tax and cap-and-trade are equally efficient.  After that, there are a lot of political economy reasons that either a tax or cap-and-trade might be less efficient.  There are also some other ideological reasons that one may be biased in favor of one over the other.

If we're talking on a national scale here, I think that we should have a cap-and-trade scheme with auctioned permits.  Put the money in an environmental trust, give it back to citizens, or... whatever - that's a secondary issue.  The main issue is cutting carbon, so we should be focused on what the cap should be.  Everything else should be considered after this primary goal.  

I probably wouldn't be opposed to a higher gas tax either.

Consider two projects - your solar panel and a coal plant.  The grid averages about 1300 lbs/MWh and the coal plant runs ~2000 lbs/MWh.  You earn a payment at the end of the year for all your carbon reductions, calculated as 1300 lbs/MWh, times the total MWh you generated, times whatever price we decide to pay per ton of carbon.

Meanwhile, the coal plant is 700 lbs/MWh on the wrong side of the line, so they pay 700 lbs/MWh, times the number of MWh they generate, times the same fee you got as a credit.  The market balances with a transfer of wealth from polluters to cleaners like you.

What the use of the average does is ensure that we are always paying for folks who clean up, and not setting bars that are too easy to reach (such as we have done in some cap & trade regimes).  More notably, it lets the market pick winners, such that we always reduce the maximum carbon for a given investment.  Since all pocketbooks are finite, this is equivalent to maximizing total carbon reduction.

This last point is important, and often overlooked. It is total carbon reduction that matters, not the specific reduction per unit of output (in this case, kWh).  If one strategy reduces 10 tons per dollar of investment and another reduces 2 tons per dollar of investment, we should chase all the 10 ton$ options first, and then do the 2 ton/$ ones.  This may sound intutitive, but can border on environmental fightin' words.  A solar panel that produces 0 carbon/kWh on a $5000/kW investment is a less desirable carbon reduction strategy than an efficient (but otherwise fossil fueled) power plant that only reduces half of the carbon/kWh as the solar panel but can be built for $500/kW.  1/2 the carbon, but 1/10th the cost, means that the latter will reduce more total carbon given limited resources.

I don't raise this to suggest a winner-picking of my own, but simply to point out the elegance of the structure.  Set the price, name the goal, and then let markets work.  Good things will happen.

Agree with you in theory, noting my earlier remark that the tax is more subject to political winds, and is therefore bound to be considered less permanent (a not insignificant fact given the operating life of lots of investments - markets will be hesitant to factor in the price if they don't expect some degree of permanence).

Disagree that the auction is secondary though.  The devilish details of these are the most important part.  Kyoto and RGGI both went with an allocation formula which has the effect of creating windfall profits to the worst polluters, and giving a huge incentive to keep those plants on line, lest they forego their blessed grandfather status.  Auctions are vastly more efficient - and politically way harder.  There is at least one model though in some of the broadband auctions that have happened for wireless bandwidth.  Perhaps other commenters are more familiar, but my recollection is that the FTC was successfully able to overcome the political resistance to an auction and structure a process that monetized a previously "free" - but tragedy-of-the-commons prone - public good and got more economic efficiency as a result.

I didn't say that the auction was secondary, I said stuff like what to do with the auction revenue is secondary!

Believe me, I understand that institutions and the structure of these markets matter.

Carbon control is far to problematic.  Far from making solutions easier, it creates incentives for cheating, inevitable conflicts, and political pressure to relent on favored emitters.  I favor what I call the gore everyones ox approaCH.  Put all big time emitters on a timetable to shutdown their emitting activities.  Lets require all fossil fule power plants be shut down by their 50th birthday with 2030 as the implimentation date.  Tgat is as of January 2030 all 50 year old fossil fule generating plants.  Lets requite that all cars constructed by 2017 must be plug in hybreds with a 50 mile battery range, or if gasoline powered, capable of 50 mpg.  Lets require that by 2027 all hybreds have a 100 mile battery range, and all cars must deliver at least 60 mpg in urban settings.  

As technological breakthroughs develop, mandate alternative solutions to the use of fossil fuels for flight.  Put research into alternative technologies to replace kilm fired bricks and cement, or develop solar technology and other technologies for industrial materials heating.  Only use direct carbon controls if replacement options do not work.

