Carbon Tax, CAFE Standards and Cap-and-Trade: An Economist's View

One Answer to Global Warming: A New Tax
September 16, 2007 -- By N. Gregory Mankiw, The New York Times

In the debate over global climate change, there is a yawning gap that needs to be bridged. The gap is not between environmentalists and industrialists, or between Democrats and Republicans. It is between policy wonks and political consultants.

Among policy wonks like me, there is a broad consensus. The scientists tell us that world temperatures are rising because humans are emitting carbon into the atmosphere. Basic economics tells us that when you tax something, you normally get less of it. So if we want to reduce global emissions of carbon, we need a global carbon tax. Q.E.D.

The idea of using taxes to fix problems, rather than merely raise government revenue, has a long history. The British economist Arthur Pigou advocated such corrective taxes to deal with pollution in the early 20th century. In his honor, economics textbooks now call them “Pigovian taxes.”

Using a Pigovian tax to address global warming is also an old idea. It was proposed as far back as 1992 by Martin S. Feldstein on the editorial page of The Wall Street Journal. Once chief economist to Ronald Reagan, Mr. Feldstein has devoted much of his career to studying how high tax rates distort incentives and impede economic growth. But like most other policy wonks, he appreciates that some taxes align private incentives with social costs and move us toward better outcomes.

Those vying for elected office, however, are reluctant to sign on to this agenda. Their political consultants are no fans of taxes, Pigovian or otherwise. Republican consultants advise using the word “tax” only if followed immediately by the word “cut.” Democratic consultants recommend the word “tax” be followed by “on the rich.”

Yet this natural aversion to carbon taxes can be overcome if the revenue from the tax is used to reduce other taxes. By itself, a carbon tax would raise the tax burden on anyone who drives a car or uses electricity produced with fossil fuels, which means just about everybody. Some might fear this would be particularly hard on the poor and middle class.

But Gilbert Metcalf, a professor of economics at Tufts, has shown how revenue from a carbon tax could be used to reduce payroll taxes in a way that would leave the distribution of total tax burden approximately unchanged. He proposes a tax of $15 per metric ton of carbon dioxide, together with a rebate of the federal payroll tax on the first $3,660 of earnings for each worker.

The case for a carbon tax looks even stronger after an examination of the other options on the table. Lawmakers in both political parties want to require carmakers to increase the fuel efficiency of the cars they sell. Passing the buck to auto companies has a lot of popular appeal.

Increased fuel efficiency, however, is not free. Like a tax, the cost of complying with more stringent regulation will be passed on to consumers in the form of higher car prices. But the government will not raise any revenue that it can use to cut other taxes to compensate for these higher prices. (And don’t expect savings on gas to compensate consumers in a meaningful way: Any truly cost-effective increase in fuel efficiency would already have been made.)

More important, enhancing fuel efficiency by itself is not the best way to reduce energy consumption. Fuel use depends not only on the efficiency of the car fleet but also on the daily decisions that people make — how far from work they choose to live and how often they carpool or use public transportation.

A carbon tax would provide incentives for people to use less fuel in a multitude of ways. By contrast, merely having more efficient cars encourages more driving. Increased driving not only produces more carbon, but also exacerbates other problems, like accidents and road congestion.

Another popular proposal to limit carbon emissions is a cap-and-trade system, under which carbon emissions are limited and allowances are bought and sold in the marketplace. The effect of such a system depends on how the carbon allowances are allocated. If the government auctions them off, then the price of a carbon allowance is effectively a carbon tax.

But the history of cap-and-trade systems suggests that the allowances would probably be handed out to power companies and other carbon emitters, which would then be free to use them or sell them at market prices. In this case, the prices of energy products would rise as they would under a carbon tax, but the government would collect no revenue to reduce other taxes and compensate consumers.

The international dimension of the problem also suggests the superiority of a carbon tax over cap-and-trade. Any long-term approach to global climate change will have to deal with the emerging economies of China and India. By some reports, China is now the world’s leading emitter of carbon, in large part simply because it has so many people. The failure of the Kyoto treaty to include these emerging economies is one reason that, in 1997, the United States Senate passed a resolution rejecting the Kyoto approach by a vote of 95 to zero.

Agreement on a truly global cap-and-trade system, however, is hard to imagine. China is unlikely to be persuaded to accept fewer carbon allowances per person than the United States. Using a historical baseline to allocate allowances, as is often proposed, would reward the United States for having been a leading cause of the problem.

But allocating carbon allowances based on population alone would create a system in which the United States, with its higher standard of living, would buy allowances from China. American voters are not going to embrace a system of higher energy prices, coupled with a large transfer of national income to the Chinese. It would amount to a massive foreign aid program to one of the world’s most rapidly growing economies.

A global carbon tax would be easier to negotiate. All governments require revenue for public purposes. The world’s nations could agree to use a carbon tax as one instrument to raise some of that revenue. No money needs to change hands across national borders. Each government could keep the revenue from its tax and use it to finance spending or whatever form of tax relief it considered best.

Convincing China of the virtues of a carbon tax, however, may prove to be the easy part. The first and more difficult step is to convince American voters, and therefore political consultants, that “tax” is not a four-letter word.

The Road To Clean Energy Starts Here, by Jeffrey D. Sachs

The Road to Clean Energy Starts Here
May 2007 Issue -- By Jeffrey D. Sachs, Scientific American

Realizing crucial energy technologies will take more than just research and development

The key to solving the climate change crisis is technology. To accommodate the economic aspirations of the more than five billion people in the developing countries, the size of the world economy should increase by a factor of four to six by 2050; at the same time, global emissions of greenhouse gases will have to remain steady or decline to prevent dangerous changes to the climate. After 2050, emissions will have to drop further, nearly to zero, for greenhouse gas concentrations to stabilize.

The overarching challenge is to make that transition at minimum cost and without economic disruption. Energy-saving technologies will play a pivotal role. Buildings can save energy at low capital cost, and often net overall savings, through improved insulation, efficient illumination and the use of heat pumps rather than home furnaces. Automobiles could, over time, reach 100 miles per gallon by a shift to plug-in hybrids, better batteries, lighter frames and other strategies. Of course, technologies such as heat pumps and plug-in hybrids partly reduce direct emissions by shifting from on-site combustion to electricity, so that low-emission power plants become paramount.

Low-emission electricity generation will be achieved in part through niche sources such as wind and biofuels. Larger-scale solutions will come from nuclear and solar power. Yet clean coal will be essential. New combustion techniques, combined with carbon capture and sequestration (CCS), offer the prospect of low- or zero-emission coal-fired thermal plants. The incremental costs of ccs may well be as low as one to three cents per kilowatt-hour.

All these technologies are achievable. Some will impose real added costs; others will pay for themselves as lower energy bills offset higher capital outlays. Some estimates suggest that, as of 2050, the world will have to negate around 30 billion tons of carbon dioxide emissions a year at a cost of roughly $25 per ton, or $750 billion annually. But with a world economy by then of perhaps $200 trillion, the cost would be well under 1 percent of world income and perhaps under 0.5 percent, a true bargain compared with the costs of inaction.

Achieving these technological solutions on a large scale, however, will require an aggressive global technology policy. First, there will have to be market incentives to avoid emissions, in the form of either tradable permits or levies. A reasonable levy might be $25 per ton of emitted carbon dioxide, introduced gradually over the next 10 to 20 years. Second, there will have to be ample government support for rapid technological change. Patents can help spur private market research and development (R&D), but public funding is required for basic science as well as for the public demonstration and the global diffusion of new technologies. In sum, we need a strategy sometimes described as RDD&D.

