SolarCoin: trust and goodness in a digital currency

This is the second post of a blog series on Electricity-Backed Currency

Originally posted by Triple Pundit on April 15, 2014

SolarCoin is a decentralized digital currency that we can trade person-to-person over the internet, without PayPal or Visa playing middleman and charging fees. Each SolarCoin represents one megawatt-hour (MWh) of solar electricity generation.

In my first blog post on SolarCoin, I describe the two ‘proofs of work’ that back the currency: a cryptographic proof of work that secures the online currency and verifies transactions, and a proof of solar power production. That introductory piece also explains how one can claim or trade for SolarCoins, but leaves unanswered the question of why one would want to do that.

So, is SolarCoin valuable?

Money value

SolarCoin is a digital currency intended to reward producers of solar electricity. Image: SolarCoin.org

All currencies, including U.S. dollars and Euros, are valuable as long as a network of merchants, people and other organizations consider them valuable. But unlike the currencies with which we are required to pay our taxes, digital currencies must provide value as a complement to national currencies.

For SolarCoins to succeed as a means of exchange, we need to begin treating them like money. They must be in people’s hands — or digital wallets — and they must be used for purchases and exchanges.

This is how Bitcoin gained value. The first famous cryptocurrency provided a decentralized, free-flowing way to do business on the internet, so people started trading it like cash.

On a fundamental level, something has value if we think it’s important.

SolarCoins not only offer the trust associated with a block chain transaction database, but also the goodness of fossil-free, renewable energy. I think we can all agree trust and goodness are important.

Decentralized Trust

To understand how digital currencies create decentralized trust, just think of the way you know trust is defined. Trust is the firm belief in the reliability, truth, ability, or strength of someone or something, according to Merriam-Webster.

In this case, it is the firm belief that SolarCoins are reliable and secure, and that the online community that holds and trades the currency cannot cheat you out of your SolarCoins or devalue SolarCoins by creating too many.

It’s decentralized because we need no central authority. Money can change hands person-to-person, and there’s no way to cheat the system — each SolarCoin or other digital currency is a unique piece of digital property that simply moves from one digital wallet to another within minutes of a transaction.

A public ledger — the block chain — records every transaction ever made in SolarCoins, which makes it impossible to get away with double-spending. This digital database enables us to make trustworthy purchases and trades over the internet without entering credit card data or going through a bank. As a result, online transaction fees can drastically decrease.

Physical Trust

SolarCoins are backed by physics, not just the computing power necessary to create and secure them. Each one was originally granted to a producer of one MWh of solar electricity — a unit of energy whose value to society stays relatively steady over time.

By contrast, other digital currencies carry little intrinsic value beyond the mutual agreement that they have monetary worth. Bitcoin’s price has fluctuated wildly over the past several years in part because bitcoins are not tied to anything stable (though there are other good explanations for the currency’s volatility, detailed in this Washington Post article arguing that Bitcoin’s value will stabilize in the future).

Advocates of the gold standard – a system in which a currency’s value is based on a set amount of gold — believe that a tangible asset is essential to ensure long-term price stability of a currency. But unlike a precious metal, the commodity represented by Solar Coin provides real value to society. Electric power from the sun benefits the environment and raises standards of living in energy-poor regions.

Earth goodness

To elaborate the concept of goodness, SolarCoins may soon be worth something in part because of the environmental and energy benefits they represent.

Solar panels in Hanover, Germany. Photograph: Christoffer Riemer

Solar panels in Hanover, Germany. Solar power is worth more than coal power or nuclear power and SolarCoin monetizes the benefits of cleaner air and a cooler climate. Photograph: Christoffer Riemer

One MWh of electric power produced by solar photovoltaics releases no greenhouse gases other than the emissions from manufacturing solar panels, while burning fossil fuels like natural gas or coal releases 1,500 pounds or more of carbon dioxide-equivalent emissions per MWh generated — not counting the upstream emissions from extracting, refining, and transporting the fuels. Beyond reducing climate-changing carbon emissions, generating solar power does not cause air or water pollution.

Because solar panels produce electricity without side effects to human and ecosystem health solar energy can be produced right where it’s used. Consequently, thousands of tiny solar ‘power plants’ can make the electrical grid more resilient by reducing our reliance on massive, polluting power plants connected to cities by inefficient, expensive, and vulnerable transmission lines.

Energy goodness

Electricity availability is closely tied to prosperous living. In areas without widespread access to energy, solar panels can bring power to the masses.

Solar electricity often replaces energy sources like kerosene lamps, diesel generators, and wood-fired stoves when it’s installed in places without a dependable electrical grid. This transition allows communities to stop purchasing and burning costly fuels, increasing quality of life with reliable power and protecting human health from harmful emissions.

Scaling up

In summary, SolarCoin has inherent value in trust and goodness. It facilitates transactional trust between strangers, rewards producers clean energy, and frees everyday exchanges from the banking system.

Now SolarCoin just needs a huge network of people holding and using the currency. Check out last week’s blog post for instructions on how you can join the open community.

Next week’s post will show how SolarCoin can gain the popularity necessary for the currency to achieve significant monetary value. Stay tuned!

SolarCoin: money backed by computers and sun power

This is the first post of the Electricity-Backed Currency blog series

Originally posted on the Mosaic blog on March 27, 2014. 

Back in 2011, Nick Gogerty and Joseph Zitoli of the Thoughtful Capital Group wrote a proposal to back national currencies with electric power. They argued that electricity provides benefits to society, unlike gold, and retains monetary value better than government debt or mortgage-backed securities — the assets the US Federal Reserve Bank currently holds against dollars in circulation.

Naturally, central bankers and policymakers around the world ignored the academic paper. It’s difficult to convince large institutions to transform a system that seems to be working just fine — and most of the world’s major currencies are relatively stable.

So this year, Gogerty and an online volunteer community created an electricity-backed digital currency, in the vein of Bitcoin, to incentivize solar energy generation. If we show a little faith in the value of sun power, this new online monetary system will increase the rate of investment in solar electricity.

SolarCoin is a decentralized digital currency that we can trade person-to-person, with no need for a bank or other intermediary. Launched in 2014, it is not affiliated with a specific country.

Proof of computer work

SolarCoin is backed by two ‘proofs of work.’ The first is called a cryptographic proof of work, basically a math problem that’s difficult for computers to solve but easy to check that they got it right.

I don’t pretend to fully understand digital cryptocurrencies, but the possible positive impact of SolarCoin shines brightly with or without computer science knowledge. All we need to know is that a database called a block chain acts as a public ledger, holding a record of every SolarCoin transaction.

This innovation prevents anyone from trying to spend the same SolarCoins twice. More generally, the invention of the block chain marks the first time in human history that we have achieved decentralized trust.

Because of this new technology, it is no longer necessary to rely on a central authority to assure shared trust in agreements — a reality that could radically transform banking by reducing or eliminating legal fees and other transaction costs. Yet the block chain has potential applications well beyond the sphere of money (check out ProofOfExistence, a service that provides evidence of ownership of a specific file at a specific time).

Proof of solar work

What makes this currency a potential game-changer in the electric power sector is its second proof of work: authentication of solar electricity production through a third party-verified meter reading. One megawatt-hour (MWh) of generation earns one SolarCoin (SLR).

The SolarCoin Foundation created 98 billion SolarCoins to match the amount of solar electricity that the International Energy Agency predicts will be generated over the next 40 years. All but 0.5 percent of these SolarCoins will go to energy producers; the remaining 500 million will compensate the computer geeks and other volunteers who build and support the infrastructure behind the currency.

The peer-to-peer network of SolarCoin holders will build the currency’s transactional value upon the belief that solar-powered electricity is worth more to the world than its value in traditional energy markets. Ideally, it will work like electronic cash.

Get SolarCoins

Up until Saturday, March 8, all the virtual money was held in reserve. That day marked the first SolarCoin pilot grant, in which Arizonan Lisa Shock received 23.4 SolarCoins by providing verification of the 23.4 MWh her rooftop installation generated between 2011 and 2013.

The pilot program represents the first steps toward developing a global system for verifying electricity generation and granting SolarCoins in a communally transparent way that still respects individual privacy. Residential solar system owners and investors in larger projects can participate in the grant program and start receiving SolarCoins for their power production.

First, you need a receiving address for your e-money. Download a SolarCoin QT wallet at SolarCoin’s website to join the solar-backed currency community.

Then head here to claim your coins. You’ll need a scan or photo of two documents: a Proof of Use that contains the physical address and nameplate capacity of the generation facility; and a Proof of Work that verifies solar electricity generated and time period from the meter.

The power generated by solar projects at a residential dwelling can earn SolarCoins for the resident, whereas the SolarCoins for large installations’ production can be claimed by the owner of the facility. This structure incentivizes the primary consumers of the electricity from rooftop solar arrays — the residents — even if the system is leased or financed.

In addition, granting SolarCoins to residents grows the SolarCoin community larger than dispersing all the rewards to a few solar leasing firms. Even better, the currency’s worth increases for everyone using it as it finds its way into more people’s digital wallets, because the value of SolarCoin is directly proportional to the number of people holding the currency.

You can also get small quantities of the currency absolutely free at a charitable faucet like this one. These faucets are third-party websites that give away SolarCoins in order to grow the economy of SolarCoin users. SolarCoins’ value as a means of exchange grows as more people hold them.

In addition, you can obtain SolarCoins on a currency exchange. Click here for a list of online sites where you can trade dollars, Bitcoins, and other currencies for SolarCoin, once you have downloaded your digital wallet.

But wait. Why would anyone want SolarCoins? Are they really worth anything?

Trust me, they’re valuable. Actually, trust SolarCoins — currencies are all about trust.

The next post in the series will explore why SolarCoins have value and how their purchasing power will increase over time.

Spain’s persistent recession is bad for the people, good for the climate

Spain is our best proof that economic crises are great for the climate; yet the ongoing troubles of the economy have much less desirable consequences for the well-being of the Spanish people

Economic recession means decreasing total production of goods and services.