Charles Barton

...that eliminates a certain amount of carbon (how to tell?), but that the government has to put in, because the market can't.  Or a town zones an area as mixed-use dense, with lots of shopping, so people can walk all over the place (like I can do in downtown Evanston), which also eliminates a bunch of carbon.  First of all, the government did it.  Second, how do we determine how much carbon was eliminated?  And third, these two processes might eliminate as much as the market does using private purchasing of different energy alternatives -- so it would seem the rational solution is a combination market/government system, no?

The government and its vast expansive glory is probably a huge emitter of carbon.  Make government agencies participate in the carbon markets.

>> starts from flawed assumptions.

all your assumptions are flawed.

Sean, I just finished reading your very important article, "Transforming electricity", and I'm not sure where else to bring up the various questions I have:

Your advocacy of distributed electrical generation vs. centralized seems to me to be a policy alternative to sequestration.  If we are going to use coal, it would be more straightforward to use small, local plants using waste heat.

I was under the impression that the electrical grid needs to be rebuilt if it is to transfer the large amounts of wind that are in places like the Dakotas and solar energy that are in the Southwest if we are to use those two sources to replace coal.  You argue against increasing grid capacity; could it handle, say, just moving wind/solar around the country if there were no other generators (obviously a hypothetical).

When you mention deregulation, in order to avoid the word "enron" popping into peope's heads, I would suggest stressing that you are talking about things like making small-scale distributed generators possible and getting rid of ridiculous grandfather pollution rules, instead of just a blanket condemnation of regulation

Have you investigated distributed electrical generation with wind/solar?  Your emphasis on distributed generation is an absolute perfect match for those who want to increase renewable technology use; can solar, for instance, also supply waste heat.

speaking of waste, is it more efficient, energy-wise, to burn dried plant material for electrical generation than to use it for biofuel?   The biofuel solution is preferred right now because people are anxious, shall we say, if not hyesterical, to have a supply of liquid fuels for their cars, but maybe it would help shift the debate from cellulosic biofuel to electrical generation.

On a more general level, you are talking about production, while most people are obsessed with consumption.  Your knowledge of production is very valuable; I wish people were more aware of production, and how to produce sustainably, than what to buy.

Thanks again

Jon:

Good questions, and my general response is that we shouldn't presume that a grid needs to provide a home for technology X.  Our goal is a low cost, low-carbon grid.  Period.  That may or may not involve wind, solar, nuclear (and yes, even coal) to varying degrees, and the point we were making is that one ought to structure so that those goals are rewarded.  Too much of current policy is focused on paths, and while I intend no ill-intent on your comments (we clearly want the same thing), I would point out that you are primarily talking about making sure that certain paths are rewarded.  Brief answers to each of your questions follow:

Not really.  Sequestration is simply a really expensive way to get rid of carbon.  But not the only one.  Yes, local sequestration is problematic (as is local coal), but that is a separate issue from whether or not our grid would be cheaper and cleaner if we located generation closer to the load, which would enable more efficient generation, fewer distribution losses and less $ on T&D.  Bear in mind that sequestration is a HUGE energy hog, and a grid that relies on it is much less efficient than the one we have today.  It solves carbon, but makes other problems bigger, by  virtue of accelerating resource depletion and emissions of non-carbon species.

Wind is an interesting issue, because while it is clean, it is fundamentally a central technology, at least at scale (e.g., big wind farms are bound to be remote from hosts). So yes, wind needs transmission.  Whether or not there is sufficient transmission in precisely the right places is a valid, project-specific question.  But separate from this is the macro reality that reducing load at the end of the wire (whether through site efficiency or on-site generation) universally eases upstream grid congestion, freeing up capacity for other uses without requiring new construction.

