S4E3: NRDC's David Doniger on the ubiquity of emissions cap-and-trade programs, an alternative to command-and-control regulation, which seemingly has fallen out of favor when it comes to managing climate-altering greenhouse gas emissions

Our discussion continues with David Doniger, Natural Resources Defense Council senior attorney, who notes that flexible market-based emissions cap-and-trade programs have been applied somewhat ubiquitously to address a range of environmental issues, from eliminating lead in gasoline, to combatting acid rain, to phasing out ozone-depleting chemicals – even to allocating catch limits for herring, an issue incidentally connected to cases now pending before the Supreme Court challenging the long-standing legal precedent known as the Chevron doctrine.

But Congress and the Supreme Court have rejected attempts to apply this flexible market-based approach to controlling greenhouse gas emissions. Today, few in Washington even attempt to suggest emissions cap-and-trade as a response to greenhouse warming, and instead call for Congress to put a "price" on carbon. But Doniger notes that putting a price on carbon involves establishing a new tax, and he doesn't see a carbon tax gaining traction among Republicans in Congress.

"I don't think we're going to see carbon taxes because the one whole party has become the anti-tax party. It's a dead letter to one whole party," Doniger says. But he does see merit to cap-and trade, and points to bipartisan congressional agreement in 2017 to employ cap-and-trade in phasing down ozone-depleting HFCs. 

"There is life in the old cap-and-trade design yet," Doniger says. "There are variations of emissions trading that we continue to promote because the flexibility reduces costs for industry and therefore lets them reach farther for the same total regulatory costs."

Transcript

S4E3: David Doniger, Natural Resources Defense Council
(transcript edited for clarity)

EMP: Welcome to the Energy Markets Podcast. I'm Bryan Lee, and we're continuing our conversation today with David Doniger, senior attorney with NRDC. David, thanks for coming back and talking with us. I wanted to talk to you about when you were with the Clinton administration, I had just begun covering the energy beat segueing from the environmental side, and started covering the Federal Energy Regulatory Commission for the first time. And they were in the process of developing what would emerge as Order 888, which restructured the electric industry – and the wholesale markets anyway. And there was a real concern as FERC was moving to establish wholesale power markets that it would be more favorable for coal fired power and it would promote coal fired power. I assume you were part of the discussion within the administration that eventually led to FERC agreeing to do an EIS?

DD: I was. But I don't remember much about it. (laugh)

EMP: Well, what was notable about it was that they went through the process and they came back and said, no, it's actually going to promote natural gas-fired generation, and it's going to clean up the power markets, and it did. We saw pretty rapidly when New England opened up its market that a lot of these old dirty plants closed because they were inefficient. The concern among many became that they were becoming overly reliant on natural gas. I'm just curious, because, in your discussion about the Obama Clean Power Plan, and its challenge that went all the way to the Supreme Court, you said, “Ironically, market forces led the power sector to meet the plan’s 2030 goal 11 years earlier, even without a rule.” And so I want to talk to you about markets versus regulation. Given that there seems to be a clear track record in competition driving cleaner resources, why don't environmental groups back competitive markets?

DD: Well, I think we often do. In many states we are backers of, and advocates within, a competitive market structure. We have no beefs with the market. We have beefs about what the market doesn't take into account. Now there was especially in the last decade, and it continues now, a run where natural gas is more competitive than coal and so it's outcompeting coal. Same is true actually with renewables which are outcompeting coal and natural gas. Now, that is not a completely, quote, free unregulated market. There are all kinds of historical breaks that were there for coal, were there for gas, and very, very important incentives now through the tax code for renewable energy and also in the Inflation Reduction Act – some of the technologies which would give the fossil fuel-fired technologies, so to speak, a fighting chance to compete without having very high emissions. What we’re against is the inherent subsidies that occur when pollution is not accounted for in the marketplace. And people make choices but they make dirty choices because the incentives that the consumers – whether they're industrial consumers or individual consumers face – are tilted by ignoring the pollution costs that just aren't priced in.

