “It would not have gone 200 meters into the atmosphere before Tehran would be razed.”

There's no doubt that this represents lame politics on Chirac's part, since, if this is his true belief, he shouldn't have been suggesting otherwise before now (or after, with his bungled attempts at retraction).

And it is worth noting that he does identify dangers that even he perceives as real, those of wider proliferation of nuclear weapons in the Middle East. So it's not as if he's encouraging Iran to get a nuclear bomb, just saying that he doesn't think that one or two Iranian nukes--in and of themselves--represent a marked increase in danger to the region or world. Instead, it's the secondary effects of proliferation, and the risks that come out of that of increased military tensions and rising risks of accidental usage, that are the main danger Chirac sees.

While I acknowledge in principal the arguments I've heard a few people make that either the world should be totally free of nuclear weapons or all countries should have the same right to acquire them if they deem them necessary for defense, it doesn't really cut the mustard for me. Nuclear weapons are, by definition, pure tools of terrorism. You cannot use a nuclear weapon without knowingly killing vast numbers of innocent bystanders (assuming any of your victims are so-called legitimate targets). To use a nuclear weapon is to commit the grossest act of terrorism possible; simply to posess nuclear weapons is to be terroristic of a sort since the mere existence of the weapon does what terrorism is all about--instill fear in a population as a way to force your political objectives onto them.

For that reason, I oppose any expansion of the world's nuclear arsenal either within any one country or to include previously non-nuclear countries. The need is for elimination of nuclear weapons, and narrow-minded strategic thinking about when this or that country might be served by gaining them miss the contextual point.

All that said, the hypocrisy that is being expressed in the "outrage" over Chirac's statements is annoying in its own right. ("Outlandishly insane"-Freedom's Zone; "This so clearly shows why the EU and 'Old Europe' cannot be trusted on Iran and other matters of security, I'm a little surprised the New York Times reported it."-Captain Ed [Ooooh, what a dig at the Ayatollah-loving NYTimes!]; "the French have had their heads in the sand so long that the sand is starting to work its way into their brains...so comments like this really shouldn't come as a big surprise"-Blogmeister USA.) To their credit, some of these folks try to argue that the Mutally Assured Destruction that was so loved by their hero Ronald Reagan (though created long before his presidency) doesn't apply to Iran, on the premise that the Iranian leaders want armageddon to happen as part of their messianic religious beliefs. Frankly, I don't buy it. The Iranian government behaves much too rationally to think that they have no cares for this earthly life. If they wanted armageddon, they could have triggered it long ago--for instance by launching an all-out war against U.S. troops in Iraq and simultaneously against Saudi Arabia. They don't need nuclear weapons for that.