Put simply, people buy less, businesses sell less, and producers produce less. A recessed economy uses less energy, takes fewer natural resources from the Earth, and does not require as much labor.

As a positive result, climate-changing greenhouse gas emissions fall. Economic downturns generally reduce the total environmental impacts associated with human activity.

On the other hand, workers are laid off, businesses fail, living standards go down, little money is available for borrowing, and government struggles to provide essential services with less tax revenue.

Currently, many climate scientists and ecological economists advocate degrowth — deliberate economic recession, by definition — in order to reduce emissions and slow atmospheric warming. These supporters of shrinking the economy essentially believe that advanced economies have grown larger than the size at which net benefits are maximized.

Why doesn't economics — a discipline obsessed with marginal costs and benefits — ask if there's an equilibrium point at which we should stop growing the economy? Graph: Maggie Winslow, University of San Francisco

Why doesn’t economics — a discipline obsessed with marginal costs and benefits — ask if there’s an equilibrium point at which we should stop growing the economy? Graph: Maggie Winslow, University of San Francisco

Let’s call this perfect size of the economy the macroeconomic bliss point. Beyond this optimal total economic output, the costs of further economic growth outweigh the benefits.

For example, using natural resources to produce energy and goods provides benefits to society, but after our material needs are met the incremental benefits of taking more resources from the Earth decrease. Meanwhile, the costs of using more and more natural resources increase as over-extraction and ecological degradation constrain future generations’ opportunities for flourishing.

Perhaps we can have negative economic growth and the consequent decrease in climate pollution without the human hardship that traditionally accompanies recession, but few economic models exist to test this possibility. Quite frankly, degrowth does not work within today’s global economic framework.

Recessions make life harder for people but they are good for nature in general. Let’s look at Spain’s interminable economic slump as an example of this conundrum.

Spanish emissions

In 2013, Spain became the first country for which wind power was the largest source of electricity generation over an entire year, according to reports from the country’s system operator Red Eléctrica de España (REE) and the Spanish Wind Energy Association (AEE). Wind accounted for 20.9 percent of power production, just edging nuclear plants for the top spot.

A wind farm outside the city of Zaragoza. In 2013, wind turbines were Spain's top source of electricity because a spike in wind power coincided with decreasing overall demand for electricity as a result of economic hard times. Photograph: Tor Eigeland/Alamy

A wind farm outside the city of Zaragoza. In 2013, wind turbines were Spain’s top source of electricity because a spike in wind power coincided with decreasing overall demand for electricity as a result of economic hard times. Photograph: Tor Eigeland/Alamy

Total electric power use in Spain has declined three years in a row because of the country’s long-lasting recession. Less economic activity means less demand for the electricity that powers the economy.

The wind blows regardless of economic conditions, so wind power naturally accounts for a greater share of electricity generation as overall generation drops. The same can be said for solar power and other renewable technologies that rely on environmental systems rather than costly fuels to produce energy.

In general, decreased demand for electricity means that less fossil fuels burn. Thus economic downturns reduce climate pollution.

Evidence from Spain supports this hypothesis. The country’s gross domestic product — the generally accepted most important indicator of macroeconomic performance — fell 1.3 percent in 2013, according to preliminary estimates (economists and politicians typically aim for at least 2 percent GDP growth to maintain a ‘healthy’ economy). Meanwhile, the industry report from the REE calculates that greenhouse gas emissions from Spain’s electricity sector in 2013 fell 23 percent from the previous year.

In my blog post Band-Aid for a Broken Market, I detail how the global financial crisis and subsequent Great Recession derailed the EU Emission Trading Scheme by causing emission reductions for which the multinational cap-and-trade system had not planned. Clearly, economic downturns bring about decreases in climate pollution.

Green misinterpretation

Yet many clean energy advocates overlook the reality that much of the decrease in carbon emissions can be attributed to economic decline. Environmental groups celebrate Spain’s record-setting wind power industry and associated emission reductions as clear-cut evidence that investment in renewable energy can in fact slow climate change.

A news article from CleanTechnica typifies the environmental community’s general misunderstanding of a shrinking economy’s influence on emissions and the proportion of power production from renewable sources: “Kudos to Spain for leading the world in renewable energy despite tough economic times.” I added the emphasis.

Granted, Spain’s renewable energy subsidies would have made wind a big factor with or without the economic recession. As Kees van der Leun, managing director of sustainable energy consultancy Ecofys, pointed out to me on Twitter, wind power output in 2013 would have been 19.6 percent of Spain’s 2008 total electricity consumption.

Over the five-year period since then, electricity use has decreased 7 percent. Had the economy grown instead of shrunk during that period, electricity consumption would likely have risen. With increasing total electricity use, it’s hard to predict what fraction of total demand would be met with wind power, since a strong economy and government incentives would drive both investment in wind projects and demand for electricity.

Now Spain plans to dramatically cut renewable energy subsidies, a move that will make returning to economic growth without causing an upsurge in carbon emissions much more difficult. Below, the fiscal reasons for such reductions in government spending are explained in more detail. Needless to say, the wind and solar industries are up in arms over the regulatory changes.1

National disaster

We can’t call Spain’s economic mess a positive development just because it reduces climate-warming emissions.. They call the current situation a crisis for good reasons.

Author Jaime Pozuelo-Monfort summarizes the predicament in the Huffington Post blog: “Spain is in deep recession not only economic-wise, but from every other point of view.” He details Spain’s corrupt political parties, incompetent leaders, separatist regions, wasteful territorial structure, massive public debt, unsustainable private debt, and failing education system.

The line-up outside an unemployment registry office in Madrid. Photograph: Wind turbines a La Muela near Zaragoza. Wind power was the top generator of electricity in Spain in 2013. Photograph: Andres Kudacki/AP

The line-up outside an unemployment registry office in Madrid. Photograph: Andres Kudacki/AP

One need not look further than the shattered Spanish labor market for confirmation of the country’s calamity: unemployment hovers just under 30 percent, while the youth unemployment rate climbed to a ridiculous 57.7 percent last November. More under-25s are looking for a job than have one.

What’s more, the official unemployment percentage would be even higher, except for two details about its computation that lead to systemic underestimates of the negative jobs impact of a prolonged recession. First, unemployment rates do not include people who have become so frustrated or hopeless that they have stopped actively looking for work. And secondly, the calculations count part-time workers seeking a full-time job as employed — even those who don’t make enough to support themselves or their families.

Many jobless adults survive on their retired parents’ pensions for survival, spreading the hurt of difficult times across generations. More troublingly, rampant unemployment diminishes the workforce supporting the pension system.

Entrenching instability

To make tough times worse, Spain recently withdrew 5 billion Euros from the Social Security Reserve Fund in December, according to Europa Press. This money was almost certainly extracted from the pension reserve account in order to assist the country in attaining its deficit goal.

Spain claims to have met its fiscal goals in 2013, but European Union officials recently visited to meet with representatives from the Valencia and Madrid regions about the reliability of budget data. Blogger Mish Sendlock sums up the general sentiment of analysts: “If Spain meets it budget deficit target this year, it will likely do so by some sort of accounting gimmickry or purposeful under-reporting of regional debt.”

Many economists consider limiting government deficits during economic recession counterproductive anyway. For example, reducing pension payments limits the purchasing power of retirees — and consequently reduces spending by many of their children too, in Spain — which compels suppliers in the economy to produce less, anticipating weak demand.

Of course, falling production reduces employment further as manufacturers and distributors lay off unneeded workers. Thus even more people end up dependent on government benefit programs, which in turn puts additional strain on the fiscal budget, restarting the process that led to Spain’s withdrawal of cash from the Social Security Reserve Fund in the place.

This vicious cycle of diminishing demand and shrinking supply perpetuates recessions. Fiscal austerity — trying to minimize government deficit — seems to hurt rather than help recovery.

Paradigm shift

Pozuelo-Monfort, a Spanish academic and social entrepreneur, warns of imminent violent revolution. He then calls for another type of revolution, one he does not elaborate beyond an analogy to open-heart surgery.

What about a revolution in macroeconomic thinking?

Since economic recession hit Spain – where the green GDP line takes a turn downhill in 2008 – carbon emissions have fallen like a heavy object dropped from a great height. At the very least, intentional economic degrowth merits serious consideration in climate policy discussions because of its proven capability to reduce greenhouse gas emissions. Figure: Knoema. Source: The World Bank.

Since economic recession hit Spain – where the green GDP line takes a turn downhill in 2008 – carbon emissions have fallen drastically. At the very least, intentional economic degrowth merits serious consideration in climate policy discussions because of its proven capability to reduce greenhouse gas emissions. Figure: Knoema. Source: The World Bank.

Economists have long been reluctant to discuss degrowth as a serious option, since a shrinking economy causes social problems that tend to disproportionately affect those who have the least to lose. Yet Spain is proving that this involuntary ‘strategy’ works to decrease greenhouse gas emissions, albeit with dreadful side effects.

Now if only we can find a way to ‘degrow’ the GDP without putting a significant portion of the population out of work.2

Macroeconomics, the study of entire national and international economies, falls short as an approach for studying the possibilities of prosperity without economic growth for two reasons:

  1. macroeconomic models customarily ignore the ecological foundation upon which all human enterprise is built; and
  2. the measures of macroeconomic success do not gauge real well-being for actual people.

In fact, the main goal of macroeconomics is to grow the economy. Standard theory says that as technology gains allow each worker to get more done, total output — as measured by GDP — must increase to keep everyone employed.

Yet the flaws  in current macroeconomic models are widely acknowledged and well-documented. Even Harvard University professor Greg Mankiw — a former economic adviser to President Bush II – admitted in last Sunday’s New York Times that economics is a primitive discipline with limited predictive powers, equating today’s economist with a medical doctor two centuries ago.