In the past two years, the Earth Institute at Columbia University has hosted a Global Roundtable on Climate Change, involving leading corporations from around the world. These companies, including many of the largest power producers, are ready to reduce carbon emissions. They know that CCS must be a high priority. A new Global Roundtable Task Force on CCS seeks to promote the required RDD&D. Fortunately, the European Union has already pledged to build at least a dozen CCS demonstration projects in Europe by 2015. But we will also need such centers in the U.S., China, India, Australia, Indonesia and other highly significant coal-power producers. In the low-income countries, this will require a few billion dollars; that is where the RDD&D investments of the high-income countries will be essential. The CCS Task Force aims to break ground on one or more demonstration plants by 2010 in every major coal region. By 2015 this crucial technology can be proved and added to the bid to avert climate disaster. This model of RDD&D won't stop there. Harnessing technology to achieve sustainable energy will involve much of the global economy for decades.

We Need to Bring Climate Idealism Down to Earth

Excerpts from:
We Need to Bring Climate Idealism Down to Earth
April 30, 2007 -- By Larry Summers, commentary, Financial Times via Economist's View

With the accumulation of scientific evidence and its persuasive presentation to the public, the global warming debate has reached a new stage. ...

The real question for debate is not whether something should be done – that debate is over among the rational. The crucial question now is what should be done so as to leave our descendants with the highest possible quality of life. ...

There is a very real danger that the global cap and trade approach ... enshrined in the Kyoto protocol – now favoured by most European governments – could be ineffective or even counterproductive by substituting for more realistic approaches to the problem. Kyoto is now the only game in town for those who do not want to be ostriches with respect to global climate change and so one has to hope for its ultimate success. But it is surely useful to try to be clear about the potential pitfalls...

First, the Kyoto approach depends on the questionable premise that nations will, in fact, be bound by binding targets or penalties for not meeting them. It is instructive in this regard to consider the history of the Maastricht Treaty within the European Union. It addressed fiscal targets ... within a group of countries that had already achieved a high degree of cohesion. It broke down almost immediately when it looked like the targets would not be binding for big countries, with the goals abandoned and no payment of even the modest penalties.

There is to date little evidence that Kyoto is driving behaviour. Whatever evidence there is of impressive emissions reductions comes from countries such as the UK, Germany and the former communist states, where coal use was being phased out for other reasons. The limited impact of Kyoto is evinced by the fact that carbon permits are now selling in the range of a negligible one euro a ton.

Second, carbon markets are invitations to engage in pork-barrel corporate subsidy politics on a massive scale. If greenhouse gas emissions are to be substantially reduced, the value of the associated emissions rights will be in the tens of billions of dollars. While in principle emission permits could be auctioned, in practice they are always allocated administratively. ...[In addition]..., the clean development mechanism has resulted in substantial payments for emissions reductions that would have occurred anyway or could have been achieved at negligible cost. There is even reason to think that certain industrial gas emissions may have been increased so that credit could be claimed for their abatement.

Third, the most serious problem with the Kyoto framework is that it is unlikely to generate substantial changes in developing country policies. ...[D]eveloping country policymakers are not likely to accept binding targets ... that fall way short on a per-capita basis of emissions levels in the industrial world. ...

The truth about climate change policy is that developing countries are where most of the future action has to be. They will account for 75 per cent of the increase in emissions over the next quarter century and are now making the infrastructure investments that will shape their future economies. ... The 1997 vote cast by all the Democrats in the Senate suggests that approaches that do not involve the developing world are unlikely to command political support in at least some parts of the industrialised world.

Perhaps these problems and others, like the difficulty of establishing emissions targets given the magnitude of economic uncertainties, can be overcome with goodwill and extensive thought. But next month I shall suggest approaches that, while less dramatic in their immediate claims for emissions reductions, may over time provide a more secure foundation for the progress that the world must have.

Carbon Currency: Regional Greenhouse Gas Initiative

When Carbon Is Currency
May 6, 2007 -- By Hannah Fairfield, The New York Times

Amid steadily increasing carbon emissions, and a federal government hesitant to take the lead on climate legislation, 10 states have joined to create the first mandatory carbon cap-and-trade program in the United States. They aim to reduce emissions from power plants by 10 percent in 10 years.

Leaders of state environmental and energy regulatory agencies hammered out the detailed model for the program, the Regional Greenhouse Gas Initiative, over the course of three years. The program sets a cap on the total amount of carbon that the 10 states — as a whole — can emit. Starting in 2009, each state will receive a set amount of carbon credits for its power plants, and each plant must have enough allowances to cover its total emissions at the end of three-year compliance periods.

In 2003, George E. Pataki, then New York’s governor, invited governors of 10 other states from Maine to Maryland to discuss a program to cut power plant emissions. All but one of the states joined the program; Pennsylvania has observer status.

Officials have closely watched the European Union, which started its carbon trading market in 2005; analysts say the Europeans have stumbled on some fronts. “We’ve learned a lot from the Europeans,” said Judith Enck, adviser on environment issues to Gov. Eliot Spitzer of New York. “The way we distribute the allowances will be vastly different than the European experience.”

To build a carbon market, its originators must create a currency of carbon credits that participants can trade. In Europe, power companies received these credits directly and could buy or sell from one another as needed. But most companies passed the cost of the credits on to consumers even though they received them free — giving the companies windfall profits. Power companies in Britain alone made about $1 billion from free credits in 2005, according to a study by the British government.

Participants in the United States want to avoid that problem by selling some or all of the credits at auction, with the proceeds going to state energy efficiency programs.

In Europe, power companies were not the only businesses to profit from the new carbon market. Because power plants there can use credits earned from offset projects that take greenhouse gases out of the atmosphere (or put less of them into it), businesses wanting to earn offset credits inundated the Europeans with proposals — many of which would have a negligible effect on emissions or were for reductions that would have taken place anyway.

To sidestep that problem, the program here limits offsets to five categories: capture of landfill gas, curbs on sulfur hexafluoride leaks, planting of trees, reductions in methane from manure, and increased energy efficiency in buildings. Power companies can offset 3.3 percent of a plant’s total emissions from any combination of the five categories.

“We saw what happened in Europe, so we limited the categories and set our criteria upfront,” said Christopher Sherry, chairman of the regional program’s staff working group and a research scientist at the New Jersey Department of Environmental Protection. “We did that so we would have assurance that the reductions actually take place.”

Although Northeastern states have taken the lead in inaugurating a mandatory carbon market, California and some of its neighbors are not far behind. Those states are watching closely; Mr. Sherry and others involved in the 10-state effort are already helping California figure out how best to accomplish its climate plan.

“The idea is to see what everyone else has done, and learn from it,” said Dale Bryk, a lawyer at the Natural Resources Defense Council who has been involved with the Northeastern regional program and California’s advisory committee. “Let’s not start from scratch.”

Tackling Climate Change: A bargain

Tackling Climate Change: A bargain
May 4, 2007 -- The Economist (Subscription)

About 0.1% of world GDP would do it

The Intergovernmental Panel on Climate Change (IPCC), set up under the auspices of the United Nations to establish a consensus on global warming and what to do about it, has now completed its fourth assessment report. The first two parts, published earlier this year, about the science and the impacts of climate change, were designed to spread gloom. Change was happening, they said; it was mankind’s fault; and it was going to be damaging. The third part, released on Friday May 4th in Bangkok, is about mitigating climate change, and is designed to spread hope. Just as mankind caused the problem, it says, so mankind can stop it—and at a reasonable cost.

In some areas of economic activity, emissions could be cut with no cost to consumers or taxpayers. The heating and lighting systems of many buildings, for instance, are startlingly inefficient. Improving this would cut both emissions and bills. Economists are troubled by this, for it implies that people and businesses are not maximising their economic self-interest; yet the low take-up of energy-efficient lightbulbs suggests this is indeed the case. Governments are therefore beginning to tighten regulations on the energy efficiency of buildings, and to talk about, for instance, banning incandescent lightbulbs. The IPCC reckons that such measures could cut 30% of projected emissions from this sector at no extra cost.

