Tuesday, December 9, 2008

Heads, Tails, or Both?

I apologize as the holidays have put me into a food daze the past couple of weeks, and I have thus sacrificed my blog in the name of gluttony. But never fear, I have conquered Thanksgiving and all its helpings to bring you this next insightful entry to fulfill all of your holiday season wishes.

As the U.S. continues to move toward a more carbon regulated economy, there is still ongoing debate as to the most effective mode of restricting greenhouse gases while not putting an undue burden on the economy. Right now, there is significant conversation regarding a bottom up approach which involves capping greenhouse gases at the output stage versus a top down approach which involves stimulating innovation to prevent gases from being emitted in the first place. Proponents of capping greenhouse gases are keeping their eyes on Copenhagen (I prefer Skoal) and beyond. Innovation proponents are keeping their focus on the new administration and how the incoming President will organize funds for the emerging industry (provided there are some left after the current bailout lotto, the two wars, the new stimulus, etc.).

In my humble (yet somehow superior) opinion, there are several facets of this debate that are important:

  • Incentives - Cap and trade incentivizes companies to not do wrong by restricting carbon emissions, while innovation stimulation incentivizes companies to do right by creating/improving/installing technology to eventually reduce greenhouse gases. Politicians may be influenced in leaning towards one or the other depending on if they prefer black mail (represented by cap and trade) or bribery (represented by innovation investment).

  • Trust - While corporations have never given us a reason not to trust them, both approaches rely on differing levels of trust. A cap on greenhouse gases does not fully rely on companies to reduce emissions on their own (low trust level). An innovation approach relies on individual corporations to incorporate greenhouse gas reduction into their overall strategy as they see fit (high trust level).

  • Pricing - Capping carbon emissions will give carbon a direct price either via a cap and trade market or a carbon tax. The price is standardized and rigid for every entity. Innovation stimulation will give carbon a less visible, more indirect, price. Companies are given more flexibility in determining their own price of carbon via the costs/benefits of utilizing innovation incentives.

  • Timing - Assuming allowances are not over-issued, offsets are regulated, the system is not overly manipulated by third parties, and/or a carbon tax is priced effectively (no big deal, right?), cap and trade should begin to reduce greenhouse gases in the short-term. Innovation is a more long-term approach. Assets take time to construct and replace, but as green innovation gains momentum, costs will be scaled down, thus decreasing the costs of reducing greenhouse gases, which could lead to lower levels than a cap approach would achieve over the long term.

  • Competition - At least in the short-term, putting a cap on greenhouse gases could increase costs of production and put U.S. firms at a further disadvantaged position from foreign non-carbon restricted counterparts (cough, China, cough). Innovation would allow firms to look at the entire competitive landscape so that new technologies can be effectively incorporated without driving costs up to non-competitive levels.

For the sake of your entertainment, I have attempted to show these as mutually exclusive options. In reality, these two "options" are really two sides of the same coin in solving the current emissions crisis and the U.S. will more than likely have a combination approach in its carbon gas management. However, there will be differing opinions on how much involvement (or interference) the government should have with both creating a carbon market and stimulating development. Should the U.S. create a rigid cap and trade market or carbon tax with price floors and oversight to prevent "gaming," or let the market be flexible in its approach utilizing a flowing market of allowances, offsets, derivatives, etc.? Further, what combination of investment, subsidies, penalties, etc. should be used and how do we ensure that the market picks technology winners and not the government? (Man, someone should really blog some answers for those questions.)

Some additional thoughts, green and otherwise:

  • What would the car companies have done if Congress had approved their $25 billion request when they actually needed $34 billion? Did the Big 3 even prepare for that first meeting or did they rely on the always savvy pick a number strategy? I also found it humorous that they all drove (or pushed, depending on their current level of innovation) low MPG/emissions vehicles instead of using private jets. I believe this is a clip of the Ford and GM CEOs teaming up to save gas (http://www.youtube.com/watch?v=UnkefjCES-4) on their way to D.C., or is it Aspen?

  • If the effects of greenhouse gas were as easily shown as the effects poor conditions have on workers in developing countries, would there be any resistance to instituting capping greenhouse gases? I bring this up because we have no problem creating safe working conditions in the U.S. even if China does not follow, but some politicians refuse to do the same for greenhouse gases which have an even broader effect until developing nations promise to do so. Or perhaps this is reaching?

  • I saw a commercial that criticized clean coal as being non-existent (http://www.youtube.com/watch?v=PdHuB7Ovl2o). This may be the current truth, but I believe this technology needs to be a priority, perhaps even the top priority, in energy innovation as coal usage will only continue to grow as developing countries further industrialize.

Thanks for reading. As always, comments are welcomed and very much appreciated. Now excuse me as I have to go on Ebay and put in my bid for the open Illinois Senate seat.


jquaglia said...
This comment has been removed by the author.
Dan Sell said...

Honestly, wikipedia does a great job summarizing what's currently going on (http://en.wikipedia.org/wiki/Emissions_trading) and going over basics. If you need info on specific markets (e.g. Kyoto, RGGI, Voluntary Carbon Market, etc.), let me know or if you have any specific questions on market mechanisms.

Anonymous said...

You are an idiot.