Measuring prosperity

Capitalism’s favorite macroeconomic metric, gross domestic product, simply quantifies the busyness of the economy. The most common way to calculate GDP measures total economic production by adding four aggregate numbers: consumer spending, business investment, government spending, and net exports.3

Basically, economists use money spent as a proxy for prosperity. The idea is that people will pay according to how much they value the things they purchase, so total expenditures can approximate material well-being.4

Yet the relationship between GDP and human flourishing is by no means linear.5 Even though GDP per person in the US is three times bigger than in 1950, Americans don’t report being any happier.

In Britain and the US, a growing economy has not brought increased life satisfaction in recent decades. Chart: Mark Easton, BBC News

In Britain and the US, a growing economy has not brought increased life satisfaction in recent decades. Chart: Mark Easton, BBC News (he meant to call the green line GDP, not “GPD”)

Many researchers have attempted to create ‘adjusted’ economic indicators that take into consideration aspects of well-being ignored by GDP — the national accounts version of baseball statistics like on-base plus slugging, which takes into consideration more aspects of hitting than the simple batting average.

In the January 15 edition of Nature, ecological economist Robert Costanza and a host of colleagues published this piece of recommended reading to detail GDP’s many flaws and provide an overview of the variety of efforts to come up with a better indicator of national success.

We need an economist to create a macroeconomic metric in the vein of sabermetrics, statistics that look beyond traditional measures of baseball skill in search of objective knowledge about the game. Drawing inspiration from the ideas of Indian economist Amartya Sen and British ecological economist Tim Jackson, someone must quantify the capabilities for human flourishing within ecological limits.

With an economic model that more accurately reflects the well-being of people and the environment, we can look beyond the traditional models and investigate whether developed societies can prosper without economic growth, as Jackson’s 2009 book Prosperity Without Growth explores.6 This line of inquiry is important because countries have struggled mightily to reduce greenhouse gas emissions with economic growth.7

Testing ground

To quote Jaime Pozuelo-Monfort once more, “Profound changes are necessary if Spaniards wish to have any future at all.”

To me, this makes Spain a terrific candidate to experiment with new ways to quantify economic success. In this case, an original method is needed to measure progress toward recovery, specifically.

Let us see if the country can be mended in terms of human health, security, comfort, and happiness without resuming the habitual growth in climate pollution and environmental destruction that routinely comes with an expanding economy.

 


  1. One type of government spending contributing to Spain’s deficit is the subsidy program for renewable energy. As part of repairing the government budget, Spain plans to eliminate subsidies for new renewable energy plants and cut benefits paid to existing facilities, a reduction that could exceed $2 billion, according to The Wall Street JournalSurprisingly, Spain may actually be able to reduce the public deficit without causing a surge in emissions upon recovery by using some of the money saved on subsidies to retire emission allowances in the EU Emission Trading SchemeBut environmental groups that credit the country’s carbon reductions to generous government support for wind and solar power would likely oppose this plan (they are predictably staunchly against the current subsidy cuts) because it intuitively seems pro-fossil fuels. Read this post for a full explanation of the proposal to use savings from cutting energy subsidies to cost-effectively reduce emissions through the EU carbon market. 
  2. One straightforward solution to the rampant unemployment associated with an economy that’s not growing is each member of the labor force working fewer hours. As technology progresses, total production across an economy must increase just to keep employment constant, since each person-hour of labor can do more work. But growing the economy is not the only option. Alternatively, we could turn these gains in labor productivity into extra leisure time for everyone. More than two centuries ago, philosopher John Stuart Mill, whom we now call an economist, reasoned that once we establish decent standards of living, we should focus on morality, equality, and increasing leisure rather than straining to accumulate more and more wealth. Yet in our capitalist economic system, time and again we have chosen greater wealth instead of more free time when additional capital, new innovations and improved processes increase the amount of output that human work can produce. 
  3. Three methods exist for computing gross domestic product, all of which should hypothetically yield the same result: (1) by aggregating the sum of the value of all the goods and services produced in a country in one year; (2) by aggregating the sum of all incomes in a country in one year; and (3) by aggregating all expenditures in a country in one year — consumption plus investment plus government spending plus exports minus imports. 
  4. To be clear, GDP in itself is not the issue, insofar as it does a great job of measuring market transactions. GDP presents problems only when it is used to make conclusions not supported by that narrow scope, like when academics, reporters, and popular writers use GDP per capita as an indication of living standards, an application not supported by the statistic. NPR’s Planet Money podcast recently ran a short radio piece called, “The Invention of the Economy” that chronicles the eight-decade history of GDP and how it’s been used and misused. The story makes the fascinating point that before the Great Depression of the 1930s there was no such thing as “the economy.” The economy is an idea that we created in order to help fix the economy! 
  5. To be more clear, GDP is far from a perfect statistic even to gauge economic activity, as it excludes secondhand goods, voluntary labor, and household work like chores and food preparation. Moreover, GDP ignores variables that affect future possibilities for consumption — and well-being — such as changes to the asset base and non-market ecological costs (pollution). 
  6. Among those who support ending economic expansion, some see degrowth as an emergency strategy to ward off the threat of climate disaster, whereas others call for a slow transition to a steady-state economy — a societal paradigm shift that, in theory, will decrease inequality and allow us to live more in harmony with natural systems. Representing members of the first group, climate scientists Kevin Anderson and Alice Bows-Larkin of the UK’s Tyndall Center propose rapid economic degrowth in developed economies to enable 10 percent-per-annum emissions reductions, an approach that allows us to stay within the arbitrarily agreed-upon 2-degrees Celsius maximum warming limit while still allowing developing countries to increase emissions for another decade as economic growth brings hundreds of millions out of poverty. Economist Peter Victor of York University typifies the second camp of degrowth advocates with LowGrow, a simulation model of the Canadian economy he uses to compare long-run future scenarios of ‘business-as-usual,’ ‘selective growth,’ and ‘degrowth,’ the last of which slowly reduces GDP to a level that corresponds to a global economy that fits within Earth’s ecological limits. The results of the study are published in a paper called “Growth, degrowth and climate change: A scenario analysis.” 
  7.  Even as many countries decrease the emission intensity of economic output — measured as carbon pollution per dollar of GDP — macroeconomic growth has prevented absolute reductions in greenhouse gas emissions. In other words, as the climate impact of economic activity is lessened by efficiency gains, these improvements are more than offset by increasing total production. 

The Olympic Winter Games: Catalyst for Climate Solutions

The snow-challenged Sochi Olympics contribute to climate change rather than work to fix it, but the Games should be a force for slowing warming

An abridged version of this article was published as a guest commentary in the Oakland Tribune on February 28, 2014

Do you like the Winter Olympics? Do you enjoy skiing, snowshoeing, sledding, or winter camping? Or do you simply marvel at the beauty of a silent white landscape on a crisp, clear morning?

Snow, of course, is the shared foundation upon which these wonderful things stand. And climate change threatens the future of snow.1

As sports commentators and news reporters from all over the world endlessly discuss Sochi’s not-so-cold weather and Olympian efforts to improve snow conditions, they often fail to mention that balmy winters may become the new normal in many long-established ski destinations, thanks to our changing global climate.2 Instead, the international media focus narrowly on Russia’s massive snowmaking effort, recruitment of the Altai shamans to summon snow, and application of snow stored from last year.

Even Google's doodle showed support for the LGBT community in Sochi, quoting the Olympic Charter: “The practice of sport is a human right. Every individual must have the possibility of practicing sport, without discrimination of any kind..." What if Google took a similar stand on the climate crisis? Source: Google

Even Google’s doodle showed support for the LGBT community in Sochi, quoting the Olympic Charter: “The practice of sport is a human right. Every individual must have the possibility of practicing sport, without discrimination of any kind…” What if Google took a similar stand on the climate crisis? Source: Google

By tradition, the Olympic Games bring global issues to center stage, concerns that often have little to do with the athletic events themselves. From the 1968 Black Power salute of medal winners Tommie Smith and John Carlos in Mexico City to the 1980 and 1984 boycotts of rival world leaders the US and USSR, respectively; from the barring of South Africa in response to apartheid between 1962 and 1992 to Beijing’s emergency measures to quell the noxious air pollution that threatened the 2008 Games; from the Munich massacre of 11 Israeli athletes in 1972 to the unwelcome mat Vladimir Putin has placed before gay athletes and spectators attending Sochi 2014, the Olympics have repeatedly situated the world’s most pressing concerns and crises in front of a world audience.

The time for acting to avoid climate catastrophe is melting away as fast as the snow and ice. The Olympic Winter Games, a wonderful world celebration of the enjoyment we all experience in snowy landscapes, is the perfect catalyst to provoke passion around climate change.

Olympic-sized threat

For the Olympic Winter Games, climate change means fewer potential host cities. A recent study (PDF) from Canada’s University of Waterloo and Austria’s Management Centre Innsbruck reports that at Earth’s current rate of warming, just six of the last 19 Winter Olympics sites will be sufficiently cold to stage the Games by the end of this century.

Sochi and the preceding Winter Games’ location, Vancouver, BC, will likely be too warm to host the Olympics by 2050, according to the Canadian-Austrian research.

Keep in mind that today’s greenhouse gas emissions will cause atmospheric warming for decades to come. If international leaders do not act immediately and forcefully to curb carbon pollution, climate change might mean game over for winter sports in much of the world.

The Olympics can generate momentum for climate solutions in three ways: (1) by focusing international attention on the impacts of reduced snowpack and glacial melt on winter sports; (2) by constructing state-of-the-art, climate-neutral facilities, transportation networks, and even entire cities; and (3) by uniting the disparate states of the world to confront one issue that affects us all: global warming.

The Sochi Games scarcely employ these strategies at all.

Global stage for climate change

First, the Olympic Winter Games provide a quadrennial opportunity to bring the effects of climate change to the world’s attention while all eyes are affixed to cold-weather sport. Athletes from across the globe should come together to pressure world leaders to develop a strategy for climate action.

