Dear Mr. President

1600 Pennsylvania Ave. NW
Washington, DC 20500

Dear Mr. President,

Thank you for acknowledging the need for a new, comprehensive national energy and climate change plan. It’s refreshing. This was a pillar of your campaign and a main reason we supported you. As the Senate prepares to consider the American Power Act we urge you however to think bigger about the energy sources that can power this nation, and job growth, while not imperiling future generations. We urge you to support a fee-and-dividend framework in lieu of the flawed cap and trade.

Political sweeteners for specific industries, such as coal, natural gas, ethanol, utilities, and old nuclear, are not examples of such big thinking. Yet the American Power Act is chalk full of them. It is also full of emissions goals. The fact is you can set all the GHG abatement goals you want, but so long as you keep permitting OCS drilling, new coal plants, or tar sand pipelines and oil shale mines with Canada that will burn and emit for decades, if not centuries, with no proven capture technology, there is no realistic pathway for such reductions.

The American Power Act also provides billions of tons of unverifiable GHG offsets/exemptions some 40% above the total cap. In addition to significantly diluting any potential GHG reductions, such offsets create all manner of perverse incentives. Some examples include encouraging the creation of pollution just to sell the rights to destroy it, or enabling someone else to buy energy inefficient goods because one entity emitted below the cap, or giving an economic incentive for accountants, companies, and governments to inflate future emissions projections to claim higher current offsets, or encouraging dictators to over report their populations or suppress their economy to generate surplus credits to sell to the rich world. These perverse incentives just further increase the likelihood that U.S. goals will fail like those of the U.N. set under the Framework Convention. Japan for instance made the goal of a modest 5% baseline reduction under Kyoto, and even with significant investment, honest effort and a stagnant economy, actually increased emissions 10% over that period.

Goals are at best guiding principles, not self-executing mechanisms. Goals are also endless excuses for haggling and bickering among nations over who gets the rights to emit GHGs and under what inexact assumptions (basing it on past emissions benefits the developed world, basing it on current emissions benefits emerging economies, basing it on future emissions benefits poor economies; there are many such abstract issues of equity in originating and distributing emissions rights). A primary reason the world still lacks a climate treaty 20 years after the United Nations Framework Convention on Climate Change was ratified in 1990 is because a top-down "all at once" global regime requires asset distribution that inevitably hurt certain countries ex ante. Climate change also represents a tragedy of the commons, where no one stands to lose in the status quo, but there are potential private gains from assigning property rights to these public goods, and so a strong incentive for hording, gaming and free-riding. The most effective way to lead in such a case is not by decree or simultaneously negotiating with dozens of countries. As the UNFCCC shows, and theory supports, there is not necessarily a rationale to expect such an approach to ever work. The best way to lead is by demonstrating the gains to be made from clean energy investment at a domestic level. Once you show the gains to be made by a more efficient tax system (by shifting taxes from socially beneficial things like income to costly things like GHGs) there is a strong incentive for similar regional and global reform, and increasing demand for U.S. GHG technology exports.

Goals are nice but meaningless without incentives, such as a fee-and-dividend approach. EPA has estimated the marginal utility value of CO2 at $21/ton. Other organizations have estimated it to be more in the $30-40 range. If you introduced a carbon tax below this rate that gradually increased above it, offering predictability for industry and business, and returned 100% of the revenue to households, via for instance quarterly checks, you would have a real incentive and economic mechanism for emissions reductions and clean energy investment and demand- much more so than any top-down “goals”. You would also have a majority of lower and middle income families that emit below average, who really love getting more money back from the government than they pay in energy taxes. Not to mention huge demand for new labor to renovate the nation’s aging energy infrastructure. Fee-and-dividend would be a strong, tangible signal for global cooperation on the grounds of self-interest, while maximizing employment effects by neither increasing the tax burden nor assigning property rights imperfectly.

We know you know all this. And we recognize fee-and-dividend is not currently as politically tenable as the opaque and ill understood cap and trade, a tax which provides widespread exemptions, escape valves, and a huge new secondary market for Wall Street to game, inflate, and ultimately distort. Do we really need to go through this again with GHGs like MBS? Do you have that much confidence in the SEC and CFTC who let a simple pyramid scheme go unchecked for years to parse what are real and fake emissions, or prevent a speculative bubble in a brand new market they have little experience with? Mr. President- scrap the cap, see the fee.

As the legislative process proceeds, hold off on new OCS and Arctic permitting. They contain a small amount of reserves compared to either U.S. demand or global reserves, yet spews billions more tons of CO2 into the atmosphere for the next 150 years for your children and the countless unborn to reckon with. The paleoclimate record already suggests we are near committed to a 2 degree centigrade global mean increase, overwhelming natural temperature forcing nearly ten-fold.

