If Duke reduces coal power demand with residential hot water collectors, clotheslines, swirl light bulbs, attached greenhouses with Trombe walls, cogeneration displacing carbon fuels, and public promotion to not use electricity then how do output-based GHG carrots and sticks play a role?  Where does Roger's fiduciary responsibilities lie with regards to these low hanging fruits?  Carbon tax (by any other name) does not need to be complicated.

My research background with market solutions is with water quality - so I've been extrapolating most of my knowledge of those systems to try and join the debate on carbon policies.  In water quality cases, we want a mass cap, so at first I didn't understand why that doesn't work as well for carbon dioxide.

I wasn't convinced the first time I read through this, but now it's starting to make sense to me.  I think I agree, but I'm going to have to give it more thought before I can add anything useful.

Additionality? No need -- just good guys and bad guys, selling or buying GHG emissions.

This sentiment applies exactly as well to energy producers under a cap. You might not like a cap for a variety of other reasons, but additionality remains a red herring.

Otherwise, sign me up. I'm yet convinced that such a system would be simpler than any other system under consideration -- there's a lot of blue sky between a blog post and bill before congress -- but I can see the merits.

www.terrapass.com/blog

Carbon Taxed at $100/ton C02 (from Wikipedia: Carbon Tax)

• $0.1027 and $0.1137 for old-style coal
  
• $0.0853 and $0.0945 per KWh for coal using 2005 technology (combined cycle)
  
• $0.0385 per KWh for natural gas using 2005 technology
  
• $0.978 per gallon of gasoline
  
• $1.119 per gallon of diesel
  
• $1.055 per gallon of jet fuel

Simply transfer half of that revenue to a $.15/kwh feed-in tarrif for wind/solar/geothermal power sources and there will be plenty of money left over for for a direct per/capita rebate to citizens.

Complicated huh?

Paybacks for solar and wind projects will shorten considerably and coal will be pulled off-line as fast as replacement power can be found. As long as everybody understands the cookies come directly from the carbon fund and expire when the air is clean there is no problem. Early adaptors get paid as they should and the market will transition to clean energy. If Nanosolar can produce solar panels cheaper than new coal there won't be a problem.

The average person will see cash in their pockets after paying for the added cost of power and fuel and efficiency changes at home will look like a very good idea. The average commercial power user will have to scramble a bit to reduce power use before their competitors do. The supermarket with the cheapest chiller plant will be able to offer lower prices than the one without.

I pretty sure that I'm as sharp as most college graduates and I can't make sense of that cap-and-trade mess up there. It looks like an inside game to me. If it passes the whole nation will replicate the California/Enron experience. A complicated law that penalizes retail consumers to profit insiders.

Put the Carbon Back

Applying your example to the arguments in this link, where they are claiming offsets for shutting down old coal plants, I could see how your output-based GHG scheme would short circuit endless lawsuits dealing with additionality. You would reduce CO2 output below existing standards, or you would not--end of story.

The mitigation of Cliffside's carbon-dioxide emissions will begin with the closure of the four older units at Cliffside. Between 2015 and 2018, Duke also must shut down an additional 800 megawatts of coal-fired generating units at other North Carolina plants that lack modern pollution controls.

I don't see tricky bits 1 & 2 as being show stoppers. It wouldn't be that hard to monitor fuel consumption.

Bit 3 is extremely problematic. A paper trail is essentially a certification program. We all know how well those work and how susceptible they are to gaming by interested parties. Some countries in Europe are sourcing their ethanol from older established sugarcane fields using the paper trail method. But all that did was plow up the Cerrado to meet the needs of less fussy customers because their ethanol supply had been diverted to Europe.

Essentially you would have to prove that your product did not release more GHG via displacement effects, excessive nitrous oxide releases, and on and on. That is probably not possible. Not to mention biodiversity issues.

Diverting biomass from landfills could probably be shown to meet those criteria. Growing it on unarable land might, but if it isn't arable, how can you grow biomass on it? How do you keep people from sending biomass to a landfill so it can be diverted?

We should start by demanding that the government stop mandating and subsidizing it. The problem may just go away.

It also could not raise the price of food, a moral imperative. With 3 billion more people on the way it might be wiser to just make most biofuels illegal, like cocaine and pot.

In the end, it all comes down to biodiversity. Poison Darts--Protecting the biodiversity of our world

But how do you decide the allocations for a cement plant? For a computer chip factory? Both have substantial emissions. Are you allocating per dollar of output? So emissions allowance would rise if prices did? Or are you talking emissions per thermal unit generated for use in industrial processes? Cause that is really input, not output. Or what? Note that this a question, not a debating point. I really don't see how you do this.

Do note though that in a market-wide system, the carbon impacts of the fertilizer would be factored into the fertilizer cost and don't need to be re-ascribed to the fuels.  (As I propose above, this would comprise thermal use, and be paid by the fertilizer mfr.)  Soil carbon and sustainable harvest would still need to be addressed, but no more than in other models.

I suppose one could make the case that the person who is emitting >0, but less than the ton/unit level got an allocation, but I'm not sure that matters in this case, because the net impact is to drive investment towards stuff that is cleaner than average, thereby driving down the average and thereby driving down total atmospheric GHGs.  (As compared to an allowance in a more traditional cap & trade model, which creates a cash windfall to anyone with the good fortune to be grandfathered and gives them an artificial advantage relative to new cleaner - but not carbon-free - power.)

With electric, as you note, it's easy to measure output, since there is a spinning meter registering kWh.  

With thermal, by contrast, you have very good metering on the input side (your fuel bill), but little on the output side (Btus to serve some purpose.)  Ironically, if all we did was encourage metering, we'd induce massive efficiency - as we've found in all the industrial energy projects we've done.  (Aside: energy managers are typically responsible for operating industrial energy assets, and perhaps for buying fuel, but do not then "bill" the other side of the operation for useful Btu production.  One of the ways that third-party outsourcing of energy assets creates value is simply by slapping on meters, which suddenly make it obvious where plants need to be tightened up.  We have found instances where industrials were quite literally throwing away millions of dollars worth of natural gas a year due to bad metering.  Buttoning those up is perhaps the fastest payback GHG reduction out there - in many cases, instant.)

