You're listening to the reversing climate change podcast by Nori the world's first carbon removal Marketplace here. Are your hosts Ross Kenyon and Kristoff. Jospeh. Hello. Welcome to the reversing climate change podcast with Nori. I'm Ross Kenyan here with Kristoff Jaws Bay and Paul gamble in the Seattle Nori office. We're here today with Alden Donnelly the director of carbon economics for Nori and we are talking about cap and trade.
And the carbon tax we get a lot of questions about what we think might be problems with these why don't they seem to work as well as we would hope that they would and we're Nori things that we can do better would you say that's a fair summation here Christoph, I think so only only think that because I think Alden is director of so much more and it's not just carbon economics. So we probably should reconsider her title.
I mean that impetus behind this podcast is there's a foreign affairs article why carbon prices isn't working and we Response and then we read it and then we said no this is way too nuanced. No one's actually going to read this we would get a lot more bang for our buck. If we just did a podcast with probably the most knowledgeable person in the world who we are humbled to have sitting across from us. We're trying to make her blush it slightly working looks like a little bit. Yeah. Okay.
So, where do we start? Should we start with saying Alden? Did you read that article? I did. Okay, so we read this Foreign Affairs. Peace, and we responded to it, but it was a little too. Complicated I wouldn't make a good newspaper piece that you always need a really strong lead there. You can't have me wants in a newspaper unless it's like the New Yorker where you have 10,000 15,000 words, like that's where it goes.
So we thought it'd be easier to do a podcast here and this article covers the history of various carbon markets cap and trade markets and why they haven't always done. So well covers what Europe and California I can remember the other ones that made it back in Ontario. Did they discuss it in great detail there. I don't think it was. Yeah, no talked about China's Market. Come on. I want to shine. So that was a big one. To yeah, and I remember when I first got into this space and I
started looking at markets. I didn't understand why but my sort of spider-sense one off and I thought intuitively it just doesn't make sense. This is not the most effective way to address emissions and part of that comes from very simple arithmetic that I learned from Klaus lackner. Who said well if you put a ton of carbon into the atmosphere it stays there for hundreds of years.
And so you need to put another tongue back and then what I thought all right, well money of emitters needs to go to people who are putting tons back and we could have always started there and That's the premise by which Nori is operating and probably the hook through which we were able to attract Alden to take these young bright-eyed Millennials. Seriously that like, oh these guys are onto something.
This is the right way to start even though obviously emitting carbon dioxide into the atmosphere isn't as simple as just canceling it out. You need to do things like reduce emissions and replace emissions and all these important things but the fundamental challenge is markets have been set up to do pricing mechanisms that have not worked. They've merely shifted around emissions. One place to another all the while CO2 is accumulating into the atmosphere. That was a mouthful.
So Alden Where Do We Begin? I think I want to start by saying I was certainly on the team that thought cap and trade was the right answer and when I formed through experience the opinion that cap and trade isn't the right answer being a well trained Economist. I assume that taxing carbon would be the right answer and it didn't take me very long to look at the history to see it wasn't the right answer it took me a
long long time. Time to start forming opinions about why it wasn't the right answer. So all I've got to say is if everybody out there that just started thinking taxing carbon was the right answer a couple of years ago figures out. It's the wrong answer in the next couple of years. That just makes them five times smarter than me because it took me so long. So we love our listeners. They're very Savvy but if I say cap-and-trade to my mother who might be listening she doesn't
have the slightest clue. So what is cap and trade cap and trade is something that's familiar to people. In countries that have dairy quotas regimes it's a quota base Supply management regime. So that was what we talked about last podcast, right? Okay. Yeah, and so basically governments decide to create a limited amount of entitlements to discharge CO2 to the
atmosphere. And then if you look back at the 44 presidents that I've looked at since 1978, they give away freely 90 to 98 percent of those entitlements to large emitters. And they create a quota Supply in every president up to and including but not uniquely the California cap and trade market a supply of quota that is well in excess of the maximum physical capacity of the covered operators to emit.
So you start with an oversupply and it gets bigger and bigger and bigger over time and the markets crashed typically within seven years or less to put more color into it a government that is implementing a cap-and-trade scheme tells, okay. You regulated entities. So these are like energy producers or people in the transportation industry manufacturing industry that sort of thing and they say, all
right. There's a cap on the number of emissions that you're allowed to emit every single year. We're going to give you these allowances or entitlements as Alden said one of them represents one ton of greenhouse gases CO2, and you're allowed to emit up to that many are allowed to use these allowances for your emissions and if you go over, Over that amount then you need to acquire more allowances from someone who has a surplus of them.
