The Safety Valve

Marc Ambinder attended a Chevron-sponsored dinner last night and came away with an answer to the question of what oil companies hope to gain from trying to position themselves as green -- it's an opportunity to present efforts to gut climate change legislation as good-faith efforts to cope with the problem:

Everyone seems to agree that a carbon tax, or, more likely, the indirect carbon tax that is a cap-and-trade system, is the next step. The cap-n-trade system will include a "safety valve," a term of art that refers to a mechanism whereby government promises that, once carbon emissions prices reach a certain level, they'll cap the price but allow for more emissions credits to be purchased.

Now Marc cunningly made his "safety valve" link to a Climate Progress article explaining why it's a bad idea. But to put it briefly, a safety valve is a great provision to add if you don't care at all about mitigating climate change. Call it "John McCain environmentalism" -- you'd like to be associated with the climate change issue, but you also want to rake in huge dollars from polluters and you don't actually care accomplishing anything on the issue other than advancing your own political career.

In a different world, what you're trying to do is to reduce carbon dioxide emissions. There are two ways to do this. One is that you can put a price on carbon (a "carbon tax") and then increase that price over time so as to generate the kind of emissions reductions you're looking for. Another is that you can set an economywide level of allowable carbon emissions and make it such that firms need to obtain emissions permits in order to emit CO2 ("cap and trade") thus allowing the market to raise the price of carbon emissions up to a level commensurate with your goal. Either way, the idea is that higher prices for emitting carbon will lead to less emissions -- it creates financial incentives to switch energy sources (coal and oil to natural gas, fossil fuels to nuclear and renewables) to switch to more energy-efficient end-uses (SUVs to minivans, conventional engines to gas-electric hybrids) and to simply use less energy (movie theaters air conditioned to 72 degrees instead of 60) overall.

But either way, the mechanism is higher prices for carbon emissions. If you add on a provision that prevents the price of carbon emissions from rising too high, then you're not taking action to reduce emissions.

Comments

...came away with an answer to the question of what oil companies hope to gain from trying to position themselves as green -- it's an opportunity to present efforts to gut climate change legislation as good-faith efforts to cope with the problem

I am utterly shocked. Was this really a mystery?

Posted by Jake H. | July 2, 2008 3:39 PM

Wow. What you just said would be true... if the "safety valve" price were zero. But assuming the safety value price is some reasonable value, then it's directly equivalent to a tax! In fact, you could always express a simple carbon tax as just a cap-and-trade system with a cap of zero and a safety valve price at whatever tax rate you wanted to set. And everything I've read points to a tax being the better policy, but since "cap-and-trade" has much better P.R., we're all happy to push that plan instead, as long as we modify it to work more like a tax.

Posted by Michael | July 2, 2008 3:43 PM

Yes, the safety-valve idea is ridiculous. It's a way for the oil companies to "strike a pose" as greenies, never mind that it totally emasculates the system and prevents any meaningful reduction of emissions.

But can't the sam be said of cap-and-trade even without the safety valve? What's to prevent the number of permits from being raised whenever one or more industries deemed "vital" to the nation's prosperity and security showed up on the Hill pleading for "relief"? In other words, there would be nothing preventing Congress, or the courts, or the regulators from changing the rules whenever it suited them. I think there's a very good chance the entire thing would just be a way for the politicians to claim they'd done something (i.e., to pose). This much is for certain, though: whatever costs there would be would be passed on to the consumer, the lawyers and lobbyists would get even fatter off the influence peddling, and the corporations even richer off the buying and selling of permits. Would greenhouse gas emissions be reduced? I doubt it.

Posted by Claudius | July 2, 2008 3:47 PM

Let's not forget that someday there may very well be both huge costs from AGW-related changes as well as huge investments in AGW-related technological and economic adaptation.

Do you think companies like Chevron are going to passively sit around and accept their share of those costs and miss their opportunities for those investments?

Hardly. The goal is to shift as much as possible of AGW adaptation costs to us, the taxpayer, and to concentrate the investments into such hands as always effectively lobby governments -- giant corporations.

Posted by El Cid | July 2, 2008 3:49 PM

there are ways to do a "safety valve" that make sense from a green perspective (among others, make the extra credits that are made available in one high-demand year come out of future allotments, say), but, i bet this isn't quite what Chevron has in mind.

still, blanket condemnations of "safety valves" in the context of cap and trade are a bit off the mark.