So here's the general thought on how to address: the vast majority of fuel combustion devices that are used to generate thermal energy (furnaces, boilers, heaters, etc.) operate within a fairly narrow band of efficiencies - the best can approach 90% conversion efficiency and the worst are in the range of 65%, with the majority clustering around 75%.  This means that for every 100 Btus of fuel burned, the typical industrial gets 75 Btus of useful energy.

So here's the idea: you simply stipulate the low end of the range - for the sake of argument, let's say 70%, and calculate thermal based on fuel purchase and a 70% efficiency.  Then add a trap door that says that if a thermal user can provide an independent technical analysis indicating that they are operating above this level, they can - subject to regulatory review - use that # for their conversion efficiency.  By picking a low number, you give everyone an incentive to start metering (which, for the reasons described above, is a good idea in and of itself).  And if people decide they don't want to go through the effort of metering, you've at least ensured that you're on the conservative end of things.

(And as a practical matter, one could fairly easily envision a gov't review of existing equipment populations to verify the 70% number as the starting point.)

One last note: key to this (and lost in most GHG inventories) is that all fuel that is burned for reasons other than transportation or electricity generation is burned for thermal uses.  It might be to heat bldgs, boil water, sterlize autoclaves, fuse metals or induce chemical reactions - but it's all thermal.  Note also that in most of those processes, you can install metering.  But in others (for example, the coke you add to iron to make steel), you have to either rely on theoretical calculations of efficiency or else use my stipulated method.  In all cases though, the key is to get to output.

Note though that per this model, carbon intensive energy becomes more expensive, giving greater incentives to chase negawatts precisely in those areas where a negawatt has the maximum carbon-reduction.

That said, there are benefits from energy efficiency that are greater than GHG impacts, and I certainly wouldn't argue that one shouldn't install CFLs just because your electricity comes from a solar panel.  But in the interests of keeping the regulation as focused as possible, I'd suggest that those non-carbon issues are best encouraged through non-carbon policies, rather than trying to trap all good things in a GHG bill.

Fair restatement? Still not understanding you properly?

Suprise you're a winner! Here's another $.20/kwh produced to help you pay for your equipment.

Suppose you want to cheat and purchase 234,000 tons of very low grade "lubricating graphite?" Well tough noogies we're lumping you with the losers and charging you $350/ton tax. If you want to burn that as fuel it's your problem to get the most value from that.

Pretty complicated rules there. How simple could that be?

Since the ultimate goal is to shut out the coal burners as soon as possible and then the natural gas burners shortly after that's not a problem.

Measure input, carbon (coal) that arrives on the train, and assume that all of that coal will be burned and the CO2 goes into the atmosphere. The fuel purchaser gets tagged for all of it and if they're producing toner or some other carbon rich product they can document and apply for a rebate.

If the producer wants to make more money they will do their best to maximize product, or kwh, delivered. Why the hell said coal burner should get a break for a solar thermal plant on the other side of the country, or the world is beyond me. That particular burner is still spewing pollutants into the atmosphere. It should still pay a penalty.

The solar plant on the other side of the planet doesn't divert load from the coal burner. It provides additional capacity. Providing capacity doesn't stop you from burning coal; only stopping the burning of coal does that. The coal burner wants a clear path that allows him to keep burning coal without undue hazard; hence the support for cap-and-trade.

It seems crazy to me. I want utility company directors to stay awake nights thinking they are one fat hurricane away from having their coal plant shut down by angry mobs. I want them to assign lots of undue hazard to burning coal. I'm not alone in this as this post today on Gristmill shows the financial markets are already assuming undue financial hazard to burn coal.

Cap-and-trade is really game-and-pollute. If anybody thought it would work Wall Street would be financing coal plants.

Put the Carbon Back

Let me guesstimate some numbers to show an example.  Natural gas when burned emits something like 130 lbs of CO2 per MMBtu.  Coal emits something on the order of 200.  Oil in between.  So I will presume we do an audit of all the fuel used for thermal purposes (easy to do, but I haven't done it) and we determine that the average thermal fuel used as a carbon signature of 150 lbs/MMBtu of fuel burned.  Which means that at our 70% stipulated efficiency, we have a output standard with the midpoint (allowance, if you will) of 150 / 0.7 = 214 lbs/MMBtu of delivered, useful energy.

Now let's say that you have a coal boiler at your factory, consuming 350,000 MMBtus/yr (about the coal demand for a midsize college steam plant).            This means that you are allowed to emit:

350,000 x 0.7 x 214 = 23,782 metric tons of CO2 per year.  (I'm leaving out the lbs to metric tons conversion, but hopefully you're following me.)

Your actual emissions are:

350,000 x 200 = 31,752 metric tons/yr

And therefore you must buy the excess from someone else with credits to sell - from folks who are on the other side of that metric.

To get to a point where you have credits to sell, you have to pursue either low/zero carbon fuels and/or greater energy efficiency.  (Note also that if you cogenerate, you immediately get more "denominator" from a single fuel source, thus rewarding that particular flavor of efficiency.)

Hopefully I did my math right... Make sense?

A silly example: if you want people to jump up and down, pay them a buck every time they jump.  This will encourage a lot of up and downing.  If, on the other hand, we seek to encourage jumping up and down by paying anyone who jumps up and down on a pogo stick, we may encourage jumping - but we've also driven capital dollars towards pogo sticks and away from trampolines, bouncy castles and plain old sneakers.  

I don't mean to be flippant, but hope my point is illustrative.  The goal is not to deploy geothermal, solar and wind: it is to lower carbon. Selectively encouraging an incomplete subset of technologies towards that goal is what I meant when I referred to winner-picking - our challenge is too great not to make sure that we have every possible horse in the race.

1) I assume allocations are based on initial delivered BTUs, and don't change as they do.

