November 23, 2008 Holmes Hummel, PhD holmes@holmeshummel

1. Committing a Carbon Trust: The Trillion Dollar Bargain Session #5 November 23, 2008 Holmes Hummel, PhD holmes@holmeshummel.net

2. Targets, Timetables, and Technology Politics of a Durable Deal: Justice as Realism Carbon Price Policies: Questions for Both Tax and Trade Cap-and-Trade: Devils in the Details Committing a Carbon Trust: The Trillion Dollar Bargain Essential Complementary Policies: California’s Advantage Climate Policy Design Pro-Series

3. Committing a Carbon Trust Political Context: Concepts of Justice Proposals for Spending Auction Revenue Show-stopping Reasons Not to Spend Revenue Compelling Claims – and Non-Compelling Claims Bargaining on Terms of a Cap-and-Trade Policy

4. Negotiating between “winners” and “losers” on the path to climate stabilization. Utilitarian justice: We’re all winners if we reach climate stabilization – and we’re all losers if we don’t. Distributive justice: Because the wealthiest 10% of U.S. households owns more than twice everything the other 90% own combined, climate policy should be progressive (not regressive). Bargaining on Impacts of Climate Policy

5. Negotiating between “winners” and “losers” on the path to climate stabilization. Utilitarian justice: We’re all winners if we reach climate stabilization – and we’re all losers if we don’t. Distributive justice: Because the wealthiest 10% of U.S. households owns more than twice everything the other 90% own combined, climate policy should be progressive (not regressive). Rawlsian justice (?): On the path to climate stabilization (i.e. a path to abolition of fossil fuel use), the climate policy bargain should satisfy the interests of fossil fuel company shareholders, who could be the biggest “losers”. Retributive justice (?): To prevent the profit potential of incumbent fossil fuel corporations from being diminished, the companies organize to diminish the political authority of those who would pass such a policy. “If you take away our profits, we will take away your power.” “If you want to stay in power, you will pay us to accept your policy.” Option 1: Address corporate influence in U.S. democracy. Option 2: Bargain… Bargaining on Impacts of Climate Policy

6. Negotiating between “winners” and “losers” on the path to climate stabilization. The “losers”? People invested in fossil fuel companies. Transition options: Guide your companies out of the fossil fuel business. Alternatively, you are only a click away from selling your interest, now. • Open Letter to Investors in Coal Power • from Chairs of the Senate Energy and Environment Committees • January 2007 Bargaining on Impacts of Climate Policy • “Building a new coal plant without taking into account global warming is neither good for the environment nor smart financially.” • “Any company planning to spend billions of dollars on new coal-fired power plants, and any investor in such a company, should think carefully about how to spend their funds so as to be part of the solution to climate change, not a part of the problem.”

7. Negotiating between “winners” and “losers” on the path to climate stabilization. The “losers”? People invested in fossil fuel companies. Transition options: Guide your companies out of the fossil fuel business. Alternatively, you are only a click away from selling your interest, now. Laborers working in the fossil fuel industry. Transition options: Job creation (e.g. Stimulating the clean energy sector) Worker training (e.g. Green Jobs Act) Investors in utilities that are regulated monopolies, with profits legally tied to sales volume. Transition options: Petition governing body to decouple profits and sales. Organize to win a return on investments in efficiency on par with generation. The “winners”? People, ecosystems, and investors in clean energy sector Bargaining on Impacts of Climate Policy

8. Negotiating between “winners” and “losers” on the path to climate stabilization. We’ve determined that: Greenhouse gas emissions caused by (some) people are driving climate change. The “overproduction” of this pollution is a result of a prices in private transactions that externalize the actual social cost. A price on GHG pollution is warranted to communicate the full social cost, which would diminish production of greenhouse gases to a socially optimal level. Either a tax or a cap-and-trade policy would generate revenues for a government presumably representing “society.” Do the “winners” have to compensate the “losers”? This is the trillion dollar bargain. Bargaining on Impacts of Climate Policy

9. Negotiating between “winners” and “losers” on the path to climate stabilization. Economic Theory: “Economically efficient prices yield a socially optimal outcomes, and equity is not a requirement of Pareto optimality – a condition that defines efficient prices.” Formal Implication: Using revenues to balance benefits and burdens is purely a political exercise that has no effect on cost of the policy. Applied Implication: Use of new government revenues from social “bads” (like GHG pollution) to displace old government revenues from social “goods” (e.g. labor) results in a net benefit to the economy, reducing the cost of the policy. Qualified Implication: Because a cost externality is not the only market failure driving the over-consumption of GHGs, using the new revenues to address the other market failures increases market efficiency and relaxes the carbon price, reducing the cost of the policy. Physics: Climate change damages are high. Bargain for your life. Bargaining on Impacts of Climate Policy

11. Committing a Carbon Trust Political Context: Concepts of Justice Proposals for Spending Auction Revenue Show-stopping Reasons Not to Spend Revenue Compelling Claims – and Non-Compelling Claims Bargaining on Terms of a Cap-and-Trade Policy

12. Essential Elements to Federal Climate Policy • National cap • Economy-wide price on carbon • Abatement for the federal government itself • International commitment • Accelerating technology development & commercialization Is there any other level of authority where these can be won? Most other essential elements for a climate policy platform either flow from these at the federal level – OR they can be achieved through authority at a different level of jurisdiction.