Three policy recommendations:

1) Enact a revenue neutral carbon tax, i.e. fee-and-dividend. Carbon equivalents could initially be taxed at a low level to provide an early signal for the market to begin transitioning to a carbon constrained world. The tax could begin in 2012 at $10/ton (about 10 cents per gallon of gasoline) and increase over time as a multiple of inflation. All revenues must be 100% returned to the taxpayers, a central element for both economic efficiency and fairness. Each legal adult resident should get an equal share via electronic transfer to bank accounts or debit cards, with half a share for children up to two children per family. Opposition will attack you no matter what you do. Framing this as a multi-hundred billion dollar tax cut to stop global climate change and drive innovation and job creation is a potent (and true) counter-argument, one that cannot be made with cap and trade. WTO compliant cross-border tariffs could be applied at the port of entry on imports that do not meet this requirement in order to prevent free-riding and emissions leakage. Allowing each nation to keep the revenues from its carbon tax will align the individual interest of sovereign governments with the common interests of the global community. China for instance seemed open to strong incentives for clean energy at Copenhagen. Instead they were presented a cap on future emissions based on the past emissions of Europe and the U.S. They not surprisingly rejected it. The world will listen to incentives that create and drive new markets.

2) Invest in and build a demonstration fast-breeder (4th generation nuclear or FBR) nuclear facility as a prototype for industry to study and scale up. These reactors can reduce nuclear waste nearly 100 fold compared to current commercial models, and can burn a much wider portfolio of fissile materials, including waste from current generation reactors (which we have centuries worth). Fast-breeder reactors also reduce the depletion timeframe of waste production from tens of thousands of years to hundreds of years, making storage vastly more feasible. DOE had a demonstration plant in the 1990s called the Integral Fast Reactor that was close to completion, but it was mistakenly cancelled/defunded in 1994 because of unwarranted environmental alarmism. Nuclear should realistically be 10-20% of the energy supply to provide reliable baseload energy. Great work being done here by Bill Gates and others: http://intellectualventures.com/Libraries/TerraPower/IV_Introducing_TWR_February_2010.sflb.ashx

3) Lease federal land parcels in the Southwest U.S. for the development and expedited permitting of concentrated solar plants (CSP). There’s ample solar forcing, cheap unused land, and green jobs would help the whole economy. The parcels could generate revenue via auction; these parcels and CSP would be quite valuable because of the fee-and-dividend. CSP is vastly more efficient than traditional photovoltaic systems and can provide up to 80% baseload reliability- more than enough to meet normal household needs. It would be cheaper to produce and buy with a gradually increasing carbon tax. Today CSP costs about $.10/kWh compared to coal at $.05kWh, which would imply a real tax of about $50/ton. Additionally, tax credits and land for the construction of next generation transmission lines are necessary.

Stop throwing money at every technology and leaky window in the country while not reducing the deficit in the process. Instead, set up clear rules of the road with a fee-and-dividend framework that would put many more people to work than fast expiring, temporary job-creating appropriations and let the market scale up clean energy. This will take some audacity.

Sincerely,
Wyatt Boyd

cc:
Rahm Emanuel
Lawrence Summers
Christina Romer
Peter Orszag
Steven Chu
Melody Barnes
Lisa P. Jackson
Nancy Sutley
Carol Browner
Timothy Geithner
Neal Wolin
Mona Sutphen
James Jones
Xav Briggs
Phil Schirilo
David Axelrod
Valerie Jarrett

Saving the World one Popsicle Stick at a Time

I truly believe we are going to solve global climate change by switching over the Federal vehicle fleet to Priuses and squeezing some more caulk between our door shims and window panes and recycling the deep fried remnants of our Whoppers to power the farm combines endlessly plowing our Corn Pops. And that ought to employ tens of millions of people in real good-paying jobs for many years to come, at a minimum. I mean, fuck incentives- let’s mandate the world to behave itself with a Bible of regulations.

There is a reason why two installments of the Cash for Clunkers tax credit program sold out in a matter of weeks and put tens of thousands of cleaner cars on the road, and a year later the stimulus program’s $5B grant based weatherization program has retrofitted less than two percent of intended houses. Not surprisingly, people rushed to save themselves money, and not surprisingly, an army of state bureaucrats couldn’t give a fuck if your house is weatherized. Generally, it’s difficult to argue that incentive and choice do not trump rules and enforcement when it comes to social policy. This is not an argument against government, but a plea for government to use a stronger set of tools.

I mean we spend 25 years of our careers trying, usually in vain, to add 1.4 years to our lives. We subtract more years trying to add more years than we statistically predict could be added. The stress level involved in decades long regulation and litigation and political triangulation aimed at reducing environmental stress seems to cause more stress than the old bastard windbag we call “the climate” could ever muster. Apparently there are legions of people waiting just a few more years for some environmental and culinary rapture, where everything is flawlessly clean and carries no risk. They’ll finally cast a line in their favorite river when the Mercury concentration drops just a few more parts per billion, or tongue that bucket of spicy KFC hot wings when the hormone levels at the chicken mills they monitor from their i-phone app dips a tosh. I for one have always just cast the line and eatin’ the fuckin’ fish. I am not so confident as to think I have much say as to when environmental Jesus will decide to make on Earth as it is in the great organic farm in the sky.

There couldn’t be a better example of this self-celebratory environmental small think than in our Nation’s capital, where they decided to Save the River and Be Green, (“Keep the River Green”?), by making you pay 5 cents for a grocery bag. For starters, if you don’t buy a grocery bag, a disposable bag to store the things you just purchased (for likely many hundreds of cents), because it costs a nickel, you have far greater things to worry about than climate change slowly whittling away at your children’s health over the next millennium, should you not starve to death before they reach adulthood, or your trash bags blowing into the pristine waters of the Anacostia- than ignoring a few inconvenient truths. Namely, the state of your personal finances and next meal.

