The Sky Trust Proposal to Reduce U.S. Carbon Emissions

 

1. Rising greenhouse gas emissions pose a serious threat of global warming. 

The Intergovernmental Panel on Climate Change, comprised of the world’s leading climate scientists, recently concluded that “there is now stronger evidence for a human influence” [1] on the earth’s climate and that greenhouse gases from the burning of fossil fuels have “contributed substantially to the observed warming over the last 50 years.”[2] An expert panel of the National Academy of Sciences has also concluded that in the 20th century, the earth warmed faster than ever before.  These reports are merely the latest in a long series of studies reaching similar conclusions.

Some of the impacts of global warming that are widely feared among climate scientists directly threaten American society and its prosperity.  Among these consequences are more frequent and severe droughts; intensified hurricanes and other storms; rising sea levels; disruption of natural ecosystems; and extinction of species.  Other long-term shifts in U. S. weather patterns are likely; their consequences are unpredictable.

Moreover, in today’s increasingly global economy, impacts on other nations may have important implications for the United States.  For example, the predicted sharp declines in agricultural productivity in Mexico[3] may lead to increased levels of illegal immigration.  Projected dramatic increases in Russian and Canadian wheat production[4] may cause intensified competition for U. S. grain exporters.  Other effects of global warming include reversal of ocean currents, with economic disruption of major international customers of U. S. exports. 

 

2.    Current  international  and  domestic  political  conditions  offer opportunities for U.  S. leadership against  global warming.

Internationally, virtually all of America’s major allies would welcome forceful U. S. leadership against global warming. 

 

European and Japanese diplomatic encouragement for a meaningful U. S. global warming policy remains strong.  These demands are likely to intensify with continuing international global warming negotiations.

 

Domestically, public opinion is ready to support a U.S. effort to combat warming.  In an August 2000 nationwide poll of 1,000 adults, the Harris Poll found that 85% of those interviewed said that global warming should be treated as a very serious or somewhat serious problem. 

 

 

3. The Sky Trust proposal would create a market for ways to efficiently reduce the U. S. economy’s massive output of greenhouse gases.

The United States is the leading source of greenhouse gas emissions, accounting for 22% of total global output.[5]  An effective program of global greenhouse gas emissions reductions must, therefore, include a strong U.S. domestic effort, which is also a prerequisite for the assertion of U. S. international leadership. 

The Sky Trust proposal is an economically rational global warming policy for the United States that would achieve an equitable, carbon-efficient economy.  Its essential features are:

·All entities introducing fossil fuels into the U. S. economy would have to buy emissions rights for the carbon in that fuel.[6]  The U. S. government would auction emissions rights for 1.346 billion metric tons of carbon, the 1990 emission level.  Emissions rights would be tradable in secondary markets for two years, and would then expire.  Additional one‑year emissions rights (also tradable) would be available at $25 per metric ton, in effect, establishing a secure ceiling price for emissions rights.  This ceiling price would be gradually increased by 7% (above inflation) each year. Initially 75% of the receipts from sales of emissions rights would be returned in equal annual payments to each U. S. legal resident.  The U. S. Treasury could send each legal resident an annual check, or the payments could be administered by a separate non-governmental trust. At the program’s outset, the per capita payment would be about $100 annually, or $400 for a family of four. 

·In the plan’s first year, 25% of proceeds from the sales of emissions rights would be used to offset any unusual burdens imposed on either producers (firms or employees) or on consumers (such as people who must drive long distances). Governors would be charged with using these funds ––initially in excess of $8 billion annually –– to mitigate such burdens appearing within their states.  The share of revenues used for transition assistance would gradually decline, disappearing altogether after 10 years.  As transitional assistance phased down, the percent of sales revenue returned to consumers in equal per capita grants would increase.

Once this plan was in place, other command and control regulations designed to force firms and households to conserve energy would become redundant and unnecessary.

 

4.  The Sky Trust proposal would significantly reduce U. S. carbon emissions.

Recent economic modeling indicates that the initial $25/ton ceiling price level for emissions rights could (independently of the plan’s built-in price escalation) reduce carbon emissions by as much as 16.4 % below business-as-usual levels.  The wide range of emissions reductions projected by the various economic models, however, illustrates the importance of caution and of the price cap on emissions rights.  A system that –– unlike the Sky Trust proposal –– imposed a hard and fast quantity cap on emissions could produce severe economic losses if the more pessimistic model results turn out to be accurate.