Now. If you go over that amount, let's say you're given a hundred allowances in the year. You're allowed to MIT a hundred tons. You have a few different options for how you might deal with that as you operate your business one way in this is the preferred way of the people who set up these markets is that you take some sort of action to reduce the overall amount of emissions in your operations or supply chain. That's a Bateman's right
abatements. Yes. Yeah, so if you're an energy producer, they want you investing in Renewables and trying to get your energy customers to switch over to better conservation methods more efficient appliances better light bulbs that sort of thing you can only do so much with that though. And so the other opportunities that you have our options, you have our to purchase more allowances from either people who have a surplus or in some cases purchase them from the
issuing entity. So from the government they'll auction off. Additional allowances if people can buy you can also buy carbon offsets and this is a really important thing for people to understand because the carbon offsets are not the same thing as allowance its carbon offset projects are certified by different entities, like verify carbon standard climate action Reserve gold standard and so on and there are projects that are either doing some sort of carbon
avoidance. So that could be building a wind farm some sort of abatement. I project a dairy digester or Planting trees. There are literally hundreds of different ways that people might do an offset project in markets like California, for example, they have a maximum amount of percentage of meeting their obligation that they're allowed to use by purchasing offsets. And I think it's 8% in California. It's 8% but that works down to 4% because there's a complicated formula.
So the government is saying, all right. You have a surplus you need to buy something. You need to buy either allowances. Has or offsets to represent the amount that you've gone over your cap, but we're only going to let you buy a certain amount of them in terms of offsets forcing you to buy the rest of them in allowances. And the reason that they do that is because it's important that the price of the allowances stay
high. So the government is trying to create demand for these allowances and if you think about it, if you were an energy producer in your an emitter in your forced to buy these things and you have the option of buying allowed. Is which are not actually representing any reduction in emissions or you have the option of buying a carbon offset project that is a real project. There's a narrative to it. It created jobs.
It might have had some other co-benefits that helped local community around it. You can go tell a story it can affect your PR strategy like which one would you prefer to buy the one? That's real? Yeah. How did you Alden was that pretty good? It was pretty good to give them a or b. Well, I would say there's a bit of a difference. Between the theory and the
reality. So when you read about cap and trade or you go see the educational videos or the basically the story you get is everybody who's a large emitter receive so many quota units entitlements and if they reduce their emissions and don't use all their quota they can sell real interest in that emission reduction to somebody else.
So the theory is that when I buy an allowance or quota unit from you you've reduce the emission and you're selling The right to add more one more time because you've over complied with your limit. What's the problem? The problem is in that 43 out of 44 cap and trade systems that have been launched to control pollution.
So not just CO2 but SO2 when smog precursors worldwide and that's me counting the European system as one as opposed to 27 in every precedent the government supplies way more
quota than everybody needs. So for the first five years of every quota regime including the u.s. SO2 Market, which people talk about is a great success story the pollution entitlement rights that you're buying don't have any pollution reduction behind them is it's just politics is that why they oversupply of they're worried about polluters are going to balk at the whole system took me a long time to
understand the history. When you go back to the very first cap and trade regimes it made sense when you went to the very first regime. Eames legislators realize that in roughly 40 States property law is state law not federal the United States that if you adopted a regulation that essentially expropriated property rights the government might have to compensate the asset owner.
This is eminent domain. Yes, and so when they were contemplating putting in these limited entitlements declining over time entitlements to emit pollution, obviously that That is over time if fully implemented is going to cause a reduction in the market value of the assets that can't fully operate without full entitlements because they have an eminent domain case that prevents.
So when the very first cap and trade regimes came in place the government said how do we design this so that when we have the quota Supply declining tightly enough that there's an eminent domain issue. We had provided enough early additional income in the oversupply. To compensate have compensated them so that we don't have to compensate the neck. It was our rational decision.
It was a logical decision. But what happened in every cap and trade regime without exception so far every time they got to that point where the allowance Supply was supposed to tighten up everything stopped seahorse, right?