Transport is trickier, because car ownership is rocketing and the demand for fuel is fairly inelastic. If people want to drive they are going to drive, unless governments jack up petrol prices to levels that are politically unacceptable. So for emissions to fall in the transport sector, new technologies, such as more efficient biofuels or electric cars, are needed. Given a big R&D effort in this sector, there is a good chance that those will be forthcoming.

Similarly, in power generation, there is scope for cutting emissions. The cost of renewable energy, such as wind and solar, has been falling. Nuclear generating technology has improved. Carbon capture and storage, which involves taking the carbon dioxide (or C02) out of power station flue gases and injecting it back into the earth, is also a possibility, though that technology is at an early stage.

Technological solutions to climate change, then, are available. But most of those on offer in the power and transport sectors cost more than fossil-fuel generated energy. Fortunately, economics comes to the rescue. Burning fossil fuels imposes a cost to society that is not reflected in their price. Economics says that it should be; and if it were, the price of using fossil fuels would rise in relation to the price of using renewable energy.

Unfortunately, the social cost of carbon is hard to calculate. Plenty of economists have tried, with unconvincing results. It requires estimating the impact of climate change on economic growth, which involves too many unknowns. So the IPCC report starts from the other end. Rather than trying to work out the social cost of carbon, and letting it feed through to reduce greenhouse-gas concentrations in the atmosphere, it starts from a manageable greenhouse-gas concentration and works backwards to a carbon price. Conveniently, it says the “social cost of carbon is at least comparable to, and possibly higher than carbon prices for even the most stringent scenarios assessed by the IPCC”.

And what is the right price? The report says that to stabilise greenhouse-gas concentrations at 550 parts per million (a level most scientists think safeish) would require a price of $20-50 per tonne of carbon by 2020-30. That is along the lines of the carbon price established the European Emissions-Trading Scheme, which varied between $6 and $40 in 2005-06. It has not bankrupted the European economy so far. The IPCC’s economic models reckon, on average, that if the world adopted such a price the global economy would be 1.3% smaller than it otherwise would have been by 2050; or, put another way, global economic growth would be 0.1% a year lower than it otherwise would have been.

The world would barely notice such figures; so one might think that climate change can be easily sorted. The problem, of course, is that the numbers work only if they are applied globally. If a few countries—even a few big countries—adopt a carbon price, it will make little difference. All the world’s big emitters need to do it. Which brings the world straight back to the problem that sank Kyoto. No country alone can make a difference, and it is in every country’s interest to ensure that everybody else bears the burden. As the IPCC report convincingly argues, the technology and the economics of this problem are easily soluble. It is the politics that is so difficult.

Gore, Gandhi, and Dioum

Al Gore at TED

March, 2008







Here is an excellent presentation on issues pertaining to the new environmental movement--global climatic disruption and resource constraints (in comparison to the previous environmental movement--biodiversity, toxins, air/water quality, and population). In the past, I have been skeptical towards Al Gore for a few reasons. The most prevalent being that he flies around the world, after leaving one of his mansions, to tell the general public to reduce emissions.



"You must be the change you wish to see in the world."

-Mohandas Gandhi



However, I am beginning to think less about his vanity and more about his ability to promote ideas in a compelling way.



"For in the end, we will conserve only what we love. We will love only what we understand. We will understand only what we are taught."

-Baba Dioum



He is one of many voices that need to be listened to as humanity attempts to reduce the tragedy of the commons and improve the living conditions for all of life.

ConocoPhillips First Major U.S.-Based Oil Company To Call For Emissions Cap

Conoco Calls for Emissions Cap (Subscription)
April 11, 2007 -- By Jeffrey Ball, The Wall Street Journal

Oil Producer Joins Effort To Shape New U.S. Policy On Greenhouse-Gas Limits

ConocoPhillips became the first major U.S.-based oil company to add its voice to the call for a federal global-warming-emission cap, in the latest sign that U.S. companies are jockeying to shape any legislation.

ConocoPhillips said it was joining the U.S. Climate Action Partnership, a group of corporations that have called for a U.S. emissions cap and have outlined broad principles that they want any cap to include. The group formed earlier this year, following the takeover of Congress by Democrats, whose leaders have said they want to legislate an emissions cap.

"We believe that the science is quite compelling and that climate change is certainly attributed to human activity and to the substantial use of fossil fuels," Jim Mulva, chairman and chief executive of Houston-based ConocoPhillips, said in announcing the company's position.

Exxon Mobil Corp., the world's biggest publicly traded oil company by market value, also has begun talking about what it wants any global-warming constraint to include, including market flexibility. But Exxon isn't saying it either endorses or opposes a federal cap. Said Dave Gardner, an Exxon spokesman: "The devil's in the details."

European-based oil giant BP PLC has endorsed a U.S. global-warming emissions cap. It is the only other oil company in USCAP.

ConocoPhillips's announcement comes amid mounting political and consumer concern about global warming and rising gasoline prices. The U.S. Energy Information Administration said yesterday that the global oil market is likely to remain tight -- and pump prices volatile -- during the summer driving season. Regular-grade gasoline should average $2.81 per gallon this summer, it said, compared with $2.84 per gallon last summer.

Companies like ConocoPhillips that are endorsing a federal global-warming cap are doing so largely in the belief that they can shape it to minimize the cost to them. Many companies, eyeing the proliferation of differing global-warming rules in places such as California and the Northeast, are concluding that a single nationwide cap will be less onerous than a patchwork of state rules.

A U.S. policy, they figure, would be easier to integrate into global-warming regulations being implemented in other countries where U.S.-based multinationals like ConocoPhillips also do business. That integration would make it easier for companies to satisfy any U.S. obligation by buying cheaper emission "credits" from the developing world, where the cost of projects to reduce or offset fossil-fuel emissions is lower. ConocoPhillips's Mr. Mulva stressed that his company wants a U.S. cap to "have linkages" to policies in other countries.

Mr. Mulva also said he wants to ensure than any federal emissions cap doesn't "create winners and losers" in the economy. But companies already are ratcheting up their lobbying push in Washington to influence the details of whatever cap emerges. That scramble is particularly intense among the industries likeliest to be hit: electric utilities, heavy manufacturers, auto makers and oil producers.

Transportation isn't likely to be hit as hard as the utility sector. That is because it is cheaper for the economy to curb a ton of emissions of carbon dioxide, the main global warming gas, by targeting utilities than by targeting cars and trucks. Still, the transport sector is likely to be hit. The bulk of that burden could fall either on fuel producers, which might be required to produce fuel that contains less carbon, or on auto makers, which might be required to engineer their vehicles so they burn less fuel.

In an indication of that tension, Mr. Mulva all but blessed a toughening of a policy the auto industry reviles: the federal government's decades-old requirement that each auto maker's fleet of new vehicles each year meets a minimum average fuel economy. "We need to do everything we can to just have more energy efficiency," he said, adding: "If that leads to higher requirements -- more miles per gallon in terms of the automobiles we drive -- that all does help in the more efficient use of energy."

The auto industry, for its part, is trying to push much of the burden onto others. It, too, has begun talking favorably about an economy-wide cap on global-warming emissions, which it figures is likely to go easier on the auto industry than would a significant toughening of the federal automotive-fuel-economy requirements.

Do We Tax Energy Enough?

Here is the link with audio and video of this great discussion as well as related papers by Hassett and Parry. I would recommend signing up for a free subscription to Resources by Resources for the Future as well as reading Greg Mankiw's blog. Below is an introduction to the discussion.