Cross-country skier and three-time Olympian Andy Newell, who placed 18th in the Men’s Sprint in Sochi, is trying to gather athletes to call on world leaders to act collaboratively to stop the climate crisis.  Source: FIS

Cross-country skier and three-time Olympian Andy Newell, who placed 18th in the Men’s Sprint in Sochi, is trying to gather athletes to call on world leaders to act collaboratively to stop the climate crisis. Photograph: FIS

US cross-country skier Andy Newell is trying earnestly to form this sort of alliance. He has been rallying his fellow Olympic athletes to sign a letter that pleads heads of state to approve a comprehensive international climate agreement in Paris next year. Two weeks before the Opening Ceremony, just 82 of over 6,000 Olympians had signed the petition.

Many competitors are hesitant to stir up controversy around the Olympics.  But athletes determined to stand up against Russian laws that discriminate based on sexual identity, despite uncertainty surrounding the possible repercussions for such demonstrations, provide evidence that the Olympics remain a great stage for social protest.

Newell hints at another possible explanation for snow-seeking athletes’ reluctance to advocate climate solutions: carbon footprint guilt. “We burn a lot of fossil fuels chasing the winter around and trying to go to these competitions,” he admits.

Nobody wants to be called a hypocrite, but Olympic athletes have the perfect platform from which to raise awareness and foment support – and the audience for winter sports is this big only once every four years.

Climate-friendly competition

Second, constructing and staging an ecologically mindful Olympics can create excitement over the potential of clean technology to produce built environments that support massive human activity without the support of fossil fuels.

As we transition to a low-carbon society, our cities change gradually. They steadily expand transit networks; construct climate-friendly public works when infrastructure needs replacing; and promote infill rather than sprawl through urban planning.

These changes take effect over decades. Where energy infrastructure and buildings already exist, it does not make economic or practical sense to destroy everything and replace it with new technology, especially when there is the hope that we can wait a few years and the price of renewable energy facilities and smart grid equipment will fall.

Instead, cities can only continue choosing the cleanest available technology as they replace pieces of our aging, outdated, fossil-powered energy infrastructure.

Obviously, the chance to quickly construct new cities from the ground up does not come along very often. The Games are an occasion to build a metropolis with sporting venues almost from scratch, so why wouldn’t a host nation erect the city of the future, which we know will need to function without polluting the climate?

Olympic construction provides the opportunity to make a statement: “This is the state of low-carbon technology in 2014.” We might discover that we are already capable of creating climate-neutral urban environments with a $50 billion budget like that of the Sochi Olympics – especially if the money goes entirely to Olympic preparations and not embezzlement and kickbacks.

Rather than greening the Games, the Dow Chemical Company, Official Carbon Partner of Sochi 2014, will allegedly offset the climate impact of this year’s Olympics through emission reductions across Russia. In fact, they’ve already taken credit for climate neutrality.3

Simply compensating the huge climate impact of the Olympics with unconvincing carbon-offset measures misses the chance to create a model ‘Green Games’. Attendees would notice ecological venue design or ridgelines covered in wind turbines, but most have no idea that Russia is paying Dow Chemical to install low-carbon technology around the country.

Instead, the world is noticing the environmental destruction and irresponsibility of these Olympics and their enormous preparation effort. Outside magazine’s McKenzie Funk wrote a brilliant critique of the ecologically and socially devastating construction project, and corrupt cronyism, that characterize President Vladimir Putin’s attempt to put on a truly extravagant Winter Games to display the new Russia.

As an Olympic green project, Russia's organizing committee created Ornithological Park in Imeretinskaya lowland. In preparation, large amounts of construction, household, and demolition waste were dumped and buried at the site of the park. Photograph: Dmitry Shevchenko

As an Olympic green project, Russia’s organizing committee created Ornithological Park in Imeretinskaya lowland. In preparation, large amounts of construction, household, and demolition waste were dumped and buried at the site of the park. Photograph: Dmitry Shevchenko

Funk describes the reasons that the Russian Geographical Society (RGS) did not even need to vote to establish their opposition to the planned Olympics: “The mountains would get more ski lifts, the river valleys highways, the caves tunnels, the beaches seawalls, and the wetlands stadiums.” The environmental violations, human rights abuses, illegal dumping, Olympic expenses, and ecosystem ruination are chronicled on the blog Sochi Watch.

But this blog post is not about the harm done by Sochi 2014, it’s about how a host nation can design the Olympic Winter Games to move forward on the planetary challenge that jeopardizes the future viability of many of the events showcased.

Some ecological damage is inevitable when preparing a city with a population of about 400,000 to host the world’s biggest winter sports event. The land footprint will expand, construction processes will release tons of greenhouse gases as well as other air and water pollutants. In addition, a lot of emissions come from producing building materials.

But piloting low-emission construction techniques to build a compact city that operates without burning fossil fuels would minimize the Games’ impact while showcasing best practices and fostering confidence about climate neutrality.

I imagine mass transit on rails shuttling people and equipment between Sochi and facilities in the Caucasus Mountains rather than crowded superhighways connecting city to slopes. I imagine wind turbines extending upward from chairlift towers; passively designed houses and arenas that maintain room temperature with minimal energy consumption; waste-to-energy facilities that supply the grid with electric power and produce liquid biofuels for zambonis and snow groomers; and solar water heaters, rainwater catchments, and carbon-sequestering gardens on every roof.

If an Olympic host creates zero-emission structures and infrastructure while performing onsite mitigation projects to counterbalance air travel and construction emissions that cannot be avoided, then the entire host city will be greened, literally with carbon-absorbing vegetation and in terms of sustainability.

Coming together

Lastly, the Olympic Games are special because the nations of the world assemble to celebrate something we all have in common: sport.

The reality of our changing climate is another experience that the whole world shares; around the world, people face many symptoms of the same disease – rising seas, shifting weather patterns, species dislocation, intensified storms, and threatened winter sports.

Let’s hope this is the last Winter Olympic Games to ignore the opportunity to place the threat of climate change on the world stage.


  1. Last week, Powder magazine editor Porter Fox published an opinion piece in the New York Times titled “The End of Snow?” The article mostly discusses the consequences to skiing, but also brings up the dangers our global meltdown poses to freshwater resources, alpine tourism, hydroelectric power, forest habitat, river ecosystems, and even food production. 
  2. Even as this January brought extreme cold and heavy snowfall to North America from the arctic, the ski industry worries that winters are getting too warm. U.S. average winter temperatures have risen 0.61 degrees Fahrenheit per decade over the last forty years, and the Global Snow Lab at Rutgers University reports that snow cover in the Northern Hemisphere has declined at the same time, most markedly in the spring. Auden Schendler, the Aspen Skiing Company’s vice president of sustainability, expresses concern that as the globe warms, winters are heating up much faster than summers. In an interview with NPR’s Weekend Edition, he laments that climate science is forecasting less and less total snowfall, yet more powerful blizzards, paradoxically. This combination of climate consequences makes it increasingly difficult for ski resorts to break even, much less prosper. If too little snowfall or too fierce storms prevent these operations from opening — and thus they can’t make money — then capital to invest in solutions like snowmaking, renewable energy, and even lobbying for climate policy, becomes scarce. 
  3. The Dow Chemical Company boasts that these Olympics are the first ever to mitigate the Games’ entire carbon footprint before the Opening Ceremony. Dow, through their ‘Sustainable Future’ program, has implemented energy-efficiency and agricultural projects to offset not only the emissions directly associated with the Sochi Olympiad, but also the travel of spectators and media attending the event. But can we really call the Olympics ‘carbon neutral’ just because offsite mitigation efforts will generate estimated emission reductions equal to the estimated emissions caused by the Winter Games? The idea behind carbon offsets is that global warming is a global phenomenon, so the location of emissions is irrelevant. In my opinion, this compartmentalized thinking oversimplifies climate change. Calculating greenhouse gas emissions is extraordinarily complex. The amount of carbon dioxide released during construction and the two-week Games is practically immeasurable because the gas escapes into the atmosphere in so many ways, according to Allen Hershkowitz, PhD., of the Natural Resources Defense Council. Projecting decreases in emissions from Dow’s carbon-abatement projects is even more difficult, in particular because plans are vague and will likely take years to complete. In general, outfitting power plants and factories with energy-efficient equipment often causes their owners to increase production, nullifying some of the projected emissions reductions for which someone may have received credit. And giving farmers low-till technology, advanced “fertilizers” and coaching on “state-of-the-art precision agriculture” hardly guarantees anything about their behavior, which will ultimately determine actual carbon savings. Dow’s other emission-offsetting projects involve retrofitting roads, buildings, and bridges with a super-strong, lightweight material to improve structural integrity. Evidently the emissions saved from decreased maintenance and extended service life for civil infrastructure outweigh the emissions from these construction projects’ diesel machinery and the production of the Carbon Fiber Reinforcement composites to be applied to old structures. Needless to say, skeptical observers often question the legitimacy of ‘third party-verified offset’ claims. 

EU Emission Trading Scheme: Radical Proposal to Meet Ambitious Goals

To reach 2030 targets set by the new EU framework on climate and energy, I propose eliminating energy subsidies and instead using those funds to tighten the carbon market and reduce emissions cost-effectively

This is the fourth post in a series about the EU ETS

On January 22, the European Commission presented the new EU framework on climate and energy for 2030. The new document sets two binding targets: (1) 40 percent emission reductions from 1990 levels by 2030; and (2) 27 percent of energy produced from renewable sources.1

The path to meet these goals, however, is not so clear.

Environmental groups gathered in Brussels to urge the EU to support stronger climate targets for 2030. Yet even the goals set by the "weak" climate and energy package will be difficult to achieve without major policy reform. Source: WWF EU

Environmental groups gathered in Brussels to urge the EU to support stronger climate targets for 2030. Yet even the goals set by the “weak” climate and energy package will be difficult to achieve without major policy reform. Photograph: WWF EU

What is clear is that the EU Emission Trading Scheme (ETS) and various national climate programs and policies, as they exist now, will not produce the emissions reductions necessary to reach the 2030 targets, much less achieve levels of success that might persuade other high-emitting states to imitate the early adopters. Something must change.

