Last week, the nation suffered from major sticker shock when we learned that our use of fossil fuels comes with a hidden price tag of $120 billion per year.  Thanks to the results of the National Research Council's report on energy and the environment, some of the extra costs of dirty energy were exposed.  (Full disclosure: Policy Integrity's faculty director, Richard L. Revesz, sat on the report's panel). 

But folks should prepare for a second round of surprise costs because, as the authors of the report mention, there are more stickers that weren't accounted for in this sum.  David Roberts notes that the $120 billion does not include major costs like tax-payer subsidies for coal, mercury pollution, and a few other by-products of "cheap" energy. 

Most notably, the report did not tally up the price of climate change or greenhouse gas emissions.  Using a very conservative estimate from recent proposed federal greenhouse gas regulations, each ton of CO2 causes $19 in social harm -- multiply that by the number of tons of CO2 emitted every year, and you get $117 billion per year. 

This low-ball number nearly doubles the report's estimate -- the combined health and climate costs of heat trapping emissions comes to $237 billion per year.  This amounts to a hidden tax of about $2,099 per household per year.

The NRC report underscored what many of us have known for some time-that the ostensibly "cheap" energy we get now from fossil fuels is actually extremely expensive.  We disassociate the price that we pay for things like heating or electricity from the big hidden costs dirty energy imposes on our nation.  In so doing, we obscure the real price tag of using fossil fuels. 

Some of these true costs have been deferred, but they will catch up to us soon enough.  Like a family living in a foreclosed house and just waiting for the sheriff to carry out the eviction order, we are living on borrowed time.

At $237 billion per year, the price of dirty energy is all the more reason to move forward with a cap on our greenhouse gas emissions. A recent Policy Integrity report found that, only looking at the greenhouse gas side of the equation, the Waxman-Markey would net $1.5 trillion, and possibly much more in savings and avoided costs.

Some policymakers worry that it will be too expensive for America to bring down our greenhouse gas emissions levels.  But the problem is, we are already paying dearly for the way we produce energy.  Over time, those costs will rise as the effects of climate change become increasingly felt.  The question is, when will we decide that the hidden fossil fuel tax isn't worth paying any more.

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California’s state budget gap was about $40 billion this year. New York’s some $50 billion. Every state in the Union is struggling with drastically lower revenues and higher costs for services of every kind, washing state capitals with red ink. At the polls next year, governors who are facing elections - - including Governor David Paterson of New York - - may find themselves politically drowned by such gargantuan deficits.

So, faced with closing schools, hospitals, fire stations, and kicking struggling families off of welfare roles, governors are turning instead, like the famous bank robber Willy Sutton, to wherever the money may be. In New York’s case, at least some of it is hidden in a carbon piggy bank.

Late last year, ten northeastern states started a cap-and-trade system covering carbon emissions from powerplants. Each facility must buy its initial “allowances” for whatever they emit from the state, generating hundreds of millions of dollars in revenues. Each state decides how to spend this money, but generally they have committed it to energy efficiency programs.

That’s where Paterson took a bold gamble. He proposed using $90 million of the state’s $202 million in carbon allowance revenues this year to subsidize the state’s budget deficit. Many criticized the move, fearing that environmental and energy efficiency goals won’t be met and that other states might copy the move, making matters worse. That may also cost the Governor some “green” friends, hurting his chances at the polls next year.

But maybe he did New Yorkers - - and the rest of us - - a real favor. First of all, more than half the carbon money still goes to energy investments. For example, Paterson recently announced a buy-back program for inefficient old appliances. That will save lots of energy as people trade up for newer energy-efficient models, stimulating the economy at the same time, just as the “cash for clunkers” program helped car dealers.

Of course Paterson could have proposed higher taxes instead of raiding the carbon piggy bank. But is it a good idea to tax workers and businesses more, penalizing hard work, or is it better to essentially tax waste and thereby encourage conservation? Many have suggested this very idea as a way to deal with climate change - - tax carbon polluters, which raises the cost of electricity and gasoline - - but lower taxes on payrolls and businesses. Such a zero-sum “tax shift”, it is argued, would reward hard work and discourage wasteful use of energy, both worthy outcomes. In any case, it would force users of energy to pay the true cost of their supply - - a cost, measured in climate change impacts, that is borne today by everyone regardless of how much energy they use.

