Pew Center Greenwashes EU Cap and Trade

As posted earlier, the Pew Center has a report purporting to assess the European Emissions Trading Scheme (ETS), timed for use in next week’s gesture-vote on Lieberman-Warner carbon dioxide rationing [“This report provides an excellent resource for those developing U.S. proposals”]. I say “gesture vote” because the House, with its frail majority, remembers full-well the 1993 Btu debacle and has no plans on making it look like Congress is actually on its way to enacting a hefty regulatory tax on energy, this close to an election.

Time does not permit a counter-paper, but something more along the lines of a Fisking. Even that assessment is important however given the claims on the Senate floor that will surely be made about the paper’s “findings”.

Let me begin by noting that on occasion, when reviewing this work, I found myself simply shaking my head at standard manifestations of the academic simply being an academic.

These instances were overwhelmed, however, by the obvious rhetorical ploys engaged to cheerlead and apologize for a project in whose success the authors’ past writings indicate they are heavily invested. So they declared it a success. Flowery praise abounds such as, in spite of the (overblown) claims of hurdles to implementing the ETS, “we think that the system has evolved surprisingly well” reflect the defensive tone of much of the apologism. Strange claims also proliferate, such as that “a functioning market for allowances has developed quickly and effortlessly without any prodding by the Commission or member state governments” (p. iii). Except for the state-mandated/created scarcity, that is, and all of the litigation that subsequently ensured. Other than that, no, no involvement by the state was needed.

The authors’ concluding line, “In this [reflecting “a societal decision that GHG emissions shall have a price”] the EU has done more with the ETS, despite all its faults, than any other nation or set of nations”, has every appearance of a pre-determined conclusion.

As previously noted, the discussion – speaking of gestures – distills to OK, so it didn’t do anything, but it must be hailed as a success because it least it “did something”.

This deserves ridicule, but also analysis.

Theme

The point of this paper, which asserts in its footnotes was written sometime prior to April 2008 if released in late May as part of the run-up of the Lieberman-Warner debate, is to apologize for the ETS shortcomings far more than to analyze them. Above all, they cannot admit failure even where their efforts to change the subject are so labored as to almost come with an implicit wink. You know the game, just doin’ my job. This is not to say that it is free of useful academic discourse, but most of that seems a distraction from the issues it pretends to address.

The apologies run on several tracks. In its introduction to the paper Pew, like the authors, leans heavily on apologies for the ETS having been rushed. Later, however, the authors note that this was far easier to implement than if the scheme that didn’t give away the ration coupons for free but auctioned them. The authors present this as lucking out into having done the right thing…really. This is one of many efforts to fight off auctioning.

Of course, the entire reason the ETS came out when it did, in very detailed and prescriptive form if with typical EU member state foot-dragging, is because the ration coupons were given away, ensuring the windfall profits (which phenomenon the authors distract from rather than address). This, combined with the 1990 baseline and Kyoto Article 4 collectivization of emissions (subsequent, if pre-Kyoto German and UK political decisions providing a cushion for the rest of the EU-15 to emit away) allowed prompt delivery of the ETS, seemingly assuring all EU parties of a free ride or something very close thereto. To dismiss the problems as simply being the problem of a rush job is less than straightforward.

The tone is set right at the opening of discussion in the Executive Summary, apologizing for the ETS, using lots of “trial period” language and clucking about how it was rushed (they even claim it is “often called the pilot or trial phase” [p. 2]; now, after the failure is obvious, sure, but that was never the case before, as implied). Of course, the delays resulted not from working out bugs but getting member states to comply, two very different things.

The very first paragraph in Eileen Claussen’s Introduction foreshadows the paper’s purpose and bias: “[T]his paper attempts to place the EU ETS in perspective”, as an “important public policy experiment”. As the sources I have linked to make clear there’s no evidence that the ETS was sold or adopted as an “experiment”. Throughout, the paper makes facially absurd claims such as “the system has so far worked as it was envisioned” (p. ii). That is simply unsupportable. Similarly, there is no support for the efforts to dismiss emission reductions as a metric for success (p. 12) – it isn’t even listed as among the “dimensions of performance” – such as “The 2005-2007 trial period [sic] was never intended to achieve significant reductions in CO2 emissions in only three years”.[1]

Still, Claussen can’t help herself and utters the indefensible “some reductions in emissions from the covered sectors were realized.” Hmmm…the authors make clear that they are only willing to go so far as to say that the scheme probably led to emission avoidances – there goes the Left again with reductions in the rate of growth are cuts! – but also that they actually cannot establish this.

