You're listening to the reversing climate change podcast
by Nori the world's first carbon removal Marketplace here.
Are your hosts Ross Kenyon and Kristoff.
Jospeh. Hello.
Welcome to the reversing climate change podcast with Nori.
I'm Ross Kenyan here with Kristoff Jaws Bay and Paul
gamble in the Seattle Nori office.
We're here today with Alden Donnelly the director of carbon
economics for Nori and we are talking about cap and trade.
And the carbon tax we get a lot of questions about what we think
might be problems with these why don't they seem to work as well
as we would hope that they would and we're Nori things that we
can do better would you say that's a fair summation here
Christoph, I think so only only think that because I think Alden
is director of so much more and it's not just carbon economics.
So we probably should reconsider her title.
I mean that impetus behind this podcast is there's a foreign
affairs article why carbon prices isn't working and we
Response and then we read it and then we said no this is way too
nuanced. No one's actually going to read
this we would get a lot more bang for our buck.
If we just did a podcast with probably the most knowledgeable
person in the world who we are humbled to have sitting across
from us. We're trying to make her blush
it slightly working looks like a little bit.
Yeah. Okay.
So, where do we start? Should we start with saying
Alden? Did you read that article?
I did. Okay, so we read this Foreign
Affairs. Peace, and we responded to it,
but it was a little too. Complicated I wouldn't make a
good newspaper piece that you always need a really strong lead
there. You can't have me wants in a
newspaper unless it's like the New Yorker where you have 10,000
15,000 words, like that's where it goes.
So we thought it'd be easier to do a podcast here and this
article covers the history of various carbon markets cap and
trade markets and why they haven't always done.
So well covers what Europe and California I can remember the
other ones that made it back in Ontario.
Did they discuss it in great detail there.
I don't think it was. Yeah, no talked about China's
Market. Come on.
I want to shine. So that was a big one.
To yeah, and I remember when I first got into this space and I
started looking at markets. I didn't understand why but my
sort of spider-sense one off and I thought intuitively it just
doesn't make sense. This is not the most effective
way to address emissions and part of that comes from very
simple arithmetic that I learned from Klaus lackner.
Who said well if you put a ton of carbon into the atmosphere it
stays there for hundreds of years.
And so you need to put another tongue back and then what I
thought all right, well money of emitters needs to go to people
who are putting tons back and we could have always started there
and That's the premise by which Nori is operating and probably
the hook through which we were able to attract Alden to take
these young bright-eyed Millennials.
Seriously that like, oh these guys are onto something.
This is the right way to start even though obviously emitting
carbon dioxide into the atmosphere isn't as simple as
just canceling it out. You need to do things like
reduce emissions and replace emissions and all these
important things but the fundamental challenge is markets
have been set up to do pricing mechanisms that have not worked.
They've merely shifted around emissions.
One place to another all the while CO2 is accumulating into
the atmosphere. That was a mouthful.
So Alden Where Do We Begin? I think I want to start by
saying I was certainly on the team that thought cap and trade
was the right answer and when I formed through experience the
opinion that cap and trade isn't the right answer being a well
trained Economist. I assume that taxing carbon
would be the right answer and it didn't take me very long to look
at the history to see it wasn't the right answer it took me a
long long time. Time to start forming opinions
about why it wasn't the right answer.
So all I've got to say is if everybody out there that just
started thinking taxing carbon was the right answer a couple of
years ago figures out. It's the wrong answer in the
next couple of years. That just makes them five times
smarter than me because it took me so long.
So we love our listeners. They're very Savvy but if I say
cap-and-trade to my mother who might be listening she doesn't
have the slightest clue. So what is cap and trade cap and
trade is something that's familiar to people.
In countries that have dairy quotas regimes it's a quota base
Supply management regime. So that was what we talked about
last podcast, right? Okay.
Yeah, and so basically governments decide to create a
limited amount of entitlements to discharge CO2 to the
atmosphere. And then if you look back at the
44 presidents that I've looked at since 1978, they give away
freely 90 to 98 percent of those entitlements to large emitters.
And they create a quota Supply in every president up to and
including but not uniquely the California cap and trade market
a supply of quota that is well in excess of the maximum
physical capacity of the covered operators to emit.
So you start with an oversupply and it gets bigger and bigger
and bigger over time and the markets crashed typically within
seven years or less to put more color into it a government that
is implementing a cap-and-trade scheme tells, okay.
You regulated entities. So these are like energy
producers or people in the transportation industry
manufacturing industry that sort of thing and they say, all
right. There's a cap on the number of
emissions that you're allowed to emit every single year.