Climate activists’ immediate reaction to Paterson’s move was negative, but perhaps it’s worth another look. If governors everywhere knew there was carbon piggy bank in their state, we might soon see more support for carbon cap-and-trade systems and quickly earn bi-partisan support for tackling climate change. Given that Congress is stalled on climate legislation, this may be one of our best bets for an American contribution to a global deal in Copenhagen later this year. If that happens, we will have Governor Paterson to thank for being bold enough to get us started.

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BFFs: German Chancellor Angela Merkel and French President Nicolas SarkozyPhoto: Chesi - Fotos CCPARIS - The leaders of Germany and France called Friday for the United Nations to support a carbon tax on imports from countries who fail to back international efforts to fight global warming.

French President Nicolas Sarkozy and German Chancellor Angela Merkel wrote to U.N. Secretary General Ban Ki-moon arguing that states that fail to back a deal at a climate summit in Copenhagen in December should be held accountable.

"It would be unacceptable for the efforts of the most ambitious countries to be undermined by the carbon emissions released by lack of or insufficient action by other countries," reads the letter released by the French presidency.

"For that reason, it should be possible to put in place appropriate adjustment measures targeting the countries that do not implement or fail to support this accord," they wrote.

The two leaders also pleaded for the creation of a world environmental agency, with as a first step the emergence of new institutions that would "encourage the emergence of a body of international environmental law."

The Dec. 7-18 meeting under the U.N. Framework Convention on Climate Change (UNFCCC) aims to set down action for tackling heat-trapping carbon emissions beyond 2012, when the provisions of the Kyoto Protocol run out.

Representatives of the world's 17 biggest carbon polluters kicked off a week of high-stakes talks on climate change Thursday with a discussion aimed at bridging differences ahead of the Copenhagen talks.

Sarkozy, whose government is to introduce a carbon levy on domestic fuel emissions in 2010, has repeatedly argued for a European Union carbon tax on imports from regions with poor environmental standards.

Germany had yet to come out in favour of a carbon tax on imports, which a German minister has warned could be perceived by developing nations as a form of "eco-imperialism."

The European Union prides itself on being at the forefront of the climate fight.

But developing countries such as India and China argue rich countries ought to shoulder the main responsibility for mitigating global warming as they have historically emitted most of the greenhouse gases at the root of the problem.

The French and German leaders said the New York talks should secure "binding and ambitious commitments from developed countries" in line with a Group of Eight target to slash emissions by 80 percent by 2050 compared to 1990 levels.

Developing nations, meanwhile, should pledge to "reduce the growth in emissions compared to current levels" within an agreed timeframe, and to publish "carbon sober growth plans" by 2012.

They also called for world leaders to agree on ways to provide financial and technological support for developing countries in their struggle to rein in carbon dioxide emissions.

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Cross-posted from Wonk Room.

According to Declan McCullagh, a libertarian blogger who works for CBS Interactive, secret Obama administration documents reveal that the cost of clean energy cap-and-trade legislation would be $1,761 per household -- despite official estimates from the Environmental Protection Agency, the Congressional Budget Office, and the Energy Information Administration of about a postage stamp a day. Based on Treasury Department documents acquired by the Competitive Enterprise Institute (CEI), McCullagh claims that “a cap and trade law would cost American taxpayers up to $200 billion a year, the equivalent of hiking personal income taxes by about 15 percent":

The Obama administration has privately concluded that a cap and trade law would cost American taxpayers up to $200 billion a year, the equivalent of hiking personal income taxes by about 15 percent. A previously unreleased analysis prepared by the U.S. Department of Treasury says the total in new taxes would be between $100 billion to $200 billion a year. At the upper end of the administration’s estimate, the cost per American household would be an extra $1,761 a year.

This is pure twaddle. McCullagh is confabulating a “disclosure” out of whole cloth:

Obama’s Plan Would Have Established Tax Cuts For Working Families. In his State of the Union address, President Obama proposed a green economy plan that would create a $80 billion carbon market and use the money raised from polluters for middle class tax cuts.

