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Hogging the Sky
[Rachel's Introduction: As 10 Eastern states prepare to launch a "cap and trade" system to sell "rights" to emit carbon dioxide into the sky, we might ask, "What constitutes our (or anyone's) 'fair share' of such rights?"]
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By Peter Montague
As a dump, the sky is a valuable resource -- a place where we can throw wastes like sulfur and nitrogen oxides, soot, mercury, methane, and carbon dioxide (among other things). Economists call the sky a "sink" rather than a "dump" but it's the same thing. (Obviously the sky has many other values besides its capacity to accept wastes -- but for now we'll ignore those other values because this is about economics.)

In recent years scientists worldwide have concluded that we have been dumping too much carbon dioxide [CO2] (and other "greenhouse gases," like methane) into the sky, thus contributing to global warming. They say we need to cut back pretty drastically.

The need to reduce CO2 emissions raises four questions:

(1) How to set a total limit on sky dumping?

(2) How to divvy up individual dumping privileges?

(3) How to persuade people to stay within their dumping allotment?

(4) If we collect money by charging people for the privilege of dumping into the sky, what should happen to that money?

Here's a brief discussion of these 4 questions:

Question 1: Scientists disagree on how much total CO2 we humans can dump into the sky each year without contributing significantly to global warming and thus to climate change. Many scientists used to believe that we could safely double the amount of CO2 in the sky, from the 280 parts per million (ppm) that the sky held in 1750, raising it to 560 ppm some time later this century.

However, in the past few years, the authoritative scientific group on climate change, the IPCC, has been saying that we need to stabilize CO2 at 450 ppm, not 560 ppm.

But late last year the best-known U.S. climate scientist, James Hansen, started saying in public that anything over 350 ppm runs the risk of changing the climate so much that we will soon find ourselves living on a "different planet" -- with coastal cities awash, major regional shortages of food and fresh water, more frequent and more intense hurricanes, tornadoes, floods, and droughts -- in sum, climate chaos.

We have already exceeded Hansen's 350 ppm limit. The CO2 concentration in the atmosphere now stands at about 380 ppm and is rising about 2 ppm each year. Even stabilizing at 450 ppm would require deep cuts soon, and of course 350 ppm would require even deeper cuts even sooner.

In any case, there is, so far, no consensus on the global cap that we should aim for, and there is no global authority except the United Nations to help nations achieve whatever cap they eventually set.

Still, almost everyone agrees big cuts are needed.

Question 2: How to Divvy Up the Sky Dump?

If you accept the need for cuts, then you accept that the sky is a limited good -- we can't continue to dump into it without limit as we've been doing. Therefore, as with any limited good, we have to set restrictions on total dumping (a "cap"), and then make sure individual dumpers, together, don't exceed the cap. This means allocating dumping privileges among the dumpers. What's the best way to do that?

As Larry Lohmann writes in his indispensable book, Carbon Trading (6 Mbytes PDF),

"What kind of rights should people or governments have to carbon dump space, given the need to maintain climatic stability for current and future generations? Do you divide up the dump space equally among the world's people? Do you give the world's worst-off disproportionate shares in the dump? Do you give the biggest shares to those who haven't yet had a chance to use much of the dump? Do you give the biggest shares to those who can least afford to cut down on their use of the dump? Do you give the most dump space to those who can use it to contribute the most to the global good? Or do you just give the most rights to the dump to those who are using it the most already?" [pg. 18, emphasis added.] This last approach is the one favored by major carbon emitters in the U.S., as we'll see.

Question 2: How to persuade dumpers to control their CO2 Emissions?

After you've decided the question of how to divvy up the sky dump, then there are three main proposals for controlling CO2 dumping:

(1) Traditional regulation. Set a cap on total emissions. Then enforce a permit system that specifies the amount of CO2 that each emitter can emit, similar to the regulatory system now operating in the U.S. for a few air and water pollutants (under the Clean Air Act and Clean Water Act). If anyone exceeds their allotted limit (and gets caught), they may eventually face punishment (ranging from a slap on the wrist to imprisonment.) Basically limits are set on each polluter (more or less) but the polluter does not pay for the privilege of polluting. Dumping into the sky is free.

