Rewarding virtue

Coal plant in South AfricaThe New York Times reports on the Regional Greenhouse Gas Initiative, a plan to cut power-plant emissions in 10 northeastern U.S. states by 10 per cent over 10 years, using a cap-and-trade system of carbon credits. The Canadian province of Ontario is contemplating joining in.

The people devising the trading system, according to the Times, have learned from the awkward beginnings of the European carbon market and are trying to sidestep some of the traps the EU built for itself. They’re auctioning the initial round of credits instead of giving them away free, and closely limiting the means by which credits can be created.

To build a carbon market, its originators must create a currency of carbon credits that participants can trade. In Europe, power companies received these credits directly and could buy or sell from one another as needed. But most companies passed the cost of the credits on to consumers even though they received them free — giving the companies windfall profits. Power companies in Britain alone made about $1 billion from free credits in 2005, according to a study by the British government.

Participants in the United States want to avoid that problem by selling some or all of the credits at auction, with the proceeds going to state energy efficiency programs.

In Europe, power companies were not the only businesses to profit from the new carbon market. Because power plants there can use credits earned from offset projects that take greenhouse gases out of the atmosphere (or put less of them into it), businesses wanting to earn offset credits inundated the Europeans with proposals — many of which would have a negligible effect on emissions or were for reductions that would have taken place anyway.

To sidestep that problem, the program here limits offsets to five categories: capture of landfill gas, curbs on sulfur hexafluoride leaks, planting of trees, reductions in methane from manure, and increased energy efficiency in buildings. Power companies can offset 3.3 percent of a plant’s total emissions from any combination of the five categories.

Ontario has only made a vague expression of curiosity about the thing, with a news release announcing that Premier Dalton McGuinty had “signaled Ontario’s interest in potentially joining.” Nevertheless, I’m curious to know how the states that are already part of the RGGI feel about admitting a member with active plans to shut down its four remaining coal-fired generating plants, including the goliath 4,000-megawatt plant at Nanticoke on Lake Erie (the biggest in North America and among the biggest in the world).

On the one hand, closing Nanticoke and the rest of Ontario’s coal-fired plants down would go a long way toward meeting the involved governments’ commitment all by itself. (They generate about 16 per cent of Ontario’s electricity.) On the other hand, their generating plants would basically be paying Ontario to do something it’d planned to do anyway — something that McGuinty was promising before he was elected in 2003.

This raises one of the fundamental problems in designing policies toward making green choices more appealing, one that comes up all the time particularly in discussions of carbon-credit programs and offsetting.

You want maximum bang for your buck, which means ideally you’d only reward people for making decisions they otherwise would not have made, but you can’t monitor intentions and predict the future (even to a reasonable approximation) without blowing your whole budget on studies and forecasting. At some point, it’s more cost-effective to reward some people for doing what they’d have done anyway than to weed them out.

Personally, I tend to think the whole discussion is a red herring. What’s wrong with rewarding some people for doing what they’d have done anyway, if that choice is the one you want to encourage? If you make pottery as a hobby and sell the occasional piece, it’s not wrong to charge for it, just because you’d have made that knicknack regardless of the reward.

What this way of thinking promotes is waiting till there’s a tangible reward before making any changes. Although I’m a big believer in economic incentives, there’s a lot to be said for personal virtue as well, for doing useful and helpful things only because they’re useful and helpful, and policies designed to screw the people who get out ahead of the crowd do not encourage that.

(Via CleanBreak. Photo credit: “Athlone Power Station, Cape Town,” Flickr/DanieVDM.)

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