Do We Tax Energy Enough?
March 29, 2007 -- American Enterprise Institute For Public Policy Research

What are the advantages and disadvantages of carbon and gasoline taxes? Ian W. H. Parry of Resources for the Future and AEI’s Kenneth P. Green, Kevin A. Hassett, and N. Gregory Mankiw will examine the pros and cons of carbon and gasoline taxes, discuss possible levels at which they could be set, and compare taxation to regulation as an alternative way to address environmental concerns.

Corporations Agree To Cut Emissions

Corporations Agree To Cut Emissions
February 20, 2007 -- Reuters via CNN

More than 100 corporate heads, international organizations and experts set out a plan on Tuesday to cut greenhouse gas emissions, calling on governments to act urgently against global warming.

"Failing to act now would lead to far higher economic and environmental costs and greater risk of irreversible impacts," the Global Roundtable on Climate Change warned in a statement, announcing their first major agreement since they began talks in 2004.

The group, which includes executives from a range of industries including air transport, energy, and technology, called on governments to set targets for greenhouse gases and carbon dioxide (CO2) emissions.

The agreement urged governments to place a price on the carbon emissions released by power plants, factories and other sectors to discourage emissions.

"Of course, addressing climate change involves risks and costs. But much greater is the risk of failing to act," said Alain Belda, chairman and CEO of the world's top aluminum producer Alcoa, who signed the pact.

The group includes General Electric, Ford Motor Co., Toyota Motor North America, investment bank Goldman Sachs, and Wal-Mart among its major corporations.

President George W. Bush's administration has rejected mandatory caps on emissions of carbon dioxide and other gases in the United States that contribute to a documented rise in world temperatures -- which is linked to more severe storms, worse droughts, rising seas and other ills.

But the White House has recently been on the defensive, especially since the February 2 release of a report by the Intergovernmental Panel on Climate Change, which called global warming "unequivocal" and said with 90 percent probability that human activities help cause it. (Full story)

The atmospheric concentration of carbon dioxide is about 30 percent higher than in 1900 and nearly half of this increase has occurred since 1980.

Given fast-rising emissions from developing nations, the group estimated that a "business-as-usual" path could put the planet at three times the carbon dioxide levels seen before 1900.

The largest carbon-emitting sector is power generation, responsible for more than 40 percent of global energy-related emissions.

Industry accounts for more than 18 percent of emissions, transport contributes another 20 percent, and the residential and services sector roughly 13 percent.

The group estimates that technology to head off mounting carbon dioxide concentrations would cost about 1 percent of global gross domestic product. Costs would fall as technologies become more established, it predicted.

"If we delay too long in beginning the changeover to increasingly de-carbonized energy systems, the eventual costs will only rise and the impact of climate change will only become more severe," the group wrote in its agreement, warning that poorer nations would see the worst impact from climate change.

Make Green Pay, Davos 2007: CNBC video

Make Green Pay is a discussion coordinated by CNBC at this years Davos meetings. The link provided will take you to the video for the entire program. The topics discussed are as follows:

MOTION 1: Nuclear energy and cleaner coal are the only workable alternatives to oil

James Rogers, President and Chief Executive Officer of Duke Energy argues for the motion that nuclear energy and cleaner coal are the only workable alternatives to oil. Today’s needs can only be met with today’s resources he says. Mr Rogers sees emission-free nuclear and advanced-coal technologies as the energy workhorses for the short-to medium term. Vinod Khosla, Founder and Partner of Khosla Ventures argues against the motion puts forward the case against the motion. He focuses on the hidden costs of nuclear and coal – the clean-up costs. Factor those in, he insists, and clean renewables start to look a whole lot more competitive.



MOTION 2: Markets are superior to regulation in leading corporations towards greener operations

In the board rooms and in the corridors of power there is increasing acknowledgement that the way in which we consume energy is damaging the earth. For most corporations though, changing attitudes are yet to translate into radically different practices. Reverend Nicholas Frances, Chief Executive Officer of Easy Being Green, puts forward the case for motion 2; that markets are the most effective influence on company behaviour. He says that a government’s ability to regulate will always lag the entrepreneur’s talent to innovate. Professor Daniel Esty, Hill House Professor at Yale University puts forward an opposing view. Professor Esty argues that business must be motivated to find solutions. Regulation, he points out, gives business the stability required for the risks associated with policy changes.



MOTION 3: A global carbon tax would do more harm than good

Professor Jose Goldemberg of Sao Paulo University reminds us that the developing world is unlikely agree to sacrifice economic development for an environmental agenda. He not only says that a global tax would do more harm than good but that to even aim for one would be unrealistic. Sir Nicholas Stern of the UK treasury and author of the Stern review stands against the motion. According to Sir Nicholas, companies must face with the full social cost of their actions and that, in economic terms, a common global carbon price would be the most efficient way of achieving this.

Grassroot Environmentalism Shifting American Policy

Waking up and catching up
January 25, 2007 -- The Economist

Belatedly, and for many reasons, America is embracing environmentalism

WHEN Jim Webb, the new Democratic senator from Virginia, replied to George Bush's state-of-the-union message, he could bear to endorse only one of the president's proposals. This was the idea of cutting America's petrol (gasoline) consumption by 20% in ten years, by increasing ethanol production to 35 billion gallons a year and raising fuel-efficiency standards for cars.

Such a plan would reduce America's dependence on imported oil from dangerous places (as would Mr Bush's plan to double the country's petroleum reserves). But it would address global warming only tangentially. The Democrats in Congress are weighing much more dramatic measures, including across-the-board cuts to the greenhouse gases that are heating up the planet. At the state level, politicians of all stripes are already taking more radical steps. Even big business is coming round. Mr Bush may be dragging his feet, but America is greening fast.

The Democrats' victory in last year's elections means that Congress's stance on environmental issues has changed dramatically. In one race for the House of Representatives, a Democratic consultant on wind power defeated a Republican ally of the oil industry. Barbara Boxer, an ardent advocate of firm action on climate change, has taken over the chairmanship of the Senate Environment Committee from James Inhofe, who often described global warming as “the greatest hoax ever perpetrated on the American people”.

Since Congress convened earlier this month, the Democrats have got to work fast. The House has passed a bill that would eliminate a tax break for oil production in America, and would impose penalties on firms that refuse to renegotiate the absurdly generous leases the government accidentally granted them in the late 1990s. The proceeds—perhaps $15 billion over the next decade—would be used to fund renewable energy schemes.

Nancy Pelosi, the new speaker of the House, is now turning her attention to global warming. She is setting up a committee to address both that issue, and America's dependence on imported fuel. She wants to see legislation before July 4th, so that she can declare “energy independence” on the same day that the founding fathers severed political ties with Britain.

Meanwhile, some half-dozen bills on global warming are circulating in the Senate. Several propose cap-and-trade schemes, whereby the government would create a fixed number of permits to produce greenhouse gases and then auction them or allocate them to businesses. Firms without enough permits to cover their emissions would either have to pollute less, or buy up spare ones from firms that had managed to cut back.

John McCain, a leading Republican presidential candidate, and Joe Lieberman, a former Democratic one, are behind the most prominent cap-and-trade scheme. Barack Obama, one of the Democrats' current presidential aspirants, is a co-sponsor. It is the most ambitious of the bills with serious backing: it would cut carbon emissions to 2004 levels by 2012 and then mandate further reductions of 2% a year until 2020. Although these targets are less onerous than those of the Kyoto protocol, the United Nations' treaty on climate change, most analysts reckon they will prove too exacting for Congress.

An alternative cap-and-trade scheme, sponsored by Jeff Bingaman, chairman of the Senate Energy Committee, suffers from the opposite problem: excessive modesty. His plan would aim to slow the growth of emissions, and ultimately stabilise them at their 2013 level by 2020. It includes a safety valve, under which the government would automatically issue more permits to pollute if the price of those permits rose too far. The economic impact would be much smaller than under the McCain-Lieberman plan but so, too, would the reductions in emissions.