EMP: You're talking about the carbon dioxide pollution or pollution in general?

DD: All kinds of pollution. You know, the original ideas for market-based instruments were mostly around sulfur, or even around smog pollutants, but they were adapted in more recent decades to carbon as carbon became recognized as the top-dog pollutant. Markets have their roles and regulations have their roles not to supplant markets, but to change the way they operate. The same with tax incentives or tax charges.

EMP: It just seems we have a very strong track record in which market-based changes – the promotion of markets – has resulted in benefits for the environment as well as the consumer. We see that in Texas. Texas doesn't have great mandates for renewable energy, but because of the efficiency of renewables we've seen that Texas is now a leader in wind and battery storage, which is even more important. I think that regardless of the externalities, the externalities are going to be there, whether you have a regulated price or a market price. Why not promote . . .

DD: Let's go back. Let's go back a few decades. Natural gas is very expensive. Coal was out competing it and that meant the dirtier fuels were the cheaper one to operate, even putting aside any kind of accounting for its pollution. Just in another terms coal was the cheapest fuel. And so you had this big build out of coal plants.

EMP: What happened when he when are you talking about when gas was expensive?

DD: The ‘70s and ‘80s.

EMP: But there weren't markets for electricity then.

DD: Well, there’s always been some kind of market. The situation with electric power, you know, classically, is you need economies of scale. So every plant needs its own service territory, and you can't have competition consistent with – well, let's put it this way, the benefits of competition are less than the benefits of the economies of scale. And so you have regulated monopolies. That's the original.

EMP: The economists have shown that the economies of scale are lost when it comes to generation. We haven't had those since the ‘70s and ‘80s the time when you were complaining that coal was being built. What we've seen since is a move towards cleaner sources of fuel, natural gas and renewables. That's being driven by market economics. 

DD: Not entirely. I mean, you could say the fracking boom is largely a market phenomenon but not entirely. It's had its help and its protection from regulations and tax codes. And then with renewables, they used to be very expensive. The importance of public incentives has been not to artificially drive the price down, but to spur the learning-by-doing and the scale that allowed entrepreneurs and market forces to bring the price down. It's like two things are happening at once. The renewables subsidies that are in place under the Inflation Reduction Act are taking advantage of the cost reductions that have been brought about by scale from the first or the second round of incentives. And then we decided to wind it up and do it again. So there's a dynamic that goes on between markets that are, quote, unregulated or unincentivized . . .

EMP: Let me interrupt you there, David. The markets are not unregulated, they're highly regulated. It's the price that's unregulated.

DD: When I say markets are unregulated, I mean for their pollution outputs, that's the main thing I'm concerned about. If you have two chemical processes – two electricity-production processes – competing with one another and one of them is dirty and the other is clean, but that difference is not captured in the marketplace, then you could say the dirty one is subsidized with our health and our environmental well-being.

EMP: You're refuting my whole premise here in that markets drive cleaner power.

DD: I’m just saying it's sometimes true. It's coincidental when it's true, but it's not immutably true. And it's fortunate when it's true, and it's been true for the last – I don’t know – decade at least, and continues to be true now that the most expensive fuel and most expensive plants to operate are the old coal plants. And no one has any interest in building new coal plants, even with the large subsidies available through the Inflation Reduction Act for installing CCS on a new coal plant – the economics don't work. The economics work potentially for installing CCS on some existing coal and gas plants when you add the incentives to the underlying market economics.

EMP: We'll just have to disagree on that one. 

DD: I’m not sure what we’re disagreeing on. 

EMP: It's the marketplace that’s shutting down the coal plants. We've seen a 50% reduction in coal-fired power in this country.