Because I now have to actually do the expensive and hard things and I don't want to and I'm going to complain to the government and the government will listen to me because I'd say I'm going to Take my jobs elsewhere and I've learned that you know responsible well-meaning people that are designing cap and trade markets today actually don't know that history that there was actually logic embedded in the idea of oversupply in the Market at first but it only works out if
you stick with the commitment to tighten up the supply quickly. It's politically too hard to do that. So the captain is too hard to do that happen trade may work as an idea and a policy if the politics could work, but you think the politics just when it comes time to tighten the belts.
it's politically unpalatable it will not happen I actively actively was probably one of the earliest and most aggressive leaders in the world advocating for cap and trade for 15 years because I thought it could be made to work and I had to give up so go ahead yeah admitting you're wrong means you're a weaker person I think I've been doing this thing where I interrupt a lot and I've just got to get my words in their first I think I've spoken 9 of the dominatrix you right now if
you've earned it okay so you said forty three out of 44 so there's one market that work it's a market that the Brokers hate and is operated continuously from 1992 through March 2017 and it was the reclaim cap-and-trade Market in the Los Angeles area so tell us about that how did it and also Define what working means people also need to understand that when we talk about creating a market that functions means that you have suppliers and there's some sort of demand or buyers
for whatever the asset is there Exchanging and if you look at say the California Market the demand for these allowances it's resulted in a situation where the government had to Institute a price floor. And if you look at the trading price of the allowances in the California markets from the very beginning it started out pretty high. I think somewhere around $22 based on speculation.
It dropped down to very very low somewhere around a dollar and then it goes up every year on a step function that's clearly showing that people aren't valuing these above Whatever the price floor is that set by the government operators, which means that you don't really have a functioning Market well and just to going to California before I go back to what working
look like in reclaim. The state of California has considered and adopted some procedures to somehow reduce Supply including tightening up the limits on how many offset credits you can use so that the allowances that are Surplus have greater demand but the state of California there are two things that are Who in their last auction as a result of some of these tightening up procedures after a number of auctions where they didn't sell out all of the allowances that were for sale.
They did sell out current vintage allowances in the last couple of auctions, but the market bought less than 60% of all of the future vintage allowances, they put up for sale. So the market saying I don't see these allowances having this year did really well, but 2019 2020 20 did really bad. Um 60% Yeah. Yeah. Yeah, and that's a normal Market response the other thing and there's another not so positive
lesson in reclaim. The California state's own advisers are saying that with all of the adjustments they've made to improve the supply-demand imbalance. The market will be sitting on a bank of at least 290 million unused allowances by 2020. So the question is are they actually willing to cut back the free allocations the issue?
Year after 2021 to bleed out that stockpile of 290 million allowances while historically going back to 1978 43 out of 44 times that a government was facing that challenge. They abandoned the cap and trade regime rather than fix it.
So they're all these unsold allowances and they're continuing to create new ones every year for free and giving them out and you're suggesting that what they need to do is stop giving out so many for free so that the people who have to buy a Allowances buy them from this extra Surplus.
They have to come up with a strategy to do with the Surplus again, politically your choices become impossible choices and reclaim the market that did operate for 25 years made a choice, which I don't like but at least it kept the market which is what made me decide to oppose cap-and-trade altogether. So when the reclaim Market you really have only two choices one
you cut back the supplies. Allowances you're making available for free for now on what do you do when you do that you're making life very very difficult for New Market entrants and you're providing a artificial Financial windfall to the incumbent largest emitters who are able to bank all their
free allowances. Now, that's not a good solution, right the alternative which is what they did in the reclaim Market was to say okay, you know, those two hundred ninety million allowances that you have in the bank as of tomorrow. Each one is only worth a half a ton when you go to use it to retire it like the cypriot haircut and kind of thing. Yeah, and that's what they did in reclaim multiple times.
So in reclaimed they kept issuing more allowances than anybody could use and then once every three or four years they said guess what all those allowances you have in the bank. They're worth half as compliance to instruments that they were when you bought them. That's not a good idea either for a lot of reasons not least of which it communicates to the marketplace that if you over comply and Bank your allowances, you're not gonna be punished. Can be punished so neither one
works. I spent a lot of time saying okay. What is a solution that works? And you know what I couldn't come up with one. So I had to find another way. This is the perfect point to put a little cherry on top and move over to carbon tax. Would you agree you want to lead us there not? Yeah. Yeah. Can we get back to like, what's the point of these markets? Right the point of these is to reduce the amount of carbon dioxide that's going into the air. And can we look at these markets?
