You know where my heart lies on this, but I want to raise another concern with cap & dividend (and, indeed with all of the systems that put costs on polluters without any commensurate carrots).  Namely, who says that rising costs = rising prices?  There is a certain economic naivete in the environmental community on this issue that is potentially toxic.  And if higher costs don't equal higher prices, how do these systems change any behavior.

To see how this is problematic, look at the problem from the other direction:

Do oil & gas tax breaks lower the cost of gasoline at the pump?  Framed another way, if we seek lower energy costs, is it good public policy to lower the costs of energy production?  Do you believe that such change in cost structures would cause producers to lower prices or increase margins?

At the risk of putting words in your mouth, I'm guessing you'd answer no to all of the above.  Logically then, why do we presume that the inverse - increasing the costs of fossil fuel production/delivery will increase prices?  Could that not just lead in compressed margins?  (After all, these are globally traded commodities, with prices set based on a whole suite of factors, of which carbon costs is only one variable.)  We've certainly seen manufacturers get squeezed by rising fuel prices in recent years who found that they were unable to raise prices to compensate.  Why should that experience be unique?  And if it happens, any policy that can be characterized as a carrotless stick could be one that redistributes wealth but doesn't provide any incentive to shift behavior.  We can - we must - do better.

As I understand the plan, a tax would be levied, to the consumer, on CO2-emitting goods & services (i.e. gasoline, home heating oil, electricity , etc.). Consumers (well, every US citizen it seems) would then get a 'rebate' based upon revenue generated from this tax.  So (please correct me if I'm wrong), the "stick" is that CO2-emitting goods & services become more expensive; goods & services that do not cause CO2 emissions would be cheaper.  The "carrot" is that every citizen gets the same monthly rebate check, regardless of how much they spend on CO2-emitting energy; therefore, if you convert to "clean & green" goods & services, you are essentially getting 'free money' from the government each month.

Here are my problems with this plan.

1. What carbon price will deter use? How much will the price of CO2-emitting goods & services increase?  I've read somewhere on Grist recently that gasoline prices have tripled in the last couple of years and we've only just seen a tiny (~2% I think?) drop-off in use. Additionally, energy demand is relatively inelastic; you need to heat your house, get to work, cook food, etc.  Just because people will be paying more upfront to do these things, and then will get a rebate at the end of the month... how is this going to drive a robust market of sustainable goods & services?  Without subsidies and incentives for alternative energy start-ups, I don't see how this shuffling of dollars around is going to be enough to drive an alternate energy revolution of the scale that we need to cut emissions 80%.

2. Rewards for bad behavior. Granted, people who switch (or are already there) to green technologies will be rewarded for that good behavior by receiving 'free' money each month.  But what incentive do these people have to stop polluting, CO2-emitting technologies altogether?  As I understand the plan, the more the public spends on CO2-emitting technologies, the higher the rebate check becomes.  So, if I'm Jane Public, and I've switched over to green fuels and energy, I'm all for the rest of the country polluting away, as it increases my check every month.  Sure, go ahead! Drill for oil in ANWR.  Suck oil out of tar sands.  Blow apart that mountain looking for coal.  It's all money in the bank for me.  I know there are some hardy souls (many on this board) who would be happy to see dividend checks decrease as a sign of decreasing use of CO2-emitting energy, but money is a powerful carrot; while there is individual incentive in this plan to switch your energy use to clean alternatives, there is no collective incentive, in fact there is the opposite, to ending CO2-emitting technologies forever.

3. Scope.  So, every US citizen, not just every taxpayer, but every citizen, will be receiving a check, every month? The scope of this plan boggles the mind.  The plan may have simplicity, but certainly I can see a massive clusterf*ck of a government agency tasked with administering this plan.  

David - what am I missing here?  Is there an upside to this plan that I am just not seeing?

Any politician thereafter who tries to take that dividend away from them as a favor to a special interest will be voted out of office. For once, special interests will be outgunned by shear numbers.

Few Americans will make the connection that rising energy costs will eat their dividend.