Given the obvious political purpose to which this document is being put, it is important to clarify at each turn that these statements, whether intentionally untrue or somehow merely uninformed, are designed to lead you to believe something that isn’t true: the increase in Europe’s covered emissions was really a reduction, and the ETS otherwise sets an example for us to follow.

Trial, Error

First, as mentioned previously, the paper slavishly pronounces 74 times in 59 pages that the 2005-2007 first phase of the ETS was a “trial phase” or “period”. The authors so boorishly reminding readers of something that actually was never previously claimed reveals the importance of this revisionism, so it warrants specific examination and debunking. The point after all is to lure the U.S. into a similar scheme on the promise that this little rough patch was not what it seems but almost planned.

This was not the claim until ETS’s obvious failure at its objective – reducing emissions – became apparent in 2007 as I indicated and in support of which I provided evidence. For example, oddly, the Directive establishing the ETS, 2003/87/EC, doesn’t say any such thing. Nor did the Commission say that when formally approving it, in the announcement before that when it was finalized, when they touted ETS in the process of hailing Kyoto coming into effect, or even the ETS FAQs page.

It has instead been consistently hailed – including while already collapsing under its design and inherent flaws – as “the European Union’s single most important measure for reducing greenhouse gas emissions – our ground-breaking Emissions Trading Scheme.” Nowhere can one identify a claim to the ground-breaking pilot phase.

Several times, Claussen and the authors make the odd claim that “the trial period demonstrates that everything does not need to be perfect at the beginning.” This is one of several euphemisms for the reality that the ETS was a flop, which the report tries to disguise with claims such as the ETS “was a definite success” and “performed surprisingly well”. This begs the question of why the paper is largely an apologia, given such sunny results, going so far as to claim “the deeper significance of the trial period [sic] of the EU ETS may be its explicit status as a work in progress.” There never was any such status, so that revisionism, too, belies the happy talk.

This tactic is clearly designed to appeal to the congressional belief that all things great and small need not be resolved in order to legislate, as the regulators will figure out how to make things work. This attitude is of course directly led to what President Bush recently called, in this very context, the looming “regulatory train wreck”. Bureaucrats, given room to interpret a general mandate, will by their very nature run with it, making it as expansive as the courts will allow often with confounding results. Of all the times to avoid repeating such past mistakes, now is certainly a good one.

Further, despite that the European Environment Agency has for several years showed its needed, if not precisely projected, trend line in order to comply with Kyoto, the authors state up front, also in apology, that “[ETS] was never intended to achieve significant reductions in only three years.” Yet not much later the authors acknowledge that ETS “is the ‘flagship measure’ by which the member states of the EU will [sic] meet their obligations under the Kyoto Protocol during the first commitment period from 2008 through 2012.” (p. 1) How does one square that with a claim that it was never intended to do much if anything to rein in spiraling emissions through 2007?

One could argue about whether the projected reductions manifested in the needed trend line were actually expected, but one thing is inescapable, and that that is the continuing increase in emissions – including covered emissions increasing twice as fast in 2007 as EU emissions as a whole – was not intended. This fact alone exposes the cheerleading rhetoric about surprisingly good performance and “definite success” as nonsense.

In addition to the numerous sources I previously reviewed and cited, I also checked the seven official EU documents the paper cites as references, finding only one of them uttered such a “trial” claim and, unfortunately for our revisionist friends, it was the one produced after the boastful rhetoric had already given way to in some ways disastrous results. “Greenhouse gas emission trends and projections in Europe 2007: Tracking progress towards Kyoto targets” (produced in late November 2007), adopts this apologetic tone, as the third year wound up its by-now obviously disappointing performance, after the fact, on p. 49 of 108, once (“In many ways, the first trading period from 1 January 2005 until 31 December 2007 can be seen as a trial phase, taking into account that the EU ETS is the first multinational emissions trading scheme of this magnitude.”).

