Hansen: Carbon Offsets Modern Equivalent of Medieval 'Indulgences'

The following is excerpted from James Hansen's "Storms of My
Grandchildren," the climate scientist's new book about what is
needed to stop global warming.

We have finally arrived at the main story: what we need to do to solve
the climate problem, and how we can save a future for our grandchildren.

The problem demands a solution with a clear framework and a strong
backbone. Yes, I know that halting and reversing the growth of carbon
dioxide in the air requires an "all hands on deck" approach-- there is
no "silver bullet" solution for world energy requirements.

People need to make basic changes in the way the live. Countries need to
cooperate. Matters as seemingly intractable as population must be
addressed. And the required changes must be economically efficient. Such
a pathway exists and is achievable.

Let's define what a workable backbone and framework should look like.
The essential backbone is a rising price on carbon applied at the source
(the mine, wellhead, or port of entry), such that it would affect all
activities that use fossil fuels, directly or indirectly.

Our goal is a global phaseout of fossil fuel carbon dioxide emissions.
We have shown, quantitatively, that the only practical way to achieve an
acceptable carbon dioxide level is to disallow the use of coal and
unconventional fossil fuels (such as tar sands and oil shale) unless the
resulting carbon is captured and stored. We realize that remaining,
readily available pools of oil and gas will be used during the
transition to a post-fossil-fuel world. But a rising carbon price surely
will make it economically senseless to go after every last drop of oil
and gas--even though use of those fuels with carbon capture and storage
may be technically feasible and permissible.

Global phaseout of fossil fuel carbon dioxide emissions is a stringent
requirement. Proposed government policies, consisting of an improved
Kyoto Protocol approach with more ambitious targets, do not have a
prayer of achieving that result. Our governments are deceiving us, and
perhaps conveniently deceiving themselves, when they say that it is
possible to reduce emissions 80 percent by 2050 with such an approach.

A successful new policy cannot include any offsets. We specified the
carbon limit based on the geophysics. The physics does not
compromise--it is what it is. And planting additional trees cannot be
factored into
the fossil fuel limitations. The plan for getting back to 350 ppm
assumes major reforestation, but that is in addition to the fossil fuel
limit, not instead of. Forest preservation and reforestation should be
handled separately from fossil fuels in a sound approach to solve the
climate problem.

The public must be firm and unwavering in demanding "no offsets,"
because this sort of monkey business is exactly the type of thing that
politicians love and will try to keep. Offsets are like the indulgences
that were sold by the church in the Middle Ages. People of means loved
indulgences, because they could practice any hanky-panky or worse, then
simply purchase an indulgence to avoid punishment for their sins.
Bishops loved them too, because they brought in lots of moola. Anybody
who argues for offsets today is either a sinner who wants to pretend he
or she has done adequate penance or a bishop collecting moola.

Be prepared for energy experts telling you that a kazillion units of
energy will be needed in 2050 or 2100. They will calculate how many
square miles of solar power plants must be built every day or how many
nuclear power plants must be built every year, and then they will wring
their hands and perhaps try to sell you something. Yes, energy use is
going to increase--mainly because parts of the world are developing
rapidly and raising their standards of living and energy use. But energy
growth need not be exceedingly rapid--energy use hardly grew during
rapid economic growth in the world's largest economy, even though the
great potential of energy efficiency was barely tapped.

Also remember that the solution to the climate problem requires a
phasedown of carbon emissions, not necessarily a phasedown of energy
use. We will need to slow the energy growth rate and decarbonizes our
energy sources to solve the problem.

Why do fossil fuels continue to provide most of our energy? The reason
is simple. Fossil fuels are the cheapest energy. This is in part due to
their marvelous energy density and the intricate energy-use
infrastructure that has grown up around fossil fuels. But there is
another reason: Fossil fuels are cheapest because we do not take into
account their true cost to society. Effects of air and water pollution
on human health are borne by the public. Damages from climate change are
also falling on the public, but they will be borne especially by our
children and grandchildren.

