Withdrawal Exposes Weakness of the Paris Climate Agreement

When President Trump announced last week that the US would withdraw from the Paris Climate Agreement, he unleashed a flood of condemnation. Foreign leaders, US politicians, corporate executives, and environmental groups all roundly criticized the move. It also hasn't polled well.

As the initial reaction dies down, it's worth considering how this happened, what it means, and what might come next. The invaluable Axios news site has some noteworthy insights on the latter problem that I will get to shortly.

I am convinced it was a mistake to withdraw. In this I share the view of many current and former business leaders, including the Secretary of State, that the US was better off as a party to the deal and all the future negotiations it entails. Even if the goal was truly to renegotiate the agreement on more favorable terms, signaling withdrawal first seems counterproductive. However, I also see the consequences of our withdrawal in less catastrophic terms than most critics of the move.

As I noted not long after it was concluded, the Paris Agreement is by design much weaker than its predecessor, the Kyoto Protocol. Although the 2015 Paris deal was probably the strongest one that could have been negotiated at the time, it still represented a big compromise between developed and developing countries on who should reduce the bulk of future emissions and who should bear the responsibility for the consequences of past emissions. Its text is full of verbs like recognize, acknowledge, encourage, etc., and  the commitments it collected were essentially voluntary.

The agreement was also explicitly negotiated so as to maximize its chances of being enacted under the executive powers of the US president, without his having to refer the agreement to the US Senate for its concurrence. That implied it could be undone in the same way.

In other words, President Obama took a calculated risk that his successor(s) would choose to be bound by his Executive Order endorsing Paris. That was tantamount to a bet on his party winning the 2016 election, since most of the Republicans who had announced at the time were opposed to it, or the Clean Power Plan that was the linchpin of future US compliance with it.

Seeking Senate approval as a treaty would have been a much bigger lift--or required an even weaker agreement--but success would have provided significant political protection for the follow-on to the unratified Kyoto Protocol. Perhaps that explains why President Trump has chosen the much slower exit path--up to three years--provided within the Paris Agreement, rather than the quicker route of pulling out of the umbrella UN Framework Convention on Climate Change. The Convention was signed by President George H.W. Bush with the bipartisan advise and consent of the Senate in 1992.

Setting politics aside, it's also not obvious that US withdrawal from Paris will put our greenhouse gas emissions on a significantly different track than if we stayed in. Even the EPA's review and likely withdrawal of its previous Clean Power Plan, which underpinned the Obama administration's strategy for meeting the voluntary goal it submitted at Paris, may have only a minor impact on global emissions.

Federal climate policy has not been the main driver of recent emissions reductions in the US power sector. Cheap, abundant natural gas from shale and the rapid adoption of renewable energy under state "renewable portfolio standards", supported by federal tax credits that were extended again in 2015, have been the primary factors in overall US emissions falling by 11% since 2005. These trends look set to continue.

The bigger question is what happens globally with the US out of the Paris Agreement--assuming the administration does not reverse course again before it can issue the required formal notice to withdraw roughly 2 1/2 years from now. 

At least in the short term, I doubt much else will change. For the most part, the Nationally Determined Commitments delivered at Paris reflected what the signatories intended to do anyway. China's NDC is a perfect example. That country's ongoing air pollution crisis provides ample incentive to scale back on energy intensity and coal-fired power plants, which are the main source of its emissions. 

Increasing the role of renewable energy in its national energy mix perfectly suits China's ambitions in renewable energy technology. Exhibit A for that is a solar manufacturing sector that went from insignificance to more than 50% of the global supply of photovoltaic (PV) cells in under a decade, while China's domestic market accounted for 21% of global PV installations through 2015. 

The reactions to last week's announcement surely raised the stakes for other countries that might consider leaving. However, this action has also provided China and other high-emitting developing countries with an ironic mirror image of one of the main arguments on which the US government based its unwillingness to implement the Kyoto Protocol. 

What ought to matter more than any of the domestic and geopolitical maneuvering around the US exit is the actual impact on the global climate. Reporting on Axios, Amy Harder (formerly of the Wall St. Journal) portrayed this as a sort of emperor's clothes moment with a column entitled, "Climate change is here to stay, so deal with it." Monday's main Axios "stream" characterized her piece as a "truth bomb." 