I argue that European states should eliminate subsidies for renewable energy, instead deploying these funds to effectively lower the ETS cap. These subsidies for wind and solar power are popular among environmentalists, but simply providing financial incentives to carbon-free energy producers is an inefficient way to reduce greenhouse gas output.

What’s more, subsidizing certain emerging energy technologies undermines the cost-effectiveness of cap-and-trade. These two policies interact in a way that sabotages the economic benefits of a market-based climate solutions.

Even more absurdly, renewable energy subsidies in the EU don’t actually decrease total emissions. 

In terms of social equity, subsidies spread the costs of reducing emissions across all taxpayers, whereas a strong, well-designed carbon-trading system can force polluters to pay the brunt of the costs of transitioning to a low-carbon energy economy.

Policy failure

A recent article from The Economist on European climate policy calls the current emission-reduction efforts “a mess.” The piece, entitled “Worse than useless,” laments that Europe’s carbon market and incentives for renewable energy have proven to be immensely expensive approaches that have achieved only modest results:

“The cost of subsidies has been far greater than anyone had expected: €16 billion ($20 billion) in Germany in 2013, which works out at a massive €150-200 per tonne of carbon dioxide. (Home insulation, in contrast, saves money while reducing emissions.)”

New German 'superminister' Sigmar Gabriel plans to cut renewable energy subsidies to reign in rising electricity prices. Environmental organizations accuse him of favoring coal-fired electricity, which is still used to back up intermittent sources like wind and solar power. *Source*: Sean Gallup, Getty Images (Europe)

New German ‘superminister’ Sigmar Gabriel plans to cut renewable energy subsidies to reign in rising electricity prices. Environmental organizations accuse him of favoring coal-fired electricity, which is still used to back up intermittent sources like wind and solar power. Photograph: Sean Gallup, Getty Images (Europe)

Sigmar Gabriel, Germany’s minister for economy and energy, estimates even higher costs  — he calculates that private consumers pay an extra €24 billion per year on electricity to finance the country’s ‘feed-in tariff‘ program, which accelerates investment in new technologies by providing long-term contracts that pay renewable energy producers a fee above the retail electricity rate.

Meanwhile, the price of an emission allowance in the ETS hovers around 5 Euros per metric ton, which points to two clear corollaries: (1) the most expensive emission reductions necessary to meet the ‘cap’ of the cap-and-trade system cost just €5 per metric ton carbon dioxide-equivalent; and (2) this carbon cap — the overall limit on emissions within the system — can and should be lowered, a lot. I will elaborate both points.

Inexpensive mitigation

First, how do we know that it costs industrial emitters in the ETS less than €5 to mitigate one ton of carbon? Well, if it were to cost more than €5 to avoid a ton of carbon emissions, then that company could simply buy another emission allowance for €5 and proceed with emitting that ton.

Firms will do whichever is cheaper: decrease their emissions or buy allowances from other firms to permit their emissions.

This is the way that cap-and-trade advocates claim that a hard limit and a system of freely tradable ‘pollution permits’ will automatically produce the most cost-effective set of emission reductions across the economy. Germany has huge subsidies for renewable energy, but it takes €150-200 of ratepayer money, collected through an electricity surcharge, to avoid the same quantity of greenhouse gas emissions that the ETS prevents with €5 of corporate money.2

Lenient limit

To my second contention: the fact that carbon permits trade at €5 per ton shows that the cap is too high. As firms in a cap-and-trade system reduce emissions, they start with the least costly reductions and then work their way to more expensive strategies for decreasing greenhouse gases.

It’s clear that ETS companies are still working through cheap carbon fixes in their facilities, since market participants choose to perform the emission reductions necessary to meet the overall carbon limit rather than pay just €5 for an emission allowance.

If the cap is tightened, it will speed up the implementation of these low-cost emission reductions. And as it becomes more costly to make that last reduction — because the low-hanging fruit will have been picked — the price of an allowance will slowly increase.3

Policy interaction

The Economist makes another good critique of clean-energy subsidies: because German emissions are constrained by the EU ETS cap, subsidizing solar and wind power does not decrease emissions at all. Instead, these incentives for renewable energy only shift emission reductions away from other potential carbon-abatement strategies, like improving energy efficiency or fuel-switching from coal to natural gas.

Ultimately, the cap determines the total emissions from a carbon-trading system. Other climate policies like energy subsidies only alter the set of greenhouse gas reductions selected to meet the cap. Economists call this ‘distorting’ the market.

An example: let’s say I could renovate my German factory to use energy more efficiently — and thus reduce carbon emissions — for just €4 per ton of emission reductions. Alternatively, I could put solar panels on the roof for €5 per ton of emission reductions.4 But the German government will pay me extra for the electricity produced by my solar array — beyond what the power is actually worth — such that it effectively costs €3 per metric ton reduction. Well, I’ll choose the solar route, foregoing the less costly energy-efficiency project thanks to ratepayer-subsidized inefficiency!

Protracted bureaucracy

The EU 2030 framework bridges near-term climate and energy targets toward the 2050 goal of reducing greenhouse gas emissions 80 to 95 percent below 1990 levels. The policy framework proposes reform of the EU Emission Trading System (ETS) to address the oversupply of emission allowances that has built up in recent years, but these changes — the creation of a ‘market stability reserve’ and the rise of the annual emission ‘cap’ decrease from 1.74% to 2.2% each year — will not take effect until 2021.

To meet the new objective of 40 percent carbon reductions by 2030, the ETS will have to be either overhauled or scrapped in favor of simpler, more direct climate policy. At the very least, the EU must revamp its approach this decade, instead of waiting for the next one.5

But the EU is a big, bureaucratic monster with an entire continent of stakeholders. Progress comes slowly for the multinational, multi-body institution, even without dissent. The “Next steps” listed on the 2030 document’s official press release say that the European Council “is expected to consider the framework at its spring meeting” in March.

And when competing interests do fight over EU decisions, the work-rate of change implementation decelerates nearly to the standstill we see in US Congress. Poland, which produces 90 percent of its electricity by burning coal, will fight tooth-and-nail against strengthening the ETS.

Effective cap lowering

How can the carbon limit be effectively lowered in the short run while the European Union slowly transforms its climate strategy to meet the ambitious 2030 goal?

Germany plans to decommission its entire fleet of nuclear power plants by 2022, which will create pressure to build new fossil fuel-powered electricity generation. Source: DPA

Germany plans to decommission its entire fleet of nuclear power plants by 2022, which will create pressure to build new fossil fuel-powered electricity generation capacity, since wind and solar alone do not supply steady, 24/7 power. Photograph: DPA

Here’s one idea: Germany can cancel its €16 billion-per-year (or more) renewable energy subsidy program and use some of that money to retire emission allowances instead.

Consumers currently pay a surcharge on their electricity bill to finance the subsidies for wind power, biomass, hydropower, geothermal energy, and solar photovoltaics. I propose the German government redirect these funds toward paying itself to throw allowances in the shredder, essentially lowering the ETS limit by however many tons worth of allowances they are able to do away with.

This strategy of retiring carbon permits would actually reduce overall emissions, unlike the climate policies on which European states currently spend. Moreover, the effective cap lowering will drive up the price of allowances, as well as put energy efficiency on a level playing field with renewable energy, ensuring cost-effectiveness.

Yet redirecting government spending from encouraging climate-friendly energy to making emission allowances scarcer has two potential drawbacks, each of which I will address.

Developing industry

First, advocates of subsidizing renewable power argue that it drives the development of a young industry — one that must grow quickly if we are to transform our energy systems to run fossil fuel-free. By encouraging investment in low- and no-carbon energy production, these technologies advance more quickly and achieve higher penetration.

But the same argument can be made for energy efficiency. Emerging clean technologies allow us to attain the same energy services using fewer resources by simply reducing wasted energy.

Since these efficiency solutions decrease the need for burning fossil fuels, they are as effective as solar and wind power at reducing emissions — often at less cost. Thus the development of energy-efficient technology and expertise deserves to compete on even terms with renewable energy.

It could even be argued that reducing energy demand is more effective and better for the environment than replacing fossil fuel burning with renewable power, because solar and wind plants (1) provide electricity only intermittently; (2) use lots of land per unit of energy produced; and (3) require more resource inputs in their construction than the implementation of most energy-efficiency technology. From this perspective, fair market treatment of all emission-reduction strategies seems like the bare minimum for achieving optimal outcomes through cap-and-trade.

Social justice

Secondly, the regressive nature of market-based climate policies like cap-and-trade fuels a strong argument against cutting subsidies for specific emission-decreasing technology and using the savings to tighten the overall carbon limit.

As the price of a permit to emit greenhouse gases rises, the price of goods and services whose production is emission-intensive rises too. Buying emission allowances costs producers; like any cost of production, firms pass this expense on to consumers.

The lowest earners in an economy spend the greatest share of their income on necessities that entail emissions to produce, like electricity. So those with the least income are affected disproportionately as a rising carbon price drives up electric power bills.

The solution to this dilemma is simple. I will use Germany as an example once again: after getting rid of the €16 billion subsidy program, electricity prices will actually go down. Most of this money can be returned directly to the people through greatly reducing the surcharge on electric power.

EU member states like Germany get allocated allowances to auction to emitters, while some other allowances are freely distributed to firms, who can then trade them with one another. Therefore the German government need not purchase permits on the open market to drive up the price of carbon; instead, the number of allowances available for auction can simply be reduced.

In 2012, the German government assumed the above ETS revenues to finance their Special Energy Climate Fund. *Source*: Federal budget draft 2012, Federal Ministry of Finance, http://www.bundesfinanzministerium.de/nn_3378/DE/Wirtschaft__und__Verwaltung/Finanz__und__Wirtschaftspolitik/Bundeshaushalt/Bundeshaushalt__20 12/20110706-Bundeshaushalt2012-Anlage2,templateId=raw,property=publicationFile.pdf

In 2012, the German government assumed the above ETS revenues to finance their Special Energy Climate Fund. Source: Federal budget draft 2012, Federal Ministry of Finance.