Suppose I have a factory making tomato paste. A certain number of delivered BTUs are needed for this purpose. Now suppose instead of delivering these BTUs  more efficiently or supplying them from a solar source I switch to a filtering system that uses many, many fewer BTUS. Because the few remaining BTUs I need are low temperature ones, deliverd by a boiler designed to produce high temperatures, those deliverable BTUs may even be produced less effficiently. But the new system uses so much less heat that I still reduce my emissions by 90%. In other words, I am not producing BTUs more efficiently, but I am producing tomato paste more efficiently. Presumably I still have allowances based on my old usage, so now have emission credits to sell. My allowance did  not get lowered when I reduced the number of BTUs I needed. True?

2)On the other hand if my factory uses a filtering rather than heating to reduce tomatoes to tomato paste to begin with, my allowances are based on the actual number of BTUs I use. So if Fred down the road makes tomato paste by the more old fashioned means, and uses more BTUs, he gets more initial allowances than I do, because he uses lots of BTUs , and I use only a few. That is true even though the end product is the same - tomato paste. Allowances are allocated based on delivered BTUs, not on products those BTUs help create. True?

A) Continued burning of fossil fuels leading to global warming and the extinction of entire local ecosystems. This includes the possible early death of well over a billion people.

B) Anything else. That is any other means of keeping the existing human population of the planet alive while we try to mitigate this mess. This could include solar, wind, geothermal, tidal, hyrdrokinetic, wave power, biomass and pogo sticks for all I care. Essentially all other options that do not release further fossilized carbon into the atmosphere are superior. Biodiversity cannot be replaced; once lost it's gone forever.

As I see it cap-and-trade is basically a means of holding the door for option A open as long as possible. The more complexity there is to a cap-and-trade program the longer that door stays open. Sean keeps referring to long-term predictable contracts for new cogeneration facilities that, surprise, will burn coal. Cap-and-trade advocate supports new coal burners; not actually a surprise.

A carbon tax in comparison could: 1) squeezes option A for cash until it's eyeballs bleed and 2) give as much of that cash as possible to any investment that replaces the services option A provided. Then option A is permanently and thoroughly deleted as a future option.

Anybody who can read the mail knows that any sea level rise at all sinks New Orleans. Miami and Sacramento are very, very likely to lose large portions of taxpaying area. Atlanta is still facing very serious drought conditions. Global warming isn't something the grandkids will have to worry about any more; it can come home to any of us very, very quickly. Simply reducing our emissions doesn't stop the trainwreck it just slows down the rate of acceleration towards the accident site.

Referring back to California's energy market again, (with apologies) there were perfectly reasonable arguments why it was supposed to work. Those same arguments were promoted by the people writing the rules, who happened to be the same people lined up to collect profits from the resulting system. The actual rule set produced was so arcane as to be a black box to almost everybody. Result: disaster. A disaster that people are still trying to excuse and deny.

With the coming disaster there's no excuse and denial kills. If it burns coal it has to be shut down.

Put the Carbon Back

The calculation that determines whether you are a buyer or seller is a function of your useful energy production, not your input energy.  The reason why my math included input energy was simply because - at present - very few boilers calculate output energy.  Fuel meters are ubiquitous, but steam meters aren't.  This can be fixed - but not overnight.  Thus my idea to stipulate a low efficiency that gives folks an incentive to prove that they are more efficient and install meters... but the operative structure throughout is delivered Btus of useful energy, just as on the electric side where the operative structure is output kWh.

Now back to your question.  If I change my process such that I need fewer Btus, then I realize a benefit by virtue of the fact that I'm buying less fuel, independent of carbon pricing.  If I had an inefficient/high carbon boiler, I would realize an additive savings from the fact that I now don't have to buy as many carbon credits either.  If I had an efficient/low carbon boiler, then maybe I don't get to sell as many credits back, but I don't think that's worth losing too much sleep over.  (Even without GHG pricing, someone with an 80% efficient boiler has less economic incentive to keep their plant insulated than one with a 60% efficient boiler, but that's a purely academic issue, and certainly wouldn't argue for providing added incentives to the efficient guy.)

On your last point about "initial allowances", I think I may have misled you.  This structure has no "starting gate" allowance such as in a cap & trade w/allowance model.  It simply sets a national (global?) standard for tons/MWh and tons/Btu, compels all who combust fuel to provide annual metering and evidence that they have bought/sold as appropriate to get to the output-based standard and then lets the market take care of the rest.  And, per the structure outlined above with annual corrections for total GHG emissions (necessary to impose a cap within this structure) and/or annual re-averaging to slowly ratchet down the tons/output metric, I would expect the tons/output value to be re-set each year.  

Now let's look at your example with Tomato Gar and Tomato Fred.  If, in year 1, Gar is below the standard and Fred is above, then Gar gets to sell carbon reductions and Fred must buy.  Now suppose in year 2 that Gar installs a filtering device so he doesn't have to run his boiler as hard.  On his annual meter, he shows that his Btu production fell and his carbon emissions fell as well.  If Gar's tons/Btu is still below the standard, Gar still gets to sell, but doesn't have quite as many to sell.  (On the other hand, you're saving $ on fuel.)  Fred, meanwhile, still has to buy the same amount, unless he has done something to change his process - or, to the degree that the standard was recalibrated in that year, a slightly different amount, but there is no economic gift given to Fred by virtue of his initial condition.  All emitters must meet the same standard in any given year, either by lowering their emissions or paying someone else to lower their's.  If you start with a high carbon intensity, you have more to pay.  Start low and you have more to sell.  This is key to the whole structure, that all tons are priced equivalently, and everyone has the same incentive to lower their emissions.  No gifts.

Clear as mud?

1. Where did you get your US GHG data from? Because you've completed excluded one of the biggest emitters of all: agriculture. All those cows and pigs and chickens at CAFOs produce a lot of methane, through enteric fermentation and then the subsequent anaerobic decay of their manure.