We're going to give you these allowances or entitlements as
Alden said one of them represents one ton of greenhouse
gases CO2, and you're allowed to emit up to that many are allowed
to use these allowances for your emissions and if you go over,
Over that amount then you need to acquire more allowances from
someone who has a surplus of them.
Now. If you go over that amount,
let's say you're given a hundred allowances in the year.
You're allowed to MIT a hundred tons.
You have a few different options for how you might deal with that
as you operate your business one way in this is the preferred way
of the people who set up these markets is that you take some
sort of action to reduce the overall amount of emissions in
your operations or supply chain. That's a Bateman's right
abatements. Yes.
Yeah, so if you're an energy producer, they want you
investing in Renewables and trying to get your energy
customers to switch over to better conservation methods more
efficient appliances better light bulbs that sort of thing
you can only do so much with that though.
And so the other opportunities that you have our options, you
have our to purchase more allowances from either people
who have a surplus or in some cases purchase them from the
issuing entity. So from the government they'll
auction off. Additional allowances if people
can buy you can also buy carbon offsets and this is a really
important thing for people to understand because the carbon
offsets are not the same thing as allowance its carbon offset
projects are certified by different entities, like verify
carbon standard climate action Reserve gold standard and so on
and there are projects that are either doing some sort of carbon
avoidance. So that could be building a wind
farm some sort of abatement. I project a dairy digester or
Planting trees. There are literally hundreds of
different ways that people might do an offset project in markets
like California, for example, they have a maximum amount of
percentage of meeting their obligation that they're allowed
to use by purchasing offsets. And I think it's 8% in
California. It's 8% but that works down to
4% because there's a complicated formula.
So the government is saying, all right.
You have a surplus you need to buy something.
You need to buy either allowances.
Has or offsets to represent the amount that you've gone over
your cap, but we're only going to let you buy a certain amount
of them in terms of offsets forcing you to buy the rest of
them in allowances. And the reason that they do that
is because it's important that the price of the allowances stay
high. So the government is trying to
create demand for these allowances and if you think
about it, if you were an energy producer in your an emitter in
your forced to buy these things and you have the option of
buying allowed. Is which are not actually
representing any reduction in emissions or you have the option
of buying a carbon offset project that is a real project.
There's a narrative to it. It created jobs.
It might have had some other co-benefits that helped local
community around it. You can go tell a story it can
affect your PR strategy like which one would you prefer to
buy the one? That's real?
Yeah. How did you Alden was that
pretty good? It was pretty good to give them
a or b. Well, I would say there's a bit
of a difference. Between the theory and the
reality. So when you read about cap and
trade or you go see the educational videos or the
basically the story you get is everybody who's a large emitter
receive so many quota units entitlements and if they reduce
their emissions and don't use all their quota they can sell
real interest in that emission reduction to somebody else.
So the theory is that when I buy an allowance or quota unit from
you you've reduce the emission and you're selling The right to
add more one more time because you've over complied with your
limit. What's the problem?
The problem is in that 43 out of 44 cap and trade systems that
have been launched to control pollution.
So not just CO2 but SO2 when smog precursors worldwide and
that's me counting the European system as one as opposed to 27
in every precedent the government supplies way more
quota than everybody needs. So for the first five years of
every quota regime including the u.s.
SO2 Market, which people talk about is a great success story
the pollution entitlement rights that you're buying don't have
any pollution reduction behind them is it's just politics is
that why they oversupply of they're worried about polluters
are going to balk at the whole system took me a long time to
understand the history. When you go back to the very
first cap and trade regimes it made sense when you went to the
very first regime. Eames legislators realize that
in roughly 40 States property law is state law not federal the
United States that if you adopted a regulation that
essentially expropriated property rights the government
might have to compensate the asset owner.
This is eminent domain. Yes, and so when they were
contemplating putting in these limited entitlements declining
over time entitlements to emit pollution, obviously that That
is over time if fully implemented is going to cause a
reduction in the market value of the assets that can't fully
operate without full entitlements because they have
an eminent domain case that prevents.
So when the very first cap and trade regimes came in place the
government said how do we design this so that when we have the
quota Supply declining tightly enough that there's an eminent
domain issue. We had provided enough early
additional income in the oversupply.
To compensate have compensated them so that we don't have to
compensate the neck. It was our rational decision.
It was a logical decision. But what happened in every cap
and trade regime without exception so far every time they
got to that point where the allowance Supply was supposed to
tighten up everything stopped seahorse, right?