Of course, some of the €16 billion saved by eliminating the feed-in tariff subsidies for renewable energy will need to be used to offset the decrease in government revenue caused by auctioning off fewer allowances. But not nearly all of it.

Auction sales in 2014 are expected to feed about €3 billion into Germany’s Special Energy and Climate Fund for ETS revenue. Even if Germany withholds a third of the allowances set to be auctioned, it will still cost them less than €1 billion because the prices fetched at auction will rise thanks to scarcity.

Thus if revenue from the surcharge on electricity is used to tighten the carbon cap instead of subsidize renewable energy, this extra fee on the power bill can be reduced to about one-sixteenth its current size. So in Germany, reallocating funds to strengthen the emission trading system will in fact lower the price of electricity in addition to benefiting the climate. That is a progressive change, not a regressive one.

Moreover, even when emission-reducing programs like cap-and-trade are regressive within states or the EU, these policies are progressive from a worldwide perspective, because the costs of climate change are far more regressive than the burdens of cap-and-trade. The poorest and most vulnerable people on Earth will be affected most as sea level rises, droughts lengthen, storms intensify, and food production slows.

Reducing emissions through market-based climate policies in wealthy, high-emitting states helps protect the world’s least-well-off populations, since global warming is just that: global. The lowest-income people whom the policy may disproportionately impact within the EU — though not as lopsidedly as with energy subsidies — have much more wealth than the impoverished millions who stand to benefit the most if we avoid catastrophic climate change.

Widespread reform

Wind turbines in front of a brown coal-fired power plant near Bergheim, Germany. Massive investments in renewable energy have not eradicated the use of fossil fuels to produce electricity in Germany. Photograph: dpa picture alliance archive/A/Alamy

Wind turbines in front of a brown coal-fired power plant near Bergheim, Germany. Massive investments in renewable energy have not eradicated the use of fossil fuels to produce electricity in Germany. Photograph: dpa picture alliance archive/A/Alamy

Similar changes to my cap-tightening proposal can be implemented in many EU states that subsidize renewable energy. Saving money on subsidies can help countries like Spain achieve their budget goals without fudging the numbers.

If each state acts to remove energy subsidies and auction fewer allowances, then overall emissions within the ETS will drop like the Times Square ball on New Year’s. The price of carbon will increase, and businesses will undertake tons of new emission-reducing projects, starting with the least costly climate solutions.

To protect ourselves from worldwide ecological and economic devastation, we must drastically reduce the amount of climate pollution we emit. It matters much more that we save the climate than how we do it, but as long as economics exists, we may as well implement the lowest-cost emission reductions first.

Note: The policy proposal advocated in this blog post was developed from a lecture given by Western Washington University Professor of Economics Dan Hagen.

 


  1. A recent Ecofys study concludes that in order for Europe to contribute their ‘fair share’ to international emission-reduction efforts, the EU must set a 2030 target between 39% and 79%, with a median value of 49%. Sandbag’s effort sharing approach indicates that a goal of 65% below 1990 levels would be appropriate. 
  2. The cost of emission allowances is ultimately passed on to consumers through a tiny increase in the price of goods whose production is carbon-intensive. Economically, carbon trading works like any rise in the cost of production. 
  3. The cost to society of one CO2-equivalent ton of greenhouse gas emissions is more than 5 Euros. That much we can agree on, though climate economics nerds fiercely debate what the actual societal cost of carbon is. Many others think that putting a monetary value on climate pollution is silly, for a variety of reasons, including that catastrophic global climate change could destroy our entire economic system. In this piece I ignore the real value of reducing emissions and focus on how reductions can be achieved most cost-effectively. Read more about estimating the complete cost of carbon emissions in my blog post The Price Ain’t Right
  4. Obviously, energy projects are not priced by the amount of emission reductions they achieve, but skipping the calculations necessary to determine price-per-ton of carbon mitigation makes the example easier to follow. 
  5. In the meantime, the EU has approved a ‘backloading’ of allowances to reduce the cap the next few years, but this plan only shifts emissions to later in the decade (it’s a political compromise — take notes, US Congress). Read more about this weak attempt to resurrect the ETS in my blog post Band-Aid for a Broken Market

Is there a bubble in my beer?

The craft beer industry has boomed in the last decade, but as hundreds of new breweries compete to quench our thirst, some analysts think they might soon be filling kegs faster than we can drink them

I disagree

Beer from microbrewers, brewpubs, and regional producers — lumped together in a category called craft beer — has exploded in popularity over the last few years.

You can do the research yourself: visit your local grocer and ask yourself how many of the craft beers on the shelves you would have recognized two years ago. Even the brewers that have existed for a while have nearly all expanded and varied their production during the recent boom.

The Brewers Association, a trade organization of the US brewing industry, collects formal data to substantiate the subjective evidence:

  • craft beer sales have been growing by more than 10 percent each year;
  • over one-tenth of US beer revenue was earned by craft brewers for the first time ever in 2012; and
  • more than 400 new breweries opened their doors in 2012.

Is this massive surge in craft beer a bubble ready to pop? In my opinion, no. Tasty artisanal brew is here to stay.

Natural carbonation, not a bubble

A bubble is a period of overinvestment in which asset prices are higher than their actual value. Put simply, optimism causes people to invest in anticipation of an unrealistically profitable future.

Some evidence suggests that capital is flowing into the brewing industry in quantities that assume persistent year-over-year market expansion. But there is no reason to believe that current valuations of beer companies exceed their real worth.

I argue that craft beer sales can keep increasing by leaps and bounds in the short run. In the future, growth will gradually level off as the craft market matures.

Yet this slowing of craft’s expansion will not produce a ruinous crash. Relatively few people will feel effects, as risk is not spread throughout the beer industry, much less the entire economy. As IPA exuberance settles into stable growth, the best brewers will emerge stronger while some new entrants fail.

Mass entry

First, let’s look at why some analysts think current investment in craft beer production is not sustainable.

US breweries in operation, 1887-2013.  *Source*: Brewers Association

US breweries in operation, 1887-2013.
Source: Brewers Association

Rapidly increasing demand is driving a mass entry into the market. The new breweries of 2012 bring the US total over 2,400 — the most since at least the 1880s, when someone first decided to count them up.

Furthermore, about 1,500 more new breweries are preparing to open in the coming months and years, even as economists and brewers alike speculate that the booming industry may not be able to support such growth, a worry best articulated in a recent piece by Noah Davis of Business Insider.

Davis essentially argues that the market’s supply side is investing in production capacity as if consumption of craft brew will continue to rise at the soaring annual rates of the recent upsurge, even though a larger total market makes slowdown in percentage growth inevitable, since bigger and bigger nominal gains are necessary to maintain the same rate of expansion.1 He foresees possible market collapse rather than natural maturation as competition intensifies, putting pressure on new and established brewers alike.

Two beverages competing to quench thirst

I disagree with this pessimistic perspective. Luckily, the craft revolution does not rely merely on innovations in business and brewing. Popular preferences are shifting away from light adjunct lagers toward flavorful beer, and this trend shows no signs of slowing.

But overall beer sales have not grown nearly as fast as demand for the craft subsector. So the only way craft beer can keep up today’s rate of escalation is to continue stealing 1 or 2 percent of the market away from big beer companies like Anheuser-Busch InBev and MillerCoors, year after year.

Interestingly, research has found that consumers treat craft and mass-produced beers as separate products. A 2011 study by economists at Washington State University uses discrete choice modeling to show that cross-price elasticities between macro lagers and high-end beers are close to zero.

This means that beer drinkers do not consider these two categories close substitutes for one another. So the reallocation of market share toward craft beer can be ascribed with confidence to changing tastes.

Moreover, it doesn’t take radical or rapid transformation of drinking habits to sustain the growth of craft beer, for now at least.

Economist Bart Watson of the Brewers Association proves this point mathematically in a blog post refuting the existence of a craft beer bubble. He shows that if each of 148 million alcohol-consuming Americans drinks just one more craft beer per month, then that equals 2.7 percent more market share for craft. And if we were to each replace one Coors Light or Budweiser with something tastier every week, then craft would immediately take nearly 12 percent of the market away from mass-produced bland beer.

Social consumption

We’ve established that craft beer is considered a distinct drink, and that incremental changes in purchasing patterns can keep the market for craft beer growing. But what evidence do we have that beer buyers will continue to switch to full-flavored brews?

We should start with an understanding of what propels this shift toward craft beer. More generally, what drives decision making for beer drinkers?

For one thing, beer is often consumed within a social group. You might end up drinking your buddy’s favorite smoked porter for no better reason than that he brought a six-pack over to your place.

Herein lies part of the reason for craft beer’s radical rise in popularity: the growth of full-flavored beer is somewhat self-perpetuating. Nobody wants to be the guy who brought a thirty-rack of Keystones to a party at which everyone is drinking organic, microbrewed, seasonal-release ales.

In addition, consumers develop a taste for beer. Few people enjoy their first-ever gulp of keg-cup swill, but many who continue to drink beer grow to love it. New beer drinkers end up preferring the types of beer made available to them as they acquire an appreciation for those styles.

Therefore, to make certain that the craft beer craze continues, we must baptize new beer drinkers in rivers of pale ale rather than Natty Ice. And we must introduce our Miller Lite-devotee brethren to varieties that taste a little less like mere barley-flavored water so that they will learn to love beer made with quality ingredients and attentive care.2

Events like beer tastings are gaining popularity as consumers increasingly consider beer an experience good.

Events like beer tastings are gaining popularity as consumers increasingly consider beer an experience good.

The objective is not to create beer snobs who turn up their noses at canned light lagers, but rather beer activists who join an emergent culture of craft champions.

This new generation of beer lovers enjoys fermented malt beverages the way the wine community takes pleasure in mindfully sipping a Napa Valley Syrah and analyzing its subtleties. Like wine connoisseurs, they appreciate local brews of diverse and constantly evolving varieties, made from locally grown grains and hops, consumed in the place of production, which itself is often a destination.

