A new wavelength? Carbon tax, cap & trade, and market adaptation.

• Author: Moore, Michal C.
• Position: Conference: US and Canadian Energy Relationship

Session Chair--Cyndee Todgham Cherniak

Canadian Speaker--Michal C. Moore

United States Speaker--Jonathan H. Adler

INTRODUCTION

Cyndee Todgham Cherniak

MS. TODGHAM CHERNIAK: Hello. My name is Cyndee Todgham Cherniak, (1) and I am a trade lawyer with McMillan LLP in Toronto. I am also a sales tax lawyer, but in this room, I will say "other than income tax" lawyer is my second hat.

So rather than me taking up much more time, I will leave my prepared marks seeing that we can segue in from the last panel. We have two speakers on this panel.

The first speaker is Michal Moore, (2) a Professor of Energy Economics and Senior Fellow at the University of Calgary. He is a former Energy Commissioner for the State of California and was Chief Economist for the United States. He is also a part of the National Renewable Energy Laboratory in Golden, Colorado. (3) He directs a research program on energy markets and is currently developing a regulatory risk evaluation model for the Marcellus shale in collaboration with colleagues at Cornell University, (4) and he will be speaking first.

After Michal Moore, Jonathan Adler (5) will give his remarks. Jonathan is a Professor of Law and Director of the Center for Business Law and Regulation at Case Western Reserve University School of Law. (6) Professor Adler is the editor of four books on environmental policy and over a dozen book chapters. (7) His articles have appeared in publications ranging from the Harvard Environmental Law Review and the Supreme Court Economic Review to the Wall Street Journal and the Washington Post. He is also a regular commentator on environmental and legal issues and has appeared on numerous radio and television programs ranging from the PBS News Hour with Jim Lehrer and NPR's "Talk of the Nation" to Fox News channel's "The O'Reilly Factor," and "Entertainment Tonight" even. (8)

So without further ado, I will pass the microphones over to the speakers and to Michal Moore.

CANADIAN SPEAKER

Michal C. Moore

PROFESSOR MOORE: Thank you very much for inviting me and to Dan for having me back. I have enjoyed it very much and very much appreciate the forum you conduct here. It is interesting. I never thought I would be the only one on a panel who had not been on Fox News, but I am.

So I will just say that my remarks are going to address the issues on the outline in three ways, and to start, I am going to go back to some remarks that were made earlier, one by Chris that said the gap between what we know and what we do is all about carbon policy. I am going to add to that and say they will do the right thing.

I am going to go back to something that John Felmy said earlier, and that is that there is a great distortion and a gap between transportation energy and electricity. I think that the failure to close that gap, the failure to address the fact that they are different, even though they use the small "e" energy, is not helpful, not accurate, and it sets appropriate regulation back at least a decade. Now, there are good reasons why groups do maintain that gap, do distort the difference, and I think these will become apparent just in the nature of my comments.

So there is an issue here that overlies everything I want to say, and that is that this is all about this issue of how to deal with carbon, is all about risk, but there is a very fundamental issue that distorts our perception about what risk is all about. No outcomes that we can describe, either academically or scientifically, are truly deterministic in this discussion.

They are all probabilistic and relative, and yet, the decisions that we have to make regarding those tend to change, sometimes pretty rapidly for individuals and firms, and that means that, at least for me as an economist, the rule sets ought to be those that allow the most flexible decisions and closest to the decision themselves.

I am going to try, if I get enough time to do this, to discuss three things. First, this whole topic is about carbon, carbon mitigation, and market adaptation. So I am going to discuss the problem, why is carbon an issue? Is it the only issue?

If we solve it, can we declare victory and just go back to the beach without any SPF 90? What are the main tools that are talked about today to solve the problem? Cap and trade, carbon taxes, some sort of uber regulation? What are they? Do they work? Should we pick a winner? Should we be in the business of picking a winner? And finally, will energy markets and their consumers adapt? Is there room for a carbon market in all of this?