Because I now have to actually do the expensive and hard things
and I don't want to and I'm going to complain to the
government and the government will listen to me because I'd
say I'm going to Take my jobs elsewhere and I've learned that
you know responsible well-meaning people that are
designing cap and trade markets today actually don't know that
history that there was actually logic embedded in the idea of
oversupply in the Market at first but it only works out if
you stick with the commitment to tighten up the supply quickly.
It's politically too hard to do that.
So the captain is too hard to do that happen trade may work as an
idea and a policy if the politics could work, but you
think the politics just when it comes time to tighten the belts.
it's politically unpalatable it will not happen I actively
actively was probably one of the earliest and most aggressive
leaders in the world advocating for cap and trade for 15 years
because I thought it could be made to work and I had to give
up so go ahead yeah admitting you're wrong means you're a
weaker person I think I've been doing this thing where I
interrupt a lot and I've just got to get my words in their
first I think I've spoken 9 of the dominatrix you right now if
you've earned it okay so you said forty three out of 44 so
there's one market that work it's a market that the Brokers
hate and is operated continuously from 1992 through
March 2017 and it was the reclaim cap-and-trade Market in
the Los Angeles area so tell us about that how did it and also
Define what working means people also need to understand that
when we talk about creating a market that functions means that
you have suppliers and there's some sort of demand or buyers
for whatever the asset is there Exchanging and if you look at
say the California Market the demand for these allowances it's
resulted in a situation where the government had to Institute
a price floor. And if you look at the trading
price of the allowances in the California markets from the very
beginning it started out pretty high.
I think somewhere around $22 based on speculation.
It dropped down to very very low somewhere around a dollar and
then it goes up every year on a step function that's clearly
showing that people aren't valuing these above Whatever the
price floor is that set by the government operators, which
means that you don't really have a functioning Market well and
just to going to California before I go back to what working
look like in reclaim. The state of California has
considered and adopted some procedures to somehow reduce
Supply including tightening up the limits on how many offset
credits you can use so that the allowances that are Surplus have
greater demand but the state of California there are two things
that are Who in their last auction as a result of some of
these tightening up procedures after a number of auctions where
they didn't sell out all of the allowances that were for sale.
They did sell out current vintage allowances in the last
couple of auctions, but the market bought less than 60% of
all of the future vintage allowances, they put up for
sale. So the market saying I don't see
these allowances having this year did really well, but 2019
2020 20 did really bad. Um 60% Yeah.
Yeah. Yeah, and that's a normal Market
response the other thing and there's another not so positive
lesson in reclaim. The California state's own
advisers are saying that with all of the adjustments they've
made to improve the supply-demand imbalance.
The market will be sitting on a bank of at least 290 million
unused allowances by 2020. So the question is are they
actually willing to cut back the free allocations the issue?
Year after 2021 to bleed out that stockpile of 290 million
allowances while historically going back to 1978 43 out of 44
times that a government was facing that challenge.
They abandoned the cap and trade regime rather than fix it.
So they're all these unsold allowances and they're
continuing to create new ones every year for free and giving
them out and you're suggesting that what they need to do is
stop giving out so many for free so that the people who have to
buy a Allowances buy them from this extra Surplus.
They have to come up with a strategy to do with the Surplus
again, politically your choices become impossible choices and
reclaim the market that did operate for 25 years made a
choice, which I don't like but at least it kept the market
which is what made me decide to oppose cap-and-trade altogether.
So when the reclaim Market you really have only two choices one
you cut back the supplies. Allowances you're making
available for free for now on what do you do when you do that
you're making life very very difficult for New Market
entrants and you're providing a artificial Financial windfall to
the incumbent largest emitters who are able to bank all their
free allowances. Now, that's not a good solution,
right the alternative which is what they did in the reclaim
Market was to say okay, you know, those two hundred ninety
million allowances that you have in the bank as of tomorrow.
Each one is only worth a half a ton when you go to use it to
retire it like the cypriot haircut and kind of thing.
Yeah, and that's what they did in reclaim multiple times.
So in reclaimed they kept issuing more allowances than
anybody could use and then once every three or four years they
said guess what all those allowances you have in the bank.
They're worth half as compliance to instruments that they were
when you bought them. That's not a good idea either
for a lot of reasons not least of which it communicates to the
marketplace that if you over comply and Bank your allowances,
you're not gonna be punished. Can be punished so neither one
works. I spent a lot of time saying
okay. What is a solution that works?
And you know what I couldn't come up with one.
So I had to find another way. This is the perfect point to put
a little cherry on top and move over to carbon tax.
Would you agree you want to lead us there not?
Yeah. Yeah.
Can we get back to like, what's the point of these markets?