How can we fix the problem? The solution necessarily will increase the
price of fossil fuel energy. We must admit that. In the end, energy
efficiency and carbon-free energy can surely be made less expensive than
fossil fuels, if fossil fuels' cost to society is included. The
difficult part is that we must make the transition with extraordinary
speed if we are to avert climate disaster. Rather than immediately
defining a proposed framework for a solution, which may appear to be
arbitrary without further information, we need to first explore the
problem and its practical difficulties.

Two alternative legislative actions have been proposed in the United
States: "fee-and-dividend" and "cap-and-trade." Let's begin by looking
at the simpler approach, fee-and-dividend. In this method, a fee is
collected at the mine or port of entry for each fossil fuel (coal, oil
and gas), i.e., at its first sale in the country. The fee is uniform, a
single number, in dollars per ton of carbon dioxide in the fuel. The
public does not directly pay any fee or tax, but the price of the goods
they buy increases in proportion to how much fossil fuel is used in
their production. Fuels such as gasoline or heating oil, along with
electricity made from coal, oil or gas, are affected directly by the
carbon fee, which is set to increase over time. The carbon fee will rise
gradually so that the public will have time to adjust their lifestyle,
choice of vehicle, home insulation, etc., so as to minimize their carbon
footprint.

Under fee-and-dividend, 100 percent of the money collected from the
fossil fuel companies at the mine or well is distributed uniformly to
the public. Thus those who do better than average in reducing their
carbon footprint will receive more in the dividend than they will pay in
the added costs of the products they buy.

The fee-and-dividend approach is straightforward. It does not require a
large bureaucracy. The total amount collected each month is divided
equally among all legal adult residents of the country, with half shares
for children, up to two children per family. This dividend is sent
electronically to bank accounts, or for people without a bank account,
to their debit card.

A rising carbon price does not eliminate the need for efficiency
regulations, but it makes them work much better. The best enforcement is
carbon price--as the fuel price rises, people pay attention to waste.

Let's discuss cap-and-trade explicitly. Then I will provide a
bottom-line proof that it cannot work.

In cap-and-trade, the amount of a fossil fuel for sale is supposedly
"capped." A nominal cap is defined by selling a limited number of
certificates that allow a business or speculator to buy the fuel. So the
fuel costs more because you must pay for the certificate and the fuel.
Congress thinks this will reduce the amount of fuel you buy--which may
be true, because it will cost you more. Congress likes cap-and-trade
because it thinks the public will not figure out that a cap is a tax.
How does the "trade" part factor in? Well, you don't have to use the
certificate; you can trade it or sell it to somebody else. There will be
markets for these certificates on Wall Street and such places. And
markets for derivatives. The biggest player is expected to be Goldman
Sachs. What is the advantage of cap-and-trade over fee-and-dividend,
with the fee distributed to the public in equal shares? There is an
advantage to cap-and-trade only for energy companies with strong
lobbyists and for Congress, which would get to dole out the money
collected in certificate selling, or just give away some certificates to
special interests.

Okay, I will try to be more specific about why cap-and-trade will be
necessarily ineffectual. Most of these arguments are relevant to other
nations as well as the United States.

First, Congress is pretending that the cap is not a tax, so it must try
to keep the cap's impact on fuel costs small. Therefore, the impact of
cap-and-trade on people's spending decisions will be small, so
necessarily it will have little effect on carbon emissions. Of course
that defeats the whole purpose, which is to drive out fossil fuels by
raising their price, replacing them with efficiency and carbon-free
energy. The impact of cap-and-trade is made even smaller by the fact
that the cap is usually not across the board at the mine. In the
fee-and-dividend system, a single number, dollars per ton of carbon
dioxide, is applied at the mine or port of entry. No exceptions, no
freebies for anyone, all fossil fuels covered for everybody. In
cap-and-trade, things are usually done in a more complicated way, which
allows lobbyists and special interests to get their fingers in the pie.
If the cap is not applied across the board, covering everything equally,
any sector not covered will be able to lower its price. Sectors not
covered then increase their fuel use.