And I wonder if the City Council that passed this even knows anything about global climate change. Do they know that a majority of greenhouse gas emissions come from coal plants, and nearly all the rest from cars, planes, trains and forest fires? Or that plastic bag curtailment could save the greenhouse gas equivalent of 14 nanoseconds of China’s economic growth? Policy like this, that lacks all perspective of magnitude or context, and yet is pitched like the Great Leap Forward at every bus station and financial transaction, forcing many an awkward conversation at cash registers across the District about whether you want a plastic bag for your tampons or 17 cans of cat food, is the codification of denial- the timeless political calculus that feigning productivity and progress while claiming credit beats the appearance of doing nothing.

I empathize deeply for the bureaucratically enmeshed career environmental regulator who has to attempt to solve global problems via a thousand little regional solutions, when obviously a couple big ones are what’s required. They usually look like they haven’t seen the light of day in four weeks, having to fill out three forms to get their three different bosses to let them write a report to seek interagency clearance, to then languish in Committee on the Hill while be slowly mutated by lobbyists beyond anything that abnormal levels of hormones could achieve. By the time they reach this point a good portion of their career, and will, has passed, and they would not last two days in the wilderness they so seek to protect- slowly adopting the same ghostly hue of the countless memoranda and email chains that pile around their cubicle sized windowless office.

No wonder so many of my generation have adopted “unorthodox lives”. No wonder so many of us hate polluters, and the fucking politicians they pay off- because we see the answer and the impediments all too clearly. In fact, it’s pretty obvious. My generation (read the surveys) says something like, “Jesus! You want to fix climate change- macro econ 101 says put a fuckin’ price on carbon, offset taxes elsewhere, and watch the clean economy build around you, employing millions of modern day Rosy the riveters and decent lower middle class jobs- the jobs that gives this country stability in the first place! But so long as coal is cheap as dirt, your plastic bag policies are a pipe dream.” After all, the primary function of government is to create middle class jobs- that soothing ointment for the many wounds of life that makes all the tedium and drudgery usually tolerable.

The more people lobby to stop global, fucking global, climate change by opting to pay a Citibank credit card bill online in lieu of getting a piece of paper mailed once a month, or inflating their fucking tires 3.2 more PSI, or turning down the thermostat two degrees, the more America loses- the whole point, a whole generation and a peerless opportunity. If irony is when something’s actual meaning is totally opposite the literal- then nothing could be more ironic than modern populist environmentalism.

The Audacity of the Grand Bargain

Seventeen years after George H. W. Bush signed the United Nations Framework Convention on Climate Change, committing the U.S. to seek greenhouse gas emissions limits, one chamber of Congress finally passed the first U.S. climate change bill in history. Coincidentally this fell on my birthday- I always thought I was the climate messiah. Too bad the 1300 page American Clean Energy and Security Act of 2009 is full of so many complicated, unnecessary and potentially dangerous provisions. The proposal commits the U.S. to reduce emissions 17% below 2005 levels by 2020 and 83% below by 2050, sets up a 20% renewable energy portfolio standard by 2020, and establishes a menagerie of committees, criterias, offsets, definitions and standards on how to measure and verify everything, all to be figured out later when these regulations are drafted.

This bill hands out all rights to emit carbon dioxide and five other gases to industries for free, in direct contrast to Obama’s campaign pledge. The results are windfall profits and the potential for an energy driven asset bubble. It provides no assurances that the price placed on carbon will actually be one that makes clean energy profitable, which was exactly the experience in Europe when they established the same system in 2005. Credits were handed out for free, and in order to get votes everyone got a big piece of the pie (resulting in more credits being handed out than there were emissions), and the price has hovered at near $0 per ton ever since, while Europe has lived with a huge regulatory bureaucracy and burden while actually increasing its greenhouse gas emissions. And if the price of carbon gets “too high”, well then more permits are handed out for free to lower the price. And if the price is still too high, well then the cap no longer applies, so everyone paid a lot of money for a big complicated system that didn’t reduce emissions. Not to mention that we are in the midst of the worst recession in three generations, largely precipitated by an asset bubble and excessive speculation in the housing market, a market that has been studied and regulated for hundreds of years. This bill sets up a multi-trillion dollar market for the next 50 years, one in which the U.S. has no experience. The same people who pushed this through so voraciously will be the same ones decrying the excesses of carbon credit default swaps and derivatives in 10 years after we have seen another huge unsustainable bubble pop.

Then there is the issue of offsets, new emissions credits that can be generated when firms offset their emissions with something that captures carbon. Except, what exactly that means and who measures it will be figured out later by the Department of Agriculture. This will take years and many lawsuits to resolve, and even then the standards may be overly broad and subject to some very clever abuse by Wall Street, who frankly I put my money on over USDA any day of the week when it comes to cleverness. Not to mention the agriculture community is in large part the regulated party, a slight conflict of interest. Then there are the trade sanction provisions. This will allow the U.S. to bring action in the WTO and UN against countries who “artificially subsidize” their products by not attaching the same carbon price as the U.S. India and China have already drawn a line in the sand and said they will reciprocate any climate change tariff or quota and challenge our actions via arbitration, which typically takes about a decade to resolve. Of course by the time this is resolved we’re already supposed to have reduced emissions nearly 20%, so we’ll either have to march on with significantly high energy costs while India and China walk, or wait until a nasty trade dispute is resolved. And of course the bill raises $650 billion in new tax revenues, not to be recycled back to the American people.