2. Your output-based standard seems reasonable for certain sectors where data is easily trackable and available (a point that you acknowledge). I like the idea.

3. The beauty of the Kyoto carbon offset market is this: it transfers money, skills, technology and ideas to the developing world in a novel, win-win format. Most of these CDM projects would have never occurred without carbon credits, and CDM does a great job of introducing new technologies to countries that would otherwise suffer without them (due to prohibitive costs and skills-barriers). Project developers in the industrialized world like the revenues and entryways into developing countries that offsets provide; the public, and most project owners at large likes the sexiness of carbon offsets.

4. Developing countries don't have caps or regulations on their industrial and agricultural gas emissions. Maybe they might in the future (and that, too, might be limited to India and China and no other developing country), but for your output-standard idea to work, it'll still require huge capital costs that offsets help to meet. You won't see as much technology-transfer and skills-transfers to the developing world through your output-based system, because it will be just as expensive (if not more, due to trade laws, importation of western technology, taxes, customs issues, etc.) to develop an output project in Mexico as it would in Belgium or any other developed country. There has to be some kind of market for offsets to encourage clean development in countries that don't have access to capital or have difficult, restrictive importation laws.

(Note that I pulled this data a while ago, and DOE/EIA has updated their site since, so the numbers may not be precisely the same.  I was using 2006 #s.)

The agricultural emissions are a good question, but I think that it is not "one of the biggest emitters of all".  The tables in the DOE link show that energy-related CO2 emissions are over 70% of the total.  That said, I'm certainly open to suggestions on how to craft an output based standard to include agriculture.  My gut reaction though is that - like transportation fuels - this may be a sector better covered under a tax-based structure.

I think some math is in order.   A northern CA tomato canner has a peak steam need during canning season of something like 100,000 lbs/hr, which is about 100 MMBtu/hr.  They run full bore for about 4 months of the year, and then essentially shut down, giving them an annual delivered Btu demand of 100 x 24 x 30 x 4 = 288,000 MMBtu/yr.  And if we assume that they currently have an 80% efficient steam boiler, that's 288,000 / 0.8 = 360,000 MMBtu of fuel per year.  At 130 lbs/MMBtu (assuming natural gas - this is CA, after all), that means that this facility is emitting 21,228 metric tons of CO2 per year.

Now let's look at how the model would apply to them.  Per my illustrative math above, the output based standard is set at 214 lbs/MMBtu of delivered energy.  The actual emissions of this facility is:

[21,288 x 2205 lbs/tonne] / 288,000 = 163 lbs/MMBtu.  So they are a net seller, by virtue of the fact that their emissions are lower than the national average and our system incentivizes people to steadily lower the average emissions.  Their total credit is:

(214 - 163) x 288,000 = 6,661 tonnes/year.

For the sake of argument, let's assume current gas prices of $10/MMBtu and presume that they can find a GHG buyer at $15/tonne.  Their annual energy cost for this plant is therefore:

$10/MMBtu x 360,000 MMBtu/yr = $3.6 million
minus $15/tonne x 6,661 t/y = $99,918
equals $3.5 million per year in net energy costs.

Now let's look at Tomato Gar.  He has found a way to use only half as much steam per tomato, but his facility is otherwise identical, so he needs 144,000 MMBtu/yr.  But he's got a lousy boiler - call it 50% efficient.  A total dog.  That means he needs to buy:

144,000 / 50% = 288,000 MMBtu/yr of fuel

which emits:

288,000 x 130 = 16,982 metric tonnes/year

or, 260 lbs/MMBtu of useful energy.  He is thus required to buy offsets, to the tune of:

(260 - 214) x 144,000 = 3,004 tonnes/yr

At the same gas and carbon pricing, this gives us net energy costs of:

288,000 MMBtu/yr x $10 = $2.88 million
plus 3,004 tonnes/yr x $15 = $45,069.
equals $2.92 million in net energy costs.

Thus, your process has an operating cost advantage against Fred's, for the simple reason that benefits from avoiding fuel costs are well in excess of the differential cost for your inefficiency.   (And this is with really extreme numbers.  I've seen horrendous boilers in my life, but I'm not sure I've ever seen one under 65%.)  Note also that if you were to install a boiler as efficient as Fred's, you'd save both carbon and fuel, giving you an added (carbon) incentive to do the right thing.  Meanwhile, Fred has gotten a little bit of a gain from the fact that he put in an efficient boiler, but he's still sucking wind economically against your plant, so he's got an incentive to follow your lead and cut total Btu use.

I think these incentives are precisely aligned, for the simple reason that it prices the carbon when it is used.  What happens after that point is subject to separate economic considerations.

I see a minor difference - that credit allocation would have to be by MWh produced last year, or capacity times capacity factor currently or something, obviously you can't allocate a priori based on FY2009 production in 2008.  But this is a very minor difference - the real fundamental of trading rights to get to that .6 (or w/e you set the average to) is completely the same.

So question 1 is do you see a major difference that I'm missing here?  If you don't, then I would take issue with the idea that the best thing to do with those credits is allocate them to industry, even on an output basis (which admittedly if you must do it is the way to do it).  Also, if you acknowledge that its fundamentally the same as cap with allocation by output, then I think the straightforward cap is better because you can bring industrial heating and transportation under the same cap, making it more inter-sector neutral in finding the lowest cost reductions.  

If 80% of the reductions under an economy wide cap would come from the electric power sector (which most models say they would), then why mandate equal reductions for electric power and industrial heating?  You're mandating more expensive reductions.  Or if you are going to have to set different levels for different sectors, you're opening up a real can of worms politically with making that fair.

But I'll stop here and first let you answer whether or not you see a substantial difference here.  Maybe I'm missing something.  

...that credit allocation would have to be by MWh produced last year, or capacity times capacity factor currently or something, obviously you can't allocate a priori based on FY2009 production in 2008.

That's right.  And as a practical matter, you do an algebraic true up each year, not on MWh, but on actual CO2 emissions in the given year.  Otherwise, you lose the integrity of the cap.  