In contrast, the fee-and-dividend approach puts a rising and substantial
price on carbon. I believe that the public, if honestly informed, will
accept a rise in the carbon fee rate because their monthly dividend will
increase correspondingly. The cap-and-trade target level for emissions
(defined by the number of permits) sets a floor on emissions. Emissions
cannot go lower than this floor, because the price of permits on the
market would crash, bringing down fossil fuel prices and again making it
more economical for profit-maximizing businesses to burn fossil fuels
than to employ energy-efficiency measures and renewable energy
technology.

With fee-and-dividend, in contrast, we will reach a series of points at
which various carbon-free energies and carbon-saving technologies are
cheaper than fossil fuels plus their fee. As time goes on, fossil fuel
use will collapse, remaining coal supplies will be left in the ground,
and we will have arrived at a clean energy future. And that is our
objective.

A perverse effect of the cap-and-trade floor is that altruistic
actions become meaningless. Say that you are concerned about your
grandchildren, so you decide to buy a high-efficiency little car. That
will reduce your emissions but not the country's or the world's; instead
it will just allow somebody else to drive a bigger SUV. Emissions will
be set by the cap, not by your actions.

Fourth, Wall Street trading of emission permits and their derivatives in
the anticipated multitrillion-dollar carbon market, along with the
demonstrated volatility of carbon markets, creates the danger of Wall
Street failures and taxpayer-funded bailouts. In the best case, if
market failures are avoided, there is the added cost of the Wall Street
trading operation and the profits of insider trading.

In contrast, a simple flat fee at the mine or well, with simple long
division to determine the size of the monthly dividend to all legal
residents, provides no role for Wall Street. Could that be the main
reason that Washington so adamantly prefers cap-and-trade?
Fee-and-dividend is revenue neutral to the public, on average.
Cap-and-trade
is not, because we, the public, provide the profits to Wall Street and
any special interests that have managed to get written into the
legislation. Of course Congress will say, "We will keep the cost very
low, so you will hardly notice it." The problem is, if it's too small
for you to notice, then it is not having an effect. But maybe Congress
doesn't really care about your grandchildren.

Hold on! Or so you must be thinking. If cap-and-trade is so bad, why do
environmental organizations such as the Environmental Defense Fund and
the National Resources Defense Council support it? And what about Waxman
and Markey, two of the strongest supporters of the environment among all
members of the House of Representatives?

I don't doubt the motives of these people and organizations, but they
have been around Washington a long time. They think they can handle this
problem the way they always have, by wheeling and dealing. Environmental
organizations "help" Congress in the legislative process, just as the
coal and oil lobbyists do. So there are lots of "good" items in the
1,400 pages of the Waxman-Markey bill, such as support for specific
renewable energies. There may be more good items than bad ones--but
unfortunately the net result is ineffectual change. Indeed, the bill
throws money to the polluters, propping up the coal industry with tens
of billions of taxpayer dollars and locking in coal emissions for decades at great expense.

Yet these organizations say, "It is a start. We will get better
legislation in the future." It would surely require continued efforts
for many decades, but we do not have many decades to straighten out
the mess.

The beauty of the fee-and-dividend approach is that the carbon fee
helps any carbon-free energy source, but it does not specify these
sources; it lets the consumer choose. It does not cost the government
anything. Whether it costs citizens, and how much, depends on how well
they reduce their carbon footprint.

A final comment on cap-and-trade versus fee-and-dividend. Say an
exogenous development occurs, for example, someone invents an
inexpensive solar cell or an algae biofuel that works wonders.
Any such invention will add to the 28 percent emissions reduction in the
fee- and- dividend approach. But the 17 percent reduction under
cap-and-trade will be unaffected, because the cap is a floor. Permit
prices would fall, so energy prices would fall, but emission reductions
would not go below the floor. Cap-and-trade is not a smart approach.

