Carbon cap-and-trade shell game?

Editor’s Note:  After a several month hiatus Cascadia Planet is back.  I’ve been busy ramping up my global sustainability practice, MROC, engaging in a huge project that represents nothing less than the invention of a new, seawater-based agriculture. I’ll tell you more about that in coming months.  Meanwhile, I will be posting articles on a number of topics related to climate and sustainability.  In the spirit of the original 1990s Cascadia Planet, building global sustainability solutions in regions and localities, I will offer occasional analyses of climate policy being developed on my home ground in Washington state.  This is the first. For background see my articles in Crosscut, Part 1 and Part 2.  And I will be doing the second and third pieces of my American Nations review, which will illuminate the difficulties of passing a national climate policy and the need to make sure state and regional climate policies stand on their own two feet.  

The Brits came to Washington state recently to tout the wonders of carbon cap-and-trade before Washington Gov. Jay Inslee’s Carbon Emissions Reduction Task Force (CERT).

United Kingdom representatives on May 15 came to share their insights on Britain’s carbon cap-and-trade (CCAT) before the 21-member group tasked with designing Washington state’s carbon framework.  Gov. Inslee’s own executive order mandates a system very much like Britain’s. 

“The carbon emissions reduction program must establish a cap on carbon pollution emissions, with binding requirements to meet our statutory emission limits, and it must include the market mechanisms needed to meet the limits in the most effective and efficient manner possible,” the order reads.  In other words, CCAT.

To hear the British representatives, CCAT is a slam dunk. John Stang reported on the meeting in Crosscut.

“The United Kingdom's combined efforts reduced its carbon emissions by 25 percent from 1990 to 2013, according to (Alyssa) Gilbert (of Ecofys UK) and Emma Wright of the United Kingdom's Department of Energy and Climate Change. British law sets a 34 percent reduction target for 2020 and an 80 percent reduction target by 2050. Nuclear power is a significant plank in the British approach.”

An impressive performance, particularly if one has no objections to new nuclear power in the quake-prone Northwest.  But how real is that 25 percent? 

It’s more like an emissions shell game, the UK Energy Research Center reports in its paper "Carbon Emission Accounting – Balancing the
 books for the UK."

“Nearly 20 years of climate change policy has failed to reduce greenhouse gas (GHG) emissions linked to
 economic activity in the UK,” researchers conclude. “Although the UK has met its Kyoto obligations, this has been achieved largely by outsourcing production and relying on importing consumer products from abroad to meet growing consumer demand. As UK consumer demand has continued to grow, so have the GHG emissions embedded in imported goods.”

In essence, consumption-based carbon accounting demonstrates that UK’s emissions reductions are showing up in the accounts of China and other industrializing nations. Working-class manufacturing jobs are going out the door in the UK.  It may be they would have anyway with global trends, but a carbon policy that works by making fossil energy more expensive certainly is a disincentive to energy-intensive manufacturing.

Washington state should take a lesson.  If we want an economy of software engineers, lawyers, accountants and other professionals, along with the people who make their coffee, clean their houses and walk their dogs, CCAT will work just fine. These are low-carbon activities. But if we want an economy where people actually make stuff, and which actually sustains family-wage working class jobs, we had better take the British experience to heart.  Particularly a state that has put billions of taxpayer benefits into retaining aerospace manufacturing.

How does a state policy avoid such impacts?  By giving manufacturing industries free passes to emit carbon.  In a CCAT carbon emitters must secure a permit for every ton they release.  Some permits are auctioned in a trading market.  Others are handed out for free in the opening years of a CCAT in order to avoid negative economic impacts.  Such as manufacturing companies moving out of state.  The membership of CERT clearly says it is where the “who gets what” deals on emissions permits will be cut. 

But those free passes undermine the goal of CCAT, which is to reduce carbon emissions.  So CCAT is caught in its own contradictions.  If it’s too tough it drives companies away. Idaho is just across the line.  If it’s too loose it falls short of what is needed to avoid carbon impacts such as loss of snowpack or shellfish industries.  Eventually the cap will tighten as free passes run out.  But then it’s back to square one.  Will companies stay when competing states and nations are offering energy with no carbon penalties?  Only if low-carbon energy is by that time price competitive.  We can hope with trends in wind, solar and energy storage it will be.  But if it’s not pressure will mount to politically bust the cap.  And if that does not happen Washington will be competitively disadvantaged.

CERT and the Washington climate community have no excuse for not understanding the distinction between carbon produced by economic activities in state and carbon associated with goods imported into the state. One of the first studies anywhere on consumption-based carbon accounting was done by Stockholm Environmental Institute for King County, Washington. King County residents emit 12 tons of carbon directly each year, but 29 tons if imports are taken into account, the study concludes.

To capture imported carbon emissions in a state CCAT, goods coming into state would have to secure emissions permits for their embedded carbon energy.  But this would amount to a carbon tariff that would violate the Interstate Commerce Clause of the U.S. Constitution. Ultimately, a national carbon framework could put a carbon tariff on goods imported from nations where carbon is not priced.  But states do not have the power. 

This represents a big hole in state carbon frameworks.  They can only cover a portion of the carbon emissions associated with economic activity in the states, perhaps less than half if the King County study reflects a statewide reality.  The portion they can cover, carbon from energy used in state, makes the state less competitive and other destinations more attractive for manufacturers.  The more effective the CCAT, the more powerful this effect becomes.

It is with these realities that Gov. Inslee and the CERT will have to cope, not happy talk from the Brits.