Right the point of these is to reduce the amount of carbon
dioxide that's going into the air.
And can we look at these markets?
And what can we say is happening?
Is it reducing the amount of CO2 in the air?
And also when we're talking about carbon pricing and
thinking that these allowances that are being traded and you
know Look at California people think oh, this is such a great
example the price that people are paying they're like, oh this
is the price for CO2 that we're pulling out but it doesn't
actually represent that so the price you're paying per
certificate 14 almost 15 dollars a ton right now.
Is a fraction of the marginal cost of actually permanently
reducing emissions over the population of covered sources,
so it's really interesting. It's where you have academics
chain cap-and-trade really works.
Well because look at how low compliance costs are compared to
what people thought they would be they're low because you're
not getting incremental emission reductions happening at a market
price of 12 bucks. You're just trading pieces of
paper for 12 bucks. And the other thing is that what
I was mentioning earlier that if you're a regulated entity and
you're buying these allowances to meet your Orkap obligations
and be like energy Creator a utility.
Yes. Yeah, your utility or find a
Refinery something like that. You have the option of buying
allowances or offsets and what that means is that because of
what Alden just said that you're just trading paper around and so
the price of this doesn't actually really represent
anything but to the buyer of these things the offsets in the
allowances are equivalent. And so that means that because
of Standard Market forces you're going to see the offset prices
ruff. Least similar to the allowances
except for in many cases particularly when you're talking
carbon removal that certificate and an offset Market that
represents a ton of carbon removed from the atmosphere and
store it in a farmer's soil has an underlying value of 1 ton,
but it's being forced to compete On a par in a market with the
commission certificate allowance that maybe an aggregate has an
underlying value of 0.25. So removing and storing carbon
in croplands looks really expensive because everybody says
a ton only cost 12 bucks. No a piece of paper that
represents that best 25% of a ton cost 12 bucks, which is 60
bucks a ton. Is that a hot enough take for
you guys though, you're looking for here.
What I want the listeners to take away from this is that when
you look at the prices that people are reporting at what is
being treated for carbon. They do not actually represent
real signals on what the value is for avoiding a ton of CO2 or
Removing a ton of CO2. These markets are set up with
different incentive structures. So this is why what we're doing
at Nori is so interesting and can be so useful because we're
creating a marketplace where people place real value on
removing one ton of CO2 and it actually represents one ton of
CO2. And so that means that the Nori
token price can really become a reference price for the world
that is truly market-driven that actually represents one ton of
CO2. It's not this abstracted thing.
NG or just slips of paper that represent something else will
you let me move us now to the carbon tax generally very
satisfied. I want to talk about carbon
thin. So no not yet.
Carbon is Tim seems like a great tool.
I actually I was off on an airplane so I could not play but
everyone else I know he got to play it was put together by Josh
Margolis of the EDF, which is the Environmental defense fund
from my understanding Paul. You did exactly what the Quote
unquote Bad actors do which is game the system and figure out
how to make money. Yeah.
So yeah. So yeah, it's this trading
simulation game. It's supposed to function in the
same way that if you were a regulated entity in a cap and
trade market how it would work and you play it over.
I think we did a two year time span and it's broken up into
four quarters. So we had eight different time
periods that you switch through the whole Nori team was playing
and the goal of it is it's a competition just like like a
real business is to try to end up with at the end of the game.
You want to have met your obligations for hitting your cap
numbers and you want to make the most amount of money which is
how a real life works. And so I met my obligations and
I had made the most money out of everyone else and all that.
I did was trade allowances. I bought low and sold High I
bought low in the auctions. I didn't buy any offsets.
I did the minimum amount of abatements that made Financial
sense and in the end, I made a lot of money.
And I made virtually no impact on actually reducing the amount
of carbon dioxide in the atmosphere.
So it was a really really useful and instructional exercise for
me to see like what are the different incentives that are
playing into this and why people make decisions that they do I
got suckered into buying a bunch of the abatements that were like
three years out in the future for the time.
They started to pay off like why did I do this?
I should have just been screwing around with these these yeah,
that's always one of the drawbacks.
These simulations we saw that when we did our simulation game
at reverse of palooza was that if you have a defined end period
then people are going to play towards the end period they're
not going to play as if like times just yeah, I think I would
have caught up and started to hammer you there after a while,
but I've missed my chance, but there's another complication to
we talked about in those kinds of markets governments are
creating the allowance Supply and again starting.