As Harder put it, "The chances of reversing climate change are slim regardless of US involvement in the Paris agreement." That's consistent with recent assessments from the International Energy Agency and others. Citing the Bipartisan Policy Center and the UN, her column suggested a pivot to greater focus on adaptation, the hard and deeply unglamorous work of bolstering infrastructure and systems to withstand changes in the climate, including those that are already baked in. Attributing the source of changes in rainfall and sea level matters less than plugging the resulting physical gaps. That makes adaptation politically less toxic than cutting emissions, though still plenty challenging, fiscally. 

As I have been watching the fallout from last week's news, I keep coming back to comparisons to the Cold War that I made when the idea of pursuing climate policy through executive action was emerging in 2010. Like the Cold War, dealing with climate change requires a similarly enduring bipartisan coalition. Major policy swings every 4 or 8 years are just too costly and ineffective, due to the planning horizons involved.

NATO may be going through a difficult moment, but it is approaching its 70th year. After seeing its key weakness exposed, can anyone honestly look at the framework of the Paris Agreement and conclude that it is likely to last as long? Yet if climate change is as serious as many suggest, those are exactly the terms in which we should be thinking.

Is the US Ready for a Carbon Tax?

• While the Trump administration seeks to undo CO2 regulations, a group of former Republican officials has proposed a new, market-based emissions plan.
• This "carbon tax" looks simpler than EPA's Clean Power Plan or previous cap-and-trade legislation, but not simpler than the pre-Obama status quo.

The idea of taxing the carbon content of energy--and presumably the goods and services produced with it--is back in the news. A group of Republican "wise men" has floated it as an alternative to the regulation-based approach to emissions that the Obama administration pursued after its preferred "cap & trade" legislation died in the Congress.

Reduced to its basics, a carbon tax is a focused version of a consumption tax, based on usage rather than income or valuation. The level of the tax would be set by law, either as a fixed amount per ton of emissions or at an initial rate with preset future increases. What can't be known with certainty in advance is just how much a given level of carbon tax would reduce actual emissions.

This contrasts with the method of setting a price on carbon preferred by many other economists and environmental groups, called "cap & trade." In this approach, the government sets a cap, or maximum level, on emissions for a designated sector or the economy as a whole, while parties subject to the cap are allowed to trade emission allowances and credits with each other under that cap. Thus policy makers set the level of emission reductions, and allow the market to find the resulting price on carbon. In principal, that ought to be more efficient than the simpler carbon tax, because market forces should drive participants with low costs of cutting emissions to make the deepest reductions and then sell their excess cuts to others, for less than it would cost the latter to reduce by that amount.

From the late 1990s until 2009 or '10 I was convinced that cap & trade was the better approach to pricing emissions. However, the experience of watching the US Congress attempt to design a cap-and-trade system for the US economy cured my certainty. As I have described at length, the inclination of legislators to help favored companies, industries and sectors, combined with the extraordinary temptations created by the sheer scale of the revenue such a system would channel through the government's hands, revealed practical problems that look insurmountable in the real world, at least under our political system.

In fairness, cap-and-trade is currently used to promote emissions reductions in various jurisdictions, including California, the mainly northeastern states participating in the Regional Greenhouse Gas Initiative, and the European Union. From what I have observed, all of them have experienced technical difficulties involving the allocation of free allowances, inadequate liquidity, and other issues. The biggest practical problem is that the carbon prices these systems have tended to deliver might be characterized as the opposite of a Goldilocks price; i.e., they are typically high enough to generate substantial revenue, creating strong constituencies for their continuation, but too low to influence behavior very much.

For example, California's emissions credits currently trade at around $13 per metric ton of CO2, equivalent to $0.10 per gallon of gasoline containing ethanol. Would an extra $1 per fill-up make much of a difference in how much you drive, which car to buy when you replace your current car, or whether to sell your car (or forgo buying one) and take public transportation?