Dianne Feinstein, a Democratic senator from California, is proposing a third approach. She wants to create cap-and-trade mechanisms within industries rather than across the economy as a whole. She has, for instance, proposed legislation that would cut power companies' emissions by 25% of their projected levels by 2020.

All these initiatives face an uphill battle. The previous Senate rejected the McCain-Lieberman plan twice—by a bigger margin the second time around. Any bill that involves mandatory caps on greenhouse-gas emissions would need 60 of the chamber's 100 votes to succeed, since Mr Inhofe has pledged to filibuster all such measures. In the House the Energy Committee is chaired by John Dingell, a Democrat from the carmaking hub of Detroit who has long opposed mandatory caps. Mr Dingell, who says Ms Pelosi's new committee is “as useful as feathers on a fish”, will still have a big say in any legislation. And even if a bill overcomes all these obstacles, it would risk a presidential veto.

A matter of security
But whatever the fate of these proposals, the political climate is changing faster than the weather. Almost all the leading presidential candidates favour emissions caps. One of them, Hillary Clinton, has condemned the Bush administration's failure to act as “unAmerican”. That is a remarkable change since 2000, when Al Gore toned down his environmental rhetoric during his presidential campaign for fear of sounding pious and obsessive. Indeed, activists are so convinced that the next president will be greener than Mr Bush that they are debating whether to settle for immediate but modest measures on global warming, or wait for a new administration to take bolder steps.

The Democrats have always been the greener party, but environmentalism is budding among Republicans too. Take Saxby Chambliss, a moderate senator. He voted against the McCain-Lieberman bill in 2005, but changed his mind after visiting Greenland to view the melting ice cap. “There really is something to it,” he now says.

Many factors lie behind the party's shift. Most have to do not with sudden sentimentality in the face of Nature, but with national security (a motivation that lies, too, behind Ms Pelosi's new committee and Mrs Clinton's patriotic posturing). Fiscal hawks fret about the impact of growing oil imports on the dollar. Military types fear global conflict for dwindling resources in the event of catastrophic global warming. Neoconservatives worry about America's dependence on oil imports from unstable if not openly hostile countries in Latin America and the Middle East. Some think the solution is simply to pump more oil at home, but others argue that America needs to move away from oil altogether. One such figure, Jim Woolsey, a former director of the Central Intelligence Agency, pointedly drives a Toyota Prius, a famously fuel-efficient car.

At the same time, a growing number of evangelical Christians are beginning to see global warming as a moral issue. They argue that mankind, as steward of God's creation, has a duty to protect the environment. One outfit, the Evangelical Climate Initiative, encourages prominent pastors and theologians to sign a “Call to Action”. Another group, the Evangelical Environmental Network, runs a website called “What would Jesus drive?” Last year Pat Robertson, a prominent televangelist, told his flock, “We really need to address the burning of fossil fuels.”

The Republican Party has a strong, albeit fitful, tradition of environmentalism. Teddy Roosevelt expanded America's national parks. Richard Nixon created the Environmental Protection Agency (EPA). Mr Bush's father, when he was president, signed off on America's first nationwide cap-and-trade scheme to control emissions of the gases that cause acid rain.

But the strongest force propelling environmentalism among Republicans is self-preservation. Arnold Schwarzenegger, the decidedly green governor of California, was one of the few luminaries in the party unaffected by last year's electoral meltdown. Republicans in other western states, where a Democratic tide is rising and a pristine landscape is a major tourist attraction, are following Mr Schwarzenegger's moves with interest. They fear the party may lose ground with moderate middle-class types who dislike urban sprawl and unfettered oil-drilling.

The destruction wrought by Hurricane Katrina in 2005 had a big influence on voters, according to Jonathan Lash of the World Resources Institute. Americans seem to view the increasing incidence of freakish weather as proof that climate change is real. Many of them paid to see Mr Gore's film on the subject, making it the third-most-successful documentary of all time (and now a candidate for an Oscar). Polls show that Americans are gradually growing more exercised about global warming, although they are still less anxious than Europeans or Japanese.


The business view
Even big business, which stands to lose most from stricter environmental regulation, is beginning to accept that change is in the air. Exxon Mobil, led until recently by a fierce sceptic of global warming, now concedes that there is a problem, and that its products are contributing to it. Last year four-fifths of utility executives polled by Cambridge Energy Research Associates, a consultancy, expected mandatory emissions caps within a decade.

If regulation is indeed on its way, many firms would like Congress to fix the rules sooner rather than later, to help them plan investments in factories and power plants with long lifespans. Earlier this week ten companies, including Alcoa, Caterpillar and DuPont, called for Congress to set up a cap-and-trade system for greenhouse gases as quickly as possible. Since most of the firms involved produce clouds of emissions, they would obviously like to influence future legislation.

But the firms' bosses claim to see emissions caps as an opportunity, not a threat. GE, a member of the group, wants its executives to use their “ecomagination”. By the same token Rick Wagoner, the head of GM, the world's biggest carmaker, recently hoped aloud that oil prices would remain high, so that his firm would keep its incentive to develop fuel-efficient cars. Wal-Mart, America's biggest retailer, hopes to double its sales of low-watt lightbulbs.

Lots of firms are growing healthily on the back of America's sudden enthusiasm for alternative energy. Americans invested almost $30 billion in the sector in 2006, according to New Energy Finance, a research firm. American venture capitalists lavish seven times more on greenery than their counterparts in Europe. Ethanol production was expected to double in the next few years, even before the latest boost from Mr Bush. Wind and solar power are also booming. And the bigger green firms become the more influence they will have over politicians.


States to the fore
At the very least, businesses want to avoid a patchwork of conflicting local regulations on environmental matters in general, and greenhouse-gas emissions in particular. There is already a bit of a muddle, since several states have taken much bolder and more experimental steps than the federal government. California, the boldest of all, has taken on carmakers, electricity companies and the EPA, to name a few. Its politicians vie to out-green one another. Some 40 of its legislators drive hybrid cars. Mr Schwarzenegger, not to be bested, has converted one of his fuel-swigging Hummers to run on hydrogen.

Congress may be thinking about tackling greenhouse-gas emissions, but California has already done it. Its Global Warming Solutions Act, which was passed last year, aims to cut them to 1990 levels by 2020—an ambitious target for a state that has grown rapidly in the past 15 years and will probably continue to do so. The details have yet to be fleshed out, but the reductions will come from both a cap-and-trade scheme for industry and regulations of various sorts.

Mr Schwarzenegger issued the first such regulation earlier this month, obliging producers of petrol and other fuels to cut the emissions of carbon dioxide from their products by 10% by 2020—presumably by mixing in more ethanol and other biofuels. It is not California's first attempt to reduce emissions from transport: its legislature voted for stringent cuts in 2002. That move has become snarled in a court battle over whether states have the right to set fuel-economy standards. Meanwhile, the politicians keep trucking. In September, the state showily sued six car manufacturers, alleging they had damaged its climate. It is also suing the EPA, for failing to regulate greenhouse-gas emissions.

California's politicians are keen on renewables too. State law requires utilities to generate 20% of the power they sell from sources such as windmills and biomass plants by 2010, and 33% by 2020. Solar power has won even greater favour: under the “million solar roofs” scheme, the state plans to spend more than $3 billion over the next decade subsidising the installation of solar-power panels.

California has also pioneered the practice of “decoupling”, which deprives power firms of their incentive to sell as much electricity as possible. Instead, the local regulator has devised a formula to reward firms whose sales are lower than expected, and to allow the recovery of the costs of energy-efficiency schemes.

