Why Pricing Carbon Isn't Enough

The successful auction of 12.5 million permits by 10 U.S. Northeastern states brought the cap-and-trade system to the limelight this week.

Although an important first step, RMI co-founder Amory Lovins believes cap-and-trade systems merely skim the surface of what ultimately needs to happen to accelerate reductions in carbon.

Said Lovins in his recent conversation with Denver Mayor John Hickenlooper at RMI's 2008 National Solutions Council event, "In the long run, I think, pricing carbon will not be either essential or certainly sufficient. Efficiency gains are a manual undertaking. You actually have to turn the crank."
The Denver Mayor had asked Amory for his opinion on carbon cap and trade and carbon taxes.

Amory continued in his usual lengthy, yet comprehensive style,

Carbon pricing is a good idea and we should do it. Putting carbon in the air should not be free any more.

We already have in place today the equivalent of about $150 a ton or more carbon tax from oil prices. This is three times the level President Bush was afraid would wreck the economy. The only difference is we send the money to OPEC instead of to ourselves.

But just as a note of caution, in the long run, I think, pricing carbon will not be either essential or certainly sufficient. It's not essential because you can still get huge returns even at the old energy prices. It is not sufficient because if you have the right price and don't bust barriers people can't respond intelligently to price and not much happens.

DuPont found its European chemical plants were just as inefficient as its U.S. plants even though in Europe they have to pay twice the energy price. That's just because they're all designed the same way with the same equipment and processes and there isn't much room for behavioral change in a chemical plant.

So yeah, we should do it, but it's not a panacea. The efficiency cornucopia is a manual model. You actually have to turn the crank. And that's about a whole lot more barrier-busting than just getting the prices right.

Lovins covered a few barriers most in need of busting including disproportionate energy subsidies and antiquated utility regulations that penalize utilities for saving energy.

"My policy framework would be arrestingly simple and trans-ideological. I would let all ways to produce or save energy compete fairly at honest prices regardless of which kind they are, what technology they use, how big they are, where they are, or who owns them, and let's see who's not in favor of that. It will of course be all the corporate socialists who are very comfortable with present arrangements they've made a lot of money to get."

And utilities should, "get rewarded for cutting your bill, not for selling more energy."

This is what California, New York, and a few other states do. By "decoupling" their profits from the number of kilowatt-hours they sell, these utilities are assured a steady revenue stream that no longer stands in the way of energy efficiency programs.

Here is the complete transcript (PDF) of the conversation, "The Policy of Energy Change."

More on Carbon Pricing and Costs
::Climate Strategy: Every Dollar Counts
::Creating a Global Carbon Market
::The TH Interview: Peter Barnes, Senior Fellow at the Tomales Bay Institute

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