And what can we say is happening? Is it reducing the amount of CO2 in the air? And also when we're talking about carbon pricing and thinking that these allowances that are being traded and you know Look at California people think oh, this is such a great example the price that people are paying they're like, oh this is the price for CO2 that we're pulling out but it doesn't actually represent that so the price you're paying per certificate 14 almost 15 dollars a ton right now.
Is a fraction of the marginal cost of actually permanently reducing emissions over the population of covered sources, so it's really interesting. It's where you have academics chain cap-and-trade really works. Well because look at how low compliance costs are compared to what people thought they would be they're low because you're not getting incremental emission reductions happening at a market price of 12 bucks. You're just trading pieces of
paper for 12 bucks. And the other thing is that what I was mentioning earlier that if you're a regulated entity and you're buying these allowances to meet your Orkap obligations and be like energy Creator a utility. Yes. Yeah, your utility or find a
Refinery something like that. You have the option of buying allowances or offsets and what that means is that because of what Alden just said that you're just trading paper around and so the price of this doesn't actually really represent anything but to the buyer of these things the offsets in the allowances are equivalent. And so that means that because of Standard Market forces you're going to see the offset prices
ruff. Least similar to the allowances except for in many cases particularly when you're talking carbon removal that certificate and an offset Market that represents a ton of carbon removed from the atmosphere and store it in a farmer's soil has an underlying value of 1 ton, but it's being forced to compete On a par in a market with the commission certificate allowance that maybe an aggregate has an
underlying value of 0.25. So removing and storing carbon in croplands looks really expensive because everybody says a ton only cost 12 bucks. No a piece of paper that represents that best 25% of a ton cost 12 bucks, which is 60 bucks a ton. Is that a hot enough take for you guys though, you're looking for here. What I want the listeners to take away from this is that when you look at the prices that people are reporting at what is
being treated for carbon. They do not actually represent real signals on what the value is for avoiding a ton of CO2 or Removing a ton of CO2. These markets are set up with different incentive structures. So this is why what we're doing at Nori is so interesting and can be so useful because we're creating a marketplace where people place real value on removing one ton of CO2 and it actually represents one ton of
CO2. And so that means that the Nori token price can really become a reference price for the world that is truly market-driven that actually represents one ton of CO2. It's not this abstracted thing. NG or just slips of paper that represent something else will you let me move us now to the carbon tax generally very satisfied. I want to talk about carbon thin. So no not yet. Carbon is Tim seems like a great tool.
I actually I was off on an airplane so I could not play but everyone else I know he got to play it was put together by Josh Margolis of the EDF, which is the Environmental defense fund from my understanding Paul. You did exactly what the Quote unquote Bad actors do which is game the system and figure out how to make money. Yeah. So yeah. So yeah, it's this trading
simulation game. It's supposed to function in the same way that if you were a regulated entity in a cap and trade market how it would work and you play it over. I think we did a two year time span and it's broken up into four quarters. So we had eight different time periods that you switch through the whole Nori team was playing and the goal of it is it's a competition just like like a real business is to try to end up with at the end of the game.
You want to have met your obligations for hitting your cap numbers and you want to make the most amount of money which is how a real life works. And so I met my obligations and I had made the most money out of everyone else and all that. I did was trade allowances. I bought low and sold High I bought low in the auctions. I didn't buy any offsets. I did the minimum amount of abatements that made Financial sense and in the end, I made a lot of money.
And I made virtually no impact on actually reducing the amount of carbon dioxide in the atmosphere. So it was a really really useful and instructional exercise for me to see like what are the different incentives that are playing into this and why people make decisions that they do I got suckered into buying a bunch of the abatements that were like three years out in the future for the time. They started to pay off like why did I do this?
I should have just been screwing around with these these yeah, that's always one of the drawbacks.
These simulations we saw that when we did our simulation game at reverse of palooza was that if you have a defined end period then people are going to play towards the end period they're not going to play as if like times just yeah, I think I would have caught up and started to hammer you there after a while, but I've missed my chance, but there's another complication to we talked about in those kinds of markets governments are creating the allowance Supply and again starting.