Instead, all along the point of the exercise was quite clearly announced in these documents as the principal vehicle for achieving GHG emission reductions.

As the UK House of Commons Parliamentary Audit Committee emphasizes, “Indeed, the Commission has estimated that: ‘The scheme should allow the EU to achieve its Kyoto target at a cost of between €2.9 billion and €3.7 billion annually…Without the scheme, compliance costs could reach up to €6.8 billion a year.” (citing “EU action against climate change”, European Commission brochure, September 2005, p 8). Ask yourself, does this in any way allow for an interpretation that reducing emissions is not in fact the point of the exercise? Apparently, in hindsight, at least to cheerleaders the ETS was not about emissions reductions, but emission trading.

Author Ellerman insists nonetheless that the ETS experience was “a definite success”, again because “this was called a ‘trial period’, ‘learning by doing’, ‘pilot phase’, for what they viewed as the real test”, beginning this year” (this quote from his recent E&ETV conversation).

By the way, this is not unique among academic apologists for imposing EU/Kyoto-style energy rationing here. As it happens, scanning activities in my own state I just ran across a University of Richmond law instructor’s presentation to the Virginia Commission claiming that the EU is on track to an 8% reduction below 1990 emissions. Flatly blatantly and absurdly untrue, for one, but he also writes of the ETS, “Unfolds in two phases: 2005-2007 (Phase I, ‘warm up’)”. So, who is he quoting? He isn’t. The implication is that this one some official assessment. It wasn’t.

This is small beer from someone claiming that a steady increase in emissions, leaving the EU back at 1990 levels (they were well below them when agreeing to Kyoto in 1997) leaves the EU on track. Further, he then shows slides showing the price of emission allowances (so what?) and trading volume (so what?), and the dog that doesn’t bark, here as there, is actual emissions. He then goes on to tout the EU promises of future performance – having not bothered to discuss past/current performance – comparing them to U.S….you guessed it… performance.

The memo has apparently gone out to not talk about the inconvenient point, and in fact to engage in whatever ruses are necessary to spin and distract from it.

Can’t afford much more success

Despite, as we shall see, that the matter of actual emission performance doesn’t matter enough to merit substantive discussion, Ellerman also claims in interviews “there were emission reductions in the first phase”. Ellerman’s surprising claim didn’t make it into his paper assessing the ETS’s performance. This is odd because his discovery would be news. Rather, it would be were it not simply untrue.

Not only had EU Environment Commissioner admitted in 2007 that he could not identify any emission reductions as having resulted from the ETS, but an assessment by people obviously less invested in the agenda found no such reductions. Commissioner Dimas is now reduced to saying that unspecified “Studies show that emissions would most likely have been significantly higher without the EU emission trading scheme.” We think we avoided some further increases is not quite the same as this groundbreaking, principal vehicle to reduce emissions reduced emissions.

It turns out that the authors would rather dismiss the issue of whether the principal vehicle for attaining emission reductions resulted in reduced emissions. They do however vaguely dwell on supposed emission avoidances attributable to the scheme (pp. 34-35). Frankly, despite paying a fair amount of attention these past few years, I was not aware that this was a goal; note how the U.S. is simply avoiding emissions over the same period – far better than Europe I might add – and we’re evil and recklessness.

For this purpose, the ETS champions have simply changed the metric, which is very telling. This is certainly intellectually dishonest. Academics ought to leave the politics to the politicians, but can’t seem to help themselves, being so ideologically vested in the larger agenda, as the paper’s bibliography reveals these particular authors are.

Euphemisms on Parade

The politically inspired overallocation is implied to be the result of overperformance, as “the error in estimation of [business as usual] emissions” (p. 34), and “2005 emissions by several states [were] in amounts that were significantly less than expected” (p. 13), such that “what was expected to be a modest shortage be[came] a surplus” (p. 31).

Given that emissions kept rising that is patently ridiculous. Yet later in the paper the authors make clear that centralizing allocation is necessary to avoid the problem, which is another way of saying that the more mandarinates, the more favors will be granted to the mandarins. Overallocation represented successful rent-seeking, not superior performance.

