Manna From Heaven
Or, how to use the economic value of the atmosphere for the good of all
United States of America
In order to prepare a possible emissions trading scheme for California, the state government has created a Market Advisory Committee. This committee is currently in the process of hearing testimony from a variety of sources. Below the Ecosystem Marketplace publishes the text of upcoming testimony by Peter Barnes, author of Capitalism 3.0
. (See http://www.climatechange.ca.gov/policies/market_advisory.html)
Testimony of Peter Barnes before the California Market Advisory Committee
Sacramento CA, February 27, 2007
I want to speak today about the first and most important issue this committee must address: how to allocate the economic value of the atmosphere. I am speaking here as a business person, and in particular as someone who started and ran a solar energy business in California in the 1970s and 80s.
As committee members are doubtless aware, capping carbon emissions creates a new and valuable kind of property right—the right to emit carbon dioxide into the atmosphere. These rights have value because supply is limited and demand is great. Indeed, as the supply of these rights is lowered year after year, their value in the market will steadily increase.
The fact that, in the future, emitting carbon will carry a price greater than zero is a good thing. It will force emitters to internalize costs they now shift to others, including future generations and non-human species.
However, the way these new property rights are allocated will make a big difference to the people of California. Once carbon is capped, everyone in California will pay higher prices to burn fossil fuels. It matters greatly whether the extra money Californians pay for fossil fuels (and all products that embody fossil fuels) goes to corporate profits, public goods, or back to citizens themselves. Billions of dollars—and the economic health of the state—are at stake.
In a sense, the value of these new property rights is like manna from heaven. It represents the windfall that is created when previously unlimited and unpriced access to a commons—the atmosphere—is limited and priced in the market. Economists refer to this value as 'scarcity rent.' Regardless of what it is called, it has real and substantial value—at least several billion dollars a year. The question this committee must address is: should this windfall be used for the common good, or should it be appropriated for private gain?
The case for private gain
Companies in the fossil fuel industry argue that they should receive this windfall because—well, because they emitted carbon for free in the past. They suggest that to make them pay for this right in the future would impose such a burden on them that they must be compensated with property rights worth billions of dollars. They also say they need these handouts in order to invest in alternative energy technologies. These arguments are specious and self-serving.
Companies that produce or burn fossil fuels have been profitable for decades, and will continue to be profitable for decades to come. They may have to shift their product mixes, as all businesses do from time to time, but they will have many years in which to do that. Moreover, they will still earn profits from selling fossil fuels—though they may sell fewer units, they will sell them for higher prices. No one need feel sorry for Chevron, PG&E or Southern California Edison.
Even if they were to suffer some financial losses, that is no reason for the state to subsidize them. They are private enterprises that must bear market risks. Climate change is not a sudden surprise; it is a reality the companies have known about for years. It is their job to adapt, and to do so without public handouts.
Moreover, to give a few companies free access to the atmosphere, while making everyone else pay, would be to create a tilted playing field that is unfair to other businesses and consumers. In the future, everyone should pay a market price for emitting carbon. No one should have a free ride. The mantra of this 'Market Advisory' committee should be: Markets for all, special favors for none.
As for the claim that these companies 'need' free emission rights in order to invest in alternative technologies, that is simply hogwash. There's no lack of private capital in California. Once carbon is capped and the price of carbon burning rises, private capital will flow into new technologies like water over a broken levee. These companies, and others, will be able to raise capital in the private markets, just as they have for past investments. To give a few companies free capital, while making all others pay market rates, would be unfair and discriminatory.
It's worth noting that fossil fuel companies have made the same arguments in New York, Massachusetts and Vermont, and in each case the state governments have rejected them. I see no reason why California should act any differently.
The case for the common good
The economic value of the atmosphere is a form of common wealth—no corporation created it, and it belongs to everyone. This common wealth can and should be used for the benefit of all.
There are several ways this can be done. The first and most obvious way is for the state to auction carbon emission permits, rather than give them free to historic polluters. The state thereby captures the atmosphere's scarcity rent, and can use it for the common good. Private companies can still trade emission permits in the secondary market, enabling them to reduce emissions in the most cost-effective ways. The benefits from such trading are the same whether the state auctions the initial permits or gives them away for free.
An important question, of course, is what the state should do with several billion dollars in yearly permit auction revenue. I will make several suggestions below. However, this is not a question that this committee needs to answer now. There will be time enough for the Governor and the Legislature to address it in future years.
A second way the economic value of the atmosphere can be used for the common good is to distribute 'carbon shares' to the citizens of California, as has been proposed by the Climate Protection Campaign of Sonoma County. Each 'carbon share' would be equal to the total number of permits issued divided by the number of eligible California citizens. Citizens would sell their shares to banks or brokerage firms, who in turn would sell them to emitters. In this way, a carbon market would develop without a state auction, and all Californians would equally share the windfall that arises from carbon capping. The committee should carefully consider this elegant option.
How to spend permit auction revenue
Assuming the state auctions carbon emission permits, it will have several billion dollars a year in new revenue. It can spend this money on public goods, and/or give it back to the citizens who ultimately pay it (via higher fossil fuel prices). I would argue for a mix of both.
Where the state should spend some of the auction revenue is on public goods that private enterprise can't provide—for example, public transit and bicycle paths. It should avoid spending money on technologies and conservation measures that private capital—spurred by higher fossil fuel prices—can readily finance.