The 7% annual increase in the plan’s price ceiling would, of course, generate further emissions reductions.  The projections of a model by Professor Lawrence H. Goulder of Stanford, with results close to the midpoint of all those surveyed, suggest that the escalating price cap would be sufficient to reach the 1990 emissions target of 1.346 billion metric tons within about a year of the program’s onset.  It would also maintain that level at least through 2015, while allowing robust economic growth. 

                                                                                               

 

5. The Sky Trust proposal would have a negligible impact on the economic growth rate.

 

The Sky Trust proposal ensures the most favorable possible ratio of current costs to future benefits because it harnesses the power and ingenuity of the free market to the task of reducing carbon emissions.  Because the plan is comprehensive, covering virtually all sources of carbon emissions, it would achieve reductions in emissions without singling out any one economic sector.

Initial economic modeling of a plan similar to the Sky Trust proposal strongly confirms the common sense conclusion of minimal economic impact.  Professor Goulder’s model suggests that a 25/ton carbon emissions rights price produces a loss of about one tenth of one percent of GDP while achieving dramatic emissions reductions.  [Most other models suggest similarly modest economic costs.]

Furthermore, the Sky Trust proposal contains additional fail-safe features designed to guard against larger than intended economic consequences.  The emissions rights price ceiling ensures that if reducing carbon emissions proves to be more expensive than expected, the economy will not be hit with excessive costs or disruptions. This “safety valve” makes the Sky Trust proposal far less risky than one based on a hard and fast cap on the quantity of emissions (as in the Kyoto agreement).  The household reimbursement provisions of the plan provide further insurance against macroeconomic disruptions.

 

6.  The Sky Trust proposal would set aside a portion of the auction revenue to ease the transition to a carbon-efficient economy.

To start, the Sky Trust proposal’s price cap for carbon emissions rights is designed to minimize transitional unemployment by ensuring that economic adjustment would be moderate and gradual.  Moreover, 25% of the revenue from the auction of carbon emissions rights would be available for easing the transition costs of firms, employees, and households for whom the transition to a low-carbon economy is most difficult. 

This transitional assistance would be particularly important to economically marginal coal mining areas, where the local employment impacts of the plan would otherwise be heavy.    Considered on a nationwide basis, the proposed impacts on employment levels are expected be small.  Energy price levels are not, in themselves, inimical to full employment.  For example, during much of the post-World War II period, the Japanese economy combined full employment with far higher energy prices than those envisioned for the United States under the current proposal.

 

7.  The Sky Trust proposal’s impacts on consumers would be small -- well within the price fluctuations experienced during the last decade.

A carbon emissions rights price of $25/ton would result in price increases of roughly 6 cents/gallon of gasoline.   Over the last ten years, average U. S. retail gasoline prices varied from 64 to 80 cents/gallon (excluding taxes).

Any increases in economy-wide consumer prices would be small compared to the range of uncertainty about the measurement of the Consumer Price Index.  Moreover, the plan’s household reimbursement provisions would protect consumer disposable income levels.

 

8. The Sky Trust proposal is an economically rational global warming policy for the United States.

The Sky Trust proposal would sell to businesses the rights to emit carbon into the atmosphere.  In effect, the Sky Trust proposal recognizes that the atmosphere’s capacity to absorb carbon emissions without climate degradation is a critical part of the production process.  Creating a market for carbon emissions rights would allow the normal operation of market forces to get the highest economic value from the atmosphere’s limited capacity to absorb carbon.  Once such a comprehensive market incentive for carbon emissions rights is in full operation, other regulatory command and control systems would become redundant and unnecessary.

 

Updated December 12, 2000

 



[1] IPCC quote from Associated Press, October 26, 2000

[2]  IPCC quote from The New York Times, October 26, 2000

[3] “Climate Change: The State of Knowledge,” Executive Office of the President, Office of Science and Technology Policy, October 1997, Figure 20.

[4] Ibid

[5] Ibid, 6.

[6] The requirement for emissions rights would be enforced “upstream”; hence, compliance could be assured by monitoring roughly 2,500 refineries, import points, pipelines, and coal mines, instead of hundreds of thousands of end-users who burn carbon-based fuels.  The administrative simplicity of this feature is one of the proposal’s chief advantages.