13. What happens if we try to keep the cost of a cap-and-trade policy down by giving pollution permits to fossil fuel investors for free…? Well, the fossil fuel investors still want the free permits – (rational rent-seeking behavior) And Members of Congress still want to keep their jobs… (which many apparently believe are more threatened by policies that raise fossil fuel prices to deter fossil fuel consumption than those that expose all of humanity to the risk of catastrophic climate change.) Lieberman-Warner approach: “Let’s use the value of pollution permits to…” a) Satisfy the demands of our patrons (and opponents) b) Mitigate the policy’s regressive impact on low-income households c) Address other market failures bottling up low-cost mitigation

14. Lieberman-Warner Bill PREVENTING ECONOMIC HARDSHIP 2012 PARTNERSHIPS WITH STATES, LOCALITIES, AND TRIBES EFFICIENCY AND RENEWABLES LOW CARBON TECHNOLOGY AND ADVANCED RESEARCH FUTURE OF COAL FUTURE OF TRANSPORTATION INTERNATIONAL PARTNERSHIPS TO REDUCE EMISSIONS AND ADAPT OTHER PROGRAMS

15. 40 Years of Funding for…

16. Recycling Revenue to Households • The point of cap-and-trade is to send a price signal to every economic actor: your choice to pollute is not free. • On the path to effectively abolishing fossil fuel use, businesses will: (a) abate emissions [leave the game of musical chairs], or (b) pass the additional costs on to consumers, who will mitigate. • If the point is to expose consumers to additional costs, then why return the additional revenue to them? • Keep most household budgets mostly unchanged. • Secure popular acceptance; defend against claims of “new taxes.” • Give direct incentive to individuals to “get ahead” by reducing their carbon footprint below the average. • Clear the federal books as fast as possible.* It is very difficult to match the federal budgeting process to the volatility carbon revenue streams may experience.

17. Mechanisms for Delivering Money to Households Dividend • Simplest, and cuts ruling-class households into the deal. • Leaves little for anything else if all receive at least as much as low-income families need. $ 20% 80% 0% 50% 100% U.S. Households by Income

18. Mechanisms for Delivering Money to Households Payroll tax Reduces an existing large, unpopular, and perverse tax. Many of the poorest 20% of households are not paying the payroll tax. $ 20% 80% 0% 50% 100% U.S. Households by Income

19. Mechanisms for Delivering Money to Households Utility discount Returns auction revenues from all sources as an electricity (& natural gas) discount. Undermines and distorts price signal on energy use; incomplete coverage. Option: PUC grant utilities permission to print revenue rebate information on bills. $ 20% 80% 0% 50% 100% U.S. Households by Income

20. Mechanisms for Delivering Money to Households Low-Income Heating and Energy Assistance Program (LIHEAP) Direct energy subsidy to low-income households. Undermines and distorts price signal on energy use; relatively low enrollment. $ 20% 80% 0% 50% 100% U.S. Households by Income

21. Mechanisms for Delivering Money to Households Electronic Benefits Transfer (EBT) & Earned Income Tax Credit Reaches lowest-income households using existing classifications and administrative infrastructure to deliver an automatic monthly payment for immediate use on all goods. EITC phases out as income rises, so extent of coverage is negotiable. Immigrant eligibility challenge: ineligible for EBT, and would need to use a Taxpayer Identification Number (TIN) to file taxes in order to receive the EITC; This eligibility problem persists in all sectors: education, health care, labor protection. E.B.T. E.I.T.C. E.I.T.C. E.I.T.C. $ 20% 80% 0% 50% 100% U.S. Households by Income

22. Committing a Carbon Trust Political Context: Concepts of Justice Proposals for Spending Auction Revenue Show-stopping Reasons Not to Spend Revenue Compelling Claims – and Non-Compelling Claims Bargaining on Terms of a Cap-and-Trade Policy

23. Show-stopping reasons not to spend carbon auction revenue at federal level • Anything you could want to spend carbon auction revenue on could be funded through $1.2 Trillion of annual appropriations – starting now. There really is a lot of money. It’s at the Pentagon. Obama plan is $15Billion per year for 10 years without auction revenues. • Anything you could fund with auction revenue wouldn’t start until 2013 • Negotiating spending can delay even getting a price signal even that soon. Jurisdictional defensiveness by leadership of other committees is strong. The price signal needs to endure while spending priorities will change, and putting rules for both in the same legislation jeopardizes each. 4. It’s hard to bite the hand that feeds you if your mission is funded by a policy that deserves critique. It only takes a few dimes to blind people to dollar-sized crimes.