I'm willing to accept with all of the best intentions and the best designers and everything and And you start with the Surplus to create the compensation that you think you're going to need later regardless what the initial attention was once government start generating revenues from
selling quota at auction. Even if they're only selling 10% of quota, they willing to give up those revenues and you can have the revenues from Kota sales or you can have the emission reductions, but typically over time you can't have both is this like taxing cigarettes you kind of hope that the people don't stop smoking. They said it will discourage smoking, but if it does you lose a resume You know, it's like a lottery taxes or that you know, what it is.
The reason I would argue it's exactly like taxing cigarettes is because two things are true and the early 1980s when our governments first started taxing cigarettes. They were absolutely convinced. It was going to cause a reduction in smoking. Did it know when did the significant measurable reductions in smoking happen like the Public Health Camp when the first company banned smoking
in the office? Oh, really and First companies to say you can't do it here because staff were complaining those bands came entirely from the private sector responding to complaints by non-smokers staff and then government started saying that and if you actually look at the numbers smoking reduction happened when people governments and companies started saying you can't smoke in here you have to go over there. Okay. So we love metaphors. Let's play this one out speak
for yourself. Arvin is smoking and if you start saying you can't put Put your carbon here. You need to manage the carbon in your supply chain. Saw the emissions, but the carbon that's right that takes you all the way back to where does that carbon come from? Oh, maybe you want to keep it in the ground and track how much you have in the garage right? Keep it there.
That's right. If it's gonna come out at least track it and focus on reducing the carbon if your supply chain and it only took me as I said 15 years to figure that out and you want to hear the like the dumbest thing I could ever admit after I figured out cap-and-trade wasn't going to work even if it theoretically could be made to work.
And then after I figured out carbon taxes don't work, which we'll get to I actually finally said, you know, we have some pretty interesting historical pollution reduction success stories. We've got the lead out of gasoline and the let out of paint and the ozone-depleting substance of the atmosphere in term to stop the growth of the hole in the ozone layer. So maybe I should look and see how we actually did those things and you know what?
I thought I was going to find out a whole bunch of different countries did very different things. Time we log to historical pollution reduction success story. We did it the same way every time whether we're Japan United States Canada Europe same way every time master of suspense. What a what was it? We didn't put a cap on tailpipe. Let emissions. We said if you sell gasoline, you got to reduce the lead content in your gasoline when we really wanted SO2 reductions and
fuel. We didn't regulate emissions we said, Guess what sulfur has to come out coincident with our regulation of SO2 emissions and power plants. We regulated maximum sulfur content in the coal that goes into the plants. I actually talked to some older people and I'm old enough who were part of Designing those when we wanted to get ozone-depleting substances out of refrigerant chemicals. We didn't regulate ozone
discharges. We regulated the chlorofluorocarbon content the pollution precursor out. Supply chain in know what the efficient way to get fossil carbon reductions out of the energy supply chain is to order fossil carbon reductions in the supply chain. So put up more no smoking signs effectively. And this is where there's a connection to Nori. However much it sounds like I'm not going there.
So if you were going to say, let's repeat the lessons we learned from our pollution reduction success stories.
Do not go to all of this expense of trying to figure out how How to measure an estimate and track commissions at the end of some stack somewhere or tailpipe say if you sell energy in this country, I don't care if you sell some combination of gasoline Diesel and propane and you sell some combination of electricity and natural gas and whatever you take your total energy sales, you tell me what they equal and millions of BTU equivalent and your fossil carbon content in the supply you
discharged on this Marketplace. Has to go down 3 percent per annum then if you exceed three percent this year, you can sell some credits to another guy governments not dishing quota. I'm not measuring emissions. I'm saying get the fossil carbon all the supply to and that gives the market the opportunity to figure out different ways. I might be more efficient for one company over another on how they want to do that.
We are not telling them what to do and we're not telling them what price to pay when we regulated in North America the lead out of gasoline every expert.
In the world in every part of the economy fuel suppliers auto manufacturers academics governments were absolutely certain that ethanol was going to replace lead as the oxygen and gasoline and everybody was absolutely certain in North America. The price of gasoline was going to increase by seven eight nine cents a gallon which was a big price increase and that they decided they were willing to make that sacrifice. They ordered the lead out and
within four years. Years of ordering the lead out there were four count them four competing unleaded gasoline fuel formulations in the marketplace and we got let out ahead of schedule while the real price of gasoline fell 12% I'm always wondering when I was a kid looking at the gas pump and I think we'll why is it unloaded? They're always unleaded it and even by leaded gasoline. Why are you telling me it's unleaded because of the success story what I'm just do a carbon
tax. Why not just do something like that. We don't necessarily like it when the government just doesn't mean by Fiat wouldn't be more marketable. Friendly to do something with the tax. There's two answers to that and more interesting one is why in my view a carbon tax doesn't work, but the general response is if you start by looking at our historical pollution reduction success stories, what you see is the private sector has only two arms to compete with one is innovation one is price.
