Random Climate Change Policy Concerns

It's been a really, really good week of sessions. I feel very engaged. Hoping to blog a bunch of different things tonight. Forgive me if some of these are over-wonky, I realize I don't explain everything to a non-energy geek like I probably should, but I'm trying to keep this blog as a journal for myself, and find I'm usually short on time.

Two slightly counterintuitive thoughts have been bugging me today...would appreciate any thoughts you guys might have:

1. Conventional wisdom is that the economic downturn is going to reduce greenhouse gas emissions because economic activity (manufacturing, transportation, etc) will slow down, and we'll burn fewer fossil fuels. No one is celebrating that - but it probably is short term fact of life that perversely helps the climate change problem. However, when you combine this fact with another fact of economic life these days - the steady offshoring of manufacturing activity from developed countries (US, Europe) and to low wage developing countries (China, Mexico), I think we have an interesting wrinkle for the upcoming international climate negotiations in Copenhagen. This is pure speculation, but my guess is that if anything the recession/depression might SPEED UP offshoring in the medium turn. Once all these U.S. factories have been turned off or turned down, when the time comes to turn them back on again, I bet it will be much easier to turn them on in China or Mexico. The recession-driven belt-tightening did the dirty work of reducing the sunk costs and transaction costs of laying off the workers, shuttering the factories, etc that often keep U.S. factories running even when labor is cheaper in China or Mexico. This further complicates the essential question that needs to be answered in Copenhagen to get a global climate change deal - what are the emissions reductions burdens that each country should bear? Offshoring perversely makes it easier for countries like the US and UK to meet their emissions targets, while even more rapidly increasing the emissions from countries that powerfully argue that they need to develop their economies out of poverty conditions and therefore need to increase their emissions. If this process is sped up...where do you set the global targets in the shorter terms? And do we still aim to go for a long-term target (say 2050) of every country having the same emissions per capita? Or per unit of GDP?

2. It's also fairly conventional wisdom (if you listen to folks like Tom Friedman or GE CEO Jeff Immelt) that the U.S. failure to regulate carbon and therefore put a price on carbon emissions is resulting in billions of dollars of capital waiting on the bench. Companies don't have a solid market signal, so they don't know what sort of things to invest in. "We have an all star team of engineers and entrepeneurs on the bench, waiting for a carbon price." This certainly makes some sense (though is less true in a credit crisis)...but my concern is what happens if the carbon price that finally gets set is insufficient to drive investment in technologies that combat climate change. The unknown fear of a carbon price is might perversely be a more effective climate change driver than the establishment of a carbon price that's very low. Plans for coal plants, which are huge emitters of greenhouse gases even in their "clean" forms, are being abandoned left and right across the country - partly because of the credit crunch, partly because of problems getting permits, but I think at least partly because of uncertainty about future carbon prices. If we set a carbon price that's too low, however, we might finally have more carbon price certainty and get more capital off the bench for climate-unfriendly investment than all the clean tech solutions we want and need.

Past history in other countries suggests that politicians are really bad at setting strict enough carbon prices - short term pain for long term gain is never an easy (or likely) vote for a politician. In the EU, for example, in order to get a climate policy in place, large emitters of greenhouse gases (utilities, cement and metal manufacturers, airlines, etc) often demand large amounts of free emissions rights, arguing that they'd go out of business or jack their prices otherwise. Many economists think this is a bad idea - they think that all emissions rights should be auctioned so that you actually feel the price of emitting carbon and try to change your behavior. In addition, politicians often don't often set the carbon emissions level (the "cap" part of cap and trade) at a level low enough to have any real impacts, for fear of disturbing existing economic activity (and jobs). But disturbing (and shifting) economic activity is the whole point. It's a tool to shift the economy from a dangerous high carbon economy to a safer low carbon economy. Yes, we'd prefer it to be slowly to allow workers and companies to transition. But being over-careful results in outcomes like the EU's first round of cap and trade - where the carbon price went to zero because there were too many emissions credits in the economy and no one needed to buy them. While I think we need to implement a carbon price, I'm more afraid of implementing a bad carbon price that's too low than not doing anything at all - because the fear of a high carbon price might actually be "working" fairly well right now.