(2) A carbon tax. Set a cap on total emissions. Then tax each pound of carbon dumped, and ratchet up the tax rate as time goes on until you reach the tax-rate that achieves the desired total reduction in emissions. The polluter pays, and every polluter has a continuing incentive to dump less.

(3) Cap and trade. Set a limit on total emissions. Then the authorities give or sell "allowances" (or "credits") which represent a right to emit a certain amount of CO2. Typically, an "allowance" will represent the right to dump one ton (or one metric tonne) of CO2 into the sky per year (though allowances can be "banked" and used at any time in the future). (One ton = 2000 pounds; one metric tonne = 2200 pounds.) Periodically, the "cap" on total CO2 emissions may be lowered by the authorities and the number of allowances available for gift or purchase would be reduced accordingly. Those who can reduce their emissions cheaply will do so and will thus have extra allowances that they can sell to others, and those who cannot reduce emissions cheaply will find it cheaper to purchase more "rights to pollute" from those who have extra allowances. (At least that's the theory that economists extol.)

Economists say that this "cap and trade" approach is the most "efficient" way for society as a whole to reduce its emissions. However, economists ignore a serious injustice that such systems can create: an old, dirty power plant in a poor neighborhood may be expensive to fix, so the owner simply buys the right to continue polluting for years or decades. The problem isn't the CO2 emissions themselves, which are not directly toxic -- but CO2 emissions are accompanied by "co-pollutants" that are real killers: oxides of sulfur and nitrogen, mercury, lead, and, most importantly, ultrafine particles of soot. When cap-and-trade was tried for more than 5 years in California, serious injustices were created, and pollution was not reduced adequately. So cap-and-trade programs may achieve "efficiency" at the expense of the health and quality of life for people of low income and people of color. This raises the question, "efficient" for whom? For wealthy polluters, perhaps, but not necessarily for everyone.

Precisely because it is "efficient" in this way, "cap and trade" is favored by the big CO2 dumpers -- and their financial backers. They say it is the cheapest way for CO2 emitters to achieve any required reductions, meaning they can often buy the "right to pollute" more cheaply that they can achieve real cleanup.

The financial industry has a slightly different motive than the coal industry -- financiers are hoping to make billions of dollars trading carbon just as they hoped to make billions selling collateralized debt obligations (CDOs), mortgage-backed securities (MBSs), and structured investment vehicles (SIVs). To the financial industry, carbon allowances are just one more investment instrument, and one they hope will provide a big payoff. In 2005, worldwide CO2 emissions from the primary energy industry totaled 27136 megatonnes (millions of tonnes) [IEA pg. 48]; if each tonne required a carbon allowance worth, say, $10, a new market worth $271 billion would spring into being overnight. That money could provide lots of good jobs for bankers, traders, lawyers, publicists, and assorted hustlers because carbon trading is very complicated and requires a large private bureaucracy to support it.

The U.S. government has no official policies on any of these questions or approaches, but 10 Eastern states are now setting up a carbon trading operation called "Reggi" -- the Regional Greenhouse Gas Initiative (RGGI). (The 10 states are Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont.)

Begun in 2003, RGGI is now pretty far along. It is scheduled to formally begin January 1, 2009, less than a year from now. Just this week, New Jersey passed a law authorizing state government to participate in the RGGI "cap and trade" scheme. Governor Jon Corzine (former chairman of the Wall Street investment bank, Goldman Sachs) is expected to sign the measure into law before Jan. 15.

RGGI is important because it seems very likely that the federal government will eventually adopt something like the RGGI approach.

RGGI has already answered the four questions:

Question 1: How to set caps? RGGI did this by negotiation. The ten states hashed it out among themselves. See Table 1, below. The 10 states have set a regional cap at 188 million tons (= 170.5 million metric tonnes) per year between now and the year 2014. For the following four years, 2015-2018, the 10-state cap will be reduced roughly 2.5% per year to get the total cap down to 153.6 million tonnes, 10% below the current cap, by the year 2018.