Peter Orzsag has some testimony on this issue - see the second bullet point

http://www.cbo.gov/ftpdocs/92xx/doc9276/05-20-Cap_Trade_Testimony.1.1.shtml

Posted by josh bivens | July 2, 2008 3:53 PM

The problems facing regulating carbon dioxide emission are no different than those faced by any regulatory framework: if the regulators aren't actually making an effort to solve the problem, then it won't actually be solved. If a carbon cap was created but set far too high, or a carbon tax were established but set far too low, then of course nothing would be accomplished. But it seems silly to attack the idea of a "safety-valve," which serves a legitimate purpose (ex. more fuel needs to be burned during a cold winter than during a mild one). We shouldn't automatically equate the idea of a "safety valve" with "loophole." It will only turn out that way if we fail to keep our legislators honest.

Posted by Michael | July 2, 2008 3:59 PM

You are totally wrong on this. A safety valve at a fairly high price per ton limits the economic cost if carbon reduction turns out to be more expensive than we think it will be. This is especially valuable for short-term implementation, where cheap clean technologies might not be available. You could do something similar by allowing borrowing permits from the future. Or you could have a fed like entity print some more permits if costs are very high.

you are sentenced to calling up one of the RFF bloggers and having them explain in detail why you don't understand this issue.

Posted by CalDem | July 2, 2008 4:03 PM

"It will only turn out that way if we fail to keep our legislators honest."

With all due respect, our record of keeping legislators honest is about 0 for 1 million. On every issue I can think of--the war, Bush's civil liberties fiascos, farm subsidies, pork earmarks, mass transit, education, entitlement reform, health care reform, fuel economy standards, etc., most politicians have shown little integrity and less political will to do the right thing. What makes us think they'll be any different on a program that would affect the entire economy?

Posted by Claudius | July 2, 2008 4:08 PM

It's not exactly a mystery why oil companies would be involved in this issue, or the goals of their involvement. That said, a real cap and trade program will never be put into effect in the U.S., and if it was, it would be an Iraq-level (or at least Carter-level) disaster for the Democrats. Setting an arbitrary cap on emissions (read: economic development), assigning credits to various interest groups (a la centralized planning in the Soviet Union) and thereby dramatically restructuring the U.S. economy for the sake of a climate that is 5 degrees cooler 100 years from now (assuming other countries follow are example) is not a politically viable program.

As a partisan, I suppose I should hope the Democratic Congress plus Obama enact a strict cap and trade program, with no loopholes. Afer all, there will be a marginal benefit to the environment and Democrats will thereby ensure future electoral defeat. Nevertheless, it seems to me that such a program would be terrible for the U.S. economy, and it would disproportionately impact the lower middle class and the poor.

Posted by rab | July 2, 2008 4:10 PM

Claudius,

I completely respect that sentiment. And I'm not optimistic, honestly. But my point was simply that any regulation framework created in bad faith will fail. If we fail to adequately address the problem of climate change, it won't be because of the safety value, it will be because of our lack of political will. The safety valve makes a lot of sense and serves a real purpose, and it seems weird to make that specific aspect of carbon regulation a proxy for bad legislation in general. The real question is whether we will elect enough good Democrats who are willing to support regulation with real teeth. The safety valve is only one of many ways our legislature might fail us on this, and it doesn't really deserve to be universally trashed.

Posted by Michael | July 2, 2008 4:17 PM

In a different world, what you're trying to do is to reduce carbon dioxide emissions.

But Matthew's "different world" is not this world. In this world, you're trying to reduce carbon dioxide emissions while at the same time mitigating damage to the economy.

The point of the safety valve is to prevent the reductions in carbon dioxide emissions from doing excessive harm to the economy through prices that are too high for the economy to bear.

Now, in Matthew's simplistic world where there are no tradeoffs for anything and the only thing anyone ever had to worry about is carbon dioxide emissions, he may be quite right. But in the actual world, where people have to worry about mutiple problems at the same time - something Matthew doesn't seem to be able to do - the safety valve is potentially a reasonable measure to accomodate both problems.