So anytime you regulate in a way that is dictating to the market either the solution or the price. Nice, you're putting the private sectors hands and your time and behind your back. So first of all what the lessons teach you is an efficient government measured says reduce the fossil content per million. Btu of energy sales and you compete on price and through Innovation. I'm not telling you what to do. So that's the big picture.
I just like to note for our listeners all didn't put her hands and tied them behind her back a circle when you Set the market participants to compete when you're saying Get the Lead Out get the fossil carbon out all of a sudden you've spawned a huge competition for market share in the new green economy. Every time we've done that the market participants have come up with solutions that the brainiest people never thought
of before. We set them down the path imagine that I have very strong opinions about what the solutions will be. I will be proved wrong. So a good regulation says two things. I don't care about tracking admissions. It's easy to track fossil carbon content reduce your fossil carbon content per million. Btu units of energy sold in supply chain. And in that regulation, you have maximum three, but one essential what we would call and Regulatory turns alternative compliance option.
This is sort of the offset. What's the other thing? You can do Beyond changing the structure of your business and your product offering you could earn credits towards that obligation by removing carbon from the atmosphere. Beer and storing it and I think everything that you're saying fits within the Mantra of the sustainability community that is trying to do the right thing. They say reduced what you can offset the rest, but they're stuck in a regime that just
doesn't make them operate. So I'm kind of curious if you were speaking to some of the heads of sustainability who might want to do the right thing or talking to government officials and saying hey look this climate change.
It's a real problem and we want to do our part and we want to lead and doing our Art what sorts of things would you like them to know or to be better informed about and what sort of advice would you want them to be giving so one of the reasons I'm so committed to Nori is in every possible set of solutions. I can imagine including better regulation or no regulation or
whatever. We're now at a point where the atmospheric concentrations are high enough that removing carbon from the atmosphere is an essential component of any strategy. So first of all, I'd say it's got to be on the table. It's To be there for real now.
We live in a world right now. For example, the United States where you actually have a budget that is offering 35 to 50 dollars a ton of tax credit to operators of gas-fired power plants if they install carbon capture and storage, but we're not offering 35 to 50 dollars of tax credit to Farmers who can store carbon in their fields probably more cost effectively and efficiently than CCS will work on gas plants.
That's kind of theological. I think I would immediately has that there's a except is probably a lot easier for the oil and gas industry to lobby for those that credits that only works in the short term because you know what happens if this strategy doesn't work, which is not going to yeah how many years before finally government throws up his hands and says, okay. I'm just going to regulate the hell out of you and shut you down and I'm going to get the regulation wrong.
We're trying to squeeze in there and hopefully make a dead before that happens, right? Yeah. Let's cut to the chase. Why don't carve Access work a great Economist Herman Daly will tell you it depends on how you design them. But there's a couple of things one. Think about what we're trying to do here. We're trying to get suppliers to reduce the fossil carbon content in our energy and Building Products supply chain. One reason carbon taxes.
Haven't worked to date there are multiple but one is probably putting a tax on a retail gas pump over here trying to send a price signal to a consumer is about out as far away from the decision whether or not to have put fossil carbon into the energy Supply chains. One of the reasons it doesn't work is it's so far away from the decisions that we're trying to influence you think the incidence of the tax would be the same though, when they just pass it all the way to the
consumer. Well, you know, what a lot of economists say that so I offer you the following prepared response over the last 12 months. The average retail price of gasoline in the United States
has increased 56 cents a gallon. Total gasoline sales in the United States. So that's a price increase that people have incurred total gasoline sales in the United States are up not down now 56 a gallon if you applied it and this is one of the things say the equivalent price at the Wellhead is twenty four dollars a barrel now all the modeling says on average the price of a barrel has gone up $24 in the last 12 months now all of the economic nah models and all the
economists will tell you there's no difference between putting in a new tax or tariff. That's 24 dollars a barrel and putting in an increase in the retail price of 66 cents a gallon stop for a minute. Do you think the oil industry would say a new Tariff of twenty four dollars a barrel apply to the Wellhead will have no impact on their investment in Energy Products will have no impact on their return. Why wouldn't they just pass it on to the consumer?