DD: It was not all because of markets but I'm very happy that – it's certainly – markets are, you know, the wind behind the boat and then maybe there's some extra motor power coming from standards and public incentives. It's fortunate that those things are running in the same direction and it means actually that public costs tipping the market, so to speak, away from coal, and hopefully away from natural gas, is a lot lower than if the underlying – you know, before you think about the incentives and the regulations – if the underlying economics were more in favor of the dirty fuel in the regulatory side or the tax incentive side would have a much bigger headwind so to speak. I think we're saying the same thing. 

EMP: It seems like cap-and-trade has gone out of favor. Nobody talks about it anymore. They talk about putting a price on carbon, which means a tax. Talk about the difference between tradable emissions programs, like cap-and-trade, and just putting a flat tax. Do they both work the same?

DD: They work very much the same way. And I think the main differences have become political. Remember, the acid rain program, which is the most fully developed model of a cap-and-trade program was adopted under the Bush administration, the first Bush administration. Republicans were kind of proud of it. They thought they could distinguish it from that nasty old Democratic command-and-control regulation. That's fine. Oh, by the way, we accomplished the phase-out of CFCs with much the same instruments. And similar instruments were used in the Reagan administration to phase down lead in gasoline, you know, with a credit system that made it cheaper and evened out the cost between refiners and overall made things cheaper. All those things were good. I mean, I was kind of suspicious of them in the beginning because actually the very first ideas for market-based pollution instruments were thought up by people who wanted to evade requirements. They wanted to say, well, I'm supposed to control Pollution A – Pollutant A – from Source X over here, and it just so happens that there's some kind of a credit I can claim when controlling Pollution A from Source Y over here, and most of the time when we looked into those things – they were called bubbles in the 1970s – they were phony. I sort of made my career – early career – popping bubbles. And I wrote an article when the first Star Wars movie came out called Beware of the Dark Side of the Bubble. The advocates of economic incentives came at this with, I would say, very impure motives. But then there was a serious effort in the late ‘80s culminating in the first Bush administration to enact the bona fide acid rain cap-and-trade program and to do it right. Actually, I give the Reagan administration credit for doing the lead phasedown right and also the CFC phasedown, they did that right. Okay, so then we proceeded through the ‘90s. The Clinton administration came in. I worked in the Clinton administration on the problem of greenhouse warming. We tried to develop a global treaty called the Kyoto Protocol on the model of the acid rain program. And you would think of it as whereas the acid rain program there's one national budget for SO2, in this Kyoto system, there would have been several dozens of national budgets for CO2, and they could be devolved down to companies in the same way that the American acid rain program devolved the budget down to individual utilities. We pushed this idea and Republicans decided they hated it. I remember a meeting at the EPA where Southern Company representatives came in after we had come back from Kyoto. And they were at that point, they were being, trying to be positive. They came in said we're ready to do the following things and they literally had an eight-and-a-half by eleven cardboard box with pieces of paper inside. Each one was a factsheet on some rinky dink program that they were ready to do. They didn’t end up subscribing to the cap-and-trade notions that we had built into Kyoto at their request. They changed their mind. I looked at what they brought in and I said, you know, you really have to start thinking outside the box. The Republican party in that same period was becoming more aligned with the fossil fuel industry. The fossil fuel industry thought any solution to greenhouse warming was a threat to the future of their fuels and they did everything they could to sink it – including turning coat on the very method that less than a decade before they had endorsed in the Clean Air Act of 1990 and the acid rain program. You can see the same thing happening with Romney care. Obamacare was modeled on Romney care. It was a great Republican idea until the GOP decided they hated it. That has really hurt the prospects of that technique. Now, but it has still actually got some uses. In 2017, there was an adverse court decision on the phasing down of HFCs – the replacements for CFCs also need to go – and we had reached an international agreement to phase them down. And the idea was to implement it, in part, through the same cap-and-trade system that had been used for CFCs. Well, there were two companies that didn't like the initial regulations and they managed to get a court decision that threw a spanner into the works. It turned out that the bulk of the chemicals industry and the refrigeration industry and the others that use these chemicals continued to think that an allowance allocation system is the best way to implement that phase down, give them the flexibility to use the old chemicals to their best advantage on their way out and the most incentives to bring in their new ones. So we were able to get a bipartisan coalition in the Senate. It was led by Senator Tom Carper. Not a surprise because he's both a powerful environmental advocate and a friend of the chemicals industry. The Republican cosponsor was kind of a surprise. It was John Kennedy of Louisiana. Together with us and the industries built up a coalition, you know, Noah's Ark style one Republican, one Democrat, and we got this through. So there is a fairly brand new cap-and-trade program. And here's a little irony – cases about reconsidering Chevron are about management of the herring fishery. The herring fishery is managed through a cap-and-trade system. There's a cap on how much herring can be caught and their allocations of catch permits to the individual boats and they all like that fine. The whole dispute there is whether they have to pay for the monitors that go on the boats to make sure that they stay within their limits. Now that's kind of like a Fortune 500 company asking why it has to pay for the CPAs to do its annual audit. But that's neither here nor there. I'm just pointing out there is life in the old cap-and-trade design yet. And there are variations of emissions trading that we continue to promote because the flexibility reduces costs for industry and therefore lets them reach farther for the same total regulatory costs. You won't find any basic beef for that from me. Now I don't think we're going to see carbon taxes because the one whole party has become the anti-tax party. It's a dead letter to one whole party. Or you could get carbon taxes but it’s going to be on rates. So, it's been easier – even though it's very hard – it's been easier to pursue environmental objectives and then work backwards. What's the budget of pollution which is consistent with that environmental objective? And then work backwards through some kind of cap-and-trade instrument or other kind of market-friendly instrument to get there, you know, with a little bit more flexibility than 1960s-style regulation.