Posted by Al | July 2, 2008 4:18 PM

Seems to me the devil is in the details on this one. Surely putting a safety valve on the cost of emissions just makes this more like a carbon tax ? Which is not a bad thing. The question is whether politicians then have the fortitude to increase the carbon tax (or the maximum emission permit price) enough to hit the emission target. Or do they just cave in to threats and bribes from the losers in
the game ?

But really, discussing details of McCain's policy proposals is a waste of time: he's a Republican, he doesn't care about policy, he doesn't know about policy, and he'll say whatever he thinks he can get away with. If you want any real policy, the current
Republican party isn't the place to look. Democrats
aren't great, but they're infinitely better, and
Obama's policy team seems good.

Posted by Richard Cownie | July 2, 2008 4:24 PM

Al,

I agree, and that is why I don't understand Yglesias's, or many of his peers, views on climate change. The reason that we should reduce emissions is because it will hurt people in the future. At least, that's what's important to me - I have never shed a tear because there aren't any trees on Mars. It is certainly possible today that we could drastically cut back emissions, and achieve provide some benefit to these people. But such a drastic cut would harm a lot of the people currently living; this is particularly true of developing countries, but is also true of the lower middle class and poor in the U.S. Matt seems to phrase the issue as if there aren't any trade-offs. To the extent Democrats share his preference for people of the future, the voters of today likely will not.

Posted by rab | July 2, 2008 4:30 PM

No Matt, it IS John McCain environmentalism. That exact loophole is mentioned on his website - that there shall be the option for unlimited waivers if there is any kind of economic pain involved. Oh, here it is:

" Permitting Unlimited Initial Offsets From Both Domestic And International Sources."

Important enough to capitalize every word.

Also notable is how he plans to streamline this and rapid that, all right under the heading where he admits all this permitting won't happen until "eventually."

Also fun is,

" Permitting "Banking" And "Borrowing" Of Permits So That Emission Reductions May Be Accelerated Or Deferred To More Economically Efficient Periods."

In other words, get ready to run a carbon deficit from day one, and any day the market has bad one.

But he really does save the best for last with his " John McCain Will Develop a Climate Change Adaptation Plan"
Which says that he won't really do anything until we study the problem some more. Including all the science at the local level (and each local level) before proceeding. He wants to make sure we plan to adapt before we do any actual, ya know, adapting. Gee I sure hope nothing changes between the time we make the plan and do the plan, cus then we might have to go back and re-do the studies for the plan, and then the plan again so we can then start, ah, adapting.

Posted by Chasm | July 2, 2008 4:32 PM

"...my point was simply that any regulation framework created in bad faith will fail. If we fail to adequately address the problem of climate change, it won't be because of the safety value, it will be because of our lack of political will."

You're right. Bad faith policies will fail. My point was that bad faith policies are the only type that Congress seems to be capable of enacting these days. There's a very good chance that the framework itself will be yet another act of bad faith--a cynical exercise in political theatre. The pressure on the politicians to "do something" about global warming will be too great to ignore, but they won't have the political will to face the economic and social impact on the voters of doing something truly meaningful. So we get more Capitol Hill Kabuki Theatre--a policy that allows the politicians to preen, but that is complex, inefficient, expensive to consumers, lucrative to corporations, market speculators, lawyers and lobbyists, and ineffective in reducing emissions. Par for the course on today's Capitol Hill.

Posted by Claudius | July 2, 2008 4:46 PM

But Matthew's "different world" is not this world. In this world, you're trying to reduce carbon dioxide emissions while at the same time mitigating damage to the economy.

Ahh, but then there's the inherent beauty of the Cap-n-Trade. You let The Market mitigate the damage to the economy. Elegant, no?

But such a drastic cut would harm a lot of the people currently living; this is particularly true of developing countries, but is also true of the lower middle class and poor in the U.S. Matt seems to phrase the issue as if there aren't any trade-offs.

How do you know it would do so much harm? Are you anti-market? I'm pretty sure teh Matt Ilk prefers bidding for permits, then using the revenues to help alleviate front-end harm to the relevant poor. A progressive tax to this effect might help too--you know, since it's The Poor who would be hit the hardest.

Posted by ed | July 2, 2008 4:47 PM

Matt,

There is always going to be a safety valve, i.e. ultimately the price could get high enough that Congress would dump the whole system overnight.