I would take issue with the idea that the best thing to do with those credits is allocate them to industry

I'm not sure I understand your point, but the critical point here isn't that industry is deemed worthy, but rather that the optimal point of regulation is at the point of emissions release.  It's a point that is as obvious as it is rare in the CO2 trading space.  At the point where fuel is burned to release CO2, the emitter has a choice to change fuels, invest in different capital or any of a suite of other options, both good and bad.  In other words, it's the point where behavior can be shifted.  Too much GHG policy is instead focused on penalizing upstream sources (LNG imports, petroleum refining, etc.) who really have no other options than the status quo.  An owner of a gas boiler can switch to biogas - but an LNG importer cannot retrofit her capital to accomodate biogas input.  Too much GHG policy is also focused on rewarding activities downstream of the emissions release (lightbulbs, etc.) which are certainly positive in their own right, but one step removed from carbon issues.  A GHG policy ultimately must transparently regulate GHG release  such that all tons are equivalently priced - and if it includes mandates for end use efficiency, it confuses that, as there is no easy way to differentially incent end-use efficiency downstream of a coal plant relative to the same technology downstream of a gas plant.

So at core, it's not about placing incentives and/or penalties on industrials; it's about placing incentives and penalties on the point of CO2 release.  Which is predominantly in power plants and industrial boilers, but we ought not confuse cause and effect.

Also, if you acknowledge that its fundamentally the same as cap with allocation by output, then I think the straightforward cap is better because you can bring industrial heating and transportation under the same cap, making it more inter-sector neutral in finding the lowest cost reductions

I don't quite understand what you're suggesting well enough to say whether I agree or disagree.  But the problem with residential (not industrial) heating and transportation is ubiquitous to all GHG plans: namely, that (a) the combustion devices are poorly metered, and so numerous as to be problematic to regulate and (b) they all have very low annual capacity factors, making their annual capital costs dominated by capital recovery rather than fuel costs.  In my mind, this latter issue is the most important, as it means that any price on carbon set in other markets will be too low to drive behavior in those sectors.  This probably means that the optimum regulatory approach is on the equipment side, whether through mandates (e.g., "all air conditioners must have a COP of X or better") or incentives.  This gets disconnected from carbon, but is probably a better tool to incent behavior - and is equally true in any GHG regulatory scheme.  Even if you choose to stick a carbon tax on the fuel, you're still stuck with that basic economic calculus.

If 80% of the reductions under an economy wide cap would come from the electric power sector (which most models say they would), then why mandate equal reductions for electric power and industrial heating

That's not what an output-based standard does.  It doesn't do any sectoral mandates - it simply forces us to acknowledge that a ton reduced in one sector has the same value as a ton reduced in another.  The reason to make sure this is done is because there are so many massive opportunities to drive up overall efficiency with combined heat and power - but if tons of CO2 associated with thermal generation are not given an equivalent value to those associated with electric generation, you will end up artificially biasing capital deployment.  (Note that this is precisely the problem that is currently bedeviling the folks in CA, who have crafted AB32 in a way that provides differential incentives in thermal & electric.)

For all practical purposes I'm pretty sure that this idea is- to take your electricity sector example- the equivalent of 1)capping CO2 economy wide at 2,393 million metric tons; 2)allocating .6 permits to every generator per MWh.  The solar plants would be able to just sell all their credits, and coal plants would have to buy credits enough to balance out the extent to which their actual production is over the .6 average.  It works out just like you described.

I'd first like to know if you'd agree that this is essentially what your plan does.  Then I'd be happy to continue the discussion on inter-sectoral neutrality, point of regulation (upstream vs downstream), etc.  But first I want to make sure we're talking about the same plan.  

"the critical point here isn't that industry is deemed worthy, but rather that the optimal point of regulation is at the point of emissions release.  ...At the point where fuel is burned to release CO2, the emitter has a choice to change fuels, invest in different capital or any of a suite of other options, both good and bad...  Too much GHG policy is instead focused on penalizing upstream sources (LNG imports, petroleum refining, etc.) who really have no other options than the status quo.

You're definitely right that the point is not who is deemed "worthy."  But pragmatically, requiring credits be submitted upstream (for some fuels, namely oil and nat gas - its not done for coal b/c coal is almost exclusively used in power plants, which have emissions monitoring equipment) is just far more convenient.  It's easier to get credits from 20 major importers than however many millions of cars or households, or even businesses.  And this requirement doesn't "penalize" the upstream sources.  Those costs get passed along.  No one doubts that the actual reductions happen downstream.  But those reductions are still incentivized with upstream regulation because the cost of that pollution gets internalized to everyone who buys from those who are regulated (e.g. everyone when upstream is regulated) by the cost premium passed along on emissions-intensive fuels.  This actually then makes it harder to game the system or slip through the cracks.

The other point is I think more important.  Prices would still rise.  The grid as a whole will still be overwhelmingly carbon intensive in the near term, steadily declining but still fairly so for a while.  This is inevitable unless you set a draconian cap. The wholesale price of electricity is then going to be set at the price where fossil fuels + cost premium = renewables - benefit from permit sale.  This is going to inevitably be above our current prices, which are basically set by fossil fuels without that cost premium.  

Cost increases for fossil fuels will be offset with cost decreases for renewables, but this is not to say price increases for fossil fuels will be offset by price decreases from renewables.  They'll sell at the clearing price as well and pocket the difference.  So I'm a bit wary of your creating such a cap with no consumer assistance for inevitable higher prices.  Though admittedly there are some very bad ways to design consumer assistance (like L-W) but there are some good ways as well.

Also, to the extent that your program gives an extra permit per extra MWh sold, I'm afraid its losing the neutrality we both prize because this puts end-use efficiency (home appliances, etc) at a disadvantage, by incentivizing build build build, sell sell sell.  This comes with associated costs of course of new transmission, load imbalance, reliability, etc - you know more about this than I do.