Congress Did Not Adopt President Obama’s Plan. The Waxman-Markey American Clean Energy and Security Act (ACES) is comprehensive clean energy legislation, coupling the carbon market with national renewable energy and energy efficiency standards. Unlike Obama’s plan, the ACES Act would establish a more limited carbon market, distribute most permits for free to polluting industry, with provisions that compel utilities to pass along their value to ratepayers, and provide further assistance for low-income consumers. One can’t use an analysis of Obama’s proposal to calculate the economic benefits of the legislation now being considered.

The American Clean Energy and Security Act Builds A Clean Economy For A Postage Stamp A Day. The EPA estimates a net cost of about $100 per household per year, which would be fully offset for lower-income consumers. The Congressional Budget Office -- which did not consider the energy efficiency measures or the cost of inaction -- determined “that the net annual economywide cost of the cap-and-trade program in 2020 would be $22 billion -- or about $175 per household.”

The American Clean Energy and Security Act Cuts Electricity Bills And Dependence On Foreign Oil. The EPA has found that Waxman-Markey cuts household electricity bills by seven percent by 2020. The EIA found the legislation would save Americans $5,600 per household in reduced dependence on foreign oil.

To come up with the false claim that Obama’s plan was “the equivalent of hiking personal income taxes by about 15 percent,” McCullagh ignored where the money would come from -- polluting industries with billions of dollars in annual profits -- and where the money would go -- tax cuts for working people.

In reality, President Obama’s proposal would have amounted to tax cuts worth hundreds of dollars for working families, with the added benefits of greatly reduced dependence on toxic oil and coal, billions of dollars of investment in clean energy, and the avoidance of catastrophic climate change.

McCullagh argues that his so-called “disclosures” will “probably not aid the political prospects of the Democrats’ cap and trade bill,” and quotes CEI’s Chris Horner: “It’s nice to see they’re not spinning each other behind closed doors.” Horner, who filed the FOIA request, runs global warming denial blogs for CEI and the National Review. In June, McCullagh breathlessly promoted CEI’s other “scandal” of a global warming denier economist who works for the EPA.

Opponents of clean energy reform are inflating the costs of action by 1,000 percent, while minimizing that the threat of climate change and our dependence on fossil fuels. Ironically, these lies may actually aid the political prospects of action, as the American public grow more disgusted with the unethical tactics of polluters and their right-wing allies.

Update: In a phone interview with the Wonk Room, CNet managing editor Jon Skillings explained that on the CNet site, "reporters self-edit" and "are generally expected to be their own fact-checkers." Promising to follow up with McCullagh, he concluded, "we take our ethics very seriously."

Update: More from NRDC's Switchboard and a correction from Politico's Ben Smith. Our Future's Bill Scher provides further analysis.

Update: Declan McCullagh is also guilty of inflating his job title, claiming on his personal website and his Twitter feed to be "the chief political correspondent" for CBSNews.com. Bill Martens, Vice President of Product Development and Strategy for CBSNews.com, tells the Wonk Room that McCullagh's actual CBSNews.com title is "senior correspondent."

Update: McCullagh has corrected his job title inflation, but not the inflated cost for clean energy reform. Does this reflect the priorities of CBS News?

Update: Alan Krueger, Treasury Assistant Secretary for Economic Policy, responds:

It is time for an honest debate about how to solve a long-term challenge and deliver comprehensive energy reform -- not for misrepresentations of the facts.

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To read the news, it would look like soda taxes are just around the corner. First, President Obama mildly suggested in an interview in Men's Health that soda taxes were worth some consideration. Then Obamafoodorama broke the news of Coca-Cola CEO Muhtar Kent's reaction to said soda tax:

“I have never seen it work where a government tells people what to eat and what to drink,’’ Kent said. “If it worked, the Soviet Union would still be around." Kent also called the soda tax "outrageous."

Whew. The man is pissed. That's probably why Coke is one of the companies behind the full-page ad in the Washington Post by a new junk food industry astroturf group designed to combat junk food taxes. More from Ob Fo:

The ad... was in the A section of the Washington Post on Sunday, part of a new campaign that lobby group Americans Against Food Taxes is running to fight taxation of soda and sugary beverages, although the plea is "don't tax our groceries." Coca Cola funds the group, as does Pepsi Cola, Dr. Pepper, Canada Dry, McDonald's, Jack in the Box, among others.