Much superior to this convoluted grand bargain, we should place a price on carbon so it is the cheapest alternative, rebate it back to the American people, and cut out 1000 pages of special interests pay-offs in the process. If we want a clean energy economy, we don’t need the government telling every business and consumer exactly how much carbon they can emit every year for the next 50 years. And we don’t need dozens of new programs and thousands of new bureaucrats trying to figure out how much we’re emitting in the first place. All we need is for clean, renewable energy to be cheaper than dirty finite energy. If clean energy is cheaper, consumers will buy it, there will be demand pull. If clean energy is cheaper, it will represent a larger profit margin and greater return on investment for producers, there will be supply push. The price is the market maker, not the government. This bill could very well result in the grotesque situation of firms producing unprofitable products for consumers who are forced to pay more for them. Many people on the Hill act as though once you acknowledge the reality of climate change, there can only be one way to address it. There is no discussion of the multiple potential approaches and associated tradeoffs. Just one bill, and a lot of gray-haired men ramming it down everyone’s throat. The consequences of such little context for debate could be some very unintended consequences.

The Obama Administration is pushing hard on so many mega issues- health care, financial regulatory reform, energy and climate change, the largest budget in the history of the world, and now it looks like immigration too. The implicit tradeoff with this ‘boil the ocean’ approach, in contrast for instance to a more incrementalist one, is it requires engagement with the entire universe of very powerful special interests. You either have to commit to hard slow negotiations with the lobbies, and take very public and potentially damaging defeats in the process, or give them broad sway in order to get votes and flattering headlines, but live with policies you may come to regret. Obama and chief whip Emmanuel have consciously chosen to attempt to complete their entire agenda in what would be a truly historical first term (and guarantee for a second) in exchange for being very willing to play ball with the interests they want to regulate. The stimulus was a prime example. The White House sent a list of broad goals and top line numbers up to the Hill, and like throwing meat to a pack of ravenous dogs said, “fill in the details.” Lobbyists get a bloated bill full of new government contracts, Congress gets the support of their local haymakers, and the White House gets a resounding legislative victory. We also get a lot debt, a still increasing unemployment rate, and a bill the American people are increasingly souring on. If all that bill produces is a few hundred thousand jobs, and nearly a trillion dollars in new debt, that could be just the opening the GOP needs. (*POSTSCRIPT: Excerpt from Fall 2010 Paper: "Mr. Obama is already faced with the reality that voters have, fairly or not, decided that his first big effort to revive the economy, the $800 billion package enacted right after he took office, was a qualified failure, and that anything tagged as further 'stimulus' will be cast by Republicans as throwing good money after bad.")

And if all this climate bill produces is mountains of new regulations, costs, and system gaming, with few emissions reductions (like Europe), then the White House just gave the GOP a gaping hole to meander through. Obama said at the time he was pushing the stimulus, "my job depends on this bill"- he knew the risk he was taking. If politics is the art of the possible, then this is some very fine art. Perhaps it’s impossible to achieve much better, but we won’t know unless we try. The bill that was passed Friday shows more about how many people want to be Rahm Emmanuel’s friend, and who don’t want to cross Henry Waxman, than about who wants to actually usher in a clean economy in the most efficient way.

Cap n’ Trade = Tax n’ Trade = Tax n’ (Bubble + Windfall)

There has been a lot of talk about a market-based cap and trade system as the ticket to a clean energy future. It’s a good solution. It could work. But it also carries significant risk, risk that a revenue neutral price signal (tax) would not. A recent MIT report highlights the expediency involved in getting climate policy right the first time. This 2009 study projects a median increase of 5.1 C (9.2 F) by 2100, up from a 2003 projection of 2.3 C. This kind of warming will have serious implications on everything from biodiversity to agricultural and forestry production to sea levels on a scale of meters. Any policy the United States seriously puts in place will take years. The EPA for instance has just completed a draft mandatory reporting rule for every producer that emits more than 25,000 pounds of GHGs a year, about 13,000 in the U.S. It has taken years of dialogue to get to this point. The rule still has to be finalized, then a registry set up ands tested, and then the actual cap would have to be developed, and then a tidal wave of litigation resolved. The point is, after all of this is sorted through, the system we get better work. Because of the potential for bubbles, price manipulation and windfall profits in a cap system, there is an elevated risk that it might not. The resultant public pushback and backlash in Washington could very well cause significant modifications if not outright repeal of such a system.