I think your program is a great way to get more capital in the hands of the firms that will need it to invest in the solutions we need.  That's important.  But its not the whole goal, and I'm afraid this as a standalone program thus fails to take account of other issues.  To the extent that some "transition assistance" or other cash/permits thrown to companies might be politically necessary, it would definitely be better to have it output based than fuel or historical pollution based.  But in striving for fuel neutrality I think you've deincentivized (at the risk of sounding like Amory Lovins, whom many gristers probably know I'm not such a fan of) negawatts.  And not included consumer assistance which will still be necessary.  Those are my two main issues.

But pragmatically, requiring credits be submitted upstream (for some fuels, namely oil and nat gas - its not done for coal b/c coal is almost exclusively used in power plants

I'm not aware that's been the motivation behind any of the push for upstream allocation, nor is it valid.  I don't know anyone who buys fuel who doesn't have a bill showing the units purchased, be they scfs of gas, tons of coal or gallons of oil.  With that information, it's quite straightforward to quantify the CO2 release at the point of combustion.  Indeed, it's a heck of a lot easier to calculate CO2 that way than with stack monitoring that is subject to all sorts of metering and data integrity errors, ranging not only from the meters themselves but also to the stack parameters (gas velocity, temperature, stack diameter, gas density, etc.) that have to be built into any end-of-pipe monitoring.  There is no reason from a monitoring perspective why one can't come up with fairly precise measures of CO2 emissions at any given combustion source other than transportation.

It's easier to get credits from 20 major importers than however many millions of cars or households, or even businesses.

Disagree. The EPA already keeps tabs on some 500,000 individual point sources for criteria pollution.  These are all the exact same point sources that would be monitored for CO2.  Again, transportation is an exception, but as I noted elsewhere, you need to treat transportation differently for reasons of capacity factor regardless of what carbon pricing regime you use.

Those costs get passed along.

That is a massive assumption, and one that I don't buy.  If it was easy to pass costs along, airlines wouldn't be facing bankruptcy in the wake of fuel price spikes.  They'd just raise rates.  We also wouldn't see the degree of hand-wringing we see today in the electric industry, as utilities grapple with the fact that their costs of generating power are increasing faster than the political process will allow utility commissions to raise rates.  We wouldn't see every industry in the world applying differential margins to different customer segments based on their ability to pay and/or switch to alternative supplies.  We wouldn't see Duke trying to move their coal plants from one jurisdiction to another so that they can more readily pass along the costs of carbon policy.  

All these forces combine to make it at best only directionally accurate that higher carbon prices on fuels will be passed through in higher fuel prices - but even in this case, it's doubtful that 100% of the costs would get passed along.  Maybe I'm wrong - but if I'm wrong, an output-based standard doesn't impose any additional costs.  By contrast, if you're wrong, we end up with a carbon policy that doesn't provide an incentive for precisely those behaviors we want a carbon policy to reward.  That's a dangerous bet.

The wholesale price of electricity is then going to be set at the price where fossil fuels + cost premium = renewables - benefit from permit sale.

I'd add two qualifiers to your assertion:

1. Renewables are not the universe of technologies to lower emissions.  If you don't put the regulatory signal at point where users can choose to deploy renewables, efficiency, fuel switch or any number of other carbon-constraining activities, we are stuck with a policy that will pick winners.  I have no doubt renewables will be in that list of picked winners, but they are not the only approach, and the full universe of winners cannot possibly be picked with the same degree of rigor by regulators as is can by markets.

2. You also have to consider demand destruction, and not just of the "we've learned to conserve variety".  If we pursue policies that cause your formula to raise the price of electricity dramatically, we will impose massive economic disruption, and massive pressure on governments to subsidize energy costs through other means, lest they lose their energy-intensive industrials.  And however much one may not like having an energy-intensive industrial as a neighbor, the world simply doesn't work without steel, ethylene and any number of other energy-intensive products. (Indeed, try making a solar panel without steel, aluminum, silicon and rubber gaskets!)  As such, any policy that does not encourage both maximum participation and the lowest possible cost carbon reduction is a policy that is playing russian roulette with the economy.

I'm afraid its losing the neutrality we both prize because this puts end-use efficiency (home appliances, etc) at a disadvantage

Clearly, end-use efficiency ought to be rewarded, and neither of us would like to see otherwise.  The challenge with respect to carbon is whether incentives placed at the end user accurately value the GHG impact of that efficiency.  A more efficient air-conditioner in coal-intensive West Virginia has a much greater carbon impact than the same appliance in hydro-intensive Idaho.  Which means that - from a carbon perspective - you need to provide a greater incentive for the former than the latter (and find a way to adjust that incentive over time as the carbon-intensity of the particular grid shifts).  This is really problematic if you put the incentive at the level of the appliance.  And as such, an incentive applied at that level really isn't a carbon policy per se - it's an efficiency policy.  There are no shortage of good reasons to encourage efficiency, and we shouldn't limit support of EE to carbon policy.  But it's an awfully blunt place to try to incent behaviors that will change CO2.

On the extent to which those costs get passed through, I would first note that energy demand is way more inelastic than plane tickets.  Your point about the PUC's interfering with utilities is a good one, but I think represents a(nother) instance of needed regulatory reform, not an inherent problem with cap/trade.  States know that regardless of whether price increases represent deep underlying issues that don't represent current policy or not, they (as elected representatives) will be held accountable.  So there's definitely a conflict of interest in terms of their desire to artificially keep prices low, even if its inefficient.  

You say significantly high energy prices would be really bad for the economy and we have to pursue the most cost effective solution.  I think by now you know I completely agree with that.  I just disagree that your plan is the most cost-effective.  If you don't give away all the permits, you have more than enough revenue to offset the price increases on both consumers and firms (though not in certain 'affected industries,' but unfortunately a degree of attrition in some of these is necessary to achieve the reductions).  Your plan transfers all the permits, without completely containing prices, though admittedly it would some.  But you could get that degree of effective price mitigation other ways, and have funds left over for advanced energy research, which unlike deployment of current technology, a carbon policy shouldn't just rely on the private sector for.  