Where does it stop or how is it different? The market is perplexing. Yeah, can you tell the audience why you're so familiar with gas prices? Because for two years I set gas prices for 568 retail stations for a large US Oil Company. It is a mystery. It's totally logical that a new tax at $24 a barrel at the Wellhead. Is the same as 66 cents Elite gallon sort of basic medium is the same but it's not it's not
it's not I swear to you. Just ask anybody in the oil patch if the government said, okay, we're going to hit you with a new tax right at the Wellhead the new tariff Revenue Severance charge of 24 bucks a barrel that's going to have no impact on you. Right?
It's not how they're going to react because that utterly changes the signals that the investors in the production in the supply chain are getting and the retail pump price is The same signal I don't care if it on paper is the same value. It's not the same signal. There are two reasons. It's not the same signal and this is true in every developed Nation. It took me a little while to
figure out this is true. The data clearly shows it took me a long time to figure out why it's true but individual non-industrial energy demand is what we call quite price inelastic if gas prices go up all of the u.s. European Canadian data shows that we put off. Other Capital expenditures to Bear The increased fuel prices and in academic analysis, they call it revealed internal discount rates. We have a tendency to avoid New Capital expenditures or things that feel like new capital
expenditures at all costs. So if you were trying to design a tax with the sole purpose of raising new government revenues and not actually changing Behavior, you would put it at the gas pump which is where But he's putting so this internal
discount rate thing. That's like saying that I'm a typical American family and I have a eight year old car and it doesn't get great gas mileage, but I would rather continue driving this car instead of buying a new car and getting better gas mileage all of that discount rate all of 30 years of data household expenditure data, not just for the us but all developed Nations say that rather than respond to the 60 cents a gallon. A price increase and replace
that old car. When you thought you were going to you will save the money not replacing the old car to be able to finance the gas purchases. And when you do that when we translate that choice into an internal District count rate the data suggest that very well educated people who manage their stock portfolio like meticulously a know the difference between a 7% and 8% return reveal an internal
discount rate on their energy. In their energy consuming equipment purchases of at least 20% and over the whole population. You're looking at a revealed discount rate of 40 to 50% So when a government is choosing to tax at that point of retail out there that's a conscious decision to proceed with a measure that's least likely among all the measures you can choose least likely to change Behavior, which might explain why some of the big oil companies actually advocate for these days.
It's behavioral economic a cognitive. Yes, and Failing and it's not like we're just trying to estimate based on models. Like this has been tried before especially in Europe. Why isn't it working over there or what are the effects in like Sweden?
Well, that's interesting again. I argue that most of the times Regulators start with the best of intentions Sweden Denmark and Norway those countries with the oldest carbon taxes and highest to write and highest started by saying much like we say in the United States and Canada. Let's do a hybrid of Maxine retail so residential and small business consumption and doing cap-and-trade this quota training thing for big industrial those governments for the most part started off
thinking that's the right way to do things. But when they start you got to give Big Industry a break because this is hard well by mistake, they figured out wait a second here. I can pack a load of new large energy-intensive industrial subsidies into the electricity rate infrastructure. ER called up my carbon policy my government costs of putting this subsidy in place. Don't show up on any government balance sheet is debt.
I just say okay, if you're an important large industry and Sweden a Refinery, I government are going to guarantee that you get your electricity on a 30-year firm price agreement for four cents a kilowatt hour and all of the cost you don't pay to get your electricity show up as a carbon or emission reduction or renewable energy. In household and small business bills. So what's the reality today?
The reality today is first of all a relatively small overall reduction and Swedish Nationwide emissions emissions. And if you're the average household in Sweden right now, you're paying the equivalent of 44 cents us a kilowatt hour and the refinery down. The street is paying the equivalent of six cents us a kilowatt hour significantly less than the typical us. Refinery is pain for Contacts that average American Energy prices about 10 cents an hour.