There are three basic issues with a cap system: 1) it’s just a nicer word for a tax because a cap creates scarcity which increases prices 2) even if the permits are auctioned off at the outset if can still result in huge windfall profits that can distort markets and create bubbles and 3) there is an implicit trade-off between price volatility and emissions reductions. This last point is because there is either a price ceiling or there isn’t. Without one, prices can be as high as the market will allow. In the case of the acid rain market, permits got above $1,000/ton and last year showed 75% year over year price volatility. This is far from good for businesses, investors or consumers. And this is in a market where there are readily available technological substitutes. Low sulfur coal is abundant. Scrubbers that capture SO2 and NO2 exist and are cheap. The same is not true for GHG reductions, so there is every reason to think that without a ceiling the price in the GHG market would be higher not lower than the already very high-priced and volatile acid rain market. However, if there is a ceiling, it is maintained in the same way the Federal Reserve targets interest rates, by open market operations with a reserve of credits. In the Fed’s case, reserves in cash, in the GHG market the reserves would be GHG credits. But what happens if you run out of these credits held in reserve? In other words, what happens if it takes more credits than have been set aside to deflate the price to the level prescribed in law? Well then you just create more permits, oh and there goes the whole point of the system – because you’re above the cap, e.g. you’re not reducing emissions which is a primary purpose of the system.

And it is often said that the issue of windfall profits, assigning private rights to a previously non-exclusive public good (like atmospheric emissions) that enriches the recipient of the now newly minted asset class, can be solved with a 100% auction system. Why is this an issue? Say the auction sells credits to the market at $5/ton CO2. The EU and Chicago Climate exchange (the largest U.S. exchange for GHG emissions) have historically traded CO2 at around $4 ton, so in all likelihood $5 is a very high initial assumption and it’ll be more like $2. But even if it’s $5, these permits will be held onto by the market until they appreciate. And the anxiety alone of a new energy scarce world will probably lead to significant appreciation right away. Not to mention that when a firm needs to buy these credits they have few short terms options and so it’s not hard to imagine them being bid up. Now if the price in the market is $20/ton, then there is a 300% windfall, the asset netted 3x what it cost, equivalent to a 75% subsidy. If there was no auction, the windfall would be infinite (something for nothing) – so it’s less windfall than without an auction, but still a windfall. Windfalls are basically strong subsidies, and subsidies distort price signals, create artificial value and expands the size of the market because of the elasticity of demand. So there is value creation absent new productivity, and absent new wealth creation these prices can not be supported indefinitely, they will have to fall. E.g. a classic boom and bust cycle – originating in windfall profits. In short, if firms get assets that trade at $20 for $5 they have a $15 profit margin, which is a good thing for the firm, but that $15 now has to be put somewhere. And because it was created simply by an actuarial identity, because the government said the credits will be sold for that price, and not because of $15 productivity gain, this $15 will contribute towards inflation and asset appreciation that is not sustainable in the mid-run.

Cap and trade can work, it is just that we must be sober about the risk it carries and think hard about getting it right. One approach would be to design a system that is entirely revenue neutral – so all that new money out there is offset by government spending. Another approach might be to smooth out price volatility by creating larger margin calls or position limits. Or, here’s another idea.

The Next Industrial Boom

Carbon Tax Shift Reflects Broad Consensus

Jamie Dimon, Chairman and CEO JPMorgan Chase & Co. “We don’t have an energy policy, we don’t have an environmental policy, we don’t have an education policy, we don’t have an infrastructure policy. And folks, these are not partisan, ok? These are more long term. We may have, I’m going to call it institutional sclerosis. You’ve seen it happen with huge institutions, with the British Empire. We are unable to make some tough decisions, for example, it would be a shame to let gas go below $3.50 or $3.25 a gallon – we should add the taxes to BTU, charge energy. We’ll all learn to be a lot more efficient, it’s not that big a deal…And then you also have alternative energy, people aren’t gonna put $100 billion into alternative energy if oil can go back to $50. And it’s a commodity, there will be a surplus one day and it will go down. But that fortitude, someone’s gotta say the truth and help us get it done. And you the citizens of this country, I think we’re gonna have to give it back to lower paid people. You know, so they’re losing $2000 a year now on oil and on food, so it’s gotta come out of payroll taxes or low income, and we shouldn’t be selfish about it. We need a real policy, and once you have a real policy, a serious policy of the United States of America, oil future prices will start to come down…I think if we don’t get our hands around this energy issue we could severely damage the future health of the United States.”

Vinod Khosla: “From an investment perspective, the current climate finds businesses in a holding pattern, unwilling to fully commit resources because of what may happen next – carbon pricing and a fuller appreciation of the externalities of our current energy sources has the potential to blow the old investment models out of the water. What sane CEO would bet that no climate change legislation will be enacted in the next fifty years, the typical life of their investments? We must remove this unnecessary risk for our businesses. The devil we know is better than the one we don’t when it comes to climate change legislation.”