Enron is connected in the media to deregulation, but please don't fall into the trap, as they are separable.  There is no logical inconsistency in universally condemning both Enron and regulation.  Alfred Kahn, former head of the FAA recently wrote that deregulation "shifts the regulatory burden from consumer protection to antitrust enforcement", which deftly explains both.  Deregulation need not mean anarchy - and in an industry as prone to market dominance as electricity, a regulator is clearly still needed.  Consider financial markets, which are among the most "deregulated" in the country in terms of access, low barriers to entry/exit, etc. - and yet we still have the SEC to protect against abuse.  What Enron showed is that if you open up the doors  (albeit very slightly) and don't bring in anti-trust enforcement, you may have deregulated, but you haven't done it responsibly.  Also bear in mind that we really haven't deregulated anything - we've simply restructured.  Again, take Enron as the example.  In 2001, Enron and Calpine were declaring bankruptcy and being held up as paragons of why-dereg-doesn't-work.  Meanwhile, the still-regulated utility PG&E was also declaring bankruptcy but got a massive bailout from Governor Davis (CA) and was also held up as a sign of why dereg didn't work.  Ergo, if businesses fail and shareholders pay the price, it is a sign that dereg doesn't work, but if businesses fail and the public bails them out, it is also a sign that dereg doesn't work.  Huh?  I'd argue that Enron and Calpine's collapse was actually a sign that we were going down the right path. Just as we needed PanAm and Branniff (and probably a few more) airlines to go belly up before we could really see the benefits of a deregulated airline industry, so  too do we need to see some clearance in the electric sector.  And we haven't even come close.

Solar thermal definitely works, but waste heat is a property of burning fuel.  The "problem" with wind and solar is that they don't start with fuel, and therefore don't have high grade waste heat.  I am obviously being facetious, but the technical point is a valid one.  

 From a purely efficiency perspective, we should do both.  Use petroleum as your example.  A barrel of crude comes into a refinery and is converted into chemicals, fuels, heat for processes and some on-site power.  The well-to-wheels fuel chain for this cycle is remarkably high, approaching 80% or higher (before it gets to our gas-guzzlers of course, but still striking that the efficiency up to the car is so much higher than that last step considering the distances involved).  By contrast, any power-only cycle is destined to be stuck at 30 - 40% efficiency.  Biofuels plants for various flavors run 60 -80%.  So the ideal is to colocate biofuel plants and biopower plants, emulating what the petroleum industry has already shown us how to do.  This is really interesting when we get to cellulosics, because the lignin content of the plant is the part that doesn't get fermented to fuel (in an ethanol plant), but is also the highest energy content, and so you could concievably make fuel, heat and power in a single facility with biofuels, using every piece of the plant. This efficiency potential gets lost in lots of the biofuels debate. (Think about land-use criticism of biofuels - it is not inconcievable to vastly reduce plant use if you increase processing efficiency, while still producing the same amount of useful product.)

The line between the two is blurry.  If I reduce my electric consumption from efficiency (ergo, reduced consumption) or on-site generation, the grid impacts are identical.  If that OSG is in a fuel-free cycle (be it solar, waste heat recovery, or by disposing of some local opportunity fuel like landfill gas), the upstream fuel effects are identical.  And if I "only" do OSG in a high-efficiency power cycle, I am still better off than when I started.  The point is that we shouldn't simply think about this being a production or consumption issue.  The question is how can we meet society's needs with ever-diminishing fossil fuel use.  Draw the boundaries around the whole system, and then what happens inside the box with individual conversion steps is somewhat arbitary, so long as we craft rules that incent the right behavior.

I'm not familiar with the term, but recognize that exergy isn't a buzzword, but one with a precise thermodynamic meaning.  In effect, exergy = useful energy.  To understand the difference, think of a small volume of 500 degree steam vs. a large volume of 50 degree water.  We could set our volumes so that both have the same amount of total energy, but clearly we have the potential to extract a lot more useful work from the higher temperature stuff (be it turning a turbine to make electric power, heating a room to 100 degrees, or any multiplicity of other uses).  Or going back to the skim-milk vs. cream example, energy treats all "milk derived products" as equivalent, while exergy recognizes the inherently higher value of cream vs. skim milk.

Simplifications, but hopefully useful.  Bottom line is that while other terms can be helpful for understanding, we shouldn't confuse precise terms like exergy and energy with emergy that - while perhaps useful from an educational perspective - doesn't have any universally recognized physical meaning.