I'm willing to accept with all of the best intentions and the
best designers and everything and And you start with the
Surplus to create the compensation that you think
you're going to need later regardless what the initial
attention was once government start generating revenues from
selling quota at auction. Even if they're only selling 10%
of quota, they willing to give up those revenues and you can
have the revenues from Kota sales or you can have the
emission reductions, but typically over time you can't
have both is this like taxing cigarettes you kind of hope that
the people don't stop smoking. They said it will discourage
smoking, but if it does you lose a resume You know, it's like a
lottery taxes or that you know, what it is.
The reason I would argue it's exactly like taxing cigarettes
is because two things are true and the early 1980s when our
governments first started taxing cigarettes.
They were absolutely convinced. It was going to cause a
reduction in smoking. Did it know when did the
significant measurable reductions in smoking happen
like the Public Health Camp when the first company banned smoking
in the office? Oh, really and First companies
to say you can't do it here because staff were complaining
those bands came entirely from the private sector responding to
complaints by non-smokers staff and then government started
saying that and if you actually look at the numbers smoking
reduction happened when people governments and companies
started saying you can't smoke in here you have to go over
there. Okay.
So we love metaphors. Let's play this one out speak
for yourself. Arvin is smoking and if you
start saying you can't put Put your carbon here.
You need to manage the carbon in your supply chain.
Saw the emissions, but the carbon that's right that takes
you all the way back to where does that carbon come from?
Oh, maybe you want to keep it in the ground and track how much
you have in the garage right? Keep it there.
That's right. If it's gonna come out at least
track it and focus on reducing the carbon if your supply chain
and it only took me as I said 15 years to figure that out and you
want to hear the like the dumbest thing I could ever admit
after I figured out cap-and-trade wasn't going to
work even if it theoretically could be made to work.
And then after I figured out carbon taxes don't work, which
we'll get to I actually finally said, you know, we have some
pretty interesting historical pollution reduction success
stories. We've got the lead out of
gasoline and the let out of paint and the ozone-depleting
substance of the atmosphere in term to stop the growth of the
hole in the ozone layer. So maybe I should look and see
how we actually did those things and you know what?
I thought I was going to find out a whole bunch of different
countries did very different things.
Time we log to historical pollution reduction success
story. We did it the same way every
time whether we're Japan United States Canada Europe same way
every time master of suspense. What a what was it?
We didn't put a cap on tailpipe. Let emissions.
We said if you sell gasoline, you got to reduce the lead
content in your gasoline when we really wanted SO2 reductions and
fuel. We didn't regulate emissions we
said, Guess what sulfur has to come out coincident with our
regulation of SO2 emissions and power plants.
We regulated maximum sulfur content in the coal that goes
into the plants. I actually talked to some older
people and I'm old enough who were part of Designing those
when we wanted to get ozone-depleting substances out
of refrigerant chemicals. We didn't regulate ozone
discharges. We regulated the
chlorofluorocarbon content the pollution precursor out.
Supply chain in know what the efficient way to get fossil
carbon reductions out of the energy supply chain is to order
fossil carbon reductions in the supply chain.
So put up more no smoking signs effectively.
And this is where there's a connection to Nori.
However much it sounds like I'm not going there.
So if you were going to say, let's repeat the lessons we
learned from our pollution reduction success stories.
Do not go to all of this expense of trying to figure out how How
to measure an estimate and track commissions at the end of some
stack somewhere or tailpipe say if you sell energy in this
country, I don't care if you sell some combination of
gasoline Diesel and propane and you sell some combination of
electricity and natural gas and whatever you take your total
energy sales, you tell me what they equal and millions of BTU
equivalent and your fossil carbon content in the supply you
discharged on this Marketplace. Has to go down 3 percent per
annum then if you exceed three percent this year, you can sell
some credits to another guy governments not dishing quota.
I'm not measuring emissions. I'm saying get the fossil carbon
all the supply to and that gives the market the opportunity to
figure out different ways. I might be more efficient for
one company over another on how they want to do that.
We are not telling them what to do and we're not telling them
what price to pay when we regulated in North America the
lead out of gasoline every expert.
In the world in every part of the economy fuel suppliers auto
manufacturers academics governments were absolutely
certain that ethanol was going to replace lead as the oxygen
and gasoline and everybody was absolutely certain in North
America. The price of gasoline was going
to increase by seven eight nine cents a gallon which was a big
price increase and that they decided they were willing to
make that sacrifice. They ordered the lead out and
within four years. Years of ordering the lead out
there were four count them four competing unleaded gasoline fuel
formulations in the marketplace and we got let out ahead of
schedule while the real price of gasoline fell 12% I'm always
wondering when I was a kid looking at the gas pump and I
think we'll why is it unloaded? They're always unleaded it and
even by leaded gasoline. Why are you telling me it's
unleaded because of the success story what I'm just do a carbon
tax. Why not just do something like
that. We don't necessarily like it
when the government just doesn't mean by Fiat wouldn't be more
marketable. Friendly to do something with
the tax. There's two answers to that and
more interesting one is why in my view a carbon tax doesn't
work, but the general response is if you start by looking at
our historical pollution reduction success stories, what
you see is the private sector has only two arms to compete
with one is innovation one is price.