They don't come much smarter than Mr. Dimon and Mr. Khosla. And they are dead right that the way to solve climate change, improve our national security, and usher in a real, sustained economic boom for the next couple of decades is to tax income or labor less, and CO2 more. More incentives on good things and you get more of them. Less incentives on bad things, you get less. Just some of the wonders that follow from competitive, fungible markets with efficient price signals (and big externalities like climate change are not efficient!) A green (referring to both dollars and the environment) is by definition more efficient, or Pareto optimal. So let's get into the the details about one proposal that would do exactly what these gentlmen are proposing, the Carbon Tax Center's policy, which advocates a REVENUE NEUTRAL carbon tax - meaning it is not a tax hike! Rather it shifts the burden from income and productivity to dangerous greenhouse gases. CO2 should be taxed as upstream as possible, either at the well-head if it's domestic or the port if it's foreign. A good price signal would be $25/ton CO2. At this rate you could slice some $50 billion a year off income taxes, or the payroll tax, or just mail every American a check for a couple hundred dollars. And at this price, clean coal with carbon capture (IGCC + CCS) is cheaper than current coal, because of the tax savings from not emitting the CO2. Coal currently costs about 2.5 cents/kWh, clean coal about 10 cents/kWh. Prototyped concentrated solar power (CSP, like solar thermal, which is way better than photovoltaic and already has baseload reliability) today costs about 7 cents/kWh. Get it? At this price point solar beats coal! And this means lots of new investments and jobs and growth. And these technologies will not just create more economic opportunities, but better ones. It is estimated for instance that each gigawatt of solar thermal energy will require 3,400 construction jobs and 250 permanent employees, twice the rate as a typical coal or gas plant. (Krupp, 65) So now more digging....

The CTC’s proposed $37 per ton revenue-neutral carbon tax, ratcheted up the same amount each year over the next decade, is consistent with the recommended range of both the U.N. Intergovernmental Panel on Climate Change, and the influential Stern Review on the Economics of Climate Change. A $37/ton carbon tax is equivalent to about a $10 per ton tax on carbon dioxide. CO2 would then have a price of about $100/ton at the end of 10 years under the CTC’s plan, or about $80/ton CO2 when adjusted for inflation.

This price point is consistent with the range of recommended prices provided by the IPCC and Stern review, and close to the conclusions of the Inter-Academy Council of Sciences. It is the consensus of these reports that such a level would provide the long-term price signal necessary for renewable technologies, from solar-thermal to carbon capture and storage, to be deployed at scale. It is also the consensus that it would stabilize CO2 concentrations at the threshold level of 550 ppm by century’s end. Absent such a price signal, CO2 levels under “business as usual” scenarios are projected to triple from pre-industrial levels to around 840 ppm. The last time CO2 levels were that high was about 40 million years ago when crocodiles roamed the North Pole.

The Intergovernmental Panel on Climate Change cites a range of $20-80 per ton of CO2 equivalent by 2030 as the necessary level to stabilize emissions at 550 ppm. (IPCC Working Group III Report Summary for Policymakers, 19) The Stern Review cites a review of 103 separate estimates of the social cost of carbon gathered from 28 published papers. It determines the mean abatement cost from these estimates to be $29 per ton CO2 equivalent. (Stern, 287) However, the Review goes on to develop an economic model that more accurately incorporates the market valuation of risk from potential catastrophic climate change, concluding, “We would therefore point to numbers for the ‘business as usual’ social cost of carbon well above (perhaps a factor of three times) the Tol mean of $29/tCO2.” (Stern, 287) The report recommends a real CO2 price of $85/ton CO2 equivalent. The $80/ton real price of CO2 advocated by the Carbon Tax Center is then consistent with both the IPCC and Stern Review estimates.

The $80/ton CO2 price signal is also generally consistent with the conclusions of the Inter-Academy Council of Arts and Sciences. As the Inter-Academy emphasizes, it is far more critical that such a price signal be certain and long-term than it is to mandate emission cuts year by year, as a cap would do. As they write in their recent report, Lighting the Way: Toward A Sustainable Energy Future, “establishing in every market that there eventually will be an emissions price – in the range of US$ 27-41 per ton of carbon dioxide equivalent – is more important than establishing exactly the number of years in which such a transition will occur.” (Chapter 4, 131) The Carbon Tax Center’s policy would put the price of CO2 in this range over a period of three or four years. It would then continue to ratchet up the price of CO2 as the transition costs to clean energies decreased alongside the renewed incentive for the development and deployment of such technologies. These reduced transition costs would act to mute the economic costs of further CO2 price increases.

It is notable that all three reports, reflecting the consensus of the scientific community, determine that there is a clear threshold price level necessary to induce widespread clean technology development. Such a price level is far from guaranteed under a cap and trade system, where prices can exhibit significant volatility. Under the Chicago Climate Exchange for example, the largest traded market in the world for greenhouse gas emissions allowances, the price per ton of CO2 has fluctuated between $1-7 over the past five years since its founding. This falls $13 below the lowest recommended level mentioned in the Stern Report, IPCC or the Inter-Academy. Such a low price level per ton does not make clean energies cost-competitive, nor does it provide the necessary incentive to prevent harmful anthropogenic climate change. A carbon tax shift guarantees price-competitiveness for renewable energies.

It is estimated that in the long-term carbon dioxide will need a price per ton of at least $30 to make the vitally important technology of carbon capture and sequestration (CCS) cost-competitive. This is no small matter. As Stern notes, without CCS the world will need a “dramatic shift away from existing fossil fuel technologies” (Stern, 368). With atmospheric concentrations of CO2 already at 380 ppm, and almost certainly to reach at least 450 ppm in the coming decades, some scientists say we cannot reduce concentrations below 550 ppm without carbon capture and storage. Given the pervasiveness and entrenched interests of coal producers in both the United States and emerging economies like China, it is unlikely any mitigation legislation could move forward without meaningfully incenting CCS technology.