Really the discussion is whether to bake one in and think things through in advance in case the price really gets too high or to just hope the cap gets set right and Congress doesn't come running in and throw out the the program.

Now of course there will be lots of disagreement as to where that cost cap should be placed, but at some point the cost of keeping a ton of carbon out the atmosphere may actually be greater than the value of doing so.

The only reason it make sense not to have any safety valve at all is if you believe any additional ton of carbon will send us over some of tipping point that causes tremendous damage to the climate.

I'd point out, for example, that if gas hit $14 per gallon today, our economy would adjust (downward), but GM would probably be so screwed the Volt would be dead.

Posted by AE | July 2, 2008 4:47 PM

Too complicated and to simple at the same time.

There are other greenhouse gasses then carbon, just taxing carbon only goes after part of the cause. And production of those gasses is polluting.

Why not simply tax man-made production of greenhouse gasses, tax the pollution and make the link direct.

Posted by zic | July 2, 2008 4:49 PM

As several people point out above, this post shows a pretty basic lack of understanding of the underlying issues. Matt is becoming almost McArdle-esque in this. A safety valve just is a tax: the key is what the price for purchasing an additional permit is.

The more dangerous loopholes are actually stuff that allow extra permits that are low-priced or free -- waivers and offsets.

Posted by mq | July 2, 2008 4:53 PM

Forgive my cynicism, but haven't we learned that these measures really aren't about protecting some monolithic "Economy," but rather the economy of certain well-off actors and sectors of the economy, potentially at the price of the poor and middle class? I mean, seriously, the folks who brought us the Bankruptcy Bill and the Subprime Crisis aren't really going to insert a "valve" for the safety of someone without lobbying power, are they?

Posted by jaz | July 2, 2008 5:36 PM

The point of the safety valve is to prevent the reductions in carbon dioxide emissions from doing excessive harm to the economy through prices that are too high for the economy to bear.

You could ditch the safty valve by having the initial cap level be high enough that the cost is not overly distructive. The key to a cap and trade system is that as you go forward, you decrease the cap. Cause, you know, we're trying to decrease the amount of CO2 being generated. You put a safety valve in there, and instead of a hard cap, you have a soft cap and a sort of luxury tax.

Posted by daveNYC | July 2, 2008 5:47 PM

This is one of the dumbest things Matt's ever written. Ever. Matt demonstrates with this that he knows less than nothing about carbon policy. Hundreds of posts we've read here about this crap, from someone who is practically bragging that he doesn't understand any of it. What a waste. We should call this kind of commentary "Matthew Yglesias wonkery", where you'd like to be associated with folks who care about policy, but you can't be bothered to actually read the stuff or think about it.

Posted by Thomas | July 2, 2008 5:52 PM

I agree with commenters who say that Matt is too harsh and a safety valve really might be a good idea.

The risk of straight cap-and-trade is that in a given year further mitigation turns out to be really really hard. If that is true, the price of permits gets jacked way way up. This is bad.

A safety valve limits the downside risk. Look it up!

e.g., here.

Posted by mk | July 2, 2008 6:25 PM

"With all due respect, our record of keeping legislators honest is about 0 for 1 million. On every issue I can think of--the war, Bush's civil liberties fiascos, farm subsidies, pork earmarks, mass transit, education, entitlement reform, health care reform, fuel economy standards, etc., most politicians have shown little integrity and less political will to do the right thing. What makes us think they'll be any different on a program that would affect the entire economy?"

Great post. The chances of our political system arriving at a rational policy and then sticking to it over any length of time are zero. I'm pinning my environmental hopes on continuing increases in fuel prices.

Posted by kafka | July 2, 2008 6:51 PM

As long as the "safety value" price is set to the same or higher than you would set a C-tax given the opportunity, it's innocuous. A safety valve value set above the C-tax value you'd support can actually help cope with the uncertainty of the various approaches - if you cap, you don't know the cost of imposing the cap; if you tax, you don't know how much emissions you'll get at that tax rate. You can also put a similar mechanism on the bottom end of the market by adjusting the starting bid price on permits. The top end mechanism is a means of automatically reducing the goal if the economic costs are significantly larger than anticipated and the bottom end mechanism is a means of automatically pursuing more aggressive reductions if they turn out to be inexpensive (and also protects against some forms of permit allocation shenanigans) - since there's a fair amount of uncertainty about how the regulations will actually play out due to the difficulties of predicting elasticities the further you get away from current price levels, mechanisms to cope with large estimation errors are desirable.