So anytime you regulate in a way that is dictating to the market
either the solution or the price.
Nice, you're putting the private sectors hands and your time and
behind your back. So first of all what the lessons
teach you is an efficient government measured says reduce
the fossil content per million. Btu of energy sales and you
compete on price and through Innovation.
I'm not telling you what to do. So that's the big picture.
I just like to note for our listeners all didn't put her
hands and tied them behind her back a circle when you Set the
market participants to compete when you're saying Get the Lead
Out get the fossil carbon out all of a sudden you've spawned a
huge competition for market share in the new green economy.
Every time we've done that the market participants have come up
with solutions that the brainiest people never thought
of before. We set them down the path
imagine that I have very strong opinions about what the
solutions will be. I will be proved wrong.
So a good regulation says two things.
I don't care about tracking admissions.
It's easy to track fossil carbon content reduce your fossil
carbon content per million. Btu units of energy sold in
supply chain. And in that regulation, you have
maximum three, but one essential what we would call and
Regulatory turns alternative compliance option.
This is sort of the offset. What's the other thing?
You can do Beyond changing the structure of your business and
your product offering you could earn credits towards that
obligation by removing carbon from the atmosphere.
Beer and storing it and I think everything that you're saying
fits within the Mantra of the sustainability community that is
trying to do the right thing. They say reduced what you can
offset the rest, but they're stuck in a regime that just
doesn't make them operate. So I'm kind of curious if you
were speaking to some of the heads of sustainability who
might want to do the right thing or talking to government
officials and saying hey look this climate change.
It's a real problem and we want to do our part and we want to
lead and doing our Art what sorts of things would you like
them to know or to be better informed about and what sort of
advice would you want them to be giving so one of the reasons I'm
so committed to Nori is in every possible set of solutions.
I can imagine including better regulation or no regulation or
whatever. We're now at a point where the
atmospheric concentrations are high enough that removing carbon
from the atmosphere is an essential component of any
strategy. So first of all, I'd say it's
got to be on the table. It's To be there for real now.
We live in a world right now. For example, the United States
where you actually have a budget that is offering 35 to 50
dollars a ton of tax credit to operators of gas-fired power
plants if they install carbon capture and storage, but we're
not offering 35 to 50 dollars of tax credit to Farmers who can
store carbon in their fields probably more cost effectively
and efficiently than CCS will work on gas plants.
That's kind of theological. I think I would immediately has
that there's a except is probably a lot easier for the
oil and gas industry to lobby for those that credits that only
works in the short term because you know what happens if this
strategy doesn't work, which is not going to yeah how many years
before finally government throws up his hands and says, okay.
I'm just going to regulate the hell out of you and shut you
down and I'm going to get the regulation wrong.
We're trying to squeeze in there and hopefully make a dead before
that happens, right? Yeah.
Let's cut to the chase. Why don't carve Access work a
great Economist Herman Daly will tell you it depends on how you
design them. But there's a couple of things
one. Think about what we're trying to
do here. We're trying to get suppliers to
reduce the fossil carbon content in our energy and Building
Products supply chain. One reason carbon taxes.
Haven't worked to date there are multiple but one is probably
putting a tax on a retail gas pump over here trying to send a
price signal to a consumer is about out as far away from the
decision whether or not to have put fossil carbon into the
energy Supply chains. One of the reasons it doesn't
work is it's so far away from the decisions that we're trying
to influence you think the incidence of the tax would be
the same though, when they just pass it all the way to the
consumer. Well, you know, what a lot of
economists say that so I offer you the following prepared
response over the last 12 months.
The average retail price of gasoline in the United States
has increased 56 cents a gallon. Total gasoline sales in the
United States. So that's a price increase that
people have incurred total gasoline sales in the United
States are up not down now 56 a gallon if you applied it and
this is one of the things say the equivalent price at the
Wellhead is twenty four dollars a barrel now all the modeling
says on average the price of a barrel has gone up $24 in the
last 12 months now all of the economic nah models and all the
economists will tell you there's no difference between putting in
a new tax or tariff. That's 24 dollars a barrel and
putting in an increase in the retail price of 66 cents a
gallon stop for a minute. Do you think the oil industry
would say a new Tariff of twenty four dollars a barrel apply to
the Wellhead will have no impact on their investment in Energy
Products will have no impact on their return.