Dr. Klaus Lackner, Professor of Geophysics and Director of the Lenfest Center for Sustainable Energy at Columbia University, estimates the long-term cost of capturing and storing CO2 to be at or below $30 ton. He has pioneered a technology that can suck CO2 out of the air and store it safely underground in an inert solid form. As he comments, “With off-the-shelf items we have right now, I can drive the cost of CO2 capture from air below $100 per ton of CO2. And I feel that, if you pursue this longer, the ultimate end game will be below $30 per ton of CO2.” (http://www.pbs.org/newshour/bb/environment/jan-june06/globalwarming_06-08.html) If his forecast proves correct, a real price of about $80/ton CO2 makes widespread deployment of CCS a no-brainer. If CCS cost reductions prove harder to come by, $80/ton CO2 makes carbon capture technologies essentially cost-competitive at current prices. The Carbon Tax Center’s plan provides the necessary incentive for the deployment of CCS under either scenario.

The bottom line is that an $80/ton long-term real price on CO2 reflects a broad scientific consensus. It is the level needed to incent the critically important long-term deployment of carbon capture and sequestration technology. Without CCS, hundreds of new coal plants in developing countries will pour tens of billions of tons of CO2 into the atmosphere in the coming decades. Without CCS you will be ignoring 55% of current CO2 emissions in the United States. CCS is a game changer. With a cap system there is no guarantee, to firms or developers or society, that CCS is an investment that will pay off. At an average price of some $4/ton CO2, like we see in the Chicago Climate Exchange or the European Union, it would be much cheaper for energy providers just to purchase allowances (or not comply) than retrofit plants with carbon capture technologies.

A tax shift is not just better for the climate and emerging clean technologies than cap and trade, it also offers the greatest potential for political compromise. These political strengths were on full display during the recent U.S. Senate debate of the Liebermann-Warner Climate Security Act. Critics of the Act correctly pointed out that the cap and trade system represents an over $4 trillion tax increase, as about 50% of the revenues raised over the next 40 years via auctioned permits are kept by the Treasury.

Add on a “safety-valve” provision (which would put a price ceiling of about $12-22 per ton CO2 via the government releasing (worthless) permits as necessary to maintain the ceiling) there is no clear price signal for carbon capture and sequestration deployment, or solar for that matter. Additionally, with a safety-valve market participants would be forced to purchase and trade permits that don’t even maintain the stated emissions reduction goals, as they are above the cap. Throw in the potential for massive volatility, and it is unclear what the adjustment and abatement costs for regulated firms will ultimately be under a cap system. And this uncertainty will only keep more clean energy capital waiting on the sidelines. As the Wall Street Journal points out, The Climate Security Act would represent the largest income redistribution since the advent of the income tax. With a tax shift from income or labor onto carbon this potent and effective argument against tackling global climate change disappears overnight.

Additionally, by returning the revenues of a carbon tax to the private sector, foreign companies that do not yet have to similarly comply will not gain a competitive advantage as domestic tax levels will remain unchanged. Such concerns could also probably be offset with WTO compliant (particularly GATT Articles 3, 11 and 20 - paper I wrote on this) cross border adjustments (tariffs) for countries that have less stringent standards than the U.S. This however would lead to long and unpleasant arbitration and probably result in retaliation by large U.S. trading partners for years to come. The fact is that with a meaningful price on carbon the United States will see huge new economic investment and growth. Jobs and capital will flow to areas like direct current transmission lines, so called “smart grids” that allow consumers to sell clean energy back to utilities via feed-in tariffs, carbon capture retrofitting, and proven renewable energy sources, among many others. Once it is apparent that a revenue neutral price on carbon is a win for the economy, the environment and national security, other countries will not be able to jump on the bandwagon fast enough. With SO2, ozone and particulate pollution it was either the EU or U.S. who first led and lesser developed countries, like China and India, who soon followed. The same would happen if the U.S. led by putting a real price on carbon. The opportunities stare the United States in the face.

The CTC’s plan has the science right. It is consistent with every major international consensus report on the economics of climate change. It is consistent with the incentive needed for critically important carbon capture and renewable energy technologies. It is revenue-neutral, unlike the fatally-flawed Climate Security Act. And with the potential for commensurate tax offsets, ranging from corporate to personal income taxes, to the FICA payroll tax, to straight dividends returned to every household – it offers a tremendous opportunity for both increased economic efficiency and political compromise. Oh yeah, and it could save the planet too.

Let's Do Something About Climate Change - But Let's Get it Right

10 Reasons Why a Tax Shift is Better than Cap and Trade

By Wyatt Boyd, The Earth Institute at Columbia University

1) Command and Control versus Market Forces. A cap dictates emissions levels and creates price uncertainty. With a safety valve provision (the government will release as many permits as it takes to get below a price ceiling) it completely loses the so-called “guarantee” of emissions reductions. Then it’s just like a tax, except more expensive because of the administrative and regulatory costs. A carbon tax gives price certainty and allows the market to do what it does best – allocate resources given complete price information. In the SO2 market, permits reached prices excess of $1,000 - do you think a cap and trade system will be accepted without a safety valve? Yet with it you can imagine a scenario where firms and states are paying for permits with absolutely no real value (they're above the cap) which is also unacceptable, and expensive.