And now the NYT has jumped in to the debate with an article which mostly echoes Ob Fo in the particulars. One twist that the NYT adds, however, is the fact that a penny per ounce federal tax on soda would raise $14.8 billion in its first year -- that's a lot of money. It's also true that a penny per ounce is a pretty steep tax -- something like $0.64 to a $1 two-ilter bottle of soda -- that's a much higher figure than I've previously heard discussed.

But for all the attention, the prospects of someone actually passing a soda tax are pathetically dim. At present, and despite Obama's interest, there is not a single significant effort in Congress to establish a soda tax. Efforts at the state level haven't gotten very far either ("It didn't look like we had the votes," complained a NJ state legislator to the NYT on why he pulled his own soda tax bill).

Not that the situation isn't dire. Marion Nestle reports on the latest study which puts more hard numbers on the soda problem:

The study found that 41 percent of children (ages 2 – 11), 62 percent of adolescents (ages 12 – 17) and 24 percent of adults drink at least one soda or other sugar-sweetened beverage every day. Regardless of income or ethnicity, adults who drink one or more sodas or other sugar-sweetened beverages every day are 27 percent more likely to be overweight or obese.

To paraphrase Nestle, since when did a daily soda (or sports drink, which is just as bad) for kids become the norm? Well, since guys like Kent spent billions in marketing dollars to establish soda as, to quote him, "a staple food." Imagine if ice cream or candy were called "a staple food." It would be a joke. And it's a joke to think of soda that way, liquid candy that it is. Yet millions of Americans clearly do -- and that has to change before we'll get a handle on the obesity epidemic.

It's true that the effectiveness of a soda tax is still a subject of great debate. Public health officials on the one hand declare it to be a crucial tool in the fight against obesity. Economists, on the other hand, are far more skeptical -- although some new work suggests that a person's feelings of "price sensitivity" at the grocery store, independent of income level, is a strong determinant of food choices and obesity. Regardless, when deciding whom to put in charge of health and wellness policies, public health experts or economists, I find the choice easy. But that's just me. Still, I think it's tempting to focus too much on the behavioral consequences of a policy like this and ignore the fact that it generates a giant pile of money. Feel free to believe a soda tax won't solve obesity. But don't deny that its revenue will create all sorts of opportunities.

So let's get back to the money. What struck me is that the $14.8 billion dollars that could be raised from a soda tax far exceeds the total amount spent annually on federal farm subsidies.  Yes, most experts want to use any money raised from junk food taxes to combat obesity. But combating obesity isn't just about public awareness campaigns and diabetes treatment.

It seems to me that a soda tax offers a strategy for the ultimate bit of food system jujitsu -- to allow reformers to stop tilting at agribusiness windmills, at least in the near term, and go about building our own. How about dedicating a good chunk of that new money -- you know, a billion or two, chump change to the big boys -- to subsidizing fruit and vegetables (whether at the producer or consumer level) and developing regional food systems.

Tom Philpott has already complained that the USDA's new "Know Your Farmer, Know Your Food" campaign is long on aspirations but desperately short on money. And with agribiz once again firmly in control of the Congressional process, we know that the hope of significantly reorienting ag subsidies is dwindling -- at least until $200/bbl oil hits the farm sector. But the USDA leadership, along with the White House, do indeed seem committed to the principles enshrined in the KYF2 program. Why not try to coopt at least some of the agribiz interests into supporting them through backing a soda tax. What do they get? Some of them will get more money, of course. But they might also get assurances that current farm policies won't be thrown out the window. It's also a strategy that might split the currently united front of industrial growers and industrial processors - let the soda guys scream and yell while we focus on the farmers.

Okay it's a bit of a pipe dream. And yes, it's a kludgy solution -- it will certainly leave strident anti-subsidy groups like the Environmental Working Group fuming. But resiliency and expediency are important, too. And anything that brings us closer to realizing alternative systems while avoiding open combat with agribusiness needs a good, hard look. I say, why not?