24. Show-stopping reasons not to spend carbon auction revenue at federal level 5. Simplicity is best. A negotiated deal that you think you understand today is highly likely to emerge from the back side of a Congressional conference as something totally Byzantine doctored by lobbyists. • All levels of governance draw funds off a residential base (rate payers, taxpayers, etc.), and many can deliver higher value policies with superior performance to the federal government – if the feds send the money back to households. 7. A carbon price will affect household budgets, and if the money is not returned, it is “raising taxes.” CBO recognizes this with the 25% deficit-reduction factor – and that’s just to shore up the $1.2 Trillion budget!

25. Show-stopping reasons not to spend carbon auction revenue at federal level 8 & 9. Negotiations for new money are subject to the same forces as existing money. • People don’t trust the way Congress spends money; impluse to reject new spending.. • Competing claims are strong: National debt and liability to elders and veterans. • If you try to protect auction revenues from the appropriations process, you create “the mother and father of all earmarks.” • Variability in carbon revenue receipts challenges the annual budgeting process for spending items. • Oil interests will want gas tax reduced in response to carbon tax; gas tax pays for transportation infrastructure. • No matter how much money you spend on compensation, it will never be enough for the fossil fuel companies being driven into new product lines. 10. If you spend a large proportion of the money (rather than return it), fossil interests will exploit distributive claims and prevailing distrust of government to destroy the policy within a matter of a few election cycles. The best defense for the policy is to engage those households directly.

26. Committing a Carbon Trust Political Context: Concepts of Justice Proposals for Spending Auction Revenue Show-stopping Reasons Not to Spend Revenue Compelling Claims – and Non-Compelling Claims Bargaining on Terms of a Cap-and-Trade Policy

27. Compelling Exceptions to Returning Revenue to Households • Implementation and enforcement of the policy itself • Competitiveness Issues • Worker transitional assistance • Incentives for states Policy-based: decoupling; interconnection standards, Performance-based: exceeding the national avg reduction (1.7%) • International commitments Infrastructure investments and adaptation in the U.S. should be included in appropriations for existing agencies. • Budget deficit reduction payment Required to receive a “revenue neutral” score from CBO. Point: It costs less to pay for things out of regular appropriations because it is not new tax money.

28. U.S. Industry Exposure to Competitiveness Concern Due to a Price on Carbon

29. U.S. Industry Exposure to Competitiveness Concern Due to a Price on Carbon 80 Imports 70 Plot U.S. Industries By Category 60 50 Nonferrous metals 40 30 Imports as % share of consumption (2006) Ferrous Metals Chemicals 20 Fabricated Metals Paper Energy Intensity 10 Refining Nonmetallic Mineral products 0 0 1 2 3 4 5 6 7 8 9 10 U.S. Energy Costs as % Share of Shipment Value (2002) Houser, T. (2008) Leveling the Playing Field. Peterson Institute for International Economics: Washington, D.C.

30. U.S. Industry Exposure to Competitiveness Concern Due to a Price on Carbon 80 70 Size of bubble indicates scale of CO2 emissions (2002) 60 50 40 30 Imports as % share of consumption (2006) 20 10 0 0 1 2 3 4 5 6 7 8 9 10 U.S. Energy Costs as % Share of Shipment Value (2002) Houser, T. (2008) Leveling the Playing Field. Peterson Institute for International Economics: Washington, D.C.

31. U.S. Industry Exposure to Competitiveness Concern Due to a Price on Carbon 80 70 60 50 Nonferrous metals Nonferrous metals 40 30 Imports as % share of consumption (2006) Ferrous Metals Ferrous Metals Chemicals 20 Fabricated Metals Paper 10 Refining Refining Nonmetallic Mineral products Nonmetallic Mineral products 0 0 1 2 3 4 5 6 7 8 9 10 U.S. Energy Costs as % Share of Shipment Value (2002) Houser, T. (2008) Leveling the Playing Field. Peterson Institute for International Economics: Washington, D.C.

32. U.S. Industry Exposure to Competitiveness Concern Due to a Price on Carbon 80 70 60 50 Nonferrous metals 40 30 Imports as % share of consumption (2006) Ferrous Metals Chemicals 20 Fabricated Metals Paper 10 Refining Nonmetallic Mineral products 0 0 1 2 3 4 5 6 7 8 9 10 U.S. Energy Costs as % Share of Shipment Value (2002) Houser, T. (2008) Leveling the Playing Field. Peterson Institute for International Economics: Washington, D.C.