2) A cap and trade system is a tax hike, while a carbon tax, ironically, is not. With a revenue-neutral carbon tax, money could be returned to taxpayers in two basic ways. Either a check could be cut and mailed to every taxpayer, similar to the petroleum fund in Alaska, or the amount raised in carbon could be offset in payroll and income tax rates. Either way the money will go back to the people and the overall tax burden will not increase. Does Liebermann-Warner have a provision to return money to the taxpayers? No. It will create scarcity in the carbon market, thus price increases that all Americans will have to face – with absolutely no relief.

3) Windfall Profits. Initially in Liebermann-Warner, over 70% of the carbon credits are handed out, for free, to applicable firms. Assigning private property rights to a current public good and then handing them out has a name – windfall profits. A cap and trade system will essentially give the largest and most polluting firms billions of dollars in new assets and value on their balance sheets. This creates distortions in the market and perverse incentives for companies to support a cap and trade system. And then when they do auction off the allowances, the Treasury keeps about $5 trillion of the $6.7 trilloin generated over the lifetime of the Act. It should be revenue neutral, like a tax shift would be.

4) Traders Bonanza. A cap and trade system would mean a huge new overnight business for traders and brokerages all over the world. As the traders say, volatility is valuable. It allows arbitrage and profits. A huge push for Liebermann-Warner has nothing to do with the environment, national security, or the economy – but solely the ability for traders to make a healthy percentage profit on each and every carbon credit trade. If that sounds expensive it’s because it is. As Mayor Bloomberg (who knows something about Wall Street as he only built its backbone, or terminal) said about the costs of cap and trade versus taxes, “if anything, they will be higher under cap-and-trade, because middlemen will be making money off the trades.”

Additionally, oil executives have recently testified that the “true”, supply-demand determined, price of oil today is about $60 per barrel. This makes sense considering Saudi Arabia alone has 1.8 million barrels a day in spare capacity and U.S. refineries are only operating at 85% capacity. There are over 2,000 federally approved drilling permits in the U.S. representing over 30 milion acres of land that are currently undeveloped. It is not because of scarcity that prices today are in uncharted territory. A full half or more of current prices result rather from speculation and irrational exuberance. When one long position pays off, it can create a stampede of similar positions and upward price spirals that further incent a long (call) position – a bubble. Do we want such speculation to extend to all carbon-based sources via a cap and trade system? Ironically, rising gas prices make a revenue neutral carbon tax less popular, when in fact it is the system most likely to control price surges that occur on the futures market and provide greater ultimate price containment.


5) Price Threshold. Carbon has a real (currently external) cost, and there is a critical cost needed to provide incentives for large-scale deployment of technologies like solar or carbon capture and storage. According to Sir Nicholas Stern, the IPCC and the International Foundation for Science, it’s around $30/ton of CO2. Setting a cap and having price volatility provides great uncertainty as to whether this price point will be reached. For instance, the Chicago Climate Exchange, the biggest cap system today in the world, prices carbon now at about $4/ton – not even close to providing the necessary level of incentives to combat climate change. There is a “tipping point” for renewables and new technologies to be deployed at scale and it demands the price certainty only a tax shift can give.

6) Efficiency. A tax shift from income and labor onto carbon produces a more efficient outcome via reducing climate change emissions and increasing productivity. Providing more incentives for good things (like income) and less for bad things (like greenhouse gases) results in more of the good and less of the bad, which is better for everyone. Mayor Bloomberg summarized it well in a recent carbon tax endorsement speech that can be found at http://cityroom.blogs.nytimes.com/2007/11/02/bloomberg-calls-for-tax-on-carbon-emissions/



7) Non-Partisan Congressional Budget Office Findings. The CBO’s recent report “Policy Options for Reducing CO2 Emissions” (http://www.cbo.gov/ftpdocs/89xx/doc8934/toc.htm) concludes a carbon tax is up to 5 times as efficient as a fixed cap system, writing: “A tax on emissions would be the most efficient incentive-based option for reducing emissions and could be relatively easy to implement.” This is largely because a tax lets firms smooth out their investments in clean technologies over time, rather than being legally forced to do it in mandated timeframes courtesy of a cap system.

8) Politically Possible. British Columbia is going to implement a tax shift from business and personal income to carbon starting in July. French President Sarkozy has endorsed a revenue neutral tax, saying "We need to profoundly revise all of our taxes...to tax pollution more, including fossil fuels, and to tax labour less." This is politically doable. (http://afp.google.com/article/ALeqM5gx9Wyuo7XJiydxsqseJmVdX3-MoQ)

9) Regulation and Litigation Nightmare. If Liebermann-Warner is passed it will take years for the EPA to draft regulation and settle an avalanche of suits from firms seeking exemption. Given the EPA’s current denial of California’s emissions waver under the Clean Air Act, I don’t have to tell you how arduous it can be to get any agency to enforce the law – even if it’s clearly in their purview. A shift in the tax code would be a very simple and unambiguous piece of legislation and could be implemented years before a cap and trade program even cleared the courts. Where does the government have more competency than in tax policy?

10) The Dean of Climate Change has spoken. In the words of Former vice-President Al Gore in his Nobel speech: “And most important of all, we need to put a price on carbon – with a CO2 tax that is then rebated back to the people, progressively, according to the laws of each nation, in ways that shift the burden of taxation from employment to pollution. This is by far the most effective and simplest way to accelerate solutions to this crisis.”