So here in Seattle at six so they've used their carbon pricing to package a whole bunch of opaque news subsidies for large emitters into the electricity bills that households and small businesses pay if you're in Denmark your pain closer to 50 cents a kilowatt hour. If you're in Norway for legacy large hydroelectricity, you're paying 40 cents a kilowatt hour. So as soon as government started down the path With whatever their intentions were they thought. Oh my goodness.
Well, what's the reality go? Look at the oecd statistics Norway Denmark Netherlands Sweden the top carbon taxing longest carbon tax histories among developed nations in the world. We think of these open socialist, you know, Farrah society's biggest household private debt increases per dollar of disposable income in the whole oecd. Their household debt numbers are through the roof. If you live in Sweden, you're living typically in a home that is 70% to 80% of the square
footage of an average u.s. Home and it's probably way more efficient than the average u.s. Home and you were spending twelve percent of your disposable income just to heat your space and your water. So the net effect of this is that negligible emission reductions massive shift of the cost burden of delivering electricity to all the society to the smallest consumers so a car Tax is about as regressive of attacks as you could possibly do unbelievably regressive.
If you're looking in these nations the disposable income of the 40% richest families is there's different ways of measuring it but says anywhere from 5 to 12 times the disposable income of the poorest families, but the richest families only consume one point seven two two point eight times as much carbon containing energy as the poorest families if you're going to finance income tax rate.
Cuts with carbon tax revenues by definition you're massively shifting tax burden from the rich to the poor a tax rate that is significant enough to cause the wealthy families to even consider buying a more efficient car is a tax rate that's bankrupted every family in the bottom forty percent of society.
So it's a tax rate the burden of which is born entirely by the poor and if you look at British Columbia where I come from and everybody says we've had this great successful carbon tax since we had Carbon tax there's only one 18 month period where British Columbia per capita gasoline use actually dipped and we have publicly available household expenditure data. The dip was small a hundred percent of the dip was low-income families no longer being able to drive their cars.
And in fact gasoline used by the higher income families went up and what happened at the same time. You were telling me about this yesterday.
Well British Columbia that gets credit for this carbon tax if you actually look over that period and look at the average typical cost of commuting from our biggest sub verb to Vancouver downtown to go to work over a five year period the carbon tax added a hundred and Seventeen dollars a year to the typical person's commute by car everyday over the same period the government of British Columbia increased the cost of doing that same commute by transit public transit by 480
dollars a year. So the Carbon tax was just enough to force underemployed and unemployed people during the 2008 through 2011 recessionary time out of their cars and when they found themselves unable to run their cars anymore, they faced a 480 dollars a year increase in the cost of doing that commute by transit. How does every Economist in the country that has written about BC successful carbon tax story say that's the picture of success.
I don't get it. I'd like to throw down the gauntlet on your behalf and safe. There's anyone who wants to make the claim that it is. We welcome them on a podcast and we should talk to them about it on the air. I would love that all of the studies that say ABCs current tax was successful compared what actual BC energy consumption was to a theoretical counterfactual a hypothetical demand rate. And if you accept the hypothetical demand rate that the leading economists pause it
is the right comparable. You have to accept Their assertion that between 2008 and 2011 during an economic recession British Columbia in the absence of a statistically insignificant carbon tax would have realized the biggest three-year increase in fuel use in recorded history because if they're making some assumptions around the counterfactual they're using to come to the conclusion that CAT tax was effective is completely Beyond any reasonable assertion.
I think we can say that cap and trade compliance carbon markets have not reduced emissions. We can say carbon taxes have not only not reduced emissions but have also placed an enormous financial burden on the poorest of residents in those jurisdictions and they spawned some non-transparent industry subsidy behavior and governments that even the same governments that are engaged in that pave. Your didn't think they were going to so it's just crony capitalism.
Yeah, so these attempts Been made with the best of intentions have resulted in such negative effects and ultimately it's 2018 and we still haven't reduced emissions in any significant measurable way. So what is left to us?
The market has to see that we have to start removing carbon from the atmosphere which is why Nori so important to me and maybe on a schedule that's much more efficient in than my own they have to ask the question that started getting me see things which is we got a bunch of really really a significant pollution reduction success stories in our past.
How do we do that? And you know what the way we were successful in the past from a regular story standpoint is exactly the way to move forward, but I can't point to a single carbon greenhouse gas emissions academic expert in the world who when they're looking at and analyzing the policy options include in their list of policy options the way we've done it well in the past, it's not on the table excellent words. To close with thank you so much Alden. Thank you all.