Hi ethai! Thanks again. I had the chance to read Making Climate Policy Work and found it super insightful.
Regarding perfect foresight
You’re right: I glossed over the extent of imperfect foresight when discussing uncertainties. For RGGI specifically, here are reasons why polluters likely have accurate expectations about their future allowance usage:
Actual RGGI caps have gone according to plan, with the exceptions of three adjustments explicitly made to reduce excess banked allowances (see my response to Ville’s comment below, adjustments 1-2, and adjustment 3).
RGGI covers power generation, arguably the sector with the clearest and most predictable pathways toward decarbonization (Cullenward and Victor, 2021, Fig. 1.2).
Recent forecasts indicate higher power demand in 2026--2030 than previously anticipated. If anything, this suggests that power plants may have underestimated their allowance needs, making full usage more likely.
There are also valid reasons for uncertainty:
RGGI is inherently political and dependent on voter preferences, which can change unpredictably over a 5-year horizon.
Low-carbon tech exists (solar, wind, nuclear), but breakthroughs in fusion or storage could unexpectedly render fossil fuels obsolete.
Whatever the foresight of polluters is right now, it should improve as third-parties retire allowances. Right now, a power plant’s cost of purchasing a CO2 allowance it won’t use is $20. The higher the price of allowances, the greater the cost of making mistaken purchases, so you’d expect their foresight to improve as more allowances are retired and prices increase.
Regarding carbon credits and Tradewater
I think it’s useful to distinguish between carbon credits and the climate actions they incentivize. Any climate action has to answer: “How much does it reduce atmospheric CO2?” But carbon credits must also answer: “How much future climate action does purchasing this credit incentivize?” That’s another hard question, and the impact of carbon credits is often unclear.
For example, Tradewater burns refrigerants and issues carbon credits, which they later sell. Even if burning refrigerants were perfectly additional, it’s unclear how much more refrigerant they will burn because you paid them $21 for a carbon credit. Similarly, someone might retire CO2 allowances and issue carbon credits to sell later. Even if retiring allowances were perfectly additional, you can’t know how many more allowances that person will retire because you bought a carbon credit from them.
Regarding policy, systems change, and Making Climate Policy Work
Cullenward and Victor emphasize the critical role of political feasibility. Carbon pricing programs (CO2 taxes + cap-and-trade) are politically costly and consequently haven’t been very useful, whereas targeted regulations (e.g. car emissions standards) have quietly done the most to decarbonize society.
They do acknowledge that a global cap-and-trade program with allowance prices matching the social cost of carbon would efficiently eliminate harmful carbon emissions. It’s just that it’s infeasible.
There is a role for cap-and-trade programs, only smaller than previously thought. To be effective in driving decarbonization, they need higher allowance prices. Their policy recommendation is to stop overallocating allowances.
You can view retiring allowances as implementing this policy recommendation, only without the politics.
Thanks again for engaging. I will really appreciate hearing your further thoughts.
Hi ethai! Thanks again. I had the chance to read Making Climate Policy Work and found it super insightful.
Regarding perfect foresight
You’re right: I glossed over the extent of imperfect foresight when discussing uncertainties. For RGGI specifically, here are reasons why polluters likely have accurate expectations about their future allowance usage:
Actual RGGI caps have gone according to plan, with the exceptions of three adjustments explicitly made to reduce excess banked allowances (see my response to Ville’s comment below, adjustments 1-2, and adjustment 3).
RGGI covers power generation, arguably the sector with the clearest and most predictable pathways toward decarbonization (Cullenward and Victor, 2021, Fig. 1.2).
Recent forecasts indicate higher power demand in 2026--2030 than previously anticipated. If anything, this suggests that power plants may have underestimated their allowance needs, making full usage more likely.
There are also valid reasons for uncertainty:
RGGI is inherently political and dependent on voter preferences, which can change unpredictably over a 5-year horizon.
Low-carbon tech exists (solar, wind, nuclear), but breakthroughs in fusion or storage could unexpectedly render fossil fuels obsolete.
Whatever the foresight of polluters is right now, it should improve as third-parties retire allowances. Right now, a power plant’s cost of purchasing a CO2 allowance it won’t use is $20. The higher the price of allowances, the greater the cost of making mistaken purchases, so you’d expect their foresight to improve as more allowances are retired and prices increase.
Regarding carbon credits and Tradewater
I think it’s useful to distinguish between carbon credits and the climate actions they incentivize. Any climate action has to answer: “How much does it reduce atmospheric CO2?” But carbon credits must also answer: “How much future climate action does purchasing this credit incentivize?” That’s another hard question, and the impact of carbon credits is often unclear.
For example, Tradewater burns refrigerants and issues carbon credits, which they later sell. Even if burning refrigerants were perfectly additional, it’s unclear how much more refrigerant they will burn because you paid them $21 for a carbon credit. Similarly, someone might retire CO2 allowances and issue carbon credits to sell later. Even if retiring allowances were perfectly additional, you can’t know how many more allowances that person will retire because you bought a carbon credit from them.
Regarding policy, systems change, and Making Climate Policy Work
Cullenward and Victor emphasize the critical role of political feasibility. Carbon pricing programs (CO2 taxes + cap-and-trade) are politically costly and consequently haven’t been very useful, whereas targeted regulations (e.g. car emissions standards) have quietly done the most to decarbonize society.
They do acknowledge that a global cap-and-trade program with allowance prices matching the social cost of carbon would efficiently eliminate harmful carbon emissions. It’s just that it’s infeasible.
There is a role for cap-and-trade programs, only smaller than previously thought. To be effective in driving decarbonization, they need higher allowance prices. Their policy recommendation is to stop overallocating allowances.
You can view retiring allowances as implementing this policy recommendation, only without the politics.
Thanks again for engaging. I will really appreciate hearing your further thoughts.
Paco