EMP: You seem to be fairly bullish on carbon capture and sequestration. Do you really feel that that technology is sound?

DD: Well, let me give you an analogy and then answer your question directly. If you go back to the early 1970s, there were experiments funded by the Energy Department – or its predecessor – for sulfur dioxide scrubbers. And, you know, if you were paid to build one of these things and operate it for a certain period of time and so on – especially if there was some performance elements in your contract – those things worked. But the company said, you know, they break down a lot. This is going to be so expensive because even though it might appear that you only need two units – two scrubbers – for this power plant, really you're going to have to have three or four because you're going to have to have spares. You're going to be going down all the time. And they had all kinds of other arguments. Well, finally when it was made a requirement, albeit in the context of a market-based cap-and-trade system, it suddenly became to the incentive of the company to keep the thing operating – to meet the requirement with two units and not have to pay for a spare. So you maintained it properly. And you did the measurements properly. And it turned out that sulfur dioxide scrubbers and many other types of powerplant pollution controls that initially companies said, this will never work. This will work but only occasionally. It'll always break down. Those things are now perfectly reliable machines and they do their job. The story should be exactly the same with carbon capture and storage. Up to this point, there have been grants and contracts and so on that give companies the incentive to build a piece of equipment and operate it. But they don't have an incentive to keep operating it and they are incented to come up with excuses why it's too expensive to operate. We're very confident that carbon capture and storage will work reliably at very high efficiencies if the requirements are there so that there are penalties – proper measurements and penalties – if you're over your budget. Will that be the best solution? For many, many companies, no. The best solution would be to trade that plant out for renewables or battery storage, etc. They’re cheaper to own and operate. And you know, you don't have to hire someone engineers and so on. And you might say that that was the way EPA approached the Clean Power Plan. There was a more sensible solution here, which is to try to shift the market – the generation market – from the dirty forms of power to the cleaner ones. So let's build regulatory obligations and credits in a way that encourage that. And the Supreme Court said, you can't do that. But you can put you can still do the old stuff. You can still write standards that are premised on pollution controls like CCS. And Roberts says it's okay that companies might choose – in the face of a carbon capture requirement – you might choose instead to replace the plant. That's okay. That's their choice. It's incidental. You just can't make them do that. You can't create regular regulatory system that basically pays them extra to do that and charges them more not to do it. At least EPA can't do that. Congress can do it. And that's largely what Congress has done in the incentives of the Inflation Reduction Act coupled with requirements to go back and write a new standard.

EMP: You played a big part in the Montreal Protocol, in what was a very, very successful environmental program. The ozone hole has been recovering for years. But it seems like it's bounced back. There's been a regression. The hole has gotten larger again. How much is the fact that there are producers in India and China still making banned chemicals? How much is that a problem? 

DD: Let's start with the positive. The Montreal Protocol – every country in the world is a party to it from South Sudan to East Timor. And it's the only agreement of that kind with universal participation. Now, from the point of view of the big countries like China and India, I think overall their participation has been in good faith. There was a problem a few years ago where – this is both a tremendous detective story and a good political and diplomatic story – where scientists who monitor the atmosphere, from in this case from volcanoes in Hawaii, began to pick up signals of excessive levels of banned CFCs. And when they tracked the wind patterns and so on, and when they looked at a couple of other stations in Japan and South Korea, it was pretty clear that it was coming from China. And the first reaction of the Chinese was, how dare you. You know, stay out of our business. But in reality, what they did was an internal crackdown. We know some of the things they did to find the illegal production and stop it. The same monitors that found the problem in the first place are now verifying that the atmospheric levels are back on track. So I'm not saying it's gone off without a hitch, but it's a tremendous success story. And even the errors so far that have been detected have been self-corrected. India and China are both sophisticated players in the marketplace for those chemicals. And they don't want to be seen as rogue suppliers, you know, that wouldn't work for them. In fact, the Kigali agreement, which controls HFCs, was agreed in 2016, was ratified in China and ratified in India before it was ratified in the U.S. – not by a whole lot, but the three biggest buyers and also all the Europeans and Japanese – basically more than 150 countries have ratified it. So that treaty too, the amendment agreed to in Kigali, is well on its way to implementation. And we do find a fairly high level of cooperation from industry because they’ve figured out that controlled reduction in the old chemicals supports the market introduction of new chemicals. Partly that's a little byproduct of patent law. You know, when these chemicals become about 20 years old, they become commodity chemicals and you can't make money making them. So it's in the interests of the industry to switch because the net cost – the percentage cost – of refrigerants in any of the businesses in which they’re used – or products in which they’re used – are small enough that these price shifts that occur with the transitions from one chemical to another are in the noise.

EMP: The Montreal Protocol was a success in small part – or in some part – because of acceptance of the science. I find it very hard to fathom, given the preponderance of climate-induced weather events – the floods, the wildfires – that we still have people who want to assert that climate change is not happening, or at least it's not a threat. We live in an age of misinformation. It seems to me that all of this misinformation maybe had its birth in the misinformation around climate. How do we get past that?

DD: I don’t know if we get past it. But just a bit more of the origins. I mean, some of our favorite climate disinformers – misinformers – got their start as smoking disinformers and their second careers as ozone layer disinformers and then they moved on to climate. They can't make a living doing that unless there's a market for that kind of disinformation. And during the ‘90s it was a very calculated effort by the fossil fuel industry to undermine the science. To pump out reassuring stuff. I mean, maybe what the origin of the problem in my mind is, when I grew up, we had three TV networks and each city had a few major papers. The advertising market rewarded those who kind of hugged the middle. It helped them build an audience. But then came cable – and Fox News in particular – and they discovered that there are submarkets out there and you can make money telling people on the right who don’t know any better misinformation they find comforting. Or making them afraid that somebody's talking about climate change is a radical that wants to take away their hamburgers. So I think climate change is a victim. But it was not where it started. It's not where it will stop. I mean, if it will ever stop. I don't know how we get back to a shared understanding of anything. I mean look at vaccines. What could have been more consensus than, for example, than that polio was terrible and the polio vaccine prevented polio and everybody ought to get your polio vaccine. And yet there's a little fringe out there that didn’t buy that, and there's a little fringe out there that thought that fluoridated water which is pretty effective at reducing cavities and even though dentists – even though dentists! – bought into the technique that would reduce the amount of work they got. But now, there are people who vehemently disbelieve the science that the COVID vaccine prevents you from getting COVID or keeps you alive. And you have all this evidence that the death rates in Red states are higher than there were in the Blue states because of the vaccine resistance. And so we've lost basic faith in science. I mean, people, quote, do their own research, unquote, on computers that they have no idea how they work. This is a very big problem for democratic societies that you don't have these consensus range of views about basic facts and then a limited degree of difference of opinion on the major issues of the day. And climate change is one of the victim areas.