That's good, because they will perceive the rising energy costs as something they are not being compensated for (even though they are) and this will drive conservation and consumer demand for products and services that save energy. The market will respond to that demand (as the Prius did and as SUV sales are) in ways not yet envisioned.

The people actually selling the fossil fuels to fossil fuel distributors won't fight too hard against the idea because they will simply jack their prices and pass the cost along.

It would work because it meshes with human nature. It would channel hundreds of millions of subconscious choices in the needed direction and unleash the free market profit monster on global warming. To date, that monster has been unleashed on mother earth. Time to sick it on a more worthy target.

Sean,

It won't matter a lot if you or Dave are right about rising energy bills being held in check by efficiency increases. I don't see that quibble as being a show stopper.

It is hard to argue with Dave's contention that:

The system is deleterious to existing centers of power in the economy, which would lobby mightily against it and, if it were passed, work ceaselessly to weaken it. Meanwhile, Joe Citizen sees no tangible benefit.

These are show stoppers. Your preference is logical and rational, but does not mesh as well with human nature, which is driven mostly by emotion and subconscious drives. 299 million Americans are incapable of or are unwilling to try to understand output-based standards.

Your point that fuel sellers might just take it in the shorts and accept lower profit margins rather than pass the cost on to consumers wasn't as convincing, assuming that was the point you were making.

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

As people see higher gas and heating oil prices they will be more motivated to reduce consumption of fossil fuels if they don't have that cash handy. When less frequent but larger payments come around people can be encouraged to put that lumpsum into energy reducing actions. e.g. $50/month will probably just another fillup of the gas tank but $300/6mths can be the purchase of more double-glazed windows or could make the downpayment on a high-efficiency front loading washer.

A properly done cap and dividend plan would not encourage more carbon emissions in hopes of a bigger dividend because the cost would become too high for those who haven't reduced (yet). Carbon price increases would be built in both because carbon reductions would decrease revenues and also to force further reductions in emissions after the low hanging fruit has been picked.

And re: 299 million votes, that strikes me as awfully cynical and pessimistic as a reason for policy (and frankly a surprising justification from David, who usually calls out those sorts of logical fallacies.)  How did a majority-white country ever outlaw slavery?  How do we ever elect politicians who don't promise to eliminate taxes?    Why didn't we throw out the bastards who spent our tax dollars rebuilding Europe after WWII?  

The truth is, we have a long history of passing laws that are in the public interest even though they might stand in opposition to our individual interest.  Arguing that cap & dividend is good policy simply because it appeals to our selfish nature is inconsistent with that history, and also an awfully dim view of what we could be.

We can even imagine "negative withholding" for low-income folks -- the employer (who withholds for many employees) computes the proper withholding amount and, for low income workers, ADDS money to their payout.  Most employers use automatic accounting software or a service that computes their withholding and then they automatically send the money to the IRS electronically.  It would be fairly straightforward to provide them with software or tables that let them collect from some employees and immediately add to the checks of others according to the IRS tables.

And, yes, using the existing system leaves out non-wage-earners directly.  However, unless non-wage-earners are independently wealthy, they are connected somehow -- they either depend on someone who is a wage-earner (in which case they get their reduction through even less withholding) or they have some form of income (SSI, workers comp, etc.)  All of those can be treated like paychecks in terms of providing a channel through which carbon dividends can be paid back to consumers.

It's ok to oppose cap-and-dividend on some grounds, but anyone who postulates that cap-and-dividend requires mailing 300 million pieces of paper around every month is trying to kill the idea and inventing nonsense to do it.

The 5% Project

However, I don't think I am too focused on 300 million pieces of paper floating around; in fact the plan suggests monthly direct deposit into bank accounts. From www.capanddividend.org:

The dividends would be wired monthly into people's bank accounts, much like Social Security payments. They'd help families pay their monthly bills.