Whether or not it's a good idea hinges entirely on the sizes of the emissions cap and the value at which the "safety valve" kicks in. I don't think it's essential to an effective regulatory regime, but if the price is right, a "safety valve" is a reasonable compromise that addresses a realistic concern.

Posted by MattXIV | July 2, 2008 7:06 PM

Forgive my cynicism, but haven't we learned that these measures really aren't about protecting some monolithic "Economy," but rather the economy of certain well-off actors and sectors of the economy, potentially at the price of the poor and middle class?

Actually, the groups protected by a "safety valve" are the energy industry, energy-intensive industries, and the lower class. The first two are obvious, but the third stems from the fact that the lower your income the larger fraction of it you're likely to spend on energy through gasoline, heating bills, and so on.

Posted by MattXIV | July 2, 2008 7:16 PM

Given the level of policy sophistication demonstrated by Matt's critics in this thread, I think they should hesitate before accusing him of not understanding what he's talking about.

Where to begin?

First of all, this entire discussion begins from the premise that mandatory carbon reductions are intrinsically and inevitably going to cause huge economic pain, and the main policy goal is to keep that pain at a tolerable level. That's just not true. When fuel prices rise, people will shift their spending elsewhere. The won't burn the money. It won't vanish from the economy. They will spend it elsewhere! They will invest in other things, and those other things will generate economic activity and jobs.

And as it happens, a dollar spent on, say, fuel efficiency produces more domestic economic benefit than a dollar spent on, say, oil. You're not just handing that dollar to a sheik -- you're spending it in your community, where it will have multiplier effects.

So first off, this notion that carbon policy will strangle the economy is a f*cking MYTH. Oy.

Second of all, if you do want to build in ways to avoid price spikes, there are far, far better ways to do it than with a safety valve, which is every bit as stupid and malign as Matt describes it. The goal here is to get some certainty about *GHG reductions* because if we don't reduce them the entire world economy is screwed and today's high gas prices will look like a f*cking holiday. So getting the reductions has to be the overwhelming priority. If you want to build in some flexibility on a year-to-year basis, do banking and borrowing, which keeps the long-term target in place. (There are other policy levers -- follow the link.)

And finally, this idea that a carbon tax is so vastly superior is another myth, built on the myth that fuel switching and efficiency investments are inflationary costs and not, um, investments. Far more important than the choice between cap-and-auction and carbon tax is what to do with the revenue, which nobody talks about. If you want to be defensive and assume this is going to be castor oil, do cap-and-dividend and buy public support. If you think the predictions of doom from the ridiculous models used by academic economists are fantasy, like they have proved to be again and again, then plow the money back into the regulated sectors to reward those reducing emissions -- that will put a rocket boost under technology shifting. That would amount to a fully refunded tax, which has worked like gangbusters in Sweden reducing NOx. (It works like a feebate, if you've heard of those.)

Anyway, look, first of all, just because your slogans are different from Matt's slogans doesn't mean you have a keen grasp of the policy space here. And second, everybody, please, have a little goddamned faith in American ingenuity and entrepreneurialism. This isn't going to kill us. We'll come out in a vastly better economic place, finally free of the fossil fuels that are currently (not theoretically) killing us. What happened to America's balls?

Posted by David Roberts | July 2, 2008 7:45 PM

... the third stems from the fact that the lower your income the larger fraction of it you're likely to spend on energy through gasoline, heating bills, and so on.

This is another subject where CW seems to have congealed in a very odd place. It's true that low-income people spend a higher percentage of their income on energy, so energy prices hurt them more. But a logical response to that fact is not to involve yourself in a quixotic battle to keep down the price of fossil fuel energy. It's going up; it's going to keep going up. Other than nipping around the margins, there's not much we can do about that.

What we can do is help low-income people use less energy. That would reduce the percentage of their income they spend on it and free them from the fossil volatility roller coaster. How can we help them use less? By directing massive amounts of money toward (easily obtainable) efficiency improvements -- providing the same energy services with lower fuel input. How can we direct massive amounts of money toward efficiency improvements? Hey, I've got an idea! Let's call it a "mandatory carbon cap"!