Question 2: How to divvy up the sky dump? REGGI allows each state to sell dumping rights, but only to the biggest polluters. Only electric power plants of 25 megawatts or more that burn fossil fuels have a right to (and must) purchase CO2 allowances under RGGI. An individual citizen who wanted to purchase a carbon allowance for the purpose of retiring it, to reduce global warming, could not do so. (For a list of the power plants subject to RGGI in each state, see the lists on the RGGI web site.)

Question 3: How to keep people within their allotments? RGGI is a cap and trade scheme. So long as RGGI is in place, no carbon tax will be imposed. Enforcement of RGGI limits has not yet been described but it will most likely resemble traditional "regulation" but with tremendous new complexities added by allowance auctions, allowance trading, declining caps, "temporal flexibility limits," "safety valves," "price triggers," "project additionality" and "offsets." (These exotic concepts are all more-or-less described in the RGGI Program Overview, though the document introduces mysterious acronyms that are never defined.)

Question 4: What to do with any money collected?

Under RGGI, each state will collect money, and there's a lot of money involved. If CO2 allowances sold for just a dollar apiece, the 10 states would collect $188 million between them each year, and nearly everyone expects allowances to sell for anywhere from $3 to $30 apiece.

New Jersey, for example, is creating a "global warming solutions fund" as part of RGGI. If carbon allowances fetch $3 each on the market, New Jersey's 20.7 million allowances (see Table 1, below) will bring in nearly $70 million each year. The rules for spending this large sum are vague. At least 60% of it will be controlled by the state Economic Development Authority, to subsidize development of ways to reduce CO2 emissions, including helping utilities build new power plants; 20% goes to the Board of Public Utilities to reduce energy demand in the state and to reduce costs of electricity to low and moderate-income urban residents; 10% will be controlled by the state Department of Environmental Protection to help municipal governments plan ways to reduce electricity demand or greenhouse gas emissions. In sum, it resembles a giant slush fund of the kind politicians know and love.

Another way to handle the money would be to return it directly to every citizen of the 10 states in equal shares -- an approach being called "cap and dividend." Peter Barnes, author of Who Owns the Sky, favors this approach, and it does seem to have a lot of merit, if we can establish that we have a clear right to sell carbon allowances in the first place. (More on this below.)

Will it work?

It remains to be seen whether the cap-and-trade approach can actually reduce CO2 emissions quickly enough to avoid climate chaos. Economists estimate that the price of CO2 needs to rise to $30 to $50 per tonne before electric utilities will feel a real inducement to shift to less-polluting technologies. In contrast, the RGGI program has built in "safety valves" to keep the price of carbon low. If the price stays above $10 per ton for two consecutive years, electric utilities can purchase "offsets" in foreign countries to cover up to 20% of their emissions. In other words, they can continue to pollute in New Jersey if a farmer in, say, Swaziland asserts that he or she has planted a lot of trees and promises to maintain them for the next 100 years (and promises not to cut down an equivalent number of trees somewhere else during the 100 years), thus sequestering a lot of carbon that would otherwise contribute to global warming. Since the farmer will receive cash for making such a claim, and the utility will be allowed to continue polluting if it makes such a claim, both parties to an "offset" agreement have powerful incentives to offer an optimistic assessment of the facts. How will RGGI state governments measure what's actually going on in Swaziland? With "offsets," opportunities for flimflam are almost limitless.

And finally, do we have a right to sell the sky?

Even if we conclude it's right and good to privatize the sky and to sell the right to dump wastes into it, the question arises, what is our fair share of the sky? The sky belongs to no one, or it belongs to everyone, doesn't it?

If you calculate the amount of CO2 emitted world-wide for the generation of electricity and divide that by the total world population, you get 0.53 tonnes of CO2 emitted per person per year. See Footnote 1 and Table 1. You might call this "one global citizen's fair share of sky-dump space" for electricity generation.

In using electricity, each citizen of the 10 RGGI states causes the emission of 3.5 tonnes of CO2 per year. So each RGGI citizen (including yours truly) is dumping seven times the world average "fair share" of CO2 emitted during electricity generation. Pretty clearly, we are hogging the sky dump.