But even outside of the objections of the scope of the program, there are still objections #1 and #2, that I think are even more important.  I don't necessarily agree with BioD that everyone will support a rebate plan; conservatives, certainly, as typically very anti-tax of any kind (why should I let the government take my money, only to give it back to me later?) and even if people do not quite understand what the payment is for, most people are savvy enough to realize that there's no such thing as a free lunch.  I don't know; I'm sure there would be people who would vote for a monthly paycheck from the gov't, but I still don't see that there is adequate incentive to move away from fossil fuels, or any support for alternative energy companies start-up costs.

What kind of monthly payment do we envision? Does anyone know? $50? $100? $1000?

Secondly, I think 'relentlessly efficiency' is more the intent that the actual result of Sean's proposal. His "carrots" are distributed in the form of a  reward keeping the ratio of emissions to delivered BTUs low. He provides no carrots for using fewer BTUs in the first place. In short, efficiency in the sense he intends really means lowering emissions per unit of economic output. But he is rewarding lowering emissions per one type of intermediate process on the way to creating that economic output. I now have three posts in queue that go into more detail on this - the weakest of them unfortunately first.

It's one thing to argue that government has a role to play to provide a social safety net, but quite another thing to say that government has a role to play handing out free cash to citizens.  How is this any different from McCain/Clinton's idea to roll back summer gas taxes?  It's just pandering.

If we're serious about reducing GHG emissions, we need to use every resource at our disposal to reduce them.  If we're serious about pandering, let's drain the public coffers with Bushian tax rebates.  But what is the logical basis for combining economic pain of GHG taxes with the economic inefficiency of free cash handouts?  

This is about as ranty as I ever get, but I gotta tell you - I see virtually no redeeming social good that comes out of this concept.

The output based standard therefore provides an incentive both to lower fossil energy use (and so reduce the numerator) or increase the amount of useful energy we can produce from a fixed unit of primary energy (to increase the denominator).  But in all cases, the economic incentive is universally to drive down the fossil energy use per unit of useful energy output.  One still has all the incentive one currently has to use less useful energy, so I'm not sure where we're disagreeing.

the economy needs useful energy.

The economy needs useful energy in order to produce output, in order to enhance human welfare. Corrected.

So ultimately you do not want to minimize emissions per unit of useful energy. You want to reduce emissions per unit of human welfare. One part of that is reducing emissions per unit of output. And just one part of that is reducing emissions per unit of useful energy. Useful energy is not the same as output. Output is not the same as human welfare. Do you honestly not see the distinctions?

Again, back to the tomato paste example. Joe uses a boiler to heat tomatoes to produce tomato paste at below the Sean Casten efficiency standard.


A) Joe puts in a more efficient boiler - voila he earns credits.
B) Instead Joe installs a filtration process that reduces his emissions exactly as much as choice A. Since the he has not changed the ratio of emissions to BTUs, he reduces the number of permits he has to buy, but not to zero, and he certainly earns no credits.

SO choice A & B both reduce emissions by exactly the same amount. Neither reduces output. But choice A gets a much bigger carrot that B. You don't think that is not picking a winner? You think that is a  rational criteria for picking a winner?

Namely, who says that rising costs = rising prices? There is a certain economic naivete in the environmental community on this issue that is potentially toxic.

...

If your boss told you tomorrow that you were getting slapped with a 20% pay cut, would you immediately be able to cut your expenses accordingly so that you held your savings account cash balances constant? I rather doubt it - and this is the same challenge that faces a business who suddenly faces added costs.

First, I don't have a boss, unless you count my wife and kids. Like you, I have clients, and if my costs go up, I pass them on to my clients. How fast they are passed on to clients is a decision made by each player. If my costs go up because of gas prices, my competitors will also have to pass on their costs, so I'm not losing business just because I strove to keep my profit margin reasonably constant (or analogously, use a stiff spring to minimize my margin compression). It's a level playing field.

The time lag (also analogous to a spring) between cost increases and price increases is a valid point and one that I was aware of but hadn't included in the discussion. Certainly, gradual price increases are not nearly as disruptive as sudden ones. A policy that gradually increases the tax (and distribution) would ameliorate a step function effect on the economy.

And re: 299 million votes, that strikes me as awfully cynical and pessimistic as a reason for policy (and frankly a surprising justification from David, who usually calls out those sorts of logical fallacies.)