Why wouldn't they just pass it on to the consumer?
Where does it stop or how is it different?
The market is perplexing. Yeah, can you tell the audience
why you're so familiar with gas prices?
Because for two years I set gas prices for 568 retail stations
for a large US Oil Company. It is a mystery.
It's totally logical that a new tax at $24 a barrel at the
Wellhead. Is the same as 66 cents Elite
gallon sort of basic medium is the same but it's not it's not
it's not I swear to you. Just ask anybody in the oil
patch if the government said, okay, we're going to hit you
with a new tax right at the Wellhead the new tariff Revenue
Severance charge of 24 bucks a barrel that's going to have no
impact on you. Right?
It's not how they're going to react because that utterly
changes the signals that the investors in the production in
the supply chain are getting and the retail pump price is The
same signal I don't care if it on paper is the same value.
It's not the same signal. There are two reasons.
It's not the same signal and this is true in every developed
Nation. It took me a little while to
figure out this is true. The data clearly shows it took
me a long time to figure out why it's true but individual
non-industrial energy demand is what we call quite price
inelastic if gas prices go up all of the u.s.
European Canadian data shows that we put off.
Other Capital expenditures to Bear The increased fuel prices
and in academic analysis, they call it revealed internal
discount rates. We have a tendency to avoid New
Capital expenditures or things that feel like new capital
expenditures at all costs. So if you were trying to design
a tax with the sole purpose of raising new government revenues
and not actually changing Behavior, you would put it at
the gas pump which is where But he's putting so this internal
discount rate thing. That's like saying that I'm a
typical American family and I have a eight year old car and it
doesn't get great gas mileage, but I would rather continue
driving this car instead of buying a new car and getting
better gas mileage all of that discount rate all of 30 years of
data household expenditure data, not just for the us but all
developed Nations say that rather than respond to the 60
cents a gallon. A price increase and replace
that old car. When you thought you were going
to you will save the money not replacing the old car to be able
to finance the gas purchases. And when you do that when we
translate that choice into an internal District count rate the
data suggest that very well educated people who manage their
stock portfolio like meticulously a know the
difference between a 7% and 8% return reveal an internal
discount rate on their energy. In their energy consuming
equipment purchases of at least 20% and over the whole
population. You're looking at a revealed
discount rate of 40 to 50% So when a government is choosing to
tax at that point of retail out there that's a conscious
decision to proceed with a measure that's least likely
among all the measures you can choose least likely to change
Behavior, which might explain why some of the big oil
companies actually advocate for these days.
It's behavioral economic a cognitive.
Yes, and Failing and it's not like we're just trying to
estimate based on models. Like this has been tried before
especially in Europe. Why isn't it working over there
or what are the effects in like Sweden?
Well, that's interesting again. I argue that most of the times
Regulators start with the best of intentions Sweden Denmark and
Norway those countries with the oldest carbon taxes and highest
to write and highest started by saying much like we say in the
United States and Canada. Let's do a hybrid of Maxine
retail so residential and small business consumption and doing
cap-and-trade this quota training thing for big
industrial those governments for the most part started off
thinking that's the right way to do things.
But when they start you got to give Big Industry a break
because this is hard well by mistake, they figured out wait a
second here. I can pack a load of new large
energy-intensive industrial subsidies into the electricity
rate infrastructure. ER called up my carbon policy my
government costs of putting this subsidy in place.
Don't show up on any government balance sheet is debt.
I just say okay, if you're an important large industry and
Sweden a Refinery, I government are going to guarantee that you
get your electricity on a 30-year firm price agreement for
four cents a kilowatt hour and all of the cost you don't pay to
get your electricity show up as a carbon or emission reduction
or renewable energy. In household and small business
bills. So what's the reality today?
The reality today is first of all a relatively small overall
reduction and Swedish Nationwide emissions emissions.
And if you're the average household in Sweden right now,
you're paying the equivalent of 44 cents us a kilowatt hour and
the refinery down. The street is paying the
equivalent of six cents us a kilowatt hour significantly less
than the typical us. Refinery is pain for Contacts
that average American Energy prices about 10 cents an hour.
So here in Seattle at six so they've used their carbon
pricing to package a whole bunch of opaque news subsidies for
large emitters into the electricity bills that
households and small businesses pay if you're in Denmark your
pain closer to 50 cents a kilowatt hour.