So first off with the problem, and I will say that the question is not real in a sense, seems pretty silly to me, but I will go ahead and attempt it anyway. If it is not real, something is happening out there. We are getting bigger, wider swings in weather behavior. (9) We are getting a sea level rise that is unmistakable. (10) We are getting melting of fresh water out of glaciers. (11) A lot of things are changing that are due to something. Is it anthropogenic forcing? (12) Probably.

Is anthropogenic forcing speeding it up? (13) Undoubtedly. It would be pretty hard to deny that. So it is a big deal. Most everyone agrees that it is real. (14) I do not know how much cyclicity there is to it or how persistent it is likely to be, but I will simply say that like any other market activity, to say, "I do not believe it, and therefore, I will not change my behavior, I will not invest in it," is not just silly, it is foolish.

And if you were a money market manager or an investor, you are not going to do that. You are going to do what economists call "hedging." (15) You are going to bet part of your money that it might be right because if you lose, you lose wholly, and if you win, you win big. And if it is wrong and you bet against it, then all you have done is to redistribute capital around the economy a little bit.

So the right strategy then is to hedge, and if that hedge is wrong and there is still an investment in the economy and there are some shifts, firms that are ossified, that have been around for a long time, probably did not deserve to have the market share that they have got anyway. But they got it because they stole land from the Indians or because they got a grant from the government early on.

Guess what? They are going to fail. And too bad because the economy is not going to get more robust, is not going to grow unless they do. So part of the hedge strategy, if it is effective, is to devise some combination of policies, incentives, programs, research and development that change behavior and change outcomes so as to minimize risk, so as to equitably distribute costs, and to adjust by reacting to changing conditions to minimize imbalance and/or disruption in the economy.

The business-as-usual scenario of the existing firm structures, as I said, or stranded capital are not necessarily left on the table, but they may be, and that is a risk in business generally. So I said that behavior, or I hinted that behavior, here in the world of energy and carbon production has to change, and there are two good reasons why.

First, there is a real, as well as a distributional, shortfall coming in terms of what we have available to us in energy, at least energy as we knew it. (16)

Second, from what I already said, climate change is a likely event, (17) and that is going to change the dynamic, the calculus, the real calculus of how energy is produced. (18) There are a couple of reasons why behavior has not changed already.

First of all, we subsidize inefficient behavior. (19) We have done that for a long time. We do it under the guise of getting things market ready or market competitive, and then we just forget to take the subsidy off. (20)

Second, we have pretty opaque pricing, (21) and as any good economist will tell you, no market works when good pricing is not relatively transparent, (22) when the consumers do not know what they are getting, or when. Let us just take an example. An electricity company bundles their rates so you cannot determine what you are spending it on: executive jets, vacations, billing offices, or something else that you cannot use to change your own behavior.

On the public side, the perceived risks of energy development biases the choices for the current mix to known relatively safe technologies and fuels. But that behavior tends to increase the cost, the risk, and the shape of future investment in the system gets hard to change. It delays change. It diminishes the reliability of the system overall because we do not bring in new technology where it is needed.

And, in fact, we reward the same ossified and old 1910 design of the electric system that we have today; we just do not make any changes. (23) The on-demand model (24) that we live with, and I heard someone say this earlier today, one of the environmental representatives, in order to protect the model that we have where everyone can have all the energy they want when they want it, is that not just stupid? That is the on-demand model.

That is when we go to the switch, and I pull the switch, and I expect the lights to come on. If you were living in Iraq today, you would not do that. You would flip the switch and wait for something to come on and then have it do work for you. (25) The on-demand model implies spinning reserves, surpluses, and a lot of excess production. (26) It is not a smart model and we are not going to be able to live with it very much longer. We need to change that.

So if we admit that there is a problem and we need to change somehow, what about the tools? What do we have available to us in our toolbox? We could close down all the offending generators, the cars that we do not like, that offend us, all the tuna clippers that should have been shipped to Mexico so they can continue polluting while we pretend they do not exist anymore.

We can change power plants. We can over-regulate and redesign power plants and tell them what they ought to look like...