Granted, 299 million was a bit of an exaggeration, but there isn't anything illogical or false about people voting to protect their interests.  This gives me an opportunity to use this quote I found on one of JMG's comments:

"The power of accurate observation is commonly called cynicism by those who have not got it."--George Bernard Shaw ; )

How did a majority-white country ever outlaw slavery? How do we ever elect politicians who don't promise to eliminate taxes? Why didn't we throw out the bastards who spent our tax dollars rebuilding Europe after WWII?

Good questions, Sean. I could almost hear the Star Spangled Banner in the background while reading that. Attempting to gain the moral high ground is a tried and true debate technique, but one that is easily countered by pointing it out as such.

Arguing that cap & dividend is good policy simply because it appeals to our selfish nature is inconsistent with that history, and also an awfully dim view of what we could be.

"...dim view of what we could be?" Hold on there, I've ...got a tear in my eye. Neither Dave nor I are leaning toward cap and dividend simply because it appeals to human nature. Can't speak for Dave here, but I suspect it would also be more effective to unleash the wants of hundreds of millions of players instead of limiting the game to manufacturers cutting costs via efficiency gains using CHP (Combined Heat and Power technology). This doesn't mean we should not also strive to "get government out of the way" when it comes to policy that will allow manufactures to put CHP to much better use.

I do have a hard time envisioning how a cap and dividend would reduce emissions from utilities. Customers don't get a choice when it comes to electricity or natural gas. It seems to me that it would be a shame to throw out one for the other, considering that each has so much potential. Hmm, could the two be combined? A hybrid cap and dividend/output based system--a little more complex, yet still just as appealing to voters. We could call it the HCDOB climate act.


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

There may be at core a philosophical difference here.  The broad sweep of human history is one of harnessing energy, and our ability to harness that energy has been intimately connected to the growth in our overall standard of living.  I don't mean to make light of the externalities associated with that energy use, but it's quite clear that the transition from a world in which one person's total energy budget was limited to their own muscles to one in which we learned to cultivate crops, harness pack animals, capture mechanical energy first from falling water, then from steam energy and finally from electric power has been one of both increasing energy use per person and standard of living per person.  If your access to saturated fat required you first to feed cattle, shovel out their stalls, milk them, separate the cream and churn the butter, you didn't find yourself for time on a lot of other things.  And at the risk of putting too fine a point on it, you and I would not have the time for this particular conversation but for butter factories, trucks and refrigeration.

Clearly, there are externalities associated with this trend, which I don't suggest we ignore.  But if you accept my premise - namely, that standard of living has always been accompanied by our access to useful energy - then our policies to address those externalities can only be addressed in one of three ways:

1. We can lower our standard of living.  Fewer people and more manual butter churns.

2. We can squeeze more useful energy out of every raw Btu we have available to us.

3. We can hypothesize that - human history notwithstanding - we can decouple delivered, useful energy use from the growth in our standard of living.

So if you agree that 2 is a better option than 1, we are simply in mild disagreement on tactics.  If you argue that we should do 1 before 2 - or that we should take a gamble on 3 - we will simply have to accept a fundamental philosophical difference.

More on topic:

How you make your money may be a bad example, but hopefully you still understand my larger point.  When a company gets hit with higher costs, they cannot always pass them along to their customers in higher prices, as their price has to factor in competing supplies.  As an example, fuel oil and gas were historically tightly linked (a relationship that has completely broken down in recent years, but bear with me for illustrative purposes).  This linkage came about because both were primarily heating fuels, and many people had the ability to switch instantaneously from one to the other.  Oil also has more carbon than natural gas.  So suppose we got a carbon price imposed that suddenly increased the cost of oil.  Would fuel oil producers suddenly raise their price to compensate?  Probably not - because if it got even a little higher than gas, it would destroy demand for fuel oil.  So, to keep revenues up, they would accept a lower profit margin.

This specific example happens generally every day, which is why corporate profits rise and fall from quarter to quarter in a rather random fashion.  Copper prices up?  Wire manufacturers profits will fall.  Labor costs up?  Textile mill profits fall.  And so it goes.  