If you're in Norway for legacy large hydroelectricity, you're
paying 40 cents a kilowatt hour. So as soon as government started
down the path With whatever their intentions were they
thought. Oh my goodness.
Well, what's the reality go? Look at the oecd statistics
Norway Denmark Netherlands Sweden the top carbon taxing
longest carbon tax histories among developed nations in the
world. We think of these open
socialist, you know, Farrah society's biggest household
private debt increases per dollar of disposable income in
the whole oecd. Their household debt numbers are
through the roof. If you live in Sweden, you're
living typically in a home that is 70% to 80% of the square
footage of an average u.s. Home and it's probably way more
efficient than the average u.s. Home and you were spending
twelve percent of your disposable income just to heat
your space and your water. So the net effect of this is
that negligible emission reductions massive shift of the
cost burden of delivering electricity to all the society
to the smallest consumers so a car Tax is about as regressive
of attacks as you could possibly do unbelievably regressive.
If you're looking in these nations the disposable income of
the 40% richest families is there's different ways of
measuring it but says anywhere from 5 to 12 times the
disposable income of the poorest families, but the richest
families only consume one point seven two two point eight times
as much carbon containing energy as the poorest families if
you're going to finance income tax rate.
Cuts with carbon tax revenues by definition you're massively
shifting tax burden from the rich to the poor a tax rate that
is significant enough to cause the wealthy families to even
consider buying a more efficient car is a tax rate that's
bankrupted every family in the bottom forty percent of society.
So it's a tax rate the burden of which is born entirely by the
poor and if you look at British Columbia where I come from and
everybody says we've had this great successful carbon tax
since we had Carbon tax there's only one 18 month period where
British Columbia per capita gasoline use actually dipped and
we have publicly available household expenditure data.
The dip was small a hundred percent of the dip was
low-income families no longer being able to drive their cars.
And in fact gasoline used by the higher income families went up
and what happened at the same time.
You were telling me about this yesterday.
Well British Columbia that gets credit for this carbon tax if
you actually look over that period and look at the average
typical cost of commuting from our biggest sub verb to
Vancouver downtown to go to work over a five year period the
carbon tax added a hundred and Seventeen dollars a year to the
typical person's commute by car everyday over the same period
the government of British Columbia increased the cost of
doing that same commute by transit public transit by 480
dollars a year. So the Carbon tax was just
enough to force underemployed and unemployed people during the
2008 through 2011 recessionary time out of their cars and when
they found themselves unable to run their cars anymore, they
faced a 480 dollars a year increase in the cost of doing
that commute by transit. How does every Economist in the
country that has written about BC successful carbon tax story
say that's the picture of success.
I don't get it. I'd like to throw down the
gauntlet on your behalf and safe.
There's anyone who wants to make the claim that it is.
We welcome them on a podcast and we should talk to them about it
on the air. I would love that all of the
studies that say ABCs current tax was successful compared what
actual BC energy consumption was to a theoretical counterfactual
a hypothetical demand rate. And if you accept the
hypothetical demand rate that the leading economists pause it
is the right comparable. You have to accept Their
assertion that between 2008 and 2011 during an economic
recession British Columbia in the absence of a statistically
insignificant carbon tax would have realized the biggest
three-year increase in fuel use in recorded history because if
they're making some assumptions around the counterfactual
they're using to come to the conclusion that CAT tax was
effective is completely Beyond any reasonable assertion.
I think we can say that cap and trade compliance carbon markets
have not reduced emissions. We can say carbon taxes have not
only not reduced emissions but have also placed an enormous
financial burden on the poorest of residents in those
jurisdictions and they spawned some non-transparent industry
subsidy behavior and governments that even the same governments
that are engaged in that pave. Your didn't think they were
going to so it's just crony capitalism.
Yeah, so these attempts Been made with the best of intentions
have resulted in such negative effects and ultimately it's 2018
and we still haven't reduced emissions in any significant
measurable way. So what is left to us?
The market has to see that we have to start removing carbon
from the atmosphere which is why Nori so important to me and
maybe on a schedule that's much more efficient in than my own
they have to ask the question that started getting me see
things which is we got a bunch of really really a significant
pollution reduction success stories in our past.
How do we do that? And you know what the way we
were successful in the past from a regular story standpoint is
exactly the way to move forward, but I can't point to a single
carbon greenhouse gas emissions academic expert in the world who
when they're looking at and analyzing the policy options
include in their list of policy options the way we've done it
well in the past, it's not on the table excellent words.
To close with thank you so much Alden.
Thank you all.