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Energy markets are neither free nor efficient, so traditional economic arguments against regulation and other government interventions do not apply. 

In response to my recent article digging into green jobs, a reader sent me a copy of a March paper by Andrew Morriss et al at University of Illinois that attempts to debunk green jobs myths.  While I see major flaws in most green jobs papers I read, many of the myths cited by this paper are irrelevant to what I consider the most important questions:

Other "myths" are simply not myths; the flaw arises because the debunkers are economists, and approach the subject from the perspective of economics.  The problem is that the energy market is neither free nor efficient, so the traditional economic assumptions about how supply and demand regulate price simply do not apply.  I'll deal with the myths in the order they are presented by Morriss et al.

Define "Green Job"

From the paper:

Myth 1: Everyone understands what a “green job” is.

Fact 1: No standard definition of a “green job” exists.

My Thoughts:  The hundreds of billions of dollars to be committed are designed to promote cleaner energy.  Who cares how green jobs are defined?  The important question is Question #1 above: Regardless if the jobs are defined as "green" or not, will more jobs be created by promotion of cleaner energy, or by some alternative sort of spending?  My last article answered this question in favor of clean energy.

Productivity of Green Jobs

From the paper:

Myth 2: Creating green jobs will boost productive employment.

Fact 2: Green jobs estimates in these oft-quoted studies include huge numbers of clerical, bureaucratic, and administrative positions that do not produce goods and services for consumption.

My Thoughts:  If cleaning up the energy economy simply creates a shift to the less efficient use of labor, then it is not worthwhile.  

However, labor efficiency is the wrong metric.  Higher labor efficiency can nearly always be achieved with greater use of capital or energy.  For instance, driving to work is statistically more labor-efficient than taking light rail.  If I take light rail, then the pro-rated labor needed to run the rail system goes into the cost of getting me to work.  If I were to drive, my labor in guiding the vehicle would not be counted in work statistics, because I am not paid for my efforts (even though I'm probably not enjoying myself much.)  Nor is the capital investment in my car included in the calculation, (although the road I drive on probably is) because it is a private, not business of government expenditure.

Green spending is likely to be more energy-efficient than other spending: reducing energy use one of the main goals.  Capital spending may go up or down, and labor usage may increase, as labor is substituted for fossil energy.  The goal should be to find those sectors which most effectively substitute spending on labor (a renewable resource of which we currently have more than we are using) for spending on fossil energy (a nonrenewable resource which causes harm to the environment.)

As I previously discussed, spending on energy efficiency programs such as weatherization  are ideally suited to substitute labor for energy.  Weatherization gets the largest share of the energy spending from the stimulus bill.

Modeling 

Myth 3: Green jobs forecasts are reliable.

Fact 3: The green jobs studies made estimates using poor economic models based on dubious assumptions.

The forecasts for green employment in these studies optimistically predict an employment boom that will take us to prosperity in a new green world. The forecasts, which are sometimes amazingly detailed, are unreliable because they are based on: a) Questionable estimates by interest groups of tiny base numbers in employment, b) Extrapolation of growth rates from those small base numbers, that does not take into consideration that growth rates eventually slow, plateau and even decline, and c) A biased and highly selective optimism about which technologies will improve. Moreover, the estimates use a technique (input-output analysis) that is inappropriate to the conditions of technological change presumed by the green jobs literature itself. This yields seemingly precise estimates that give the illusion of scientific reliability to numbers that are actually based on faulty assumptions.

My Thoughts: As often with the arguments against greenery, the critics equate greenery with exciting new (and expensive) technologies such as solar PV.  Some of the proponents fall into this trap as well.  And everyone should be uncomfortable with relying on attributing any level of accuracy to a study even though it claims to be precise.  Precision is impossible in economic forcasting.

In fact, the majority of the spending will be going to old, proven technology with a long track record.  Building weatherization and mass transit have been around and evolving for over a century, and these two alone get well over half of the spending.  Cofiring of biomass is also a proven and very cost effective technology.  All of these will reduce, not increase the overall cost of energy, without waiting for technology improvements.

No, we won't get the number of jobs we expect, but for the purpose of decision-making, we only need to be confident that we'll get more jobs than if we had not acted.