Such measures (along with high power prices to pay for them) have helped California rein in its electricity consumption—although lovely weather and a relative lack of heavy industry have also played a part. Power use per person has remained roughly stable in the state since the 1970s, even as it has doubled in the rest of the country. As a result, California's greenhouse-gas emissions per person are on a par with those of Denmark. Relative to the size of its economy, they are lower.

But California is not America's only green enclave. Nine states in the north-east have combined to reduce emissions from power generation through a cap-and-trade scheme. Two of them plan to auction all the permits, unlike the countries in the European Union's Emissions Trading Scheme, which handed them out for nothing. Ten states have signed up to follow California's standards on car exhaust, including its requirements on greenhouse gases. Many more promote ethanol, or renewables, or energy-efficient buildings.

On the whole, left-leaning states are keener on greenery than right-wing ones, which tend to be more energy-intensive. But politicians of all stripes in the Midwest are keen to promote ethanol for the sake of local farmers, who grow the corn from which it is made. And Texas recently overtook California as the country's biggest generator of wind power.

Greenery is also popular at the local level. Almost 400 cities have devised plans to curb or reduce their greenhouse gas emissions. Many buy only fuel-efficient cars for their municipal fleets. Laura Miller, the mayor of Dallas, has spoken out against the plans of local utilities to build 17 new coal-fired power plants. What is the point of her city buying police cars fuelled by natural gas, she asks, when they will soon be overshadowed by clouds of soot?

Despite all this grassroots environmentalism, America remains the biggest contributor to global warming, accounting for roughly a fifth of all the world's emissions. The federal government's recalcitrance on the subject remains the biggest obstacle to an effective global scheme to tackle the problem. But whereas in Europe or Asia new ideas often flow from the centre to the regions, in America the states are the incubators of big shifts in policy. This means that change is coming—fast.

America's Moral Leadership & Pollution

The Greening of America
January 25, 2007 -- The Economist

How America is likely to take over leadership of the fight against climate change; and how it can get it right.

A country with a presidential system tends to get identified with its leader. So, for the rest of the world, America is George Bush's America right now. It is the country that has mismanaged the Iraq war; holds prisoners without trial at Guantánamo Bay; restricts funding for stem-cell research because of fundamentalist religious beliefs; and destroyed the chance of a global climate-change deal based on the Kyoto protocol.

But to simplify thus is to misunderstand—especially in the case of huge, federal America. One of its great strengths is the diversity of its political, economic and cultural life. While the White House dug its heels in on global warming, much of the rest of the country was moving. That's what forced the president's concession to greens in the state-of-the-union address on January 23rd. His poll ratings sinking under the weight of Iraq, Mr Bush is grasping for popular issues to keep him afloat; and global warming has evidently become such an issue. Albeit in the context of energy security, a now familiar concern of his, Mr Bush spoke for the first time to Congress of “the serious challenge of global climate change” and proposed measures designed, in part, to combat it.


Hot for the time of year
It's the weather, appropriately, that has turned public opinion—starting with Hurricane Katrina. Scientists had been warning Americans for years that the risk of “extreme weather events” would probably increase as a result of climate change. But scientific papers do not drive messages home as convincingly as the destruction of a city. And the heatwave that torched America's west coast last year, accompanied by a constant drip of new research on melting glaciers and dying polar bears, has only strengthened the belief that something must be done.


Business is changing its mind too. Five years ago corporate America was solidly against carbon controls. But the threat of a patchwork of state regulations, combined with the opportunity to profit from new technologies, began to shift business attitudes. And that movement has gained momentum, because companies that saw their competitors espouse carbon controls began to fear that, once the government got down to designing regulations, they would be left out of the discussion if they did not jump on the bandwagon. So now the loudest voices are not resisting change but arguing for it.

Support for carbon controls has also grown among some unlikely groups: security hawks (who want to reduce America's dependence on Middle Eastern oil); farmers (who like subsidies for growing the raw material for ethanol); and evangelicals (who worry that man should be looking after the Earth God gave him a little better). This alliance has helped persuade politicians to move. Arnold Schwarzenegger, California's Republican governor, has led the advance, with muscular measures legislating Kyoto-style curbs in his state. His popularity has rebounded as a result. And now there is movement too at the federal level, which is where it really matters. Since the Democrats took control of Congress after the November mid-term elections, bills to tackle climate change have proliferated. And three of the serious candidates for the presidency in 2008—John McCain, Hillary Clinton and Barack Obama—are all pushing for federal measures.


Europe's good, and bad, example
Unfortunately, Mr Bush's new-found interest in climate change is coupled with, and distorted by, his focus on energy security. Reducing America's petrol consumption by 20% by 2017, a target he announced in the state-of-the-union address, would certainly diminish the country's dependence on Middle Eastern oil, but the way he plans to go about it may not be either efficient or clean. Increasing fuel-economy standards for cars and trucks will go part of the way, but for most of the switch America will have to rely on a greater use of alternative fuels. That means ethanol (inefficient because of heavy subsidies and high tariffs on imports of foreign ethanol) or liquefied coal (filthy because of high carbon emissions).

The measure of Mr Bush's failure to tackle this issue seriously is his continued rejection of the only two clean and efficient solutions to climate change. One is a carbon tax, which this paper has long advocated. The second is a cap-and-trade system of the sort Europe introduced to meet the Kyoto targets. It would limit companies' emissions while allowing them to buy and sell permits to pollute. Either system should, by setting a price on carbon, discourage its emission; and, in doing so, encourage the development and use of cleaner-energy technologies. Just as America's adoption of catalytic converters led eventually to the world's conversion to lead-free petrol, so its drive to clean-energy technologies will ensure that these too spread.

A tax is unlikely because of America's aversion to that three-letter word. Given that, it should go for a tough cap-and-trade system. In doing so, it can usefully learn from Europe's experience. First, get good data. Europe failed to do so: companies were given too many permits, and emissions have therefore not fallen. Second, auction permits (which are, in effect, money) rather than giving them away free. Europe gave them away, which allowed polluters to make windfall profits. This will be a huge fight; for, if the federal government did what the Europeans did, it would hand out $40 billion-50 billion in permits. Third, set a long time-horizon. Europeans do not know whether carbon emissions will still be constrained after 2012, when Kyoto runs out. Since most clean-energy projects have a payback period of more than five years, the system thus fails to encourage green investment.

One of America's most admirable characteristics is its belief that it has a duty of moral leadership. At present, however, it's not doing too well on that score. Global warming could change that. By tackling the issue now it could regain the high moral ground (at the same time as forging ahead in the clean-energy business, which Europe might otherwise dominate). And it looks as though it will; for even if the Toxic Texan continues to evade the issue, his successor will grasp it.

Rachel Carson Meets Adam Smith

On April 21st 2005, The Economist published an article entitled 'Rescuing Environmentalism'. Here are some snippets from this great article:

Market forces could prove the environment's best friend—if only greens could learn to love them.

The environmental movement's foundational concepts, its method for framing legislative proposals, and its very institutions are outmoded. Today environmentalism is just another special interest.” Those damning words come not from any industry lobby or right-wing think-tank. They are drawn from “The Death of Environmentalism”, an influential essay published recently by two greens with impeccable credentials. They claim that environmental groups are politically adrift and dreadfully out of touch.

...
Consider, for example, their invocation of the woolly “precautionary principle” to demonise any complex technology (next-generation nuclear plants, say, or genetically modified crops) that they do not like the look of. A more sensible green analysis of nuclear power would weigh its (very high) economic costs and (fairly low) safety risks against the important benefit of generating electricity with no greenhouse-gas emissions.