Now, even if it was just a one-to-one substitution, a barrel-equivalent of efficiency for a barrel of oil, for the same price, it would be a policy win. But as it happens, investment dollars put toward efficiency get you more energy equivalent (esp. as oil prices rise), more jobs, less trade deficit, and more multiplier effects. You are giving low-income people ongoing predictability and stability in their energy prices.

So yes, equity is a hugely important consideration here. But it does NOT argue for inaction or for kludged, ineffective policies. It argues for aggressive efficiency investment.

Posted by David Roberts | July 2, 2008 8:03 PM

Isn't this discussion a little too self-contained? No policy to lower CO2 emissions can possible work in a vacuum, neither caps nor taxes, and there's no reason whatsoever to believe that any adjustment of "the market" can deal effectively with global warming.

Build a wind-farm in my backyard and find me an apartment on a trolley-line before you price me out of "the market" for carbon fuel!

Posted by Jacob Freeze | July 3, 2008 4:02 AM

First of all, this entire discussion begins from the premise that mandatory carbon reductions are intrinsically and inevitably going to cause huge economic pain, and the main policy goal is to keep that pain at a tolerable level.

Come on, that's a caricature and you know it. The purpose of the safety valve is to alleviate the risk that mitigation in a given year will be very expensive and drive up energy costs alot. "Intrinsically and inevitably" describes a world of certainty. The whole point is the uncertainty.

Suppose the risk of hurting the economy is very small. Then a well-designed safety valve will never have any effect.

Suppose the risk is big. Then a safety valve might keep gas at say 5 bucks rather than spiking up to 6 bucks for a few months.

Do you really want to argue that you don't see the economic benefit of preventing short-term spikes in the price of gas? Ask any economist in the entire world. Literally. Any economist.

It's true that low-income people spend a higher percentage of their income on energy, so energy prices hurt them more. But a logical response to that fact is not to involve yourself in a quixotic battle to keep down the price of fossil fuel energy. It's going up; it's going to keep going up. Other than nipping around the margins, there's not much we can do about that.

What we can do is help low-income people use less energy. That would reduce the percentage of their income they spend on it and free them from the fossil volatility roller coaster. How can we help them use less? By directing massive amounts of money toward (easily obtainable) efficiency improvements -- providing the same energy services with lower fuel input. How can we direct massive amounts of money toward efficiency improvements? Hey, I've got an idea! Let's call it a "mandatory carbon cap"!

I'm sorry, this is crazy. We can all agree that rebates to poor people will help them adjust to high fuel costs. But you didn't say that. You said raising the price of fuel (that is what a cap does) will help them adjust to high fuel costs. Did you mean to put this point differently?

The point makes no sense. A rebate (or another form of redistribution) is the only way to help a poor consumer. "I'm going to raise the price now, because the price will go up soon anyway, therefore I am helping you" is a terrible argument. And I love your writing 99% of the time.

Posted by mk | July 3, 2008 12:02 PM

And as it happens, a dollar spent on, say, fuel efficiency produces more domestic economic benefit than a dollar spent on, say, oil. You're not just handing that dollar to a sheik -- you're spending it in your community, where it will have multiplier effects.

Broken windows fallacy. Ultimately the dollar is only useful for paying off taxes ot the American government, and only Americans do so, so it will ultimately be used to buy American goods. The alternative energy source is only useful because we're not buying oil from the sheik. The difference is whether we spend the same resources building stuff for the sheik or stuff that we'd be as well off without if we did buy oil from the sheik. Since buring the oil produces negative externalities, the later option is better, but only because burning the oil produces negative externalities.

Posted by MattXIV | July 3, 2008 1:36 PM

Whatever, just gimme my oil. And drill wherever you have to. All you poor hippies can ride bikes for all I care. Maybe we can put all environmentalists on treadmills to generate electricity.

Posted by Jack | July 3, 2008 2:08 PM

You clearly don't understand the issue.

Posted by D | July 3, 2008 9:10 PM

You missed the boat with this post. You should call up some environmental economists and ask them questions about uncertainty, Weitzman's 1974 paper, and why you really do want a "safety valve". They might have to draw some graphs, just warning you. It's actually not an easy thing to explain, which is why I won't do it in this response, but before you advocate against the safety valve you should learn something about it.

Posted by SS | July 5, 2008 7:24 PM