Moreover, California's emissions have been essentially flat since the state implemented cap-and-trade in 2012. However, since 2002 the state's electric utilities--historically the highest emitting sector--have operated and invested under a Renewable Portfolio Standard requiring them to increase the share of renewable energy in their generation mix to 20% by 2010, 33% by 2020, and now 50% by 2030. I suspect that accounts for most of the 7% drop in emissions since 2002, while the impact of a carbon price equivalent to 0.6 cents per kilowatt-hour (kWh) is likely lost in the noise. Of course a carbon tax would create its own political and practical complications.

First, consider how a carbon tax would affect different energy sources. As with cap & trade, a carbon tax should have its biggest impact on the highest-emitting forms of energy. In practice that would compound the current disadvantages for coal compared to abundant, low-priced natural gas and rapidly growing, essentially zero-emitting renewables like wind and solar power. At least on the surface, that seems at odds with the stated goal of the Trump administration to attempt to rescue the US coal industry and the communities that depend on it.

Like cap & trade, a carbon tax would also require a significant amount of new bookkeeping to track the path of "embedded emissions"--the CO2 and other greenhouse gases emitted at each step of a product or service's supply chain--through the economy. Some of this is already done voluntarily by companies participating in various sustainability reporting efforts, but it would be new for many others. The EPA, Department of Energy, and numerous non-governmental agencies have done much work to quantify such emissions, but a carbon tax would require a level of rigor and audit trail consistent with the creation of what amounts to a shadow currency within the economy.

A carbon tax also raises similar questions of how to spend the resulting revenue that have bedeviled cap & trade. At the current US emissions and assuming few sources were exempted, the proposed $40 per metric ton initial carbon tax would raise around $275 billion per year. That's 8% of this year's federal budget. It doesn't take a cynic to guess that the first inclination of any Congress enacting such a tax would be to hang onto this money to fund new programs, reduce the federal deficit, or some combination, rather than returning it to taxpayers as former Secretaries Baker and Schultz and the economists who back them suggest.

Their proposal would require that the proceeds of the carbon tax be rebated to essentially the same people who would be paying it at the gas pump or in their gas and electric bills. This sounds similar to the "Cap and Dividend" approach to cap & trade proposed by Senators Cantwell (D) and Collins (R) a few years ago. Their bill had the great advantage of simplicity, requiring just a fraction of the 1,427 pages of the 2009 Waxman-Markey cap & trade bill, the main purpose of which seemed to be to redistribute vast sums of money outside the tax code. But like W-M, it went absolutely nowhere.

Like it or not, that's my best guess of the fate of the current carbon tax idea, too. The biggest challenge facing a carbon tax today is that it would not be running as a simpler, more market-oriented alternative to prescriptive legislation or complex EPA regulations. After all, the administration's intention appears to be to eliminate the EPA's main emissions-reduction regulation, the Clean Power Plan, not to replace it.

And although the new US Secretary of State, Mr. Tillerson, is on record numerous times in support of a carbon tax, that position seems to have been put forward mainly in preference to cap & trade, rather than on its own merits in the absence of any other strict climate policy.

A carbon tax would raise the effective price of energy commodities in which we appear to have a global competitive advantage, at least for now. The current proposal may rebate the carbon tax on exports, but most economic activity starts and ends within this country. And as noted in the NY Times op-ed by Dr. Feldstein and the other economists backing this measure, the revenue recycling to consumers would be on an equal basis, rather than proportional to usage, so there would be winners and losers as with any redistributive taxation. Lower-income Americans driving older cars seem likelier to come out on the short end of that than wealthier consumers driving new cars that meet rising fuel economy standards.

Ultimately, we must ask why President Trump or his team would want to impose a new tax on US consumers and businesses to address a problem that has probably just become an even lower priority for them than it was. Notwithstanding Mr. Trump's demonstrated unpredictability, the simplest answer seems to be that he wouldn't.

US Energy Under Trump

• President-Elect Trump and his appointees plan a major policy and regulatory shift for energy, focusing more on economic benefits and less on environmental impacts.
• Obama-era regulations most at risk of roll-back are those justified mainly on climate concerns not shared by Mr. Trump and his team.
• Emissions are still likely to fall in the next four years as shale and renewable energy output grow. 

Next week's presidential inauguration will trigger the biggest policy and regulatory shift for the US energy industry in at least ten years. That's how long it has been since energy policy was set by a Republican president and Congress. Donald Trump is a different kind of Republican, though, and his goal does not seem to be a return to scarcity and high energy prices. What should we expect, instead?