Finally I never suggested some sort of alternate way of incentivizing end-use efficiency.  My point was only that you relatively disincentivize it by using all the revenue to incentivize building new capacity.  You qualify my little new cost equation that it only has renewables.  Fine, I should have written "clean generation" instead, but the point still stands.  The prices still rise with no consumer relief, and limited to renewables or not (and we'd both agree not) you're strictly  incentivizing additional capacity.  That inherently is a relative disincentive for end use efficiency, because they're direct competitors.  Its the same point you make on how guaranteed capital recovery, accelerated depreciation scheduling, etc for certain new generation sources under current regulations relatively disincentivizes CHP.

1. I wouldn't underestimate the political complexity of changing utility regulation.  I completely agree with you that it needs to be changed, but it has 100 years of regulatory and judicial history.  I've been personally and quixotically trying to get that changed for the last decade!  And it's a mess of federal and state policies that require lots of jurisdictions to move concurrently and in mutually reinforcing ways.  I'm not saying it shouldn't be priority one of any energy policy - just that from a practical perspective, we ought to assume a fairly significant time constant on the reform, at least insofar as we are crafting GHG policies that are contingent thereon.  By all means, let's shoot to reform it quicker - let's just not depend on it.

2. We probably disagree about whether carbon funds should be used for things not directly related to carbon reduction.  Clearly, the government as a role to play in funding R&D.  But in order for a ton of increase to have the same price as a ton of decrease (but for the sign change), you need to link buyers and sellers.  If instead the proceeds are distributed out to various actors, including but not limited to those who would immediately act to reduce CO2 emissions, you effectively place a higher value on a ton of reduction in one venue than another.  (e.g., the existing coal plant that doesn't produce avoids a cost of $X/ton.  But the new solar plant that is relying on carbon payment to finance gets <$X/ton, since some portion of the total number of receipts was paid out to other entities who are not directly engaged in the reduction of GHG emissions.)  This is the ultimate cost-effective test for a carbon policy: the cost of a ton.  Many other social, technical and energy programs warrant government support - but if we use proceeds of a carbon policy to provide that support, the carbon policy is no longer a low-cost way to lower carbon.  It is reminiscent of a conversation I had many years ago with the headmaster of a private school, who essentially said that as much as there is a certain moral discomfort that comes from being a part of a system that provides better education only to the wealthiest kids, the problem is the system.  As he put it, a private school has one agenda: getting kids prepared for college.  A public school by contrast has many competing agendas, including not just college but also busing, special ed., curricula mandates driven by school board politics, conforming to government nutritional guidelines, teachers union negotiations, etc.  All of which are independently noble, but which conspire to divert resources away from education. This, writ large is the problem with any carbon bill that seeks to do 15 things well.  The central  conceit of an output based standard is that it aims only to do one thing well: quickly and cheaply reduce GHG emissions.

3. Finally, re: compliance, you're certainly right about the audit trail.  But is it really any different than all the M&V that goes into certifying REC credits?  Or from the audit trail required for corporate financial filings?  Are these audit systems perfect?  Of course not.  But they are largely workable systems to assemble and independently verify data that is more voluminous and way more complicated than what we're talking about here: all an OPS needs is fuel records and good energy meters.  Compare that to the deep dive that accountants must do on accounts recievable, journal entries, capital depreciation schedules, etc. to sign off on the financial books of any given company and the challenge of audit compliance for a carbon policy is trivial.

I think the real place we disagree is illustrated by your point that: "But in order for a ton of increase to have the same price as a ton of decrease (but for the sign change), you need to link buyers and sellers."

It sorta goes with your insistence that a price on carbon alone is a stick without a carrot.  I think this thinking in general misses the point.  Because demand for electricity is so inelastic, and most consumers are served by vertically integrated monopolies, you have these companies with a basically captive market.  People will be stuck paying whatever rates they get, which is why we regulate them so heavily (although obviously not always intelligently), and people will be stuck still needing (and consuming) the product (kwhs) more than most.  The issue then for any energy policy is relative economics.  To what extent does it rearrange investment appeal among the menu of options technically available to encourage the demand be met sustainably, factoring in carbon pollution.  To that extent a carrot and a stick are a distinction without a difference.

I'm afraid it might seem that I'm arguing back to where your point is - that a ton of carbon should cost the same whether its a + or a -.  But the thing is, I don't think your coverage then extends "full" coverage so much as its double coverage.  There is significant demand already for electricity in this country.  To the extent that any policy prices polluting sources out of the market for meeting that demand and recovering costs, that is guaranteed market share for clean sources.  It's like a free market feed in tariff.  And all the costs incurred by the fossil fuel generators, even the ones that do stay in business, serve to raise the wholesale price of electricity, which is a further benefit to the investment appeal for clean generation.

But what's inescapable in both our plans is that the nominal cost of electricity will raise.  This is why I prefer keeping a substantial portion of the money for consumer assistance, to lower the effective price increase.  Meaning price increases occur in both our plans, but consumers can better afford it in mine, meaning less economic disruption, which we both agree is important.  You're spending the money on doubling down an incentive that already exists without that extra spending.  So aside from the perversity of    inadvertently disincentivizing negawatts, its just not the best use of the money.

Technology research is one of my other programs, and I have very few.  Consumer assistance (lump sum, not graduated like a tax cut), corporate tax cuts to free up capital for firms to invest (which yours does by just giving them all the permits), and technology research.  And the research really is key for a few reasons.  First, you can't try and mess with the market to prevent price increases per unit of a good if you're not decreasing the carbon intensity of that good, or you can but it does more harm than good (like I wrote in the oped).  So research allows you to develop ways to fundamentally lower the carbon intensity of certain goods, which is the only way to lower the actual bills (along with conservation/efficiency).  