...
Yesterday's failed hopes, today's heavy costs and tomorrow's demanding ambitions have been driving public policy quietly towards market-based approaches. One example lies in the assignment of property rights over “commons”, such as fisheries, that are abused because they belong at once to everyone and no one. Where tradable fishing quotas have been issued, the result has been a drop in over-fishing. Emissions trading is also taking off. America led the way with its sulphur-dioxide trading scheme, and today the EU is pioneering carbon-dioxide trading with the (albeit still controversial) goal of slowing down climate change.

These, however, are obvious targets. What is really intriguing are efforts to value previously ignored “ecological services”, both basic ones such as water filtration and flood prevention, and luxuries such as preserving wildlife. At the same time, advances in environmental science are making those valuation studies more accurate. Market mechanisms can then be employed to achieve these goals at the lowest cost. Today, countries from Panama to Papua New Guinea are investigating ways to price nature in this way (see article).

If this new green revolution is to succeed, however, three things must happen. The most important is that prices must be set correctly. The best way to do this is through liquid markets, as in the case of emissions trading. Here, politics merely sets the goal. How that goal is achieved is up to the traders.

A proper price, however, requires proper information. So the second goal must be to provide it. The tendency to regard the environment as a “free good” must be tempered with an understanding of what it does for humanity and how. Thanks to the recent Millennium Ecosystem Assessment and the World Bank's annual “Little Green Data Book” (released this week), that is happening. More work is needed, but thanks to technologies such as satellite observation, computing and the internet, green accounting is getting cheaper and easier.

Which leads naturally to the third goal, the embrace of cost-benefit analysis. At this, greens roll their eyes, complaining that it reduces nature to dollars and cents. In one sense, they are right. Some things in nature are irreplaceable—literally priceless. Even so, it is essential to consider trade-offs when analysing almost all green problems. The marginal cost of removing the last 5% of a given pollutant is often far higher than removing the first 5% or even 50%: for public policy to ignore such facts would be inexcusable.

If governments invest seriously in green data acquisition and co-ordination, they will no longer be flying blind. And by advocating data-based, analytically rigorous policies rather than pious appeals to “save the planet”, the green movement could overcome the scepticism of the ordinary voter. It might even move from the fringes of politics to the middle ground where most voters reside.

Whether the big environmental groups join or not, the next green revolution is already under way. Rachel Carson, the crusading journalist who inspired greens in the 1950s and 60s, is joining hands with Adam Smith, the hero of free-marketeers. The world may yet leapfrog from the dark ages of clumsy, costly, command-and-control regulations to an enlightened age of informed, innovative, incentive-based greenery.

Carbon Down, Profits Up

On June 8th, 2006 The Economist published an article entitled 'Can business be cool: Why a growing number of firms are taking global warming seriously'.

Rupert Murdoch is no green activist. But in Pebble Beach later this summer, the annual gathering of executives of Mr Murdoch's News Corporation—which last year led to a dramatic shift in the media conglomerate's attitude to the internet—will be addressed by several leading environmentalists, including a vice-president turned climate-change movie star. Last month BSkyB, a British satellite-television company chaired by Mr Murdoch and run by his son, James, declared itself “carbon-neutral”, having taken various steps to cut or offset its discharges of carbon into the atmosphere.

The army of corporate greens is growing fast. Late last year HSBC became the first big bank to announce that it was carbon-neutral, joining other financial institutions, including Swiss Re, a reinsurer, and Goldman Sachs, an investment bank, in waging war on climate-warming gases (of which carbon dioxide is the main culprit). Last year General Electric (GE), an industrial powerhouse, launched its “Ecomagination” strategy, aiming to cut its output of greenhouse gases and to invest heavily in clean (ie, carbon-free) technologies. In October Wal-Mart announced a series of environmental schemes, including doubling the fuel-efficiency of its fleet of vehicles within a decade. Tesco and Sainsbury, two of Britain's biggest retailers, are competing fiercely to be the greenest. And on June 7th some leading British bosses lobbied Tony Blair for a more ambitious policy on climate change, even if that involves harsher regulation.

The greening of business is by no means universal, however. Money from Exxon Mobil, Ford and General Motors helped pay for television advertisements aired recently in America by the Competitive Enterprise Institute, with the daft slogan “Carbon dioxide: they call it pollution; we call it life”. Besides, environmentalist critics say, some firms are engaged in superficial “greenwash” to boost the image of essentially climate-hurting businesses. Take BP, the most prominent corporate advocate of action on climate change, with its “Beyond Petroleum” ad campaign, high-profile investments in green energy, and even a “carbon calculator” on its website that helps consumers measure their personal “carbon footprint”, or overall emissions of carbon. Yet, critics complain, BP's recent record profits are largely thanks to sales of huge amounts of carbon-packed oil and gas.

Most of the corporate converts say they are acting not out of some vague sense of social responsibility, or even personal angst, but because climate change creates real business risks and opportunities—from regulatory compliance to insuring clients on flood plains. And although these concerns vary hugely from one company to the next, few firms can be sure of remaining unaffected.

The most obvious risk is of rising energy costs. Indeed, the recent high price of oil and natural gas, allied to fears over the security of energy supplies from the Middle East and Russia—neither of which have anything to do with climate change—may be the main reason why many firms have recently become interested in alternative energy sources. But at the same time, a growing number of bosses—whatever their personal views about the scientific evidence of climate change—now think that the public has become convinced that global warming is for real. Hurricane Katrina was particularly important in changing opinion in America. Many businessmen have concluded that this new public mood will result, sooner or later, in government action to control carbon emissions—most likely, using some sort of carbon tax or Kyoto-like system of tradable caps on firms' carbon emissions.

A carbon-trading system is already in place in the European Union. But even in America, some influential businesses are exerting pressure on the government to control carbon emissions. One motive is to help firms facing decisions that will depend for their long-term profitability on what carbon regime, if any, is in place. “Some asset-intensive industries are making investments now that have a 30- to 50-year horizon,” says Travis Engen, who recently stepped down as boss of Alcan, a big aluminium firm. “As CEO, I wanted to make damn sure my investments were good for the future, not just today”—which, for him, meant evaluating investments assuming that his firm would soon have to pay to emit carbon.

Indeed, some expect President Bush to start thinking more about climate change after November's mid-term elections, especially now that he has appointed a keen environmentalist as treasury secretary—Hank Paulson, who as boss of Goldman Sachs was the force behind the investment bank's greener stance. “American businesses are starting to realise that something is going to happen on carbon,” says Jim Rogers, chief executive of Duke Energy, one of the country's biggest power producers, who reckons legislation is quite likely to pass in Congress by 2009.

As firms try to do something about climate change, the typical first step is to improve their energy efficiency, by both reducing consumption and also shifting the mix of sources from hydrocarbons towards cleaner alternatives. Given high oil prices, those that have already done so have found energy efficiency to be surprisingly good for profits.

“Carbon Down, Profits Up”, a report by the Climate Group, an organisation founded in 2004 by various firms and governments, listed 74 companies from 18 industries in 11 countries that are committed to cutting greenhouse-gas emissions. So far, this has brought them combined savings of $11.6 billion, claims the report. Four firms—Bayer, British Telecom, DuPont and Norske Canada—account for $4 billion of this between them.

Many companies, including BP, also see the chance to make money from providing things that help reduce global warming—from clean coal-fired power-stations, to wind farms, to mortgages with better rates for homes that are carbon-neutral. GE plans to double its revenues from 17 clean-technology businesses to $20 billion by 2010. HSBC's decision to become carbon-neutral is part of a plan to develop a carbon-finance business, both for retail consumers and corporate clients. “We believe it is a major business opportunity for us, not a hobby or corporate social responsibility,” says Francis Sullivan of HSBC. And even as car firms lobby against regulating carbon, they are investing heavily in cleaner hybrid cars.