To gauge how sharply the energy polices of the incoming Trump administration will diverge from those of the last eight years, we need to understand what motivates both leaders. The Obama administration's approach was driven by a deep, shared conviction that climate change is the most important challenge the US--and world--faces. The cost of energy and its impact on the economy became secondary concerns, subordinated by the belief that the added cost of climate policies would be offset in whole or part by the benefits of the green investment they unleashed--remember "green jobs"?

We saw this in President Obama's first year in office. Amid a deep recession he worked with Congress to attempt to limit greenhouse gas emissions by means of an economy-wide cap-and-trade system, on which he had campaigned. The House of Representatives passed the Waxman-Markey bill (HR.2454), a veritable dog's breakfast of economic distortions. Yet despite a filibuster-proof majority in the Senate in 2009, Waxman-Markey and every subsequent cap-and-trade bill died there.

That failure set in motion the agenda that the Obama administration has pursued ever since, to achieve via regulations the emissions reductions it could not deliver through comprehensive climate legislation. Last year's publication of the EPA's final Clean Power Plan was a key component of an effort that seems set to continue until just before Inauguration Day.

The transformation of energy regulations under President Obama was dramatic enough that a transition to any Republican administration would be a big change. The transition now in prospect will be even more jarring. Mr. Trump's rhetoric and his choices for key administration positions point to a concerted effort to unravel as many of the Obama-era regulations affecting energy as possible. That isn't just based on philosophical differences over regulation and markets. For President-Elect Trump the economy and jobs are paramount, so the Obama energy regulations must look like an unjustifiable threat to the fossil fuel supplies that still meet 81% of the nation's energy needs.

Despite that, it is unlikely the new administration will go out of its way to target renewable energy or the tax credits that have driven its growth to date. Renewables are becoming increasingly popular with conservatives. However, because Mr. Trump sees climate change as, at best, a secondary issue that may not be amenable to human intervention, his administration's won't put renewables on a pedestal as the Obama administration has done.

The biggest challenge for renewable energy may come from tax reform intended to make US companies and factories more competitive globally and shrink the incentive for them to relocate to lower-tax countries. This appears to be a high priority for the new White House and Congress, and one on which they broadly agree. If corporate tax rates drop, the value of the tax credits renewables enjoy is likely to fall, too, making wind, solar and other such projects less attractive and less competitive.

It remains to be seen how many of the Obama energy regulations can be rolled back. The most recent regulations might be averted through legislation like the Midnight Rules Relief Act, or the REINS Act, both of which would update the Congressional Review Act, a rarely used 1990s law intended to limit what presidents could impose by last-minute executive actions. Other regulations may eventually stand or fall as the courts rule. The stakes are high, particularly for regulations affecting the production of oil and gas from shale by means of hydraulic fracturing and horizontal drilling.

Energy independence was a touchstone of Mr. Trump's candidacy. Despite his campaign's focus on coal, it is fracking, as hydraulic fracturing is more commonly known, that holds the key to achieving that goal in the foreseeable future. It has been the main driver of the growth in US energy production since 2010.

The latest long-term forecast from the US Energy Information Administration (EIA) puts energy independence within reach--in the sense of the US becoming a net exporter of energy--by 2026 or sooner. However, the recent flurry of regulations affecting such things as drilling on federal land, and putting large portions of US waters off-limits for offshore drilling would not have been part of that projection. As EIA Administrator Adam Sieminski remarked at a briefing on the forecast, "If you had policy that changed relative to hydraulic fracturing, it would make a big, big difference to everything that's in here."

That's a key point, because most past notions of energy independence assumed that energy prices would have to be very high to promote lots of efficiency and conservation and stimulate large amounts of expensive new supply. The shale revolution changed that.

However, the global context is also changing. OPEC is attempting to reassert its control over the oil market, with help from non-OPEC countries like Russia. Two years of low oil prices shrank global oil and gas investment budgets by around a trillion dollars, and the International Energy Agency has warned of coming oil price spikes as a result. Forestalling tighter US regulations on fracking and offshore drilling increases the chances that US supplies could grow by enough to balance shortfalls elsewhere and avert much higher prices at the gas pump.