In short, the social aspects of beer choice are important; once craft is cool, the sky is the limit. In 2012, 47 percent of all draft beer consumed in Oregon was Oregon craft beer, according to the Oregon Brewers Guild. If you include craft beer from out-of-state, the portion surely exceeds half.

Keeping brewers busy

But can the permeation of craft beer drinking keep up with the propagation of brewing capacity?

One figure in particular is promising for the craft brewing industry: from 2009 to 2011, output increased from 66 to 78 percent of maximum capacity, even as hundreds of new facilities opened and many more expanded.

Anecdotal evidence suggests that the trend has continued, despite the influx of breweries in 2012. Medium and large craft breweries report trouble keeping pace with swelling demand, and many of the market’s newest entrants are microbreweries with tiny capacities. Currently, very little brewing equipment sits idle.

Supporting the craft

Of course, none of this evidence of an evolving market guarantees that beer drinkers can support 4,000 different beer makers. Much of the growth in sales is met by regional craft brewers getting bigger and bigger.

Even massive brewing conglomerates have managed to profit from the transformation of tastes.

Beer advocates fiercely debate whether faux-microbrews like Blue Moon help or hurt the craft beer movement. Coors advertises the 'artfully crafted' ale without ever mentioning the beer's corporate overlord, despite the company's massive brand recognition. *Illustration*: Shelly Bartek

Beer advocates fiercely debate whether faux-microbrews like Blue Moon help or hurt the craft beer movement. Coors advertises the ‘artfully crafted’ ale without ever mentioning the beer’s corporate overlord, despite the company’s massive brand recognition. Illustration: Shelly Bartek

In response to shifting beer preferences, AB Inbev and MillerCoors have developed their own widely distributed ‘artfully crafted’ brands — Shock Top and Blue Moon, respectively. These beers’ labels bear no mention of their corporate overlords, yet each year they keep a portion of the increase in full-flavored beer sales away from the craft segment of the market.

Somewhat paradoxically, though, the fake-craft beers of multinational brewing firms actually enhance medium-run penetration of the craft subsector. Beers like Blue Moon provide an introduction to flavorful suds and create interest in different styles among consumers who may not have otherwise been exposed to craft tastes. Once these beer drinkers move beyond faux-craft brands, they will contribute to craft beer’s swelling market share.

The Brewers Association defines a craft brewer as “small, independent, and traditional.”  ‘Independent’ ensures that the brewery isn’t owned or controlled by one of the beverage industry’s mega-corporations, and ‘traditional’ limits the use of adjuncts — grains other than barley — to flavor enhancement rather than lightening.

The ‘small’ constraint, however, keeps loosening as brewing companies like Sierra Nevada, New Belgium (makers of Fat Tire), and The Boston Beer Company (makers of Sam Adams) brew more beer each year. Right now, a craft brewery must produce 6 million barrels or less, but if a well-known craft producer wants that cap raised, the Brewers Association will likely comply in order to hold on to its most successful members.

So craft brewers that have become major brands also soak up some of the increasing demand for full-flavored beer. How did these artisanal brewing companies become such large producers? Marketing certainly has played a role, but in this new beer culture, quality counts.

Cold-filtering the market

The exponential expansion of options has led craft fans to constantly seek out the newest and best, rather than pledge allegiance to a tried-and-true brand. And these days, the internet can make any round of pints a tasting competition.

As craft brewers run out of shelf space to conquer from cheap beer, they begin to compete with one another for coveted spots in the refrigerated aisle. *source*: Delish

As craft brewers run out of shelf space to conquer from cheap beer, they begin to compete with one another for coveted spots in the refrigerated aisle. SourceDelish

Sites like BeerAdvocate provide a forum for discerning consumers to critique beer, as well as a resource for developing more ‘quality controllers.’ Wannabe-beer nerds can use expert reviews to train their palates to detect intricacies like citric hop notes, caramel malt sweetness, and the fruity esters of a Belgian yeast strain.

More discriminating customers and the influx of producers combine to make the brewing sector cutthroat. Supermarket shelves are increasingly crowded; macrobreweries have locally targeted faux-craft brands; and successful craft brewers can take advantage of superior technical knowledge, years of experience, and access to capital. Some new entrants to the flooded craft beer market will inevitably fail.

Yet the intense competition will only improve the collection of tasty options on tap, canned, and in bottles, as long as beer drinkers keep buying the finest beers.

We reward the highest quality brews with no-cost promotion naturally — with or without the internet — thanks to social influences’ aforementioned effect on preferences. Someday growth in the craft market will level off a bit, and we want to make sure that the best brewers succeed.

Not a crash

But when that inescapable day arrives, and the craft beer subsector cannot keep increasing in volume at such a frenetic pace, will a bubble not pop? We all know that irrational exuberance commonly follows overconsumption of brewskis — but we also know all too well about the unwell feeling of the subsequent crash.3

To call this market maturation a bubble entails looming economic devastation thanks to overly optimistic expectations that go unmet. But greedy brokers are not using the money of unsuspecting investors to make bets that craft beer sales will continue to grow more than 10 percent per year.

Quite the reverse, these new breweries are predominantly small private investments, and many are in fact undercapitalized.

Yes, it’s much easier for a start-up beer maker to obtain financial backing than it was a half-decade ago, but obtaining a bank loan to open a microbrewery today remains far more difficult than getting a home loan in 2006. And even if new brewing companies are a risky investment thanks to imminent slowing of market expansion, thankfully no complex financial instruments have put the entire economy on the line, as happened with the housing bubble and, to a lesser extent, the Dot-com boom of last decade.

In summary, if you worry about a craft beer bubble, remember that very few folks’ life savings hang in the balance.  For the most part, new microbreweries emerge from homebrew projects, with financing from some combination of personal wealth, bank loans, angel investors, and small private lenders.

More importantly, remember that we control the marketplace. So drink more craft beer, preferably with others. Convene a gathering to conduct ‘research’ and share favorites.


  1. If you sell 100 beers this year then next year you will need to sell 10 more to achieve 10 percent growth in output, but then ten the next year production must increase by 11 beers — from 110 to 121 — to maintain that growth rate. 
  2. A clean-finishing pilsner might be a good place to start — the crisp mouthfeel and light body remind our swill-swallowing friend of what he knows as ‘beer’, but the rest of the experience will prove much more satisfying and delicious than the mass-produced lagers to which he’s accustomed. 
  3. Former Federal Reserve Chairman Alan Greenspan coined the phrase “irrational exuberance” to describe the Dot-com bubble of the late 1990s. Yale professor Robert Shiller has since used it as the title for two books about oversaturated markets that value assets too highly. 

The EU Emission Trading Scheme: The Price Ain’t Right

Emission allowances in Europe are too cheap to prompt greenhouse gas reductions, but don’t ask the US government what the price of climate pollution should be, lest they mention the Social Cost of Carbon

This is the third post in a series about the EU ETS

Last week’s piece about the European Union Emission Trading Scheme (ETS) makes clear that persistently low prices on climate pollution prevent the carbon market from working effectively. That is to say, an emission allowance price that won’t budge above 5 Euros per metric ton of carbon dioxide will not drive investment in carbon-free innovation. Without a hurried global transition to low-emitting energy systems, the future looks bleak  —  our climate will become increasingly unstable and extreme.1

Market price

In a cap-and-trade system like the ETS, no central authority sets the price of greenhouse gas emissions. Instead the total number of allowances on the market sets a restrictive “carbon limit.”

Ideally, a scarcity of emission allowances would produce trades among emitting entities, with firms implementing the least costly emission-reduction strategies first. The price at which emitters trade allowances equals the cost of the last emission reduction necessary to meet the cap, according to economic theory.

So to drive up prices, the number of allowances must be reduced. In a closed system this lower cap would bring fewer emissions. The EU’s ‘backloading’ rescue plan employs this strategy by withholding carbon allowances until later in the decade.

Social Cost of Carbon

Nobody believes that €5 — or $6.80 U.S. — is the actual cost to society of one metric ton of carbon dioxide. But estimates of the true cost of greenhouse gas emissions vary widely.

If only figuring out the 'true' social cost of carbon were as easy as understanding a marginal benefit-marginal cost graph. *Source*: UK Eco Study http://ukeco.exblog.jp/

If only figuring out the ‘true’ social cost of carbon were as easy as understanding a marginal benefit-marginal cost graph. *Source*: UK Eco Study http://ukeco.exblog.jp/

Compare $6.80 to the latest revised estimates of the Obama Administration’s Interagency Working Group on the Social Cost of Carbon (SCC) — $37 per incremental metric ton of carbon emissions.

Note that $37 is simply the ‘cost of carbon’ that the group has chosen to publicize from the numerous results of an update to the SCC calculations. The SCC makes use of the averages of estimates from three integrated assessment models (IAMs) of climate projections, each run through five socio-economic reference scenarios.

The outcomes from the three IAMs are evaluated using three different discount rates, which are used to combine costs over time. The $37 estimate represents the average of all scenarios, discounted at 3 percent.2

I argue that the U.S. government’s calculation, though more than five times the price of carbon in Europe’s market, is still a very conservative estimate for four reasons.3

First, the chosen social discount rate is too high for assessing the costs of global climate change. For those familiar with discounting in a business setting, 3 percent may seem like a low rate — one that values the future highly at the expense of the present.4 But carbon dioxide emitted now will be causing atmospheric warming in fifty years; social costs and benefits that will affect the world far into the future are subject to a special social discount rate.

If you’re new to discount rates, you can think about them like an economist: costs that will be incurred further into the future carry less weight than immediate costs in today’s decisions (the same is true for future and present benefits). ‘Discounting’ future costs allows the SCC working group to unite today’s and tomorrow’s climate impacts into one Social Cost of Carbon.