Why do we therefore assume that carbon pricing swill magically transform itself into an equivalent increase in energy costs?  Or, more polemically, why should we allow dirty energy producers to pass all those costs along to maintain equivalent profit margins?

Why is a carbon dividend a good thing?

 There's a really dangerous strain of liberal thought lurking within the cap & dividend model: namely, that it is good government policy to give people money.  Says who? <snip>

Well, you actually. The difference it that instead of giving everybody money you want to give money to people who fit your preferred criteria. Those carrots you keep lobbying for are just another form of income distribution.

It's one thing to argue that government has a role to play to provide a social safety net, but quite another thing to say that government has a role to play handing out free cash to citizens.  How is this any different from McCain/Clinton's idea to roll back summer gas taxes?  It's just pandering.

No, it's not pandering. The heart of the problem is that emissions are created at a profit to a few at the expense of the many. A guy burning coal in Iowa creates emissions that hazard me here in California without compensating me. Cap and dividend is a user fee paid to citizens for the hazard imposed upon them by further GHG emissions. Gas taxes are effectively user fees since the majority of them go towards road and transportation construction and maintenance funding.  

If we're serious about reducing GHG emissions, we need to use every resource at our disposal to reduce them.  If we're serious about pandering, let's drain the public coffers with Bushian tax rebates.  But what is the logical basis for combining economic pain of GHG taxes with the economic inefficiency of free cash handouts?

An easy example is the impact on heating bills. Increased heating oil costs can be defrayed by private homeowners who convert to geo-exchange. (like George Bush and Al Gore did) Their dividend will help them pay for the transition while the carbon tax makes the payback period of the new system shorter. The retired lady who rents in a multi-family building and cannot shift her landlord's heating system has extra money to pay the extra heating bills or move to a building that converted to geo-exchange. She doesn't freeze as she would in a cap-and-trade system where she eats the extra costs.

If the guy down the road from them can heat his house with a sunrooom and a water tank he wins too. We don't pick winners; we reward them.

All households can change out their lightbulbs ride mass transit more often and change energy use patterns to avoid costs otherwise and increase the value of their dividend.

Likewise if utilities are forced to pay an extra $100/ton carbon emitted wind or solar power gets a LOT cheaper in comparison. Meanwhile homeowners that can afford it will purchase solar panels due to the cost shift. Modular solar systems are in development now so people can install in sections and avoid large up-front costs.

This is about as ranty as I ever get, but I gotta tell you - I see virtually no redeeming social good that comes out of this concept.

Well, yeah; that could be because despite all evidence and your own testimony that you can't sell projects that pencil out you still believe in the mythical "free market." In this case the free market has failed and a regulatory correction is needed. The exchange of money is just a token system to assign more value to one set of options and penalize another set while leaving the widest variety of solution sets open.

Considering the amount of inherited wealth, effectively "free cash" from a birth lottery, invested the "free market" I find your objections to "free cash handouts" a bit off. They polluted my air; they can pay up.

Put the Carbon Back

This, at core is the way that all economic activity outside of government happens - and the great problem with our GHG conversation is that we presume that you can incentivize behavior in a model that creates buyers without sellers.  

Consider: if you have 10 cent/cup lemonade and I want lemonade, I pay you 10 cents for a cup.  +10 cents/cup for you, -10 cents/cup for me.  Easy system that gives us both what we need.

By contrast, a "cap & dividend" approach to lemonade distribution replaces this model with one that stipulates that as a lemonade buyer, I'm still out 10 cents a cup.  But instead of buying lemonade from you, I pay it to the feds, who then see to it that I get my lemonade allowance.  Meanwhile as a lemonade seller you get... what, exactly?  Your pro rata share of all those 10 cent cups as distributed through the population?  What possible reason would you have to build a lemonade stand under that paradigm?  The only way that model works is if you think that the the Federal Department of Lemonade Provision will do a better, cheaper, faster job of getting lemonade to the masses than you can.  If you distrