There's an implicit assumption in much of the climate policy debate that to meaningfully lower greenhouse-gas emissions, we need a high price on carbon. The assumption is wrong.
Economics 101
In a market setting, price is a function of supply and demand. For a given commodity, prices will be high when demand outpaces supply and low when supply outpaces demand. Thus oil, for instance, is expensive. And autographed copies of my pen and ink cartoons are cheap (in spite of their rarity, I might add).
A cap-and-trade system is an attempt to create a market around a particular commodity, namely GHG emissions. The same dynamic will apply: if demand for GHG reduction outpaces supply, the price of GHG reduction will be high; if supply of GHG reduction outpaces demand, the price will be low.
If we pass a cap-and-trade policy that yields sustained high prices for GHG emissions, it will not be a sign of a successful policy. Quite the opposite: it will mean that the supply of GHG reduction is insufficient to meet the demand.
This economic reality doesn't always sit well with the environmental community. They often speak of high GHG prices as a way of teaching polluters a lesson and driving consumers to change their wasteful ways. And they want high revenue for pollution reduction to provide incentive for those who do the right thing.
But those desires confuse the ends and the means. The ends, the ultimate goal of policy, is pollution reduction. If supply fails to meet demand, we aren't getting what we want.
One of the reasons renewable energy credits (RECs) are trading at such high prices nowadays is that those markets built in steadily rising demand for renewable energy (by gradually increasing the percentage utilities had to procure), but artificially constrained supply by picking winners. From a narrow perspective, this is a good thing, in that there is a lot of money (in some cases nearly $50/MWh) available to support renewable deployment. But the price is so high only because the market is supply-constrained. We are implicitly limiting the deployment of clean energy. From that perspective, the high price isn't much to cheer about.
On the other side, the price of tradeable SOx permits has collapsed since that market was established, since the supply of SOx reductions has vastly exceeded initial expectations. To be fair, grandfather rights given to existing coal plants did artificially depress demand in that market. But even within the (lowered) expectations that grandfathering created, the falling price still provides an implicit signal that we are reducing SOx emissions faster and more cheaply than we thought possible. And since the ultimate goal is to reduce SOx emissions, that's a good thing.
Why this matters
First off, realize that I am making an argument exactly contrary to my own personal economic interests. My company is building projects that reduce CO2 emissions, and to the extent those reductions have financial value, higher prices = more money for me. I'm also arguing against the specific economic interests of everyone else in the clean energy community, for the same reason.
But at the end of the day, our specific economic interests aren't the issue, no matter how deserving we may be. What matters is that we reduce CO2 as quickly and as cheaply as possible. Quickly because we can't afford to wait. Cheaply because of the economic disruption caused by expensive energy, but also because all wallets are finite, and maximum CO2 reduction is logically incompatible with expensive CO2.
More urgently, what matters is that we get a GHG policy passed, and so long as we continue to frame our GHG conversation as a fight between morality and economics, we will fight rather than act.
A good cap-and-trade bill, one that leverages the innate ability of a competitive market to surprise us with excess supply, need not be economically painful. Such a bill would facilitate the capture of all the low-hanging fruit first. It would support technologies and concepts that no one has yet thought of, increasing the supply of GHG reductions beyond what we can today conceive. All of which will drive GHG prices down, to our collective environmental benefit.
When all is said and done, the purpose of a GHG policy is not to penalize GHG emitters, nor to reward GHG reducers. It is to reduce GHG emissions. And real success on that metric is incompatible with high GHG prices.
Comments View as Flat
DarthPetrol Posted 5:53 am
15 Jun 2008
It's all about punishment
Another good post Sean. But the environmental movement isn't about saving the planet, it is all about socialism, or more specifically destroying succesful capitalists. Here is my litmus test for so called environmentalists.
In January 2009 Dick Cheney leaves the Vice President's office. Let's imagine that he becomes the CEO of ExxonMobil. Shortly after he takes over, ExxonMobil discovers a low-cost way to sequester CO2, essentially solving the global climate problem, stabilizing CO2 at 350ppm, exceeding the wildest dreams of Joseph Romm and Al Gore. The discovery increases the value of ExxonMobil many times over and makes Dick Cheney the richest man on earth.
So is this scenario acceptable? Isn't the argument all about saving the planet? (BTW - I know that ExxonMobil is actually working on something very interesting which might do what I just said.)
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GRLCowan Posted 6:04 am
15 Jun 2008
A $35-$55-per-tonne-C ceiling ...
should be imposed by this.
--- G.R.L. Cowan, H2 energy fan 'til ~1996
http://www.eagle.ca/~gcowan/boron_blast.html
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Nucbuddy Posted 6:55 am
15 Jun 2008
Oil fundamentals imply low price
Sean Caston wrote: For a given commodity, prices will be high when demand outpaces supply and low when supply outpaces demand. Thus oil, for instance, is expensive.
Oil supply is up, and demand is down, Sean.
google.com/search?q=%22there+is+no+gas+shortage%22
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Max8806 Posted 8:08 am
15 Jun 2008
Good post Sean, but people err the other way too
It certainly is important to keep the cost in perspective as a means towards the end of GHG reductions, and not as retribution. However, I think there's just as problematic arguments from the other side that costs must be held low, even if that means compromising the integrity of the program (level of reductions).
When confronted over issues of reliability of offsets, supporters insist 'but its an effective mechanism to contain the cost of permits.' This completely misses the point. You could contain the cost of permits by allowing companies to offset a certain percentage of their emissions by buying me a Big Mac, and it would be even more effective at containing costs. So the question is really how many actual, additional, verifiable, and permanent tons of carbon sequestration some of these offsets would really produce. Unfortunately, the answer is not so encouraging.
The Boxer cost-containment auction ("offramp") is another measure that would allow the economy to "meet the cap" while actually circumventing actual emissions reductions. Finally, if we were discussing a carbon tax, as opposed to cap, then certainly a higher carbon price would lead to more reductions than a lower one (all other things equal). So while its important not to view carbon costs as punishment, its equally important I think not to view them as unacceptable to the point where we rationalize compromising the actual reductions to avoid them. If we refused that, and carbon prices spiked, then eventually there would emerge a political necessity to identify more low-hanging fruit that doesn't compromise reductions. Then people in power would start listening to your ideas about needed regulatory reform to put CHP on a level playing field with new generation.
One last thing. You wrote about the 1990 CAA SOx program "To be fair, grandfather rights given to existing coal plants did artificially depress demand in that market [thus lowering price of permits]." Grandfathering credits, which was referred to as 'free allocation' during the Lieberman-Warner debate, does not actually affect the price of permits, because it does not affect the underlying supply or demand. I wrote about it in more detail here:
http://www.washingtonpost.com/wp-dyn/content/article/2008 ...
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Max8806 Posted 8:21 am
15 Jun 2008
Not all "speculation" is unreasonable
Nucbuddy,
That article cites lower US demand as if that should dictate US prices. However, its a global market, so the only demand number that counts is global demand. Thats where the price is set.
On speculation, he points to how investors are buying up futures contracts, inflating demand because it used to be mostly just companies who deal in oil bidding on contracts. However, its worth noting that these speculators are only buying futures contracts because they anticipate oil to be worth much more in the future. Meaning they anticipate a shortage sometime in the future.
Speculation is buying low and selling high right? So if they're buying up oil inflating the price when theres not a current shortage, anticipating dropping it back on the market when there is one, they're actually smoothing out the price trend. It's foolish to insist that current supply and demand should set price independent of prospects for those fundamentals in the future. Asia used to have a nonexistent auto market, and in a couple decades its going to be the biggest one globally. India is coming out with that $2,500 'people's car.' This on top of continuing industrial growth. If we're eventually gonna hit a shortage, even if we're not there yet, its important that these future fundamentals drive up price now to get the market to reflect that its a finite resource. Otherwise you're just asking to run headlong off a cliff, if you don't want the market to incorporate any possibility of a shortage until you're smack in the middle of one.
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Sean Casten Posted 11:34 am
15 Jun 2008
Max - grandfathering
I disagree that grandfathering doesn't affect underlying supply or demand. There is a (admittedly, unknowable) supply curve for SOx reductions, at incrementally higher prices. By grandfathering old coal plants, we essentially shifted the demand curve down against that supply curve, leading to lower prices than we would have otherwise have.
I do agree with your other point though about not filling bills with trapdoors and superfluous offsets. And to be clear, the point of my post is not to argue against high GHG pricing per se - simply to make sure we don't confuse the price with the goal.
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zach Posted 12:30 pm
15 Jun 2008
somebody needs to explain to me
why CO2 is an important greenhouse gas. The way it was explained to me in my college days was that it diffuses easily in the atmosphere and doesn't absorb enough radiation to make a real difference in it's surrounding environment.
Can somebody point me to the chemistry surrounding this matter? I'd greatly appreciate an unbiased opinion.
what I need to know before jumping on the CO2 bandwagon:
- HOW MUCH energy is absorbed by CO2
- HOW MUCH is converted into radiated heat
- HOW MUCH that affects the surrounding environment
I couldn't find that info in a quick Google search so I'm a little skeptical that this carbon-credits "right to pollute" thing is relevant at best and a complete sham aimed at making money at the worst.Permalink
Wolverine Posted 12:36 pm
15 Jun 2008
Real Economics 101
If you get rid of the trade portion, capping GHGs and charging a high price for exceeding the limit would certainly lower emissions. Only those who don't care about global warming and just want to scam money off this issue are promoting the trade portion.
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Max8806 Posted 8:36 pm
15 Jun 2008
Grandfathering
Sean, maybe we mean different things by 'grandfathering.' If plants are exempted from compliance obligations altogether, then you're clearly right that that reduces the demand for credits. As I understand it, 'grandfathered' plants under the 1990 CAA were simply the ones that got substantial amounts of credits given to them for free to them comply. However this doesn't change prices because retiring a free credit still incurs the opportunity cost of not selling it for cash. In this case, the opportunity cost is exactly the same as the 'real' cost of buying a credit: the going market rate for a credit. Or am I wrong on the policy- did 'grandfathered' plants get exempted from needing to submit allowances at all?
And wolverine, what part of the 'trade' inherently threatens the aggregate level of pollution reduction (if you take out questionable offsets)? We shouldn't be opposed to economic gain if it is sustainable, i.e. compatible with emission reduction goals.
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GreyFlcn Posted 10:24 pm
15 Jun 2008
So
What if you had a full auction permit process with no offsets? Tradeable, with year-to-year banking of course.
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Sean Casten Posted 10:31 pm
15 Jun 2008
That works, Greyflcn
But note that the key is that permits aren't given away for free - of which an auction is but one way to accomplish. We tend to frame the conversation as auctions vs. allowances, but the real issue is whether or not we treat pollution as a right or a privilege. If a privilege, then we shouldn't give away free rights to pollute (per an allowance), but that could just as readily be done through bilateral contracting as through auctions.
It's a minor point, but just want to make sure we're clear that the issues is that there is a non-zero price for pollution - not that the price has to be set by an auction per se.
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Sean Casten Posted 10:36 pm
15 Jun 2008
Wolverine - theory vs. practice
Which is the best way to buy milk? At a price set by the grocer, based on how much she thinks she can earn based on her costs and the market demand for milk? Or at a price set by the government based on how much some vast bureaucracy thinks is an appropriate price for milk?
The universe of people who think that the former is a heck of a lot more efficient way to allocate resources is much broader than simply those seeking to "scam money off the issue" as you put it. Capping GHGs at a government set price is exactly as economically efficient a way to lower GHG emissions as the Soviet model was a good way to provide bread to the citizens of Moscow, and for exactly the same reason. (And recall that the problem with Russian breadlines wasn't simply the price: it was also the quality and supply. A centrally planned market for GHG credits will suffer the same problems.)
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Sean Casten Posted 10:42 pm
15 Jun 2008
Max
You may have more expertise in that market than I do, but it still seems to me that the logic doesn't pencil. If the recipient of a free right to pollute has the option to either retire that credit or resell it, then there is a narrow truth to your point. But I don't believe they had that option - they had to retire them, which had the effect of shifting the demand curve down as noted.
The big effect though of those programs in my experience though is a second order one. By shifting all the responsibility for pollution-reduction to new plants, it raised the cost of power construction & generation from new facilities, thus raising the market clearing price for electricity. Meanwhile, the old grandfathered plants got to keep running with an artificial, legislatively-gifted economic advantage. This caused a slowdown in the rate of new plants, affecting supply/demand considerations in power markets just as it did in SOx markets. And since construction slowed down, we again see a slowdown in demand for SOx credits.
All of this is of course tangential to the larger point, which is that - flawed as that model may have been - we still saw more SOx reduction at lower cost than anyone thought possible at the outset, which is a good thing. And which means that - if we roll back the clock - the arguments for why we must grandfather to protect those old plants were almost certainly based on a flimsy house of economic cards. This is worth bearing in mind as we hear the same requests for grandfathering from those same coal plants in our current GHG debate.
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Max8806 Posted 11:47 pm
15 Jun 2008
A Plant Always Has a Choice
Sean, they're never really 'forced' to retire a credit, they just have the incentive of the revenue from selling electricity. So if a plant could get more revenue from selling its allocated permit than it could get from retiring it to make electricity to sell, it would choose the former. I've spoken to quite a few economists about this and there seems to be a consensus on it, despite its admitted lack of intuitiveness.
Ultimately, the price is set by demand for credits (and supply, which is set by the cap). Demand is set by the aggregate level of production of emissions-intensive goods, as well as the level of emissions intensity of course. So if the decision on whether to produce or not is not affected by allocation, it doesn't affect the price. And production levels are decided based on Marginal Cost (and Marginal Revenue, which isn't affected by what we're talking about here), and the MC is the same (market price for a credit) whether the permit is free or allocated (allocated carries same opportunity cost, as described before). So the allocation doesn't affect production levels, and so doesn't affect price. Unless of course you give them conditionally, like on a per kwh produced basis or something.
I happen to believe (now I'm going off on my own, but I think my theory here is well grounded) that there is in fact a second order problem, that causes free allocation to affect demand. While it doesn't explicitly affect incentives on level of production, it does in one very important respect. It affects the decision on whether or not to shut down, because you have to stay in business to keep collecting your allocation windfall every year. But to this extent, it actually increases demand, because it artificially preserves these old dirty plants that if they were operating "rationally" would shut down in a carbon-internalized market because they demand too many allowances.
So your point about the second order problem causing a slowdown in new plant construction is a good one, I think you just looked at it the wrong way. Ultimately this didn't lead to less demand for permits because of fewer new plants; it led to greater demand for permits (and thus higher prices) by artificially preserving the old plants. If the system were more neutral, more of those old plants would have been turned over for new ones, which would have been more efficient and demanded fewer permits.
And you're certainly right that we saw SOx reductions at lower cost than projected, and that that's a good thing. As I understand it, this was in large part due to 2 major sources of cheap reductions: 1) moving to lower-sulphur coal, and 2) firms found they could build scrubbers that were half as effective as the old ones for 1/4 the cost, because the old ones had highly redundant protection to comply with the prior regime's command and control regulations. The 1/2 and 1/4 fractions I just made up, but the point being that they could make scrubbers that made fewer absolute reductions, but more cost-effective ones.
And since neither of these two sources of cheap reductions were predicted, it is another argument for not picking winners, which I gather we agree on. We don't want to "promote tomorrow's solutions" at the risk of biasing the market against taking the truly lowest-cost ones that we might not have figured out yet.
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Biodiversivist Posted 1:03 am
16 Jun 2008
Amen
In the end, it all comes down to biodiversity. Poison Darts--Protecting the biodiversity of our world
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Gar Lipow Posted 1:20 am
16 Jun 2008
Depends on whether cheapness is your only goal
As I've pointed out before, nations that use regulatory means produced much greater reductions. I'm not even sure we came out ahead in price per emisssion.
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amazingdrx Posted 1:42 am
16 Jun 2008
Per kwh subsidy
Only a per (GHG free) kwh subsidy or a subdidy based on kwhs saved through conservation can let the market choose the technology. Otherwise the government is allocating funds according to lobbyist payoffs.
It's just that simple. The complication of various cap and giveaway, auction, dividend, trade, benefits only status quo energy producers and traders.
Even if 100% of the cash raised by permit sales could be returned fairly to each energy consumer, trading of the permits would inflate energy prices still more. But in reality government/corporate partners will soak up a large portion of the permit money.
Give the subsidies now going to big oil, nuclear, coal, and agribizz to consumers who invest in renewable/conservation energy devices, of their own choosing, and a real free market will decide which technology is best. 10 cents per GHG free kwh or kwh saved through conservation would be a good starting point.
http://amazngdrx.blogharbor.com/blog
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Nucbuddy Posted 2:09 am
16 Jun 2008
$80 billion per year subsidy for nukes?
Amazingdrx wrote: Only a per (GHG free) kwh subsidy [...] can let the market choose the technology. [...] 10 cents per GHG free kwh [...] would be a good starting point.
This would provide the current American nuclear-power industry with an $80 billion/year subsidy.
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Wolverine Posted 4:16 am
16 Jun 2008
False Analogies And Wrong Priorities
Sean,
Your analogy about selling and buying milk is totally inapposite. We're talking about greatly reducing emissions that are messing up global climate by polluting our atmosphere, not selling food. A correct analogy would be to the Clean Air Act, which sets limits on pollutants. As Gar Lipow points out above, simply setting limits on pollutants produces better results than convoluted schemes that obviously prioritize something other than emissions reductions.
And the latter is the problem here. Once again, discussion of a major environmental problem has degenerated into an economic discussion. As an environmentalist, I don't give a damn about economics until human society stops destroying the Earth. After humans lower their numbers greatly and begin living in an environmentally friendly manner, then we can discuss economics. Even if you don't care about other species or the land, air, or water for their own sakes, your economically driven models will have everyone eating, drinking, and breathing their money.
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Nucbuddy Posted 4:53 am
16 Jun 2008
Society for the Prevention of Human Creativity
Wolverine wrote: After humans lower their numbers greatly
Unless human-creativity were also lowered, what might prevent human numbers from springing back up?
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Sean Casten Posted 4:57 am
16 Jun 2008
Wolverine
Let's first be clear: there is no conflict between being an environmentalist and being concerned about the economy. To the extent we have a disagreement, it may only be about the degree to which one can actually succeed on both metrics.
To your specific points:
- I'm not arguing for any convoluted scheme that puts limits on anything other than emissions reductions. Indeed, you'll note my criticism of the Lieberman-Warner bill was that it horribly confused the goal of emissions reductions with the pork it chooses to dispense on issues that are only tangentially GHG-related. It's also why I prefer output-based standards, wherein all proceeds and distributions from a carbon policy directly incent or penalize actions that have favorable/unfavorable impacts on our GHG emissions. We both want a GHG pricing scheme in which the only way to pay or get paid is as a direct function of your actions that impact atmospheric GHG concentration. My point is that once we agree on that choice, we are vastly better served to let markets allocate resources and determine the optimal allocation of capital than to stipulate it from on-high.
- The Clean Air Act is a perfect example of this point. As I noted here, The Clean Air Act inadvertently mandates higher CO2 emissions, by virtue of it's input-driven approach and mandate focus. (Indeed, I am rather firmly convinced that any GHG bill that does not also include an overhaul of the CAA may trigger massive litigation, to the extent that the two mandate directionally-opposed behaviors on emitters.) The CAA not only fails to incentivize the lowest-cost approaches to pollution control from a capital perspective, but also mandates technologies - from baghouses to SCRs - that all reduce the fuel efficiency of the plants they are bolted onto, thereby increasing CO2 emissions. I am not at all suggesting that the CAA has not done wonders for criteria pollutants. Rather, its mandate-focus has ensured that the most cost-effective approaches to pollution control are never taken. (Indeed, I have experience in many industrial plants that have consciously chosen not to invest in devices that would increase their fuel efficiency, lest they trigger New Source Review.) We should not throw out the intent of the Clean Air Act, but we should also recognize that it is in fact a textbook example of the unintended adverse economic consequences of mandates.
- Finally, I'd argue quite strongly that you cannot maximize the environmental benefit of any policy if you don't factor in the economics. Let's say you have $1000 to spend on environmental compliance. If you spend that $1000 on technologies that cost $100/ton to reduce CO2, you'll reduce 10 tons. If you spend it on technologies that cost $10/ton, you'll reduce 100 tons. In that simple scenario, ignoring the economic consequences is an implicit decision not to reduce an additional 90 tons of CO2. But the simplistic example is generalizeable in any case where financial resources are finite. In other words, everywhere.
You wrote that "I don't give a damn about economics until human society stops destroying the Earth", and I share your passion. But be careful not to frame the issue as a contest between the economy and the environment - in a land of finite resources, it is morally irresponsible not to make sure we're deploying the lowest-cost pollution control technologies first. A well-structured market-approach will do precisely that, and will surprise us with lower cost reductions than we thought possible. A mandate approach is incapable of such flexibility and - regardless of what one thinks about economic considerations - is environmentally irresponsible.Permalink
Nucbuddy Posted 6:03 am
16 Jun 2008
Logical fallacy of the Original Post
Sean Caston wrote in the OP: There's an implicit assumption in much of the climate policy debate that to meaningfully lower greenhouse gas (GHG) emissions, we need a high price on carbon. The assumption is wrong.
There's an implicit assumption in much of what you, Sean Caston, post on Gristmill that to meaningfully lower atmospheric greenhouse gas (GHG) levels, we need to lower greenhouse gas (GHG) emissions. The assumption is wrong.
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Sean Casten Posted 6:36 am
16 Jun 2008
Please, prove me wrong
Nookbody: What are you waiting for then? If you've got a more profitable way to lower GHG emissions that I know of, deploy it! I take no pride in authorship. I only know that fossil fuel costs money, fossil fuel combustion releases CO2 and therefore reducing fossil fuel combustion saves money and CO2. If you have a more economic way to lower CO2, by all means, do it.
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Nucbuddy Posted 7:11 am
16 Jun 2008
More logical fallacies
Sean Caston wrote: If you've got a more profitable way to lower GHG emissions that I know of, deploy it!
I beg your pardon? In what way could it be profitable for one to lower GHG levels (strangely, you wrote "emissions"; maybe it was a typo)?
Sean Caston wrote: fossil fuel costs money [...] and therefore reducing fossil fuel combustion saves money
en.wikipedia.org/wiki/Syllogism
Syllogisms require two premises. Is fuel-cost the only cost involved in generating electricity from powerplants?
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escrowe Posted 7:31 am
16 Jun 2008
Be proactive
A way is not the only way. The problem with positing and employing one effective solution is that 10 others are instantly forgotten.
How about seeding clouds to change the pH of rainwater, thereby drawing carbon into solution and precipitating it into the ocean and groundwater? There to become seashells and limestone...Although, since there is really so little available carbon in the atmosphere, it would take many years of intense effort to impact levels.
How about growing many large trees and turning them into houses, grand pianos, and upscale piano bars?
Escrowe "Fool me once, blow your head off..."
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escrowe Posted 7:47 am
16 Jun 2008
Sciebce? Bah!
Don't hold your breath waiting for an answer (unless you're trying to reduce CO2 levels). You should recognize the religious nature of this discussion and frame your inquiries accordingly:
Oh Al Gore, Who Art in Washington, Where Shall I Send My Donation?
Be sure to use the properly marked envelopes to track your donations and receive full credit (but sadly, no tax write-off).
The answer to questions 1, 2 and 3 is LITTLE or NONE. Likewise to the following question: What is the contribution of human activity to global climate change?
Escrowe "Fool me once, blow your head off..."
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hapa Posted 7:53 am
16 Jun 2008
trollwatching
it's just better during presidential elections. it's like a little quadrennial renaissance.
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amazingdrx Posted 9:51 am
16 Jun 2008
They are on a mission
Yes hapa, troll central command mobilizes them for battle. It's a holy mission from the troll god.
Any progress must be halted. Progressive change burns their flesh, they must prevent it at all costs. No matter how many alternate internet identities they must occupy to do it.
http://amazngdrx.blogharbor.com/blog
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Wolverine Posted 12:51 pm
16 Jun 2008
Economics & The Earth
Sean,
I see you're getting it from both sides, but you should ignore the anti-environmentalists. Unfortunately, discussions about energy and global warming seem to really bring them out, but I'm sure you have better things to do than reply to meritless posts.
While I understand your position and agree with some of it, your basic assumption is provably false. The conflict between the natural environment and economic concerns is this: All economics are based on exploitation of natural resources. (Economics 101.) Exploitation of natural resources is ecologically destructive. (Ecology 101.) One must therefore choose a side. Sorry, you can't have your cake and eat it, too.
The differences between us are caused by the fact that we literally live in different worlds. I see the world through the natural environment and base decisions on whether to support or oppose something on how it would be impacted. That's why, for example, I oppose wind generators in otherwise natural areas and transmitting electricity across natural areas, even if the electricity is generated by solar panels. And it's why I just want to see strict limits on GHG emissions, not convoluted programs like cap and trade.
The problem with the Clean Air Act (CAA) is that it's not strict enough and is very convoluted, not that it didn't recognize CO2 as a problem decades ago when it was written. As an environmental attorney, I can tell you that the needless complexity of the Clean Air and Water Acts often has me pulling my hair out in frustration over not being able to hold polluters liable. A clear, strict limit on emissions is by far the best way to realize the intended result of lowered emissions. A convoluted program like that of the CAA will just lead to more shenanigans.
But on the other side of the coin, as you admit, the CAA did reduce certain pollutants significantly, so it worked very well in that regard. The unintended consequence of causing more CO2 to be emitted, as you characterize it, could easily be remedied by just adding CO2 limits to the Act.
This is not rocket science. If you want to lower emissions of something, pass a law that sets strict limits on those emissions. All else is trying to have your cake and eat it, too, and you'll end up with neither.
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Sean Casten Posted 11:17 pm
16 Jun 2008
Wolverine
The problem with the CAA goes deeper, and it sails into economic zones. The only way one can comply with the Clean Air Act is by installing a device that will lower the fuel efficiency of the power plant. This is not only bad for CO2, but it's also economically bad, since it drives up the operating cost of the plant. Meanwhile, if a plant chooses to invest in efficiency that will bring about an equivalent reduction in criteria pollution, they will almost certainly trigger New Source Review, forcing them to be held to a higher environmental standard. This makes many industrials openly nervous to do anything that would increase the efficiency of their combustion devices, which has environmental and economic consequences.
Consider the following example. Suppose a facility emits 100 units of NOx, and the CAA mandates that it must come down to 80. Option 1 is to install an SCR on the stack, which will drop the NOx to 79, but impose a 5% parasitic load penalty on the plant, driving up CO2 and operating costs (not to mention capital cost recovery for the SCR.) Option 2 is to double the fuel efficiency of the plant, cutting total fuel use in half, but doing so by boosting combustion temperatures. NOx release per unit of fuel combustion thus increases - let's stipulate that NOx "only" falls by 40% in this case, relative to the 50% reduction in fuel use.
Let's look closely now at Option 2, recalling that we had 100 units of NOx to begin with. On paper, this is clearly the better option, since a 40% reduction takes us down to 60, relative to the 79 we got with SCR. Better still, we have done so by lowering CO2 as well and making the plant more economically viable, with all sorts of ancillary benefits for job creation & the local economy. Unfortunately, the CAA only encourages option 1. First, because as an input based measure (e.g., a part-per-million standard), the 50% reduction in fuel - and associated combustion air - means that the regulated metric of NOx in this case is actually increasing, since fuel+air (the "millions" in the ppm denominator) are falling faster than the NOx (the "parts" in the numerator). Second, because efficiency is not in anyones list of BACT/MACT technologies. And third because - as noted previously - the efficiency upgrade to this plant would trigger NSR and compel the plant to be held to a more recent - and likely higher - NOx standard than they are held to under their current permit. In other words, given the choice between reducing 40 units of NOx or 21, the CAA mandates 21 - and an increase in CO2 emissions.
These numbers are only illustrative, but I have numerous experiences with actual plants that faced variants of this theme and almost uniformly ended up making a choice along the lines of Option 1, in spite of the The net result is that the CAA - by ignoring economics - has failed as an environmental policy as well, in the sense that it has directed resources away from the most environmentally beneficial approaches. And in a world of finite resources, that's a really dumb approach.
Note that you cannot simply meld CO2 into the CAA, since any input-based approach as the CAA is is by design hostile to energy efficiency. And the only cost-effective way to lower CO2 emissions is to burn less fuel. (CO2 is much more like lead than NOx in this case, in the sense that the way you get it out of the exhaust is by taking it out of the fuel, not by putting pollution control on the tailpipe.) What is much more likely is that we will have to overhaul the CAA to build in output-based standards, at which point it will finally preferentially direct resources towards those approaches which are both economically and environmentally beneficial. Because you can have your cake and eat it, at least with respect to CO2.
As a final note, economics is not about exploitation of natural resources. It is simply the study of how humans value and trade resources. It applies just as much to the extraction of oil for money as it does to giving backrubs in the hope of sexual favors. In all cases, the economic optimum (which we rarely realize) is the one in which the aggregate society realizes the maximum collective value per unit cost. It's convenient to think about these costs in terms of dollars, but they could just as easily be normalized to any other unit. But there is nothing innately extractive about that discipline. A world with zero resource extraction can still exchange goods, and that exchange can still be studied through an economic prism.
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joebhed Posted 11:37 pm
16 Jun 2008
Very well said.
I haven't read the other comments yet.
But your point is completely lost on a lot of environmentalists.
This is why the Cap-and-trade is the wrong mechanism to fund the CC solution.
We don't want the highest cost for solving the problems.
We want the lowest cost.
Because we are all consumers of the solutions.
The CBO found the carbon tax to be the vehicle for achieving our CC goals quickest and cheapest.
Now, if any fellow enviros know any good reason why we should be pursuing a slower and more costly mechanism in pursuit of these goals, please say why that is.
Achieving the reductions depends on a lot of technology that is not available yet, and that will be in desperate need of serious volumes of dollars - all of which must ultimately come from consumers and taxpayers.
When it comes to solving the CC problem, cost does matter.
And, if we do not address the cost issue, not only the Repugs but also some Dems will prevent us getting serious CC bills passed any time soon.
We need to get started NOW - actually yesterday.
Carbon Tax Now.
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Max8806 Posted 11:43 pm
16 Jun 2008
CAA inefficiency
Sean, a couple questions. First, how does a scrubber decrease the fuel efficiency of the plant? Also, in your NOx example, you say that NOx pollution is measured in a ppm standard, so that the overall NOx reductions of increasing fuel efficiency aren't recognized. I thought NOx was under a similar cap and trade program, where they just need to purchase credits for aggregate emissions, not meet a certain ppm threshold. Are NOx and SOx regulated differently then? And if so, presumably SOx considerations don't encounter this problem? Or does it?
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Sean Casten Posted 11:50 pm
16 Jun 2008
joebhed
We agree on the ends, but not the means. A carbon tax is probably the worst way to reduce CO2 cheaply, for a couple reasons:
- It's set by the Feds, and always subject to political pressure to change or eliminate. From a business perspective, this makes it extremely flawed as a planning tool, since any long-term bet on my ability to earn revenues (or pay penalties) based on the carbon tax is implicitly a bet on the vagaries of the political cycle. Equity & debt markets don't like those kind of bets, and a carbon tax will therefore slow the release of capital into the energy sector - which needs massive capital reallocation to meaningfully reduce GHG emissions.
- It's a stick without a carrot. It puts a penalty on polluters, but provides no direct incentive to those who would invest in pollution reduction technologies, except to the degree that the tax is passed through fully and uniformly in prices. More on that topic here.
- It doesn't adjust. The great power of a market-driven mechanism is that markets can respond and shift, proactively driving the price down as businesses seek to meet their obligations (as set by the cap) in the most cost-effective way possible. A carbon tax, by contrast is reactive, with the ability to move up or down only in response to backwards looking views of what the economy has done in response to the tax. Taxes, by design are chronically unable to quickly address the inherent fallibility of the mortals who wrote the tax bill. A market-driven structure by contrast will quickly shift resources toward the most cost effective approaches, exposing fallibility of those who bet wrong on a regular basis (See: Bear Stearns.)
So yes, GHG prices need to be low. But a carbon tax is not the way to get there.Permalink
Max8806 Posted 11:55 pm
16 Jun 2008
Cap/Trade vs. Carbon Tax
Joebhed,
There's actually a really good reason to prefer cap/trade vs. carbon tax to deal with GHG pollution. A carbon tax is "more efficient" because there's certainty about compliance costs, so businesses can plan accordingly and prudently. But this certainty about compliance cost comes at the cost of uncertainty about the level of reductions incurred. So its true that a Carbon Tax will achieve reductions more cheaply than a Cap and Trade, its just that you can't know in advance the level of reductions you're gonna get. You just know, whatever you get, you got it for cheaper than setting the cap to that level.
So since you can't have certainty about both compliance costs and level of reductions, neither one is "better," they're for different problems. If 1000 units of pollution is only 1000 times worse than 1, then take a carbon tax. However, if theres a particular threshold you really don't want to get to, than you need a cap/trade, because the point is the point of the program is to ensure you get a certain level of reductions.
Everyone always insists o we need a carbon tax instead, its more efficient. Ok, what will you set it to? Its not just a matter of political haggling, its a real policy deficiency. No one has any idea what you'd need to set the tax to, and how fast it would need to increase over time, to achieve a 70-80% reduction. And even if you took political haggling completely out of the picture, the way it would be done (remember in a perfect world, without political haggling) would be by using a CGE model to chart the optimum course of GHG reductions and set the CO2 tax to that cost trend. This is what Peter Orszag, director of the CBO told Congress, when he testified in favor of a Carbon Tax.
I'm not even going to get into now how problematic this is, because of how unreliable those models are. You really can't reliably model the rate of technological innovation in an industry that basically doesn't even exist yet, at least not in any comparable way to how it would under a Carbon price. But that's what a Carbon tax relies on, if you want any indication at all of getting near a certain level of reductions. Its so fashionable to rip on cap/trade and advocate a carbon tax because its "more efficient." People don't even stop to think that that economic efficiency comes at the cost of the whole point of the program in the first place - ensuring a necessary level of reductions in a certain defined time frame.
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Sean Casten Posted 12:02 am
17 Jun 2008
Max
Any end of pipe control imposes parasitic loads for the fans, pumps and other mechanical bits and pieces necessary to pull the pollutant out of the exhaust. Scrubbers, electrostatic precipitators, baghouses, SCR... all require additional electric loads to run the equipment necessary to blow air, shake bags, remove collected soot, etc. Colleagues of mine in the utility industry have told me that the cost to bring a grandfathered coal plant into full compliance with the CAA (e.g., as would be required by those plants affected by the recent CAIR and CAMR rulings) will impose overall efficiency hits on those power plants of 5 - 10%. When you look at the volume of coal plants affected, this can be as much as a 1% increase in total US electricity consumption, or almost a year's worth of load growth - and it's all phantom load, and all at coal plants. So we could burn a lot more coal in the name of environmental compliance in upcoming years. Bizarro.
RE: SOx and NOx: any standard that is on a ppm or even to some degree on a ton/year basis runs into this problem. The only way around it is to regulate on an output basis, such that you must achieve X tons/MWh of useful output (or MMBtu, as the case may be). There are states that have done this, although the feds are lagging behind. Texas was one of the first states to install an output based standard (I believe for SOx and NOx, but my memory could be fuzzy.) Other states have since followed, but sporadically, and often rather goofily. New York, for example, set output standards by technology, such that an engine has a looser threshold than a microturbine. Dumb. But the key to such an approach is that it allows emitters to affect both sides of the fraction, essentially using efficiency as a pollution control device.
Output-based standards are coming - most folks I talk to in DC and in the states will admit privately that the CAA is busted, but that they are politically reluctant to open it up, lest lots of ill intent creep under the rug. Which is politically legitimate, but it has to happen eventually, and probably once we do get close to passing a GHG bill, to avoid the conflict noted above. (A point that McCain actually realized several years ago when he started talking about so-called "4P" regulation that would include all 4 big pollutants in a single climate bill.)
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Max8806 Posted 12:13 am
17 Jun 2008
Implicit Output Based Requirement
But if you have a strict 'pay per ton emitted' as opposed to 'pay per ppm of pollutant,' doesn't that also do the trick? Because then, if you make your plant more fuel efficient, you decrease the total tons emitted, without decreasing output, which is a decrease in pollution per MWh/mmBTU. And aren't SOx (and I thought NOx, maybe not...) regulated in this way under CAA?
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Sean Casten Posted 12:27 am
17 Jun 2008
Max - sort of
But NSR complicates, because if you make an investment that increases the efficiency of your process, you will almost invariably get branded as a major modification and have to re-file your permit. You also have the problem that as a bi-modal, pass/fail test, the CAA - even on a $/ton metric - doesn't provide any greater incentive to A students than to C students. (As compared to a system with tradeable permits, wherein the A student gets a bit more cash for their differential goodness.)
An example might illustrate: we are currently working on a project that would pull waste heat off the back of a charcoal manufacturing plant. The plant was built long enough ago that their permit didn't require them to install a baghouse. But they have lots of hot gas coming off the back that we could make power out of. The big concern that has been raised at the plant is that if we install waste heat recovery boilers on the back, to generate fuel-free power, that might trigger NSR and force them to also install a baghouse. Economically, the project pencils without a baghouse. Doesn't pencil with one. And so if we can't get some sort of an NSR dispensation from the local DEP, the upshot is that we will not make fuel-free power, and the plant will continue to buy fuel-intensive power off the grid. All because of environmental policy!
But note that the issue here isn't solved with a ton/year reg because the total tons in this case are unchanged at the plant (although making fuel-free power would necessarily reduce SOx, NOx and particulate emissions off-premises by compelling some central station to dial back - but those benefits are not reflected in a CAA-type permitting process). Since the tons don't change, NSR ends up trumping. By contrast, if you go to an output approach, the plant ends up coming out better on it's permit, and so the whole issue is avoided - not to mention factoring in, albeit indirectly, the beyond-battery-limits emissions reductions associated with on-site efficiency.
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Max8806 Posted 12:46 am
17 Jun 2008
Costs and Revenues must both be considered
Sean, you wrote:
"But note that the issue here isn't solved with a ton/year reg because the total tons in this case are unchanged at the plant (although making fuel-free power would necessarily reduce SOx, NOx and particulate emissions off-premises by compelling some central station to dial back - but those benefits are not reflected in a CAA-type permitting process)."
If the tons of emissions are unchanged but the plant gets to create far more of a commodity that it can sell for extra dollars, without having to purchase extra permits (as it normally would by burning more fuel), the plant is in fact capturing that benefit. Its not just accruing to society for less SOx and NOx elsewhere. The plant's decision takes into account marginal costs and marginal revenues to determine whether to go forward. So even if it doesn't directly reduce the need for permits, if it increases revenue without a comparable increase in liability for needing permits, it still works out.
Now this may all get messed up by NSR. That's an interesting point you bring up that I wasn't aware of, and I think a very valid one. But I see this as separate from the issue of whether a permit liability of total tons is inferior to one based on tons per power output. In fact, I think to the extent that it is different, it may cede some of the economic neutrality by encouraging further production over end use efficiency. Sorta reminds me of the 'bonus allowances' for deploying CCS in Liberman-Warner. It was sold as needing to incentivize CCS. But just the ability to create extra electricity without requiring new permits is a real economic incentive. (Although one might argue they're willing to depart from neutrality with CCS b/c of its importance in light of our massive coal system/infrastructure, but I don't see that sort of argument in play here).
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Sean Casten Posted 1:06 am
17 Jun 2008
Max - and beyond battery limits
There is an additional issue beyond NSR. Namely, that you have to factor in beyond-battery limits impacts or else efficient on-site generation (of heat or power) ends up creating a benefit that isn't otherwise captures. Output-based standards do that. Any other approach effectively transfers that benefit to someone upstream who doesn't deserve it. (e.g., if on-site gen causes an upstream coal plant to dial back, they will emit fewer tons/year of emissions. But they shouldn't receive the benefit for that action - it should accrue to the person who put the efficient plant in in the first place.)
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Max8806 Posted 1:42 am
17 Jun 2008
Sean,
Then how again is a 'pay per ton' not an implicit output based standard? If you add extra generation without needing extra permits, you are improving the output based standard of pollution per MWh. Sorry if I'm missing something really obvious. But you keep grouping 'pay per ton' with the ppm standard, and opposing those two in favor of an output based standard. But for the reason above it seems to me like a neutral pay per ton is much closer (if not identical) to an output based standard, and much different than the ppm one. So I don't get the way you classify these three.
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Sean Casten Posted 1:59 am
17 Jun 2008
Max
Good questions, and it's subtle, but easiest explained with an example. Let's use CO2, only because the causality is cleaner (but the logic below holds for any other pollutant as well.)
Suppose a facility has an on-site boiler, emitting a certain amount of CO2, and they want to replace the boiler with a cogen plant, producing both heat and power. We'll stipulate that they do a really good job of designing that cogen plant, hitting 80% overall efficiency. As they generate their energy with that cogen plant, they will pull less power off the grid, which otherwise would have been made at 33% efficiency (US average). Total MWh demand hasn't changed - it's just that we've replaced an inefficient central generator with an efficient local generator. Thus, we are now releasing less CO2 per MWh of electricity and - since MWh of electricity consumption hasn't changed - we've reduced global GHG emissions.
On an output basis, this is all perfectly captured and incentivized. But on a ton/year basis, we get pinched. The facility installing the cogen unit is locally going to release more tons/year (since they're now making heat and power as opposed to just heat) even as their actions are causing GHG emissions to fall globally. So directionally, they are treated as an incremental source. Meanwhile, the local plant that dials back has less demand for their electricity, which causes them to burn less fuel and release less CO2. So they now find it easier to stay in compliance with their permit, in spite of the fact that their tons/MWh is essentially the same. (And in spite of the fact that the change that happened was entirely beyond their reasonable control.)
So while at a macro level the ton/year basis works, at the level of the specific site that is permitted, it can actually end up creating financial benefits and penalties to exactly the wrong parties.
Note also that the math is not unique to CHP - it comes into play in any instance where a combustion source is shifted from one permitted entity to another. If you replaced an electric heater with a gas-fired heater, you'd have exactly the same problem - or any number of other possibilities.
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joebhed Posted 2:14 am
17 Jun 2008
Sorry for the interruption, Sean
OK, so we agree to disagree on the means.
I pointed out the CBO found the carbon tax to be the most `efficient' (quicker and cheaper) means of achieving the goals.
Maybe you mean something different than "cheaper" when you say lower allowance prices.
You take issue with the "political" nature of the tax.
On the one hand you say it is "extremely flawed" `subject to political whim'.
On the other, you say, it doesn't adjust.
Of course, it will be set to adjust, and it will be further adjustable over time.
I assume you have read the CBO study:
"Relative to a cap-and-trade program with pre-specified
emission limits each year, a steadily rising tax could better
accommodate cost fluctuations while simultaneously
achieving a long-term target for emissions.
Such a tax would provide firms with an incentive to undertake more
emission reductions when the cost of doing so was relatively
low, and allow them to reduce emissions less when
the cost of doing so was particularly high.
In contrast, an inflexible cap-and-trade program would require that
annual caps were met regardless of the cost, thereby
failing to take advantage of low-cost opportunities to cut
more emissions than were required by the cap and failing
to provide firms with leeway in years when costs were
higher."
So, I don't get your point.
Unless, it's just that we don't trust the government.
You say it is a stick without a carrot.
I don't understand.
There's a flow of revenues.
Consider the revenue from the Auction option.
Consider the carbon tax.
Same thing. Same size carrot.
What do we do with the revenue?
Incentivize.
"The most efficient approaches to reducing emissions of CO2 involve giving businesses and
households an economic incentive for such reductions. Such an incentive could be provided
in various ways, including a tax on emissions."
"This Congressional Budget Office (CBO) study--prepared at the request of the Chairman of the Senate Committee on Energy and Natural Resources--compares those policy options on the basis of three key criteria: their potential to reduce emissions efficiently, to be implemented with relatively low administrative costs, and to create incentives for emission reductions that are consistent with incentives in other countries."
"The policy options described above differ in their potential
to reduce emissions efficiently, to be implemented
with relatively low administrative costs, and to create
incentives for emission reductions that are consistent
with incentives in other countries. CBO draws the following
conclusions:
A tax on emissions would be the most efficient
incentive-based option for reducing emissions and
could be relatively easy to implement."
So, again, you take issue with the political nature of the tax.
I take issue with the greed-driven nature(highest ROI now) of the market traders who would hold the carbon futures and trade them UP over the next forty years.
I definitely prefer to have the flexibility of watching over the annual review of the level of the carbon tax being set as part of the ongoing "political" business of the country, in which we ALL participate.
That is, as opposed to having the invisible hand of the free-marketeers who have a proven track record of being willing to manipulate any market and any commodity for the good of those doing the betting.
I recognize that debt-and equity markets LOVE those kinds of bets, especially when thy have a forty year market to bet them into. This is precisely why we should never allow those marketers to have the power to set the price of the American people achieving their public policy goals.
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Sean Casten Posted 2:40 am
17 Jun 2008
Joebhed
There are no shortage of academics and government types (including the CBO) who insist that a carbon tax and a cap & trade can be set up to be mathematically equivalent. And in the narrow confines of a spreadsheet, that's true. Unfortunately, they are wildly different in the real world when capital allocation decisions are made. The CBO has the luxury of not having to actually put their money where their mouth is, and while I'm not suggesting they aren't trying to do the right thing, I put very little stock in how they say that the economy will respond to various price shocks. I put a lot more in the degree to which I can convince my board to make an investment based on carbon taxes that will reduce carbon - and the answer is not much.
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Max8806 Posted 3:38 am
17 Jun 2008
Joebhed,
Assuming you agree that the point of any carbon policy is to achieve 80% reductions by 2050, how would you propose doing that with a carbon tax? How much would the tax be? How fast would it rise? Or, to avoid putting you on the spot, just tell me how you would determine those? Remember if you don't have a perfect ironclad method upfront, and have to occasionally tweak the tax to respond to the rate of tech improvements (to make sure its not too high or too low) you've introduced the same uncertainty about the future price of Carbon that you were trying to avoid with a cap/trade. So how would you put us on a path to 80% reductions over the next 40 years today?
Also, you quote the CBO report as saying
"In contrast, an inflexible cap-and-trade program would require that annual caps were met regardless of the cost, thereby failing to take advantage of low-cost opportunities to cut more emissions than were required by the cap and failing to provide firms with leeway in years when costs were higher."
Note "inflexible cap and trade." Both of these issues can easily be solved with banking of allowances and auction price floors. The CBO report beats up a totally inflexible straw man Cap/Trade unlike anything thats even been proposed, much less seriously considered for passage.
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Max8806 Posted 3:55 am
17 Jun 2008
Sean,
I realize you probably have better things to do than keep refining this point for me, so perhaps we'll have to agree to disagree. I feel compelled though to point out something that keeps jumping out as not being addressed in your analysis, though I bear in mind that you could very well be right and I could be wrong. You write:
"On an output basis, this is all perfectly captured and incentivized. But on a ton/year basis, we get pinched. The facility installing the cogen unit is locally going to release more tons/year (since they're now making heat and power as opposed to just heat) even as their actions are causing GHG emissions to fall globally. So directionally, they are treated as an incremental source. Meanwhile, the local plant that dials back has less demand for their electricity, which causes them to burn less fuel and release less CO2. So they now find it easier to stay in compliance with their permit, in spite of the fact that their tons/MWh is essentially the same."
Again with the revenue point. Even though they're an incremental source, if they get more incremental (additional) production, whether heat or power (anything they can use/sell), then they have still benefited from the efficiency. When a cap/trade makes a source buy a permit for each ton of emissions (CO2, NOx, w/e), you can consider those permits as basically just a factor cost like any other. A wind turbine plant that finds a way to build wind turbines with less steel per turbine profits from that efficiency, even if they do it by installing a bigger plant that actually forces them to pay more for (more) steel. Because they take in even more revenue. So when you add 'carbon permits' to the list of materials you need to build a widget, turbine, or kwh, then the gains of efficiency from carbon reduction (using permits more efficiently, like steel in the previous example) are captured as well.
And your example that the Coal Plant far away dials back production and finds it 'easier to stay within their permit' I think is misplaced. The coal plant is not gaining from the CHP's efficiency, its losing market share! "Dialing back" means selling less of its product, because it can no longer compete profitably with the CHP, precisely because the CHP's efficiency gains have been internalized. There's no 'staying within their permit' issue for the coal plant, because there's no firm-level quota. If the coal plant could still compete as well in selling its product, it could buy another permit- just like a turbine plant will buy another ton of steel if it could profitably turn it into something to sell. I think your chain of causation of the CHP powering up and the coal plant powers down (when they're selling the same good basically) proves exactly what I've been saying.
Does any of this seem on target to you?
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Sean Casten Posted 4:59 am
17 Jun 2008
Max
There's no question that there are other economic considerations that come into play besides carbon. The question is does the carbon policy incent or dis-incent behaviors on the margin? After all, solar has lower operating costs than any carbon-containing fuel source, but no one is arguing that this fuel-specific calculus means that the solar plant doesn't need a carbon credit.
Thus, the issue with the ton/year number as outlined above is that - on the margin of a carbon policy - it imposes differential permitting costs on the facility doing the right thing and differential permitting savings on the facility doing the wrong thing. That's why you need an output standard - not because the the GHG revenue is the only factor driving economics, but becuase if a GHG policy doesn't provide a differential (albeit, not an exclusive) incentive to lower GHG emissions, it's a lousy GHG policy.
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Max8806 Posted 5:17 am
17 Jun 2008
Current Cap/Trade Proposals
Sean, So you think the kind of cap/trade being considered now, with plants being required to buy credits to cover their emissions, fall into this trap and disincentivize certain efficiencies?
You would instead have a permit requirement per output? Would you phrase this as per $ output? If you did it by specific product output like kwh's, you run the risk of leaving different requirements for different sectors, like the earlier NY example you called dumb. How exactly do you implement this plan?
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Wolverine Posted 5:19 am
17 Jun 2008
CAA & Economic Models
Sean,
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David Mack Posted 5:55 am
17 Jun 2008
Joebhed
You use the CBO's study to support a carbon tax vs. Sean's output based standards. From the little I know about the CBO study, they seem to have only compared carbon tax and cap and trade and concluded carbon tax was most economically efficient of a small number of options. Had the CBO considered output based standards, their conclusions would probably be different.
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BILL HANNAHAN Posted 6:39 am
17 Jun 2008
Interesting discussion
" On an output basis, this is all perfectly captured and incentivized. But on a ton/year basis, we get pinched. The facility installing the cogen unit is locally going to release more tons/year (since they're now making heat and power as opposed to just heat) even as their actions are causing GHG emissions to fall globally. So directionally, they are treated as an incremental source. "
Adding a cogen plant will increase local fuel consumption and emissions. However it will also reduce the plants electric bill by 5 to 10¢ per kWh, which is much more than the cost of fuel consumed to make that power, which in turn is much more than the fee on the emissions produced by making that power locally. So even though the emissions fee will increase for dumping more harmful material into the environment locally, there is still a huge overall incentive to build the cogen plant.
" Assuming you agree that the point of any carbon policy is to achieve 80% reductions by 2050, how would you propose doing that with a carbon tax? "
The point of any carbon policy should be to maximize quality of life. If an 80% reduction causes far more suffering and death than 50% reduction, because of its high cost, it is bad policy.
That's why the fee on the dumping of toxic waste into the atmosphere should be set equal to our best estimate of the cost of the damage that it causes.
" Where we totally part ways is that I think electricity use should be limited, as it's extremely environmentally harmful to the Earth and other species, so my model of strict output limits with no exceptions probably doesn't work for someone like you who has other priorities like the economy. "
How about priorities like human suffering, starvation, disease? Are you opposed to non emitting sources of electricity? If cold fusion worked, would that be a disaster?
" But my model would produce the best results, the economy be damned "
You may think this is a trick question but I'm really serious, Want would your vision of the perfect world be like?
Before the advent of technology, population was controlled by starvation, disease, predation and exposure. Do you really want to go back to that kind of world?
Humans developed technology to suppress those four mechanisms. It has been very successful, and human population is exploding out of control. We need to find ethical and humane approaches to replace those mechanisms.
Abandoning technology and going back to the natural world is not something I would wish on the human race.
Things Everybody Should Know About Energy
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Sean Casten Posted 7:25 am
17 Jun 2008
Max
Check out my post on output based standards to see how the details work here.
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Max8806 Posted 8:42 am
17 Jun 2008
Bill - Tipping Points
You wrote:
"The point of any carbon policy should be to maximize quality of life. If an 80% reduction causes far more suffering and death than 50% reduction, because of its high cost, it is bad policy.
That's why the fee on the dumping of toxic waste into the atmosphere should be set equal to our best estimate of the cost of the damage that it causes."
You're definitely right that the point is to maximize quality of life (I won't take up Wolverine's objections here). I think you don't take into account though how the notion of a tipping point affects our "best estimate of the cost of the damage that it [CO2] causes." An 80% reduction may be the better path than a 50% reduction, even if it costs 3 times as much, if it prevents 10x as much damage in global climate change. This is the nature of having a tipping point you need to avoid. And I think there's a pretty general consensus that climate change presents such a challenge, where we're trying to get to a very specific PPM in the atmosphere to avoid catastrophe.
A tax would definitely be more efficient for most criteria pollutants, where the damage incurred from 100 tons is basically 100 times the damage incurred by 1 ton. But when you have GHG concentrations where 100X is wayyy more dangerous than 100 times X if you cross that tipping point, the Carbon Tax argument doesn't pan out.
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joebhed Posted 11:54 am
17 Jun 2008
This is to maxx8806 at 10:55.
C&t vs, Carbon tax results.
There is no way of knowing the future.
Whether by setting a cap, or by setting a tax, or by betting based on output standards, the achievement of the goals CANNOT be guaranteed.
With a Cap/Trade program it is very easy to NOT be achieving the CAP outputs, while paying an exorbitant price to pollute. Technology would need to be available to be invested in by those with a dog in the fight.
Without carbon sequestration, coal plants will continue to operate for the simple reason that Americans are intolerant of power outages. A couple of years out in the "trading" market and those coal plant producers will pay dearly for the allowances they will need to buy, but there will be no option. And the consumers of those kWh produced by those plants will pay dearly for their power.
Can you guarantee that will not happen? Can you insure it?
Ironically, you use this argument against the carbon tax, when it is true for all other options as well.
So, any path toward our carbon goals will be fraught with uncertainty, just like a lot of other things in this world. You are not sacrificing "the whole point of the program" by any stretch of the imagination.
If you want to write the insurance policy for the certainty you describe, "ensuring a necessary level of reductions in a certain defined time frame", then I will be your first buyer.
But it is way over-simplistic to imply that any choice of policy options is going to guarantee your desired goals.
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joebhed Posted 12:38 pm
17 Jun 2008
To maxx at 2;55
You start out asking for my carbon tax level.
The CBO study uses an estimate of the marginal benefit of the emissions reduction, which should be equal to the cost of the allowance, at any given point in time.
That's good enough for me.
What will you get for an auction price in year one?
Same thing.
Oh, you don't know what the price will be?
Me, neither.
Importantly, the tax level is capable of being decreased if technology is not available to meet the goals.
It is capable of being increased if the options for reduction are right there on the shelf, or in the carbon marketplace like the recyclers.
Banking can occur at any level of this discussion.
What it is not, is certain.
There is no "certain ironclad method" to any of this.
The path to 80 percent reductions over 40 years begins with but a single step.
Massive investments in energy efficiency at all levels.
Now, I am sorry if I misled you with my quote from the CBO study, maxx.
So, just to be clear, the options that were analyzed were:
Carbon Dioxide Tax
Cap With Safety Valve and Either Banking or a Price Floor
Cap With Banking and Either a Circuit Breaker or Managed Borrowing
Inflexible Cap
It can be seen that there was no straw man subterfuge either by the CBO or me.
And, contrary to your comment, they analyzed every option that I have yet seen in any of the bills. Not that more work doesn't need doing.
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joebhed Posted 12:52 pm
17 Jun 2008
to David Mack at 4:55 PM
You seem to be asking ME for an answer to why the CBO did not compare the policy option of Sean's "output-based standard"(OBS) to the ones I describe below.
Carbon Dioxide Tax
Cap With Safety Valve and Either Banking or a Price Floor
Cap With Banking and Either a Circuit Breaker or Managed Borrowing
Inflexible Cap
The CBO study was prepared in response to the request of the Chair of the Senate Committee on Energy and Natural Resources, so I guess I can give him a call and ask for an expansion of the analysis.
Below are the comments on the criteria used in the CBO evaluation:
"In this study, the Congressional Budget Office (CBO) compares these incentive-based approaches, focusing on three key criteria:
A Efficiency in maintaining a balance between the uncertain benefits and costs of reducing CO2emissions,
B Ease or difficulty of implementation, and
C Possible interactions with other countries' policies for curbing CO2--that is, the potential to ensure that U.S. and foreign policies produce similar incentives to cut emissions inside and outside the United States.
It can be seen that their approach is not certainty, but to maintain a balance between uncertain benefits and uncertain costs.
Good enough for government work, and good enough for me.
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David Mack Posted 1:43 pm
17 Jun 2008
Joebhed
I'm just questioning your assertion that a carbon tax is the cheapest way to reduce greenhouse gases. I don't expect you to know why OBS were not included in their study. I largely agree with the CBO report that a tax is better than cap and trade (modified or not). However, I've accepted Sean's argument that OBS are even better.
To minimize the economic impact of GHG policy, the price of delivered energy must be kept as low as possible. In order to accomplish this, there need to be not only disincentives for "dirty" energy but efficient incentives for "clean" energy. A carbon tax that has only sticks but no carrots will lead to an underinvestment in clean energy and rising energy costs. I don't trust the government in subsidizing its favored clean energy technologies. I'd prefer a market based approach that Sean advocates. If the carbon tax revenue is used to pay for a tax cut, it would be a social policy investment, which has merit, but does not lead to lower GHG's.
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Nucbuddy Posted 3:14 pm
17 Jun 2008
Reply to this is just a click away
Joebhed wrote: This is to maxx8806 at 10:55.
...Then click the reply to this link located at the bottom of that message. Click the parent link below my username to be taken to the message that the present message is in reply-to.
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Max8806 Posted 9:53 pm
17 Jun 2008
Joebhed,
First, you can ensure that the cap will be met if you design it right. The penalty for emitting a ton of CO2 without submitting a permit for it is literally defined as the 3x the price for a permit. So no one's gonna choose to exceed it. This can be undermined by 1)poor design, such that "offsets" are used that aren't actually additional, meaning the economy is "meeting the cap" without actually implementing reductions; or 2) if the legislation is repealed, amended, etc.
1) is obviously not an inherent flaw with cap/trade, but can be solved just by not including dubious offsets. 2) is an inherent flaw in any legislation, but I think it is reasonable to say is not any more likely from a well designed cap than a CO2 tax. Which leads me to your next point:
"Importantly, the tax level is capable of being decreased if technology is not available to meet the goals.
It is capable of being increased if the options for reduction are right there on the shelf, or in the carbon marketplace like the recyclers."
The entire efficiency benefit from the CO2 is based on the certainty of compliance cost. Its that a business theoretically knows in 2012 what his emissions will cost him in 2040. If you are open to changing that over time, then you can no longer tout the efficiency of the CO2 tax because you have ceded it. If you are not open to changing it over time than you very likely set it too high, too low, or made it ratchet up too fast or too slow.
Finally, on determining the level of the CO2 tax, you write:
"The CBO study uses an estimate of the marginal benefit of the emissions reduction, which should be equal to the cost of the allowance, at any given point in time.
That's good enough for me."
But saying you'd set it to where Marginal Benefit = Marginal Cost is the obvious part. The question is how you determine that level. And practically it happens by modeling the optimum price path, which is dependent on a lot of variables, the most important one being the rate of technological improvement. In an industry that basically doesn't exist yet. Not in any meaningful way compared to what a serious carbon price would create. So any model like that is inherently flawed. You're stuck with the "wrong" price (or rate of increase), or you have to change tweak it occasionally which destroys the certainty of cost of compliance and so undermines the purported efficiency.
That's why instead of the government trying to determine that price, it should leave it to the market. True, that eventual market price will get us fewer reductions than if we were omniscient enough to create the perfect model upfront, but that's impossible.
Just to close with a practical example. This model would be done by the EIA. The EIA did a model for Lieberman-Warner that would be basically the kind of model we're talking about here. The 'Core' case projected 240 new nuclear plants going up in 10 years. Why? They didn't account for any number of bottlenecks, it was done strictly on theoretical cost numbers (which were also set too low). Sure, we can all probably agree that's pretty unrealistic, but how do you model regulatory bottlenecks, industry supply chain bottlenecks? This depends on everything from where and when a new heavy reactor parts manufacturer is established, to how long the NRC will take to license the South African PBMR. None of which the EIA (or anyone) can predict.
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Sean Casten Posted 10:41 pm
17 Jun 2008
Tax vs. C&T
Good thread, but I think it's still missing a critical point. For a carbon price to induce a desired change in behavior, you need some degree of price certainty for both buyers and sellers. A carbon tax provides certainty to buyers (e.g., emitters), at least within the confines of a political process. But it provides no certainty to sellers, nor even a direct path to market. (Someone who reduces a ton of CO2 in a carbon tax regime realizes revenue only to the extent that their competitors product fully priced in the carbon tax, such that they can pocket the differential profit.)
A cap & trade on its face doesn't appear to provide such certainty either, since a declining cap (and ideally a declining price, per my initial post) appear to make it hard to guess long term prices. But watch what happens: both buyers and sellers want long term certainty, and so in a cap & trade model where bilateral deals are possible - which is most definitely not what Lieberman-Warner would have done, although that just speaks to what a lousy C&T it was - both buyers and sellers have an incentive to provide price certainty to one another.
So let's say we've got a coal plant and a solar plant. The former is a buyer, the latter is a seller. Neither facility has certainty about the long term average price of carbon, but both would like certainty. Structured properly, those two parties simply agree on a deal (say, "I'll sell you all my carbon reduction credits for the next 10 years for $15/ton". They add in the appropriate audit and papertrail to meet the legislative requirements of the cap and presto: we've got price certainty for both parties, CO2 reduction and behaviors appropriately rewarded & penalized. Maybe they only sell 70% of the solar plants available tons to give themselves a little bit of room to accomodate a falling cap. Maybe the coal plant leaves a fraction of their cap obligations to be met through some other mechanism, either financial or physical.
But note that this approach is impossible in a carbon tax regime, which is the CTs biggest shortcoming: it provides no direct incentive to invest in CO2 reducing technologies.
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joebhed Posted 11:44 am
18 Jun 2008
To david mack at 12:43am.
Get some sleep!
I can see that you have accepted Sean's OBS arguments.
I am definitely not there yet.
But I try to read each post open-mindedly.
And I apologize if sometimes my comments seem off-key.
There are a couple of threads to this thread.
Distrust of government solutions.
Certainty is the only acceptable option.
The market is imperfectly infallible.
At least compared to government.
Today, those of us who want to posit public policy solutions for public policy problems have our hands full.
Energy-wise, I am sure y'all have heard of the REA and BPA and the FPA, etc.
I am a former electric co-op and municipal utility manager/ceo.
I have seen, and done, what is collectively possible when good people work together to good ends.
I have worked on behalf of consumers for a good part of my life trying to do exactly the things that Sean is doing, and wants to do in the carbon constrained future.
So I am not afraid of advocating solutions that involve the PEOPLE of this country, acting through their government.
You guys are rallying around something called "efficient incentives for clean energy".
Well, so am I.
As such, your criticism of the carbon tax as a "stick without a carrot" is meaningless to me.
It IS a fact that nobody has floated a bill that includes the carbon tax and a package of socially responsible "efficient incentives for clean energy".
But, I am.
What are we going to do with the tax money?
It seems obvious the answer is a revolving-loan/grant fund, a.k.a. incentives, for clean energy.
Here is where thee seems to be a disconnect.
Something about a tax cut?????
I am not advocating a carbon tax with a stick but no carrots.
THAT is the straw man here.
The mainstream bills out there right now utilize a revenue stream funded by an auction of carbon allowances, or what I call pollution permits.
They, in turn, use that revenue stream to fund the triplicate of :
Appropriate Income-restoration
Massive research in Technology Solutions
An Appropriate-technology Investment Bank.
If anyone thinks these are not what is needed to make progress on a carbon-balancing energy technology, then say WHY.
I think they are appropriate - and represent the manifestation of my "revolving loan/grant fund for clean energy.
Only, I am funding it with the carbon tax that the PEOPLE are paying, and I am developing solutions for those same people, at the lowest cost.
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joebhed Posted 7:35 am
19 Jun 2008
To maxx at 8:53
You start by saying that there CAN be certainty in achieving the CAP goals, IF we start with an undefined, yet infallible, setting of the CAP.
A business will "theoretically" know in 2012 what its costs will be thirty years later?
Ummmmm.
Excuse me?
Wanna bet?
Are you hiding everything behind "theoretically"?
You've seen the bills out there.
Are any of them acceptable to your definition of proper design?
I hope not.
You then posit that the proposed penalties ensure that power producers will not "choose" to fail to meet their obligations.
Ever heard of RPS?
They are doubling the cost of electricity in some areas.
Renewable projects do not get built because of mandates.(CAPs and penalties).
"Things" get in the way.
Like unavailable technology.
Like NIMBYs.
Like regulatory uncertainty.
The utilities don't "choose" to avoid renewables.
But, there are none getting built.
Again, the cost of the policy failure DOUBLES the price of power supply to consumers.
This is what I want to avoid with the, yes, flexibility, of a carbon tax.
Just like you say, there is no technology yet for a lot of things we're going to need.
Every one of your negative observations about the carbon tax apply equally, if not more so, in spades, to a C&T solution.
What happens to the value of the pollution permit when those technology, or material supply bottlenecks show up in five years?
Do the free marketers give that old knife in your back a little twist, just to make sure you get the message?
Unless carbon sequestration has a breakthrough this week, it will not be available before 2020 on power plants, even for retrofit.
Without CCS, coal plants would either have to shut down or to pay 3X the price for the allowance.
Which is what price, maxx?
You state we don't have the correct formulas for modeling the answer to that question when it applies to the carbon tax.
Again, in spades for the C&T.
Nobody knows.
It depends.
Same with the carbon tax.
You keep implying that without knowing RIGHT HERE AND NOW what the annual carbon tax rate will be, my position is fatally flawed somehow.
But the C&Ters can let the market decide, and whatever it is, is fine.
Well, I remember Enron.
And I remember Bear Stearns.
And I remember what I paid for gas last evening.
Screw the market.
Or the market screws you.
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Max8806 Posted 8:32 am
19 Jun 2008
Joebhed,
You write:
"You start by saying that there CAN be certainty in achieving the CAP goals, IF we start with an undefined, yet infallible, setting of the CAP.
A business will "theoretically" know in 2012 what its costs will be thirty years later?
Ummmmm.
Excuse me?
Wanna bet?"
That certainty I write about that you're referring to is actually for the Carbon Tax, not the C/T. I'm just pointing out that since the efficiency gains from a carbon tax are due to the certainty of cost of compliance 30 years hence, if you're willing to change the CO2 tax in the interim (to ensure flexibility or achieving a certain level of reductions), than you no longer have certainty about cost of compliance and you no longer have the added efficiency. I looked back over what I wrote and I see I wrote "the benefit of CO2 is certainty..." so I left out 'tax' in CO2 tax. I would have still thought it would be clear in context, because I say CO2 tax the next sentence. But to the extent it was unclear, sorry about that.
You compare this to a RPS doubling cost. I would point out that this is a cap/trade is a bit less prone to running into those cost problems as an RPS, because theres more ways to meet a cap than just a certain prescribed set of actions, which is all RPS allows. If you can't meet an RPS with wind/solar/w/e you're screwed. With a cap, you can use end use efficiency, supply side efficiency (cogeneration/chp), or anything else that no one's thought of yet. Will energy prices still rise sharply for coal-heavy regions? Probably yes, certainly at least in the short term. I won't run away from that. But 1) this is partly because they currently enjoy way lower rates than other parts of the country that have a cleaner energy mix, and 2) a Carbon Tax doesn't solve this unless you set the tax sufficiently low as to not overly disadvantage coal. Which means low enough to not make serious reductions.
You then write:
"You state we don't have the correct formulas for modeling the answer to that question when it applies to the carbon tax.
Again, in spades for the C&T.
Nobody knows."
You're right. Nobody knows. But C&T is upfront about it, no one claims certainty about costs of compliance for C&T (I keep highlighting this by mentioning that the added efficiency to a tax IS the certainty). Whereas CO2 tax enthusiasts claim the efficiency gains of it - which are rooted in the cost of compliance certainty - and yet insist in can be designed in a way to ALSO achieve a certain level of reductions. My point is you can't have it both ways.
C&T:
-Certain emissions reductions level
-Uncertain cost of compliance/reductions
CO2 Tax:
-Certain cost of compliance
-Uncertain level of reductions
So we're prioritizing different things here. I am quite open that there are 1) uncertain costs of compliance for a cap, and 2) that the cost incurred will have gotten us less reductions than if we set the CO2 tax to that price level over time.
BUT, you can't ever know that in advance to get the CO2 to achieve any level of certainty about reductions targets without compromising the efficiency of it.
So I prioritize getting 80% reductions by a certain time, even though I admit it may cost 3 times as much as getting half the reductions would. And your plan ensures spending less per emissions reduced, but you can't come anywhere near my plan's level of certainty that you'd actually get to 80%. Again unless you were willing to undermine the very certainty, and so efficiency, that made you choose your plan in the first place.
Neither have us have the "wrong" plan, we're just prioritizing different things. That being said, given the nature of climate change, where we have a tipping point we're trying to avoid, it seems that when you can't have certainty about both (which you can't) its better to be certain about avoiding that tipping point. But that's just me.
So you can't have it both ways. Including C/T. I
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Max8806 Posted 8:35 am
19 Jun 2008
oops
last line was just a note to myself. also, somewhere in there I said "CO2" instead of "CO2 tax" again.
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joebhed Posted 10:46 am
19 Jun 2008
sean at 9;41
Alright, Sean.
I have not been ignoring you.
I have been reading over your five-part manifesto.
There is a lot I don't understand.
Let's start with the simple stuff.
You have mentioned that the C&T proposals to date are unacceptable.
I agree.
I am unsure what C&T proposal IS acceptable to you.
Is that defined somewhere?
If it is, I didn't see it.
I don't understand some of the basis for the analysis.
If you are following MY "carbon tax and incentive" proposals on this page, then you know that I am not talking the same carbon tax as you.
I am talking about a carbon tax scenario WITH both sticks and carrots.
My carbon tax proposal `mimics" the funds flow from the auction scenarios of several proposed C&T bills.
I repeat - a flow of costs and benefits from consumers to consumers.
The inflow of costs come from consumers to the government, through the carbon-producing industries.
The outflow of benefits goes from the government to the consumers through the same mechanism as other proposals for funding technology research and development, capital investment and income-stabilization.
THAT is how someone who is reducing a ton of carbon in a carbon tax regime gets access to revenues.
Neither of us is backing any proposal already out there.
Both of us recognize that we cannot get to what I think are our common goals without there being an investment pool available to fund the technology solutions that are needed.
I think you and I are on equal footing.
Having said that, maybe all I should do is ask why ANY proposal for C&T is superior to the carbon tax I am proposing?
Is it an anti-government thing?
I tried to address that.
Is it fondness for the free marketplace, that invisible hand?
Or, does it have something to do, again, with efficiency?
In your example, the solar dude is selling his "carbon reduction credits"(CRCs) to the coal dude.
What the coal dude has is an inadequate supply of carbon "allowances to pollute" (my term).
Are carbon allowances to pollute the same thing as CRCs?
If so, where did the solar guy get the credits?
You posit that every(?) energy source will either have to buy something, or will sell something.
There's a certain perceived balance here.
I have no idea from where that balance comes.
Is it just assumed?
What if there are not enough of one of those somethings, like CRCs.
Again, I am not sure where the "good guys" get their CRCs.
In your scenario, this assumed balance lets the goods offset the evils.
Let's say we're five years out, and FOR WHATEVER REASON, there are not enough new CRC-bearing entities without enough CRCs to sell.
Not enough of those solar power plants got built.
What happens?
This is akin to the RPS scenario to me.
It's a "meet or pay" CAP.
So, we pay.
We still pollute.
I just don't see how your scenario is any more efficient, any more certain, any more economical or any more viable than the carbon tax with incentives proposal I am putting forward.
More later.
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joebhed Posted 11:27 am
19 Jun 2008
To maxx at 7:32
maxx
I am going to catch up, and then I think I will be computer-less for about a week.
Yes, I did misunderstand that point.
I hope that, regardless, what it came down to is that there is not, cannot be, any certainty about any of the policy proposals we are discussing.
I believe you said that later.
Something about, we "prioritize" different aspects of the policies.
At one point you said that C&T proponents recognize this upfront, but that some carbon taxers like me claim that the tax can produce "known" levels of benefits.
I think you would agree that this is not my position at all.
To the contrary, my position is that neither of the scenarios, cap or tax, can have known levels of benefits either. I wrote that earlier.
You also opine that my RPS-like scenario does not apply to C&T because we have so many technology options here.
I am not sure what they are, maxx, and I think our short to medium term options are inadequate.
Once we get to 2020 or 2025 I think we will do fine.
It is the interim that I worry about.
I haven't seen the analysis that says we can accomplish the 80 percent in a "rational" manner without both nukes and CCS.
And, to me, no CCS is tantamount to no renewables.
Thus, the RPS parallel.
The uncertainty again.
And THAT uncertainty undermines your claim that the C&T gives you the certainty of the emissions reduction level.
The only degree of certainty possible in the short term is a shut down minimally of some of the existing coal plants, threatening reliability of electric service.
To me, C&T is a "build it and they will come" philosophy.
If the C&T is going to include an auction and a flow of funds as I indicated earlier, and to Sean, then why introduce the uncertainty of the cost.
We should strive to achieve our public policy goals on a least-cost basis.
You say you prioritize getting 80 percent reductions by a certain time.
I prioritize that also.
But some economic principle out there tells me that the more it costs in year one and year two and three, the less capital there is going to be available, and the more costly it is going to be, in year 38.
As far as having it both ways goes, I harken back to the CBO study, which I trust by now you understand looked at ALL the policy proposals in ALL the bills in the Congress.
" The most efficient policy tool for decreasing CO2 emissions is the one that can best balance the costs and benefits of the reductions, even when both are uncertain."
"The policy options described here differ in their potential to reduce emissions efficiently, to be implemented with relatively low administrative costs, and to create incentives for emission reductions that are consistent with incentives in other countries."
"CBO draws the following conclusions:
A tax on emissions would be the most efficient
incentive-based option for reducing emissions and
could be relatively easy to implement."
Still.
Thanks.
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Max8806 Posted 12:55 pm
19 Jun 2008
Joebhed,
I'll just return to one point, because you quote the CBO as saying
" The most efficient policy tool for decreasing CO2 emissions is the one that can best balance the costs and benefits of the reductions, even when both are uncertain."
Again, I don't disagree. I'm just emphasizing that it's important to remember where this efficiency comes from. Its that the CBO presumes a CO2 tax will not be changed, ever. Thus a company can set up a plant in 2012 and know what carbon will cost him in 2040.
The point is this is not possible if you prioritize getting to 80% reductions, because you cannot know the level of reductions you will get from a certain tax in advance. You can guess, but you'll inevitably be wrong, or if you're right at first you'll have the pace of the increase wrong.
I don't think its as simple as 'they both have uncertainties, but the carbon tax is more efficient.' They each have certainty about some things at the risk of uncertainty of others. Namely C&T provides certainty of level of reductions (you disagree, but I think the point is more that costs might skyrocket in the short term than that reductions won't be met. The cap will be met unless you introduce shady offsets or politicians change the bill. But these cost increases can be addressed to some extent by short term permit borrowing against a relatively high interest rate, banking with early price floor, etc) but uncertainty about cost of compliance. Carbon tax provides certainty about cost of compliance, but uncertainty about level of reductions.
I just mentioned above in the parentheticals a couple ways you can help improve the cap/trade's uncertainty about costs, without undermining the certainty of aggregate reductions (by preserving the cap). I do not happen to know of a similar way to bring a carbon tax more certainty about level of reductions, without undermining its certainty of future cost of compliance (which any CBO economist will tell you is why they found it to be more efficient).
So bottom line is each has a benefit and drawback. But with cap/trade, I see ways of minimizing the drawbacks without sacrificing the benefit. With carbon tax I see it more as a zero sum game. Because any means of providing flexibility to ensure you get to a certain level of reductions (whether reactionary or pre-prescribed formulaic) undermines the certainty about costs, and so efficiency.
But if someone could show me a way of designing a carbon tax with some assurance of getting to an 80% reduction, sign me up. I just don't see getting there without forfeiting the reason for picking the CO2 tax in the first place. Otherwise, the certainty on 80% is more important to me than knowing whatever reductions I get, I got them from a bargain. I don't care so much how much I get unless I can be assured it is very near to 80%.
I fear I'm repeating myself so I'll stop here. Sorry if its been terribly redundant, but I do mean to drive home this point because I think its a major one that gets totally ignored in the mainstream debate.
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Sean Casten Posted 12:27 am
20 Jun 2008
Joebhed
The approach I prefer is the output-based approach outlined here.
To your questions, I am definitely of the opinion that injecting government into the process of collecting and distributing GHG proceeds induces a massive inefficiency on the process - we can have the most noble elected representatives making those decisions, but the size of the funds are so massive that we will still unleash a massive lobbying brigade that distorts that process. (Indeed, witness the Lieberman-Warner debate as evidence. Relatively speaking, there was a lot less time spent discussing how far we were going to ratchet down GHG emissions than there was spent discussing how the $7 trillion would be distributed through the economy.) That's not a judgement on government per se - it's just a judgment on the nature of that process.
At core though, that's not my biggest beef with any system that collects fees, sends them inside the beltway and then redistributes them to other purposes. Rather, it is the following two issues:
- A price imposed on carbon emissions does not necessarily create an investment thesis for carbon reduction. This is a point too often glossed over in the world of economic theory. And - at the risk of touting my own bona fides - one that I have absolutely no incentive to misrepresent. We've got a big pile of cash available to invest in greenhouse gas reduction, and I find it impossible to see how a carbon tax (or any other regime based only on putting a price on carbon emissions) makes it easier to spend that money, except in the very long term. And we need to get GHG reduction down now, not just in the long term when carbon taxes finally roll into price for carbon-containing energy.
- So the price alone isn't sufficient to drive investment. This then raises the question of how the proceeds are distributed. And if the proceeds are distributed to uses other than the direct reduction in GHG emissions (no matter how noble: low-income energy price support, wildlife conservation, etc.), it implicitly dilutes the value of GHG reduction. Let's say for the sake of argument that polluters have to pay $10/ton. Of the proceeds, what percentage are used to directly incentivize immediate GHG reduction? Maybe we take 5% for low-income energy support. Another 5% to protect coastal areas. 10% for R&D in new technologies that might someday lower GHGs, but are just research projects today. 10% in payroll tax rebates to provide a nice progressive flair. I'm making up numbers, but even if we stop there and then leave the rest available for totally technology agnostic payments to GHG reducers, paid out only based on the direct, verifiable number of tons reduced, we've only got 70% of the initial funds left. Which means that while it costs $10/ton to pollute, it's only worth $7/ton to save. The system simply doesn't work.
This isn't to say that those other goals aren't noble - just that if the goal of the policy is to reduce GHGs, then it ought to be structured to do that one thing really well. If the goal is to provide other social benefit programs, then it ought to be structured to do those things really well. But as soon as we start lumping all those into a single bill, we simply do a lot of things half-assedly.Permalink
David Mack Posted 4:12 am
21 Jun 2008
Joebhed
I can understand where you're coming from. I too want a solution to global warming that minimizes economic cost. If the economic cost is low, the rate of greenhouse gas reduction will be faster. Until a few months ago, I'd never heard of output based standards. I supported carbon taxes because I think they are a cost effective stick. They treat all tonnes of pollution the same way. I assumed that with a efficient stick in place, the market would eventually adapt to a carbon constrained world at lowest cost. I too was skeptical that a better option existed.
It will take a lot of investment to build a lower carbon world. I've accepted the argument that carbon taxes do not reward all sources of GHG reduction equally (at least in the short term). Without proper carrots, the investment required for the new low carbon world won't happen. The beauty of output based standards is that they distribute carrots in an economically efficient way too (which a tax doesn't do). They allocate money to the most effective technology to improve today's energy mix. I feel like I'm being a cheerleader, but I'd recommend you to go through Sean's blog posts on gristmill and his company website http://blog.recycled-energy.com/.
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hapa Posted 4:37 am
21 Jun 2008
the long term
350 implies that the long term of GHG reduction is within walking distance.
predicting "$10 a ton" for any extended period -- without an interim planetary meltdown -- is not realistic.
lester brown's plan, not far out of line with hansen's 2025 target for eliminating coal emissions, puts carbon prices at >$200 in 10 years. only a massive equipment shift paling any current RPS or GHG proposal would make that price work in the larger economy.
those are the changes to meet the challenge as the undiluted science is presenting it. a complete overhaul.
stop tinkering!
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