But discounting can’t be applied equally to any analysis —  the rate at which future costs and benefits are discounted matters. A high discount rate gives the future less influence over today’s evaluations, because future values are ‘discounted’ a lot. On the other end of the spectrum, discounting at zero percent makes present and future costs equally important in economic analyses.

Researchers analyzing expected future values get to simply choose a discount rate they deem appropriate and defend as such. The following example demonstrates why we must acknowledge the importance of choosing carefully.

A few years back, Sir Nicolas Stern, a top adviser to the British government, and Yale professor William Nordhaus engaged in a polite-yet-heated intellectual dispute on this subject. Simply by applying different discount rates, Stern and Nordhaus used largely the same scientific data to prove that a ton of carbon should be priced at $85 and less than $10, respectively.5

The trillion-dollar question remains unanswered: At what rate should we discount the anticipated costs of global weirding when we play this name-a-carbon-price game? Only economics nerds like Stern and Nordhaus debate such matters. And they can’t seem to agree.

One group’s opinion is certain, though: if future generations had a seat at the carbon-pricing table, they would advocate a rate much lower than 3 percent. Yet-to-be-born people certainly would not favor employing a discount rate so high that it treats people 24 years from now as if their lives are worth half as much as ours today.6

So 3 percent is too high — discounting the values of the future that quickly might lead us to destroy the planet in pursuit of riches that can’t buy back a stable climate. But we must discount at least a little to account for the fact that present gains can be invested in making the future better. Today’s profits from a fossil fuel-based economy could hypothetically fund the development of tomorrow’s clean-energy technology.

I am not qualified to have an opinion on the optimal social discount rate for evaluating the economic impacts of the climate crisis on our children and grandchildren, but we all know what’s at stake. The future of the planet can’t be assessed in the same way as a typical investment, even a typical investment in public goods or social welfare.

For intergenerational issues, even guidelines from the Obama Administration’s Office of Management and Budget promote using a discount rate less than 3 percent. I guess that department of the executive branch never spoke with the group developing the SCC.

To reiterate my first point, social discount rates, in order to treat future people equitably, must be low enough that they allow consequences that won’t show up until decades — even centuries — from now to shape our present evaluations and actions.

Second, the $37 Social Cost of Carbon completely ignores catastrophic climate risk. The range of climate change risk scenarios is not distributed in such a way that lends itself to looking at the average when establishing a Social Cost of Carbon.

The chance that global warming may produce cataclysmic effects — outcomes in which the standard of living to which we’ve become accustomed in the modern world is no longer achievable — make it hard to justify simply taxing greenhouse gas emissions based on the average climate change-socioeconomic scenario and then continuing our business-as-usual pursuit of profit maximization.

Check out the 'long tail' costs of extreme climate change in the far-right column. *Source*: Interagency Working Group on Social Cost of Carbon, United States Government. May 2013 Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis.

Check out the ‘long tail’ costs of extreme climate change in the far-right column. Also, notice how much the ‘average’ Social Cost of Carbon increases just by discounting at 2.5 rather than 3 percent. *Source*: Interagency Working Group on Social Cost of Carbon, United States Government. May 2013 Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis.

In technical terms, the worst-case effects of climate change would cause a great deal more damage than the economic models’ 50th percentile predictions. Statisticians call this phenomenon a long tail. In practice, the abnormal distribution of impact scenarios suggests that we should proceed with caution.

Even the Obama Administration’s report acknowledges the risks of the most extreme climate scenarios by including an extra SCC value, in addition to the average result at each of three chosen discount rates. This fourth calculation illustrates “higher-than-expected economic impacts from climate change further out in the tails of the … distribution.”7

The fourth SCC figure is the models’ 95th percentile value, at 3 percent discounting. In May 2013, this estimate was $109 per metric ton — nearly three times the publicized “average” Social Cost of Carbon.8

This discrepancy illustrates the massive risk to which we expose our world and ourselves if we simply take the average of all projections when planning for the warmer future.9

The third reason that the Social Cost of Carbon estimate is too low has to do with the trend of all climate change estimates and projections — and the fact that reality has far outpaced most models. With each new Assessment Report, the Intergovernmental Panel on Climate Change (IPCC) has become more certain about the anthropogenic causes of our warming planet, and the group’s projections for the future are increasingly ominous and confident.

This pattern of worse and worse forecasts from the leading international body for climate change study should not be ignored. Why shouldn’t we expect the prognoses to continue their descent into the realm of doomsday prophecies?

One reason that the future predictions keep getting more dismal is that models must be repeatedly updated to take into account climate change impacts arriving earlier than even the worst-case scenarios of earlier studies. Sea-level rise and the diminishing of Arctic sea ice extent are just two items in the list of climate consequences coming on more quickly than had been previously projected by the IPCC.

Studies that underestimate the degree of future change are often called “conservative,” but I argue that with respect to climate change, the conservative way to predict the future would be to plan for the most catastrophic scenario. The Obama Administration should raise their SCC to avoid making the same mistakes as the IPCC.10

Lastly, even the “conservative” IPCC, in their Fourth Assessment Report, remarks that the Social Cost of Carbon “very likely…underestimates” the damages of climate change. And the US EPA itself admits, “The models used to develop SCC estimates…do not currently include all of the important physical, ecological, and economic impacts of climate change recognized in the climate change literature.”

Limitations of data availability and model construction render impossible the task of aggregating all of the costs of climate pollution, even if emissions could be accurately measured and the future could be accurately predicted. Moreover, some of the costs of climate change are difficult to quantify. What is the present-value total cost of future ocean acidification?

In fact, the economics literature that informs the SCC often omits severe expected climate-change impacts simply because they do not lend themselves to monetization. Species extinction, for example, is not easy to economically value, and thus is left out of many climate economics models.

Because data is imperfect and models ignore many non-market anticipated costs, we should heed the Precautionary Principle. We should acknowledge that it is in our collective best interest to accept and apply a greater social cost of carbon than our complex models calculate.

The European Corollary

If the US estimate of carbon emissions’ external cost is not comprehensive enough, forward-looking enough, ‘trendy’ enough, or vigilant enough — all of which skew the SCC figure toward inexpensiveness — then the almost-negligible price of an allowance in the European carbon trade must be far too low. Yet the ETS is a cap-and-trade system rather than an emission tax; nobody directly sets the price of carbon.

Do low prices mean that the cap-and-trade system failed? Or that it is working so well that emission allowances have become nearly worthless simply because total emissions stay under the ‘cap’ more cheaply than expected? Most economists would respond in the same way they answer most tough questions: “It depends.”

It depends how the  goals of the ETS are defined. It depends whom you ask. It depends on whether or not you believe in putting a price on pollution. It always depends on the discount rate.

President Truman once requested a “one-handed economist” because he was sick of hearing, “On the one hand, … On other hand, …” Well, this series of blog posts about the EU ETS may end up looking as if it were written by the Indian deity Durga — there will be a piece about every viewpoint.

The following addendum provides a glimpse into a once-prevalent perspective that has been regaining momentum recently: that the cost of ecological destruction cannot be expressed in dollars and cents. Certainly this argument deserves its own long-winded post; the next section is only a preview.

Non-monetizable harm

Evidently, using money as a metric assumes that anything can be traded for anything else. The idea that every cost and benefit in the world can be ‘dollarized’ provokes doubts from many non-economists (and from some scholars within the economics community).

Hard-to-quantify losses, like the aforementioned extinction, lead to an important dilemma. Assigning a dollar value to the survival of polar bears as a species suggests that for this amount of money society could be compensated for the end of that animal’s existence. Such a human-centric view offends people who think of the world from an ecological perspective.

On the other hand, if we exclude unmonetized damages from the societal cost of carbon — or exile them to the oft-ignored ‘caveat’ and verbal qualification appendices — then these costs are treated as effectively insignificant. In a capitalist world-economy, ‘priceless’ sounds a heck-of-a-lot like ‘worthless.’


  1. For a basic explanation of the ETS and its current predicament, check out my blog post “Band-Aid for a Broken Market.” 
  2. The Interagency Working Group ran each climate and socio-economic scenario combination with 2, 3, and 5 percent discounting. 
  3. “Conservative estimate,” in this case, means “way too low.” But remember that America is still the Land of the Free (right to pollute the climate) — the Social Cost of Carbon is, at this point, an intellectual exercise. 
  4. In the world of business, discount rates typically mirror the cost of capital or expected return on an investment of similar risk profile. For example, if I can invest my money somewhere guaranteed grow 5 percent yearly, then the future income generated by any other potential investment should be discounted at 5 percent per year, since I could just put all my money into the guaranteed-5-percent fund. 
  5. What’s more, they each had very convincing arguments defending their choice of discount rate. One sentence simplified summaries follow: Nordhaus, rather than deciding upon a rate at which we “should” discount future costs and benefits, used market interest rates to determine peoples’ actual time preferences. Stern, on the other hand, considers discounting with respect to climate change a moral issue, making a case that we should take intergenerational equity and sustainable development into account when examining alternate trajectories that diverge vastly and are highly uncertain. 
  6. According to the superscientific Rule of 72
  7. Interagency Working Group on Social Cost of Carbon. (2013). Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis. United States Government. http://www.whitehouse.gov/sites/default/files/omb/inforeg/social_cost_of_carbon_for_ria_2013_update.pdf 
  8. Before the November 2013 revision, the official SCC was $38. Again, this number was based on the average of every ‘run’ of the models. The results were discounted at 3 percent. 
  9. For reference, a few sources (one more) calculate that every dollar-per-metric ton increase in the price of carbon dioxide emissions will result in a one cent-per-gallon hike in gasoline prices. According to that hypothesis, a carbon tax of $109 would add just over a dollar to the price of a gallon of gas, while pricing emissions at the level suggested by the Obama Administration’s SCC would raise gas prices by a third as much. That the U.S. Social Cost of Carbon estimate would have such a small effect on consumer prices plainly illustrates how absurdly cheap carbon is in the EU’s cap-and-trade system. 
  10. And of course the Social Cost of Carbon should be implemented as something more than a theoretical exercise.