"Free" Markets

Myth 4: Green jobs promote employment growth.

Fact 4: By promoting more jobs instead of more productivity, the green jobs described in the literature actually encourage low-paying jobs in less desirable conditions. Economic growth cannot be ordered by Congress or by the United Nations (UN). Government interference in the economy – such as restricting successful technologies in favor of speculative technologies favored by special interests – will generate stagnation.

Myth 6: Government mandates are a substitute for free markets.

Fact 6: Companies react more swiftly and efficiently to the demands of their customers/markets, than to cumbersome government mandates.

My Thoughts: The government already interferes on a massive scale in energy, to support the fossil fuel industries.  Electric and gas utilities are either government regulated (IOUs), government-run (munis), or government-sponsored non-profit cooperatives (REAs.)  Unless you live in Lubbock, your electric utility is a monopoly. Our transportation infrastructure is government-built and maintained (or government-sponsored, in the case of toll roads.)  Rules, taxes, and incentives specifically targeted at fossil fuels are legion.  

Deriding "government interference" in an industry with so much government involvement already is ludicrous.  Nothing can happen in the energy industry without "government interference."   The trick is to make sure that any change is change for the better.  "Hands off" is not an option.

Yes, green spending produces a higher proportion of low skilled jobs than would spending on capital intensive fossil fuels.  But green spending creates more jobs at every skill level than spending on fossil fuels, making workers at every level of skill better off.

A typical instance of the authors' blind faith in markets appears in the section titled "Markets vs. Mandates." "The implication of the necessity of a mandate is that profit-seeking building owners are too foolish to make investments in energy saving despite the alleged short-term paybacks."   Yet this is precisely what happens, if not because building owners are foolish.  It happens because renters, not building owners derive the benefits from the efficiency investments, and because many building owners lack the skills and information necessary to make informed decisions.

Instances of profit-seeking building owners not making efficiency improvements abound. When the building owner does not pay the utility bill (as with most rentals), there is no incentive to make such improvements at all. Even in owner-occupied buildings, how many building owners know what improvements will be cost effective, or make it a priority to find out? Without adequate information, no improvements will be made.

Anti-Trade

Myth 5: The world economy can be remade by reducing trade and relying on local production and reduced consumption without dramatically decreasing our standard of living.

Fact 5: History shows that individual nations cannot produce everything its citizens need or desire. People and countries have talents that allow specialization in products and services that make them ever more efficient, lower-cost producers, thereby enriching all people .

To the extent that we're not just exporting the manufacture of energy-intensive goods to other counties, I agree with this caveat.  However, to the extent that transport requires large amounts of energy, some of the arguments for re-localization make sense, or where the production of the good (such as oil) is controlled by non-market forces (Russia, Venezuela, OPEC, etc.) free trade (which is rooted in the assumption that markets operate efficiently) does not make sense.

If we could actually create an increase in domestic oil, the conservative proponents of domestic drilling (whom I think of as the "Local Oil" movement) would have a point, despite the fact that they use the same anti-trade rhetoric.  Unfortunately, since total production of domestic oil is capped by our already-diminished reserves, the Local Oil movement is simply asking for more domestic oil today, at the cost of less domestic oil for our children.  In contrast, today's local farmers can avoid taking food from their children by using sustainable farming practices.

Free trade makes sense in free (or at least reasonably efficient) markets where total supply is not limited.  Inefficient markets may rob us of the benefits of free trade.  When the total supply of a commodity is finite, as with fossil fuels, we can never have true "free trade," because one set of participants has no voice in the transaction.  Future generations have no say about what they give up in future consumption when we consume a finite resource today.

Pie-in-the-Sky

Myth 7: Wishing for technological progress is sufficient.

Fact 7: Some technologies preferred by the green jobs studies are not capable of efficiently reaching the scale necessary to meet today’s demands.

Absolutely true. We can't decarbonize the economy this decade.  We need to start now with the established, cost-effective technologies we have today, such as energy efficiency, electricity transmission, wind power, geothermal, and mass transit which are capable of scaling and bring both jobs and economic benefits today.  As new technologies such as solar become cost effective, we will have the infrastructure in place to allow them to scale.