33. U.S. Industry Exposure to Competitiveness Concern Due to a Price on Carbon If the U.S. takes action on climate change, foreign competitors will be at an advantage, so we should use a ‘stick’ as a consequence to make them take comparable action. What kind of ‘stick’? Restricting access to our markets for energy-intensive goods like iron, steel, cement, etc. I see, so I’m in favor of climate policy, but to protect jobs in our industrial sector, we should insist China and India taking comparable action…? This is the rhetorical linkage between competitiveness and developing country commitments.

34. Energy-Intensive Primary Goods in Perspective U.S. GDP $13.8 Trillion 2007 manufacturing data for the U.S. will be available in March 2009.

35. Energy-Intensive Primary Goods in Perspective Energy-Intensive Primary Goods $173 Billion 9% All U.S. Imports $2 Trillion U.S. GDP $13.8 Trillion 2007 manufacturing data for the U.S. will be available in March 2009.

36. Energy-Intensive Primary Goods in Perspective Energy-Intensive Primary Goods $173 Billion Energy-Intensive Primary Goods Imported from China $18.4 Billion 10% 9% All U.S. Imports $2 Trillion

37. Energy-Intensive Primary Goods in Perspective

38. Energy-Intensive Primary Goods in Perspective China GDP $3.25 Trillion All Exports Exports To U.S. 37% $1.21 Trillion 26% $322 B

39. Energy-Intensive Primary Goods in Perspective China GDP $3.25 Trillion All Exports Exports To U.S. 37% $1.21 Trillion 26% $322 B 6% Energy-Intensive Primary Goods $18.4 Billion

40. Concerns about “Competitiveness” International Market Price for Steel: $1000/ton Labor & Ore & Equip Illustration: Steel Profit Energy

41. Concerns about “Competitiveness” Illustration: Steel International Market Price for Steel: $1000/ton Profit Labor & Ore & Equip Energy

42. Concerns about “Competitiveness” Illustration: Steel International Market Price for Steel: $1000/ton CO2 “Leakage” Production, emissions, and jobs all leave the country For no benefit to the climate or the economy Climate Policy Intensity commitment No price on carbon Kyoto + 10% No price on carbon 15% reduction Price on carbon

43. Concerns about “Competitiveness” Labor & Ore & Equip Must Keep Costs Competitive Illustration: Steel International Market Price for Steel: $1000/ton Carbon AND Reduce GHG’s Labor & Ore & Equip Energy Climate Policy No price on carbon; Intensity commitment No price on carbon; Kyoto + 10% Price on carbon; 15% reduction

44. Concerns about “Competitiveness” Labor & Ore & Equip Option D: Output-Based Rebate Carbon Carbon Carbon Labor & Ore & Equip Energy Climate Policy No price on carbon; Intensity commitment No price on carbon; Kyoto + 10% Price on carbon; 15% reduction

45. Committing a Carbon Trust Political Context: Concepts of Justice Proposals for Spending Auction Revenue Show-stopping Reasons Not to Spend Revenue Compelling Claims – and Non-Compelling Claims Bargaining on Terms of a Cap-and-Trade Policy

46. Snapshot of U.S. Power Plants:Size, Location, and Fuel Plant Fuel Type 2004 Generation

47. How the Electric Power Sector Stacks Up Biggest CO2 Polluter Millions tons of CO2 Total CO2 Pollution by Firm Most Carbon-Intensive Generation lbs CO2 per MWh Average Carbon Intensity of Generation, by Firm

48. How the Electric Power Sector Stacks Up • AEP • Southern • Duke • TVA • Ameren • MidAmerican • NRG • Xcel • FirstEnergy • TXU • Progress • Edison • Dominion • FPL • Allegheny

49. Power Companies Reporting for 2000-2008Over $10 Million in Lobbying & Campaign Contributions Southern Entergy FPL Duke FirstEnergy TXU Progress DTE AEP Xcel Edison Dominion Ameren $85 Million $25 Million $24 Million $21 Million $19 Million $19 Million $15 Million $15 Million $15 Million $15 Million $14 Million $11 Million $10 Million Top 20 CO2 emitters* contributed more than $230 million total, with Southern Company accounting for more than 1/3. * TVA excluded because it cannot contribute as a federal entity. Source: Center for Responsive Politics

50. Power Companies Reporting for 2000-2008Over $10 Million in Lobbying & Campaign Contributions Southern Entergy FPL Duke FirstEnergy TXU Progress DTE AEP Xcel Edison Dominion Ameren