Going carbon-neutral—in which a firm cuts its carbon output as much as possible and then offsets any left over by paying to reduce emissions elsewhere—is particularly attractive to firms that sell directly to the public and reckon that their customers want them to take climate change seriously. Since these sorts of firms are often not great carbon-emitters in the first place, “carbon neutrality” can be fairly painless. “Trusted consumer-facing brands can be the missing link, helping millions of people to aspire to lower-carbon lifestyles and begin to tackle an issue that feels overwhelming,” intones BSkyB's James Murdoch, optimistically.

A recent study by the Carbon Trust, a British quango, reckoned that, for industries such as airlines, up to 50% of brand value may be at risk if firms fail to take action on climate change. This figure is challenged by many in the industry who point to the low take-up of British Airways' service enabling passengers to offset their flight's carbon emissions. And there's the rub. A growing number of companies—urged on by shareholders who see greenery as a sign that managers are thinking long-term—are ready to do something about climate change. It remains to be seen whether their customers are willing to pay the price.

Emissions Trading

On June 10th, 2006 The Economist published an article entitled 'Gaming gases' that discusses the exploitation of the carbon market by power companies. Thus far, it appears that these corporations have the comparative advantage in this newly formed market, instead of the environment.

Why a scheme designed to punish polluters is rewarding them.

All new policy instruments have teething troubles but the European Emissions Trading Scheme (ETS) has more than its fair share. Designed to discourage the production of greenhouse gases and encourage investment in cleaner forms of energy, it has rewarded polluters rather than penalising them, and failed to boost alternatives.

The article continues by saying:

Three problems have emerged. The first is the consequence of handing allowances free to existing polluters (a process known as 'grandfathering') . The polluters pocketed them, passing on the extra cost of production to their consumers. Moreover, once trading took off, the price of allowances rocketed to €30 ($40) a tonne. Developing countries, meanwhile, were selling permits for about half that (because they cannot yet be traded, and are regarded as riskier). So polluters have been cashing in their allowances, buying cheap Clean Development Mechanism (CDM) permits--and keeping the difference. According to a report by IPA Energy Consulting, Britain's power companies alone have profited to the tune of around £800m ($1.5 billion) a year.

The second problem was that when the scheme started there was little information about how much pollution the 13,000 factories were emitting. The original levels claimed by member governments were not much more than guesswork, and not surprisingly were generous. Now that levels are being monitored, it turns out that Europe is not emitting as much as it thought it was. When this emerged last month, the price of carbon allowances crashed.

Third, the current phase of the ETS lasts for only three years. Nobody knows what level of allowances will then be set. Since the payback period for cleaner power-generating technology is at least five years, there is no incentive for producers to invest in cleaner technologies.

None of this suggests that using the market to curb emissions is a bad idea. But if the EU is to create a system for airlines, it should learn from the ETS's teething troubles. The scheme should be based on reliable information, permits should be auctioned not grandfathered and it should run for long enough to get polluters to change their ways.

To view a previous article on carbon trading, click here

Pigovian Tax

The legacy that a society leaves for future generations is always remembered more than the short-term shenanigans that ensued because of shortsighted policies. The baby boom generation's legacy will likely consist of: conflicts with communist nations, the internet, terrorism, Social Security, Medicare and environmental degradation. The last of which might be most damaging and therefore remembered by future generations.

Following U.S. leadership of environmental neglect, the world is experiencing the largest mass extinction in approximately 65 million years, human population is over 6.5 billion -- and exponentially growing -- and the global economy has been incapable of representing sustainable policies.

Carbon as a commodity is an ingenious, yet, extraordinarily complex endeavor that is unlikely to produce the intended results for at least a decade. Until the externalities of pollution can be respected and individuals feel ownership towards environmental degradation, the economy will continue on this unsustainable path. Ironically, the tragedy of the commons could one day represent the legacy of the country that declared war against communism, the U.S.A.

There is no single solution to this problem that has been exacerbated by the children of the 'greatest generation'. Pigovian taxes are likely the best immediate response to curb the enthusiastic consumption by industrialized nations. Greg Mankiw opines that Pigouvian taxes could be the answer to everyone's problems.

The Democrats say they want more environmental protection. The Republicans say they want to make permanent the recent cuts in income, dividend, and estate taxes. Everyone says they want a smaller budget deficit. We can achieve all of these objectives by agreeing to higher Pigovian taxes, such as taxes on gasoline or carbon. The Republicans concede that government revenue will be higher than it is under the President's proposed budget, and the Democrats concede that the President's tax cuts on income, dividends, and estates will be permanent.

The burden of any tax is shared by both buyers and sellers regardless of whom it is levied on. However, the benefits of conserving finite resources using policy will promote sustainable development and healthier living. The comparative advantage of a consumption tax versus a capital tax should be discussed more among economists, politicians and the common citizen. Taxing capital discourages saving whereas taxing consumption does not!

Carbon Trading

On May 4th, 2006 The Economist published an article entitled 'Carbon Trading' that discusses the exploitation of the carbon market by power companies and shorting traders. Thus far, it appears that these corporations and individuals have the comparative advantage in this newly formed market, instead of the environment.

MARKETS are naturally volatile; but when they are new, thin and involve governments, they are especially capricious. So it is with the market for carbon-emission permits created by the establishment of the European Union Emissions Trading Scheme (ETS) in January 2005. The price of permits, which had tripled since the scheme's launch, dropped by more than half in the last week of April.

The ETS is designed to cut greenhouse-gas emissions so that European countries meet the targets set for them by the Kyoto climate-change agreement. Some 13,000 factories and power stations in five different industries may emit carbon only if they have a permit. At the start of the scheme, they were given permits worth around 2.2 billion tonnes of carbon dioxide per year. Those permits may be used up as fuel is burned and carbon generated, or they may be traded. Around €10 billion-worth ($12.4 billion-worth) of permits were traded last year. This year the figure will probably be three times that.

When the scheme was originally established, politicians expected the permit price to hover around €10 a tonne. Instead, it rose to a peak of €30. “The gas-coal spread is mostly responsible,” explains Anthony White of Climate Change Capital, a specialist investment bank. The power-generation business dominates the carbon market, because it emits so much pollution. In Europe, gas and coal are the main fuels used. When the gas price rises, power companies tend to switch to coal. Coal is dirtier than gas; so, as power companies switch to coal, they need more permits, and the price rises.

Then, in late April, several countries, including France and Spain, announced how much carbon they had emitted last year. The numbers were surprisingly small. Suddenly, the future demand for permits looked lower than expected—and the price crashed. Unfortunately, the numbers reflect not the scheme's success in cutting pollution, but industry's success in getting itself allocated more permits than actual emissions warranted when the scheme was launched. Dieter Helm, an energy economist at Oxford University, questions the way the information was sprung on the market, and the degree of competition (or lack of it) in the market. “It ought to be investigated,” he says.

So far, the ETS has done more for power-generating companies than it has for curbing pollution. Because carbon permits were handed out free, rather than auctioned (as most economists said they should be); and because the carbon price has been unexpectedly high, permit-holders found they were sitting on unexpectedly valuable property rights. IPA Energy Consulting, in a report for the British government on the scheme, says it reckons that the British power-generation sector has profited to the tune of £800m ($1.5 billion) a year.

Meanwhile, there's no sign that the permit regime has brought about a switch to cleaner fuel—indeed, the reverse has been happening. That's not just because gas has been so much more expensive than coal, but also because the first phase of the ETS lasts only three years. Beyond that, nobody has any idea how many permits will be issued, and therefore what the price might be. And since investments to reduce emissions have pay-back periods of five or more years, nobody is going to start investing on a three-year view.

The ETS's troubles do not mean markets are no use in curbing emissions—but they do mean that markets need to be part of a scheme that has been well designed. The ETS hasn't.