The gigantic scale of the job is a reason to start as soon as possible, not to delay.

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For an $80 billion program, President Barack Obama's cap-and-trade proposal is very short on specifics. His budget plan [PDF] provides only the briefest policy rationale for cap-and-trade, describing it as "a policy approach that dramatically reduced acid rain at much lower costs than the traditional government regulations and mandates of the past."

The acid-rain program's regulatory costs were indeed low, partly because emission allowances were freely allocated to industry. But Obama's plan calls for 100 percent auctioning of allowances, which erases the perceived cost advantage and puts cap-and-trade on par with carbon taxes in terms of political viability.

To ameliorate cost impacts, the plan would allocate most (80 percent) of the auction proceeds to a permanent $800 "Making Work Pay" tax cut for working families; but with cap-and-trade nothing is ever "permanent." Carbon trading prices in Europe have dropped from over $30 to $10 per ton CO2 over the last year, and in the U.S. northeastern states allowances are currently selling at a meager $3 per ton. Obama's plan is betting on $20 per ton, but linking the nation's tax system to an erratic revenue source would be imprudent.

The obvious, but unanswered, question is why a 100-percent auction would be preferable to a fixed-price sale of allowances, i.e. a carbon tax, which could simply be set at $20 per ton. There would be no price volatility.

Regarding the claim that cap-and-trade "dramatically reduced acid rain," the reduction was not sufficiently dramatic to actually solve the acid rain problem. Further reductions would yield an estimated societal return-on-investment of 2,500 percent from health and environmental benefits, and yet emission trading creates no incentive for such further reductions even when costs are far below initial expectations. The EPA has been trying for years to institute rules for more stringent acid rain regulations, but under the current cap-and-trade regime the rules cannot be strengthened without an Act of Congress -- or a very protracted court battle. The implications for global climate policy should be clear.

A carbon tax would create a stable price signal and a predictable investment climate that would be more conducive to long-term investments in clean-energy technology and infrastructure. Alternatively, a price floor applied to allowance auctions would avert the kind of price erosion and collapse that has characterized prior trading systems. Had a price floor been applied in the acid rain program, there may have been no need for the EPA's new rules.

Irrespective of whether carbon pricing revenue comes from an auction or from a fixed-price sale of allowances, the allocation of the revenue to a Making Work Pay tax cut would be problematic because consumers would not be equitably compensated for high energy costs. The tax burden would shift, not just onto wealthy taxpayers, but also onto low-income groups such as retirees on fixed incomes or people who expend a relatively large portion of their income on energy. The tax cut would have to somehow be linked to energy consumption to make it equitable.

A simpler and more direct way to mitigate energy costs -- one that is not discussed or considered in Obama's plan -- would be to apply most of the carbon pricing revenue to subsidize energy prices, e.g. at a uniform cents-per-kilowatt-hour rate for electricity. If the revenue is allocated to industry as an energy production subsidy it would have much the same cost-cutting effect as free allocation of allowances -- but with one crucial difference: Clean and renewable energy technologies would also qualify for the subsidy, and would therefore not be disadvantaged by the allocation method. Competition from subsidized clean energy would deter polluting industries from passing their costs onto consumers, and would make fossil-fuel energy progressively less economically viable as clean energy attains economies of scale and gains market share. (By contrast, free allocation is equivalent to giving all of the revenue to polluters.)

For example, if the electricity industry comprises 90 percent fossil-fuel energy and 10 percent renewable, then the subsidy would reduce the net tax on fossil fuels by a factor of ten while providing a per-kilowatt-hour subsidy of nearly ten times that amount to renewable energy. The same net tax could even support a much greater subsidy if the subsidy were focused on new renewables, excluding legacy hydroelectric and nuclear power. Eventually, as carbon is phased out of the electricity industry, the clean-energy subsidy would automatically diminish and the net tax on fossil-fuel energy would increase until the latter becomes uneconomical.

In essence, the subsidized-energy approach replaces the big "stick" of a high tax with a big "carrot" of high subsidies, which can be equally effective at incentivizing clean energy deployment. Carrots might succeed where sticks have so far failed to achieve political consensus on federal climate policy.

[Revised 3/22/2009]

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