Just as important as spending auction revenue on public goods is recycling much of it to citizens. Such recycling is important for economic reasons—it will sustain consumer purchasing power, without which all California businesses and households will suffer—and for political reasons as well—it will sustain popular support for carbon capping in the face of rising energy prices.
Let me be frank here. Carbon capping is a form of rationing—that is, it's a system for physically limiting use of a vital commodity because of an extraordinary emergency. The last time we had rationing in America—during World War II—the emergency lasted only four years. This time, the emergency—human-induced climate change—will last for perhaps a century, and so must the carbon rationing system. In order to last for that length of time, the system must have popular support. That means it must be fair, transparent, and simple to administer. If it is subject to 'gaming' by private corporations, the way electricity deregulation was, or if it results in higher prices but no tangible benefits, it won't last long and it won't do the job that needs to be done.
There are several ways revenue from permit auctions can be recycled to citizens. For example, revenue could be recycled in proportion to energy usage (e.g., via rebates on utility bills), in proportion to need (e.g., via earned income tax credits or means-tested grants), or on a per capita basis, like Alaska Permanent Fund dividends. I favor the per capita method for several reasons.
First, since the source of the windfall is a common asset (the atmosphere), per capita dividends are an indisputably fair way to allocate it. I should note here that the U.S. Supreme Court, in Zobel v. Williams
(1982), ruled that Alaska had to distribute its oil-based dividends on a per capita basis, else it would violate the Equal Protection clause of the 14th Amendment.
Second, the method is simple and easy to administer. Third, it is universal, thus maximizing political support. And fourth, it creates the right incentives for individual behavior.
This last point can be understood from the following example. Once carbon is capped, all Californians will face higher prices for fossil fuels. However, people who drive Hummers will pay a lot more in higher prices than people who ride bicycles. If everyone gets the same amount back, Hummer drivers will lose money while bicycle riders come out ahead. In other words, carbon conservers will be rewarded and carbon guzzlers will be penalized—exactly the right incentives. By contrast, if rebates are paid in proportion to energy usage, Hummer drivers will get back more than bicycle riders, and there will be no reward for conservation.
I would be thrilled if this committee were to recommend permit auctions and per capita dividends. However, as I said a moment ago, the exact use of auction revenue can be decided by politicians in future years. It is enough for this committee to make clear that it should be used for the good of all.
The European experience
Fortunately, California is not the first large economy to consider carbon capping. The European Union has had a carbon trading system since 2005, and there are lessons to be learned from its experience.
The most important lesson is that giving free emission permits to historic polluters (as Europe has done) results in windfall profits to the companies that get the permits, and higher prices to everyone else. This has been noted by the Wall Street Journal, The Economist, and numerous independent studies.1
As Peter Ainsworth, the shadow Environment Minister for Britain's Conservative Party, has said about the EU system: "The problem will not be sorted out until the market is made to work properly by forcing firms to bid for their permits instead of being allowed to lobby government for them free of charge."2
My personal business experience
I want to close by telling the committee about my personal experience in the solar industry during the 1970s and 80s. The company I co-founded designed and installed solar heating systems in the San Francisco Bay Area. At our peak, we employed 35 people and had yearly sales of over $2 million. Then, George Deukmejian and Ronald Reagan abolished the tax credits that enabled solar energy to compete on a somewhat level playing field with gas and electricity. At that point, my company—and thousands like it—went bankrupt.
I'm not complaining about my company's demise. My point is that never once did the state or federal government offer to compensate companies like mine that were destroyed by a change in policy. After all, we were private businesses and had to live or die by the market.
Yet today, this state and the federal government are besieged by hugely profitable corporations who insist they must be compensated for changes brought about by global warming. As your vice-chairman, Larry Goulder, has noted, giving these companies free emission permits would multiply their profits and stock market valuations several-fold.3
This would not be capitalism; it would be welfare for carbon emitters on a massive scale.
In my view, it would be a tragic irony if the 'solution' to climate change included a massive transfer of wealth to corporations that largely created the problem. This would be like rewarding tobacco companies with billions of dollars for all the lung cancer they caused in the past.
The alternative to doing this is to auction carbon emission permits or distri¬bute carbon shares to citizens. That is what I urge this committee to recommend.
Wall Street Journal, "For German Firms, New Emissions Caps Roil Landscape," 9/11/06; The Economist, "How America is likely to take over leadership of the fight against climate change; and how it can get it right," 1/25/07.
BBC News, "£1bn windfall from carbon trade," 6/1/06.
A.Lans Bovenberg and Lawrence H. Goulder, 2000, "Neutralizing the Adverse Industry
Effects of CO2 Abatement Policies: What Does it Cost?," NBER Working Paper 7654, Cambridge, MA.
Peter Barnes co-founded and led The Solar Center from 1976 to 1982. In 1983 he co-founded Working Assets and served as president until 1995. He also served on the boards of the California Solar Industries Association and the State Assistance Fund for Energy (SAFE-BIDCO). He is the author of
Who Owns The Sky? (2001) and
Capitalism 3.0 (2006). At present he is a senior fellow at the Tomales Bay Institute in Point Reyes Station CA.
First published: February 7, 2007
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