These transition to the next issue to be whitewashed with “The overallocation argument has had the unfortunate effect of implying that there has been no abatement during the trial period [sic]” (p. 34) Abatement is a little more slippery than the professed goal of reductions. We soon see why.

The fact that there were no emission reductions as promised, just (estimates of) emissions avoided, is found in the unannounced bait-and-switch of the metric for success such as “Abatement is very hard to estimate because it involves the construction of a counterfactual estimate of what emissions would have been in the absence of the EU ETS” (p. 34). That is, emissions went up, change the subject.

Section II, “Context”. As the title indicates this is also dedicated to apologizing for ETS’s failure, not assessing its performance. It goes heavy on “trial period” and the “rushed” defense, and invokes the new euphemism, calling it a “warm-up phase” (p. 7). The authors walk through what they deem to be the factors to use when evaluating the ETS: that the first period, never sold as anything but a refinement of a successful U.S. trading scheme (for sulfur and nitrogen oxides, which are actual pollutants unlike CO2, which cannot be scrubbed out), was actually just a trial period and “important public policy experiment”; and that it involved numerous countries so needs to be assessed gently.

The multinational flavor segued into a distracting discussion about how, let’s face it, unlike U.S. states each of the EU parties actually have their own, say, diplomatic representation at the UN among other differences so how much should we have expected from a system including so many of them? This is just one of many efforts to distract when purporting to drill down into an important aspect of the program.

Later they expand upon these factors but the one obvious metric is never mentioned as a way to address performance of an emission reduction scheme what sort of emission performance followed.

More important, here the authors acknowledge that cap-and-trade was Plan B, offered in response to the failure of an emissions tax offered (to their credit) in the 1990s (pp. 7-8). When the front door is locked, try the back, jimmy the kitchen window, whatever it takes. This raises one key indicator that Europe knows full well the ETS failed and will not in fact deliver as “the principal vehicle for emission reductions”: Brussels is now flailing about once again in pursuit of authority to impose an EU-wide “Kyoto tax”. Nothing could better make the case against the fiction this document attempts to create.

The authors then raise the last refuge of economists and policymakers defending cap-and-trade over a tax: “a cap-and-trade approach was chosen because it guaranteed a limit on a significant part of the EU’s emissions” (p. 8). Really? After all of that talk about how pleasantly surprised they were, that this flagship measure to reduce emissions had resulted in an emissions increase, if one that they are just sure would have been higher without it? After all of the flexible mechanisms installed in the scheme? Let’s pressure test this: I am willing to bet that they authors cannot predict for me whatever volume of covered emissions are “guaranteed” for this year or next. I’m confident that is not a bet they would take.

In truth, cap-and-trade is chosen not for such excuses but solely because it is not a tax, and as such is less likely to meet public outrage and, given that it offers rents to covered entities, has a corporate constituency interested in windfall and related profits from the increased energy costs. To maintain claims such as this, after all we’ve learned, is just plain sophistry.

The conflict is thus that their scheme only works when the ration coupons are auctioned, but auctioning strips them of their corporate constituency (except for nuclear and the usual remoras of windmill and solar panel lobbyists); so auctioning – to make the scheme work – is politically infeasible because it erases the sole public support the schemers had, on the condition of a free-ride or something awfully close thereto.

Part III, “Performance”, somehow avoids actually addressing performance, and completely revises what constitutes a successful ETS. It says “the performance of a cap-and-trade system has many dimensions”, burying “the impact on covered emissions” as third of five enumerated factors that, presumably, the section then discusses in detail. No.

These five listed dimensions are broken down a, b, c, d, and e. The discussion then begins, also broken down using the alphabet. Oddly, the discussion has little to do with the “dimensions” enumerated, which of course would require a discrete conversation about the impact of the “definitely successful ETS” on covered emissions. Actual performance is not revealed; they opt instead for charts on trading volume, long and short positions, and other red herrings.

IV “Controversies” purports to tackle sore spots such as the obvious windfall profits reaped by recipients of the ration coupons. Actually, it doesn’t. It largely instead changes the subject once again, while attributing complaints about the system to ignorance. It just couldn’t be that this scheme in which we are so vested could actually have had problems.