Second, the flood of capital in the private sector will quite naturally go to the low hanging fruit.  That's good and rational, but we need to start now to ensure that the price of additional reductions doesn't spike unreasonably once those are picked.  Like I've written before, the entire electricity sector is low hanging fruit, relatively speaking.  We need better batteries to bring the transportation sector under that roof to keep those national emissions reductions going without having to turn to a more complicated/expensive means of reductions, just to give one example.  The cap itself compels deployment of today's solutions, but it still underdeploys research for tomorrow's, because that creates benefits that no one company can capture.   That's why the public sector has to be involved.  

Your program seems really appealing at first, and I grant its better than L-W.  But when you realize how this really works out, that trading to get around that .6 average is really a cap with full allocation by production, you run into some unintended consequences that compel me at least to conclude we could use the permits better.

A special carbon payment to a low-carbon plant would add up to a double-subsidy for that plant, if carbon emission is already taxed. A  tax on one's competition is also a latent subsidy for oneself. There is no intrinsic need to subsidize the low-carbon plants twice, Sean, by adding discrete subsidy to their existing latent subsidy. Either the latent-subsidy they receive is high-enough to allow them to compete, or the carbon-tax needs to be higher.

Re: FERC.  One of the perversities of our regulatory model is that we have years of judicial precedent that have established that any transaction between a utility and their customer is an in-state transaction, and therefore not subject to federal oversight since it doesn't include any interstate commerce.  The trouble with that is that the transaction between the utility and their customer also includes all sorts of rules about how you can be compensated for siting electricity generation at the load since - even if I export onto the grid - I am still connecting through a monopoly utility, who sets all the rules of distribution.  And since the only ways to meaningfully drive up generation efficiency on the grid is to site generation at the load (both because of the potential to use opportunity fuels on the front end, and to recover waste heat on the back end, not to mention bypassing the efficiency penalty of the T&D network), it means that FERC is essentially powerless to make precisely the types of changes that are required to drive up the efficiency of the national power grid.  They do have oversight when it comes to transmission and high-voltage generation that connects to the transmission system ("high voltage" is a near-synonym for "interstate commerce" in modern utility law), but the big 2x / 3x efficiency gains are all held back by laws beyond their purview.  

Confused yet?  State utilities have used this to their tremendous advantage, especially in the SE where they have gotten their utility regulators trained to scream "States Rights!" every time the feds try to fix the problem.  (Joke: How much does it cost to buy an Alabama utility regulator?  A: I don't know, because Southern Company isn't selling.)

In this context, the pricing issue is really problematic.  If we mandate a carbon price on those utilities and don't provide customers with the freedom to generate their own electricity and/or otherwise bypass the grid - e.g., we simply keep the status quo - then stipulating that the carbon price imposed on the utility will be fully reflected in the retail rate for power is implicitly stipulating that regulated utilities - who are, after all, the source of the carbon - should not be asked to bear any of the costs of carbon compliance.  Follow the math:  

1. Pre GHG policy: Costs + profit = price
   
2. Post GHG policy: Costs + G + profit = price + G (where G is the cost of GHG pollution).  

The alternative, of course is to compel the utility's shareholders to bear some of that cost.  But if you do that, now you've removed the price signal from the customer!  Damned if you do, damned if you don't.

This goes away with an output-based standard, because the customer can now choose to self-generate power, at which point they have a commodity that their utility wants - namely, an emissions reduction credit.  Suddenly, the two parties can have a meaningful and productive negotiation that leads to the deployment of lower carbon generation and gradually dials down the carbon intensivity of the grid.

One final point: there is no reason that a carbon price ought lead to an increase in the nominal price of electricity.  The grid today is only 1/2 as fuel efficient as it was in 1910.  (See Figure 1 here.)  

If we just went back to 1910 efficiency levels, we'd cut US CO2 emissions by 20% (electric sector CO2 emissions by ~50%) and cut energy rates.  It is the perverse silver lining of our F'd up electric regulatory model that such opportunities exist, but they absolutely do exist. A GHG policy that includes carrots and sticks and lets all these sources come on line to "go back to the future" would lower GHG emissions and lower electric rates.  It's what we ought to strive for.  But if we instead use the proceeds from CO2 emitters to offset higher prices by customers, we simply create a self-fulfilling prophesy, with no incentive for cleaner sources to come on line (thanks to regulatory goofiness) and therefore higher prices.

PS nucbuddy, its Sean Casten, not Caston.

1. Utility gets the exclusive franchise in a given territory.
   
2. Utility then is given an "obligation to serve" every customer in that territory.  (Thus, they must run the wires out the expensive-to-serve rural customer just as readily as the guy living next door to the substation.  They also have to get crews out ASAP after ice storms to get the grid back up.)
   
3. In order to prevent the charging of monopoly rents, and in exchange for the monopoly franchise, the utility is no longer allowed to set their prices.  Instead, they must submit requests to the utility commission for capital expenditure.  Provided that the utility commission deems such capital to be "prudent" and in the public interest, the utility may then be compensated through rates for that capital at a rate of return that is commensurate with the the returns earned by other industries with similar risk profiles.
   
4. All operating costs are passed through to customers at no mark-up, so as to prevent the incentive to raise salaries or fringe benefits as a way to boost profits.
   
5. Once those are all done, the utility commission determines how much revenue the utility needs in a given year, estimates the total kWh sales, divides one by the other and sets the $/kWh rate.

So - to your question as to why utilities need a kick in the butt from the feds to take actions that would lower their operating costs?  Because the regulatory system makes it thus.  Utilities make money by spending money, not by saving it.  Everything you think you know about how business works gets subverted in electric-land.

Did I mention that the system needs repair?

(BTW: for a much longer overview of modern utility law, see here.)

"If we mandate a carbon price on those utilities and don't provide customers with the freedom to generate their own electricity and/or otherwise bypass the grid - e.g., we simply keep the status quo - then stipulating that the carbon price imposed on the utility will be fully reflected in the retail rate for power is implicitly stipulating that regulated utilities - who are, after all, the source of the carbon - should not be asked to bear any of the costs of carbon compliance.  Follow the math:  

   1. Pre GHG policy: Costs + profit = price
   2. Post GHG policy: Costs + G + profit = price + G (where G is the cost o