Energy infrastructure is likely to be another focus of the new administration, because the economic and competitive benefits of abundant energy will be diluted if, for example, Marcellus and Utica shale gas or Bakken and Permian Basin shale oil have to be exported because domestic customers don't have access to them.

That suggests an early effort to reverse decisions by the current administration to block the construction of various pipelines, starting with the Keystone XL pipeline and more recently the Dakota Access Pipeline. That will force new confrontations with activists and environmental organizations that have raised their game to a new level in the last eight years.

Such opposition would likely intensify if the new administration sought to withdraw the US from the Paris climate agreement, which recently went into effect, or submitted it for review by the US Senate as a treaty. But it's not clear that a big change in direction would require leaving Paris.

The US commitments at Paris, like those of the other signatories, were voluntary and non-binding. For that matter, recent shifts in US energy consumption and especially electricity generation have put the US in a good position to meet its initial Paris goals with little or no additional effort, as noted by outgoing Energy Secretary Moniz. The Paris Agreement will only become a major point of contention if President Trump chooses to make it one.

In his list of the top energy stories of 2016, fellow blogger Robert Rapier rated the election of Donald Trump ahead of the OPEC deal and many other important events of the year, based on its likely impact on "every segment of the US energy industry." In retrospect that was equally true of Barack Obama's election in 2008. The shift we are about to experience on energy will be that much sharper, because President Obama and President-Elect Trump both set out to make big changes to the status quo for energy, in opposite directions. We shouldn't miss one important difference, however.

The course that Barack Obama's administration followed on energy was largely predictable from the start, because it was based on openly and deeply held beliefs about energy and the environment. Donald Trump's well-known preference for deals over dogma sets up the prospect of some big surprises, in addition to what we can already anticipate.

Is the US Really Energy Independent?

Toward the end of Sunday night's presidential debate I was startled to hear Secretary Clinton reply to an audience question by stating, "We are now for the first time ever energy-independent." If the price of oil were $100, rather than $50, that might have constituted a "Free Poland" moment, recalling President Ford's famous gaffe in a 1976 debate.

This point is likely to get lost in the dueling fact-checking of both candidates' numerous claims, but while the overall US energy deficit has fallen from about a quarter of total consumption (net of exports) in 2008 to just 11% in 2015, we still import 8 million barrels per day of oil from other countries. That includes over 3 million barrels per day from OPEC, a figure that has been growing again as US oil and gas drilling slowed following the collapse of oil prices in late 2104.

Oil has always been at the heart of our notions of energy security and energy independence, because it is our most geopolitically sensitive energy source and the one for which it is hardest to devise large-scale substitutes. So although the US is certainly in a better overall position than it has been in decades, with progress on multiple aspects of energy, it is not yet energy independent, especially where it counts the most.

Moreover, the policies that Mrs. Clinton has proposed would, at least initially, be likely to expand that gap by imposing additional restrictions on hydraulic fracturing, or "fracking." Mr. Trump, for his part, seemed to devote much of his response to Mr. Bone's debate question  talking about coal, which while still a significant player in electricity production has become largely irrelevant to the topic of energy independence, because its use is being displaced by other domestic energy sources, mainly natural gas and renewables like wind and solar power.

In fact, of the various contributors to the energy independence gains the US has made from 2008-15 (shown in blue in the above chart) the largest depend on fracking. Oil still makes up most of our remaining energy deficit, after help from a million barrels per day of ethanol--50% of the energy content of which comes from domestic natural gas. Electric vehicles also help, but the roughly 400,000 on the road in the US today displace the equivalent of only about 12,000 barrels per day of oil products, too small to be visible on the scale of this graph. As a result, continued fracking of shale and tight oil resources must be the linchpin of any realistic strategy to close the remaining US energy deficit within the next decade or so.

I understand that Secretary Clinton's proposed energy policies put a higher priority on addressing climate change. However, she raised the issue of energy independence in the second debate, even though her proposals are unlikely to deliver it in the foreseeable future--or preserve our present, hard-won reduced dependence on foreign energy sources. Anyone who doubts that this is a pocketbook issue should recall where oil and gasoline prices were just three years ago, before US shale added over 4 million barrels per day to global oil supplies.