So long as we were hogging the sky dump without claiming any "right" to do so, it might be explained as merely a thoughtless act, or an act of greed.

Even if our government were to impose a carbon tax on CO2 emissions, that in itself would not imply that we were claiming a "right" to emit carbon. We could tax carbon dumping without claiming any special "right" to dump more than our fair share.

But now, with cap and trade, we are asserting, as a matter of law, that each citizen of a RGGI state owns the right to dump seven times the per-capita world average CO2 into the atmosphere for electricity. If you think RGGI-state citizens are not claiming such as right, look at it this way: you cannot sell something that you do not own. If the citizens of New Jersey can sell an electric utility the right to emit carbon dioxide, then the citizens of New Jersey must be claiming that they own such a right -- otherwise they couldn't sell it.

As a citizen of New Jersey, I have to ask, where did we citizens of the RGGI states acquire the right to sell seven times our fair share of "dump space" in the sky? Who or what gave us that right? If we are challenged in an international court of justice, what legal and ethical authorities can we cite to support our outsized claim of ownership? Is it merely that we are rich people with a huge army, and might makes right?

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Table 1 -- Each RGGI state's annual CO2 emission cap from now to 2014, in short tons (column 1), then converted to metric tonnes (column 2), and finally divided by the state's 2005 population (column 3) to get tonnes per person allowed in each state (column 4). As you can see Delaware is allowed to dump 8.1 tonnes per person annually, while Vermont is only allowed to dump 1.8 tonnes per person. These numbers were worked out during negotiations between the states. The 10-state regional cap (170 million tonnes divvied up among 48,656,341 citizens of the 10 states) works out to an average of 3.5 tonnes emitted per person per year, which is 7 times the global average per-capita CO2 emissions from the electrical-generation sector of total global primary energy systems.

State............ Tons....... Tonnes .. Pop.(2005) Tonnes/person

Connecticut:.. 10,695,036.... 9702373.5... 3510297... 2.8

Delaware:...... 7,559,787.... 6858123.4... 843524.... 8.1

Maine:......... 5,948,902.... 5396753.1... 1321505... 4.1

Maryland:..... 37,427,007... 33953209.6... 5600538... 6.1

Massachusetts: 26,660,204... 24185730.2... 6398743... 3.8

New Hampshire:. 8,620,460.... 7820349.8... 1309940... 6.0

New Jersey:... 22,892,730... 20767935.3... 8717925... 2.4

New York:..... 64,310,805... 58341780.9.. 19254630... 3.0

Rhode Island:.. 2,659,239.... 2412421.0... 1076189... 2.2

Vermont:....... 1,225,830.... 1112054.3... 623050.... 1.8

RGGI totals.. 188,000,000.. 170,550,731.. 48656341... 3.5 (avg)

Global totals..... 3.77E9....... 3.42E9.... 6432E6.. 0.53 (avg)

Table 1. Sources of the data: The state caps were found on pages 3 and 8 of the RGGI Memorandum of Understanding between the states. Maryland was missing from that document, so Maryland's cap was calculated by subtracting the total of the other nine states from the announced 10-state cap of 188 million tons, a figure found in footnote 1 on page 2 of the "Overview of RGGI CO2 Budget Trading Program." State populations for 2005 are from the U.S. Bureau of the Census. The global energy data, CO2 emissions and population data are from International Energy Agency, "Key World Energy Statistics 2007," pg. 48.



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[1] Data from International Energy Agency (IEA), Key World Energy Statistics 2007. World total primary energy supply (TPES) in 2005 was 11434 Mtoe (million tonnes of oil equivalent). (IEA pg. 48) World electricity consumption was 16695 Twh [terawatt-hours] (= 1435.5 Mtoe, using the conversion factor on IEA pg. 58), so electricity provided (1435.5/11434)*100 = 12.6% of global TPES. Total global CO2 emissions from TPES in 2005 were 27136E6 tonnes CO2. (IEA, pg. 48) If 12.6% of this is from electricity, then electricity accounted for CO2 emissions of 27136E6*0.126 = 3.42E9 tonnes CO2, or 3.42E9/6432E6 = 0.53 tonnes per person, globally, in 2005.