Contrary to the assertion by proponents of a Kyoto-style cap-and-trade
agreement, cap-and-trade is not the fastest way to an international
agreement. That assertion is another case of calling black "white,"
apparently under the assumption that the listener will accept it without
thinking. A cap-and-trade agreement will be just as hard to achieve as
was the Kyoto Protocol. Indeed, why should China, India, and the rest of
the developing world accept a cap when their per-capita emissions are an
order of magnitude less than America's or Europe's? Leaders of
developing countries are making that argument more and more vocally.
Even if differences are papered over to achieve a cap-and-trade
agreement at upcoming international talks, the agreement is guaranteed
to be ineffectual. So eventually (quickly, I hope!) it must be replaced
with a more meaningful approach. Let's define one.

The key requirement is that the United States and China agree to apply
across-the-board fees to carbon-based fuels. Why would China do that?
Lots of reasons. China is developing rapidly and it does not want to be
saddled with the fossil fuel addiction that plagues the United States.
Besides, China would be hit at least as hard as the United States by
climate change. The most economically efficient way for China to limit
its fossil fuel dependence, to encourage energy efficiency and
carbon-free energies, is via a uniform carbon fee.

The same is true for the United States. Indeed, if the United States
does not take such an approach but rather continues to throw lifelines
to special interests, its economic power and standard of living will
deteriorate, because such actions make the United States economy less
and less efficient relative to the rest of the world.

Agreement between the United States and China comes down to negotiating
the ratio of their respective carbon tax rates. In this negotiation the
question of fairness will come up--the United States being more
responsible for the excess carbon dioxide in the air today despite its
smaller population. That negotiation will not be easy, but once both
countries realize they are on the same boat and will sink or survive
together, an agreement should be possible. Europe, Japan and most
developed countries would likely agree to a similar status to that of
the United States. It would not be difficult to deal with any country
that refuses to levy a comparable across-the-board carbon fee. An import
duty could be collected by countries importing products from any nation
that does not levy such a carbon fee. The World Trade Organization
already has rules permitting such duties. The duty would be based on
standard estimates of the amount of fossil fuels that go into producing
the imported product, with the exporting company allowed the option of
demonstrating that its product is made without fossil fuels, or with a
lesser amount of them. In fact, exporting countries would have a strong
incentive to impose their own carbon fee, so that they could keep the
revenue themselves.

As for developing nations, and the poorest nations in the world, how can
they be treated fairly? They also must have a fee on their fossil fuel
use or a duty applied to the products that they export. That is the only
way that fossil fuels can be phased out. If these countries do not have
a tax on fossil fuels, then industry will move there, as it has moved
already from the West to China and India, with carbon pollution moving
along with it. Fairness can be achieved by using the funds from export
duties, which are likely to greatly exceed foreign aid, to improve the
economic and social well-being of the developing nations.

In summary, the backbone of a solution to the climate problem is a flat
carbon emissions price applied across all fossil fuels at the source.
This carbon price (fee, tax) must rise continually, at a rate that is
economically sound. The funds must be distributed back to the citizens
(not to special interests)--otherwise the tax rate will never be high
enough to lead to a clean energy future. If your government comes back
and tells you that it is going to have a "goal" or "target" for carbon
emission reductions, even a "mandatory" one, you know that it is lying
to you, and that it doesn't give a damn about your children or
grandchildren. For the moment, let's assume that our governments will
see the light.

Once the necessity of a backbone flat carbon price across all fossil
fuel sources is recognized, the required elements for a framework
agreement become clear. The principal requirement will be to define how
this tax rate will vary between nations. Recalcitrance of any nations to
agree to the carbon price can be handled via import duties, which are
permissible under existing international agreements. The framework must
also define how proceeds of carbon duties will be used to assure
fairness, encourage practices that improve women's rights and education,
and help control population. A procedure should be defined for a regular
adjustment of funds' distribution for fairness and to reward best
performance. Well, what happens if, instead of accepting the need for a
rising carbon price, our governments continue to deceive us, setting
goals and targets for carbon emissions reductions?

In that case we had better start thinking about the Venus syndrome.