EMP: I read it on the Internet so it must be true. That was the joke in the newsroom back in the late ‘90s when this new thing called Google came along. You mentioned vaccines. Just the other day I saw an article in the New York Post that was blaming Anthony Fauci for the uptick in measles that we've seen recently, which is clearly due resistance to vaccines, and can’t be laid at the feet of Anthony Fauci. But he's the latest punching bag.

DD: What happens on the right – and certainly in the area of global warming – is projection. Nobody actually said, I want to take your hamburgers away. It just becomes some projection of what they might do. That may be not the best example. But, you know, they want to take your cars or actually the programs – policies – are intended to increase choice not to take away cars. Here's one on the gas stoves. There was some individual in the Consumer Product Safety Commission who opined that there might be some dangers from the NOx emissions inside the home and that maybe we needed a standard. If there were a standard that would maybe mean that the burners would have to be cleaner. That would only address new stoves, because that's the only jurisdiction they have is over new products. But that immediately got transmuted into “they” want to take away “your” existing stove. Also, it turns out that electric induction stoves work better than gas stoves. If you've actually had experience with them. When chefs get experience with them say, wow, this is not your grandfather's electric range. So, these products and policies which are intended to increase choice and make your life better would not force things on you. The message is transmuted as deprivation and fear and government overreach. Because that protects the incumbents and that's what this is all about. It’s protecting the incumbent. The gas industry is playing this game now. The oil industry is trying to do this with respect to electric cars. You have carmakers who want to switch to electric cars because it's a better technology. Yeah, they have some qualms about the pace maybe, but they're in favor of it and they actually in the litigation, the carmakers are on EPA’s side. It's the fuel makers are complaining because they're going to lose their market for oil. Who's behind Fox News? Who's behind the Koch brothers? It's the incumbents. And that comes back to a point that I’ve been making in the context of litigation against the administrative state and the conservative justices’ approach to this. Justice Gorsuch seems to have his focus on the liberty of those who would be regulated, which in the context of the COVID vaccine case meant landlords. What about the renters? They were being evicted, and normally, they should be evicted if they can't pay their rent. But these weren't normal circumstances. They're going to be thrown into shelters. This is the theory of the regulation and pass more COVID around and get more sickened and more death. Well, so in Gorsuch’s such as mind, there was no mention of the plight of the victims, the beneficiaries of the regulatory move. And he said the same thing in the West Virginia case, sort of you know, you got to protect the power industry from being inappropriately regulated – protect their liberty. But who's looking out for the liberty of the people who have to breathe soot or smog or suffer the impacts of climate change from the power company's carbon pollution? So, you know, I'm not saying all the weight should go to the victims and none to the regulated. It certainly shouldn't be the other way around. It's got to be some balance. That's what government decisions are supposed to be about. Congress, and then with the help of agencies whom they enlist to help implement these laws, is trying to balance, well, how much of the burden an industry in order to relieve the burden on the victim? Vice versa.

EMP: David Doniger, senior attorney with the Natural Resources Defense Council, thank you very much. 

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