Energy and the 2016 Presidential Primaries

With another round of important primary elections taking place this week, I am sadly tardy in taking a high-level look at the energy positions of the candidates. The winnowing that has already taken place simplifies the task, even as it raises the stakes: A further contraction of the field after the voting in Florida, Illinois, North Carolina and Ohio could eliminate whole approaches to national energy policy.

The divide on energy between the Republican and Democratic fields also seems wider than in recent years. In 2008, when oil prices were approaching an all-time high, Republicans placed more emphasis on resource access--"drill baby, drill"--but both major party nominees supported cap-and-trade to address climate change. After recent remarks by Secretary Clinton and Senator Sanders, this November's election is shaping up as a binary choice between the continuation of the energy revolution that has saved the US hundreds of billions of dollars, and the elevation of environmental concerns as the main criteria for future energy decisions.

I'll take a closer look at the energy positions of the remaining Democratic candidates in a future post. For now I want to focus on the Republican field, because the first round of winner-take-all primaries looks like a make-or-break moment for the two candidates with the most detailed published positions on energy:

• Kasich - On his campaign website the Ohio governor argues for increasing US energy supplies from all sources, including efficiency and conservation.  He endorses North American energy independence, but also sees the need for innovation in clean energy technology. He would rein in regulation, including the Clean Power Plan, to "balance environmental stewardship with job creation." And while he has supported the development of Ohio's Utica shale, putting the state in the top rank of natural gas producers for the first time in decades, he has also led an effort to increase state taxes on oil and gas production. The appeal of Governor Kasich's positions to moderates is understandable, although no one would mistake them for a 2016 Democrat's energy platform.
• Rubio - The Florida senator's energy proposals are even more detailed, with more of a legislative focus than Governor Kasich's. Their tone is simultaneously positive and adversarial: Senator Rubio has an upbeat vision for the role energy can play for the US, and much of it is presented on his website in counterpoint to the actions and priorities of an administration he clearly believes has largely been mistaken on energy. There's a "wonkish" flavor to much of the content, such as his argument for education reform to fill the jobs energy development can help create. Although a reference to support for the Transatlantic Trade & Investment Partnership might be a red flag in a year dominated by populist sentiment, most of the ideas here fall solidly within the mainstream of recent conservative thought on energy.

Each of the other two remaining Republicans represents a more significant departure from their party's recent approach to energy, at least at the presidential level:

• Cruz - Senator Cruz appears to take a more overtly libertarian stance on energy and what he calls the Great American Energy Renaissance. He wouldn't just lighten federal regulation of energy, as his rivals advocate; he would take on the government's ability to regulate. For example, in addition to opposing the Clean Power Plan, he co-sponsored legislation that would make it much harder for the EPA and administration to use the federal Clean Air Act to devise other ways to regulate greenhouse gas emissions from power plants. Consistent with his plan to abolish the IRS, he would also eliminate the Department of Energy. He supports an all-of-the-above energy strategy, but on a level playing field. Ethanol, for example, after his phase-out of the Renewable Portfolio Standard, would have to find its way into the energy mix without a federal mandate or subsidies.  
• Trump - From my quick perusal of it, the Trump website lacks the kind of specifics on energy that are found on the other candidates' sites. We are left to piece together Mr. Trump's positions on energy based on his answers to specific questions or issues, elsewhere. You can find a number of quotes from those on Google. If there's a unifying principle to his views on energy, he seems to be as deal-focused as on other topics, and less allergic to using the power of government than his opponents.  For example, he supported the Keystone XL pipeline but apparently thought we could get a better deal from Canada and the project developer. If Dilbert creator Scott Adams is correct in his analysis of Donald Trump as a Master Persuader, the details of his views on any issue like this matter less in an election than how he frames them.  

The energy context of the 2016 election could not be more different than that of four or eight years ago. A global oil glut and natural gas priced low enough to edge out coal for the top spot in US power generation are giving candidates a rare luxury. They can address energy without the pressure of angry consumers demanding immediate answers. However, even if the election will not be decided based on energy, it remains a major pillar of the economy. How candidates view energy can shed important light on the consistency of their other positions. I expect to return to this point in the weeks ahead.