When assessing the evolution of “credit” prices (p. 13), the authors naturally begin their data-plot in January 2005, when the state-mandated “market” was initiated. Yet only pages later, when purporting to explain away the possible impact of these credit prices on energy prices (Fig. 6, p. 28), they begin their data-plot in March 2005, without explanation.

Of course the cost of fuels also contributed significantly to the price increase, but the “period of correlation” they aim to dismiss is artificially truncated. The only period that should have been cropped is when the credit prices had collapsed due to exposure of the overallocation scandal, given that they then played little to no role in electricity prices, the uncertainty which this prompted having been one more distorting factor watering down the impact of the ETS during the period after this was revealed.

In short, they artificially shortened the relevant period for these purposes, while uselessly extending it, as part of the implausible advocacy campaign of claiming that a scheme of requiring ration coupons really had little to nothing to do with energy price spikes.

The trend lines for credit (“EUA”) prices and peak power are clearly both already on the upswing, while coal and natural gas had yet to begin their spike, which seems to explain the curious choice of baseline: to include the entire history does not help to diminish the connection between credit prices and energy prices, but instead shows a closer relationship than when the authors crop the chart for an arbitrary baseline. (Note: EUA prices clearly rose from 1/05-3/05, and it seems certain peak power did too; I have not obtained Tendences Carbone data for these “rushed” purposes, though I will stand corrected if I am in fact incorrect about this).

The authors hint that concerns about “windfall profits” – which have been fully admitted to by numerous participants – might just be “imagined” (p. 24). Sort of like catastrophic man-made global warming, I suppose.

In fact it is clear that the authors either misunderstand the complaint about windfall profits, or simply misstate it for these purposes (pp. 24-25). Their conclusion, that “In sum, the issues associated with windfall profits and the free distribution of emission allowances are more complicated than they are often presented to be”, applies more to the authors’ distracted treatment of the issue than to the typical treatment of the matter.

They even make the bizarre (I believe, straw[2]) “argument that ‘windfall profits’ caused higher electricity prices” to cast about their claims of ignorance (p. 27). Yes, that would be an ignorant argument, but it really isn’t the one being made. The complaint is not that producers unfairly passed on costs; after all this was the entirely logical outcome.

As a May 30 op-ed in the Washington Post put it: “in a free market, the allocations would instead result in windfall profits for the companies. A free credit would not be used to produce a product that creates emissions (such as electricity from coal) unless a company could recoup, through higher prices, the money it otherwise could have made by selling the credit. Either way, the additional cost to consumers would be the going market price for a credit. Europe has experienced this with its cap-and-trade program and recently announced plans to end free allocations to electricity generators starting in 2012.” (emphasis added)

The complaint is obviously instead about the windfall itself, that it was created by this fiat and its giving away for free something that instigates and sets up a pass-thru as a “cost” to producers. It is at best an opportunity cost if they use the ration coupon to produce power, hence its inclusion in the price (a phenomenon that is misstated by that WaPo op-ed, btw). But for the authors to acknowledge that would, again, require acknowledging a flaw in a scheme which their publication record makes clear is one whose success they are heavily vested in.

The point remains that this scheme results in increased energy prices and, if the ration coupons are given away, windfall profits. That they will reap them – either by selling the ration coupons or incorporating the opportunity cost of doing so in their prices –is ensured by the free allocation. Free allocation means windfall. Auctioning would at least eliminate much of the latter. The authors labor to elide that conclusion, wandering off instead into discourse over the merits of regulated and deregulated electricity markets given the free allocation (regulated is better, to avoid the windfall).

Along that line, they stumble into an accurate statement, begging the question of why they don’t delve into the real issue, with “whether allowances are distributed for free or through an auction will typically have no effect on market prices in competitive electricity markets, although it will effect individual supplier profitability” (p. 27).

Exactly. The authors’ refusal to simply conclude that auctioning is best is likely because auctioning dooms the process, by chasing off the one indispensable political constituency, rent-seeking businesses.

As noted, the authors misstate the objection to windfall profits, as supposedly being that they caused high electricity prices. I believe that it is in this discussion that Pew exposes its corporate constituency of rent-seekers. Consider the inanity of the authors’ efforts to discount the dreaded auctioning of the ration coupons, which opens by dismissing the impact on electricity costs of a remedy for windfall profits: “A commonly advocated remedy for windfall profits is auctioning allowances instead of allocating them freely to existing units. This remedy would not cause electricity prices to be any lower, but it would end the granting of the scarcity rent associated with the free allowances to fossil generators” [NB: or to nukes] (p. 30).

But the point of a remedy for windfall profits is to eliminate the windfall profits; changing the subject to say well, it wouldn’t lower the increase to your electricity costs, so why don’t you leave our windfall alone is actually pretty funny. This penicillin to treat your infection won’t make you play the piano any better, so why don’t we talk just drop the discussion? These guys. Killing me.

A windy discourse on auctioning follows (pp. 30-31), but again missing the point, raising more peripheral arguments for auctioning – raising revenues for the state and ensuring pass-thru in regulated electricity markets – as the “main virtues” held forth by proponents. No, it is to avoid the windfall, with all of its moral hazard.

Conclusion

There is more, but as the authors say about Europe and its ETS, I am rushed due to the fact that this paper was published to influence an imminent legislative debate.

In sum, the authors did fairly assess numerous market factors influencing the supply and demand of credits, the details of the mechanics of how the ETS market worked, if without really assessing how it performed. But their principal goal seems to have been to write an editorial more than the “fair assessment” of ETS they claim.

Despite all of the rhetoric about the evidence presented by a single price for emissions, the development of trading platforms, etc., as the ETS’s objectives, ETS’s inescapable objective was the quite simple one of reducing emissions, including turning around the upward trajectory during the 2005-07 first – not “trial” – phase. They distracted attention with detailed discourse about whether a market exists, which really isn’t up for debate, as opposed to how the market performed. A secondary goal of the authors seems to have been rationalizing cap-and-trade over the more politically painful direct tax, again to protect the windfall.

This paper’s principal themes, or rather apologies, are what Ellerman repeats over and again in interviews: this was a rushed effort and it was a miracle they got it going at all (post facto expectation-diminishing, otherwise known as revisionism), the objectives were to get something in place, not reduce emissions (same), and the allocations were a data problem, not the obvious, predicted result of the gaming and political favor-granting that inherent in these schemes; further, that political favor-granting is whitewashed out, in favor of saying that unexpectedly low emissions led to what we now call “overallocation”. Actually, we were told emissions would drop, they rose; somehow that translates into unexpectedly low emissions.

Later the authors chalk up emission increases as mere “natural variations in BAU emissions” (why can’t the alarmists acknowledge the same thing with climate?), such dismissal being defeated somewhat by the fact that the EU’s response was to markedly tighten the allocations (p. 32), revealing that Brussels (and, it seems likely, the authors) knows full well the cause was political overallocation.

So, now, going forward we hear all sorts of happy talk about how it will now work, which should be judged against the very same talk offered when the ETS was implemented, with no talk of a grand public policy experiment or trial phase. Further, we know that the changes made to date are recognized to be insufficient to change the problems, given the suite of amendments pending in Brussels, which are being held up because, e.g., the call for auctioning, which threatens the free lunch of many and windfall profits and other rents of others, and therefore has caused much squawking and opposition.

By the authors’ own test, the ETS is a failure, and much worse than even it had to be, even if they cannot bring themselves to say it. “The best that economists can do is to focus on minimizing the adverse effects that political concerns can have on the efficiency of programs and on structuring programs that clearly separate distributional decisions from the efficient performance of the system.” (p. 30)

All of which is to say tax the stuff, don’t ration it, with all of the hazards posed by the temptation of rents. But they don’t, to my mind, honestly address those truths. The take-aways from any objective assessment of ETS is the following. It has worked so well that:

– Europe threatens a trade war against the U.S. if we don’t do it too, because it’s not fair they should be the only ones to hobble their competitiveness this way

– Brussels is looking again at Plan A, i.e., for ways to impose a Kyoto tax

– Leakage has occurred, with energy intensive jobs fleeing

– ETS contributed to the run-up in electricity prices

– Windfall profits in the billions were made as a direct result

– Emissions are going up, faster than the U.S. and faster in the covered sectors than economy-wide

If this is “a definite success”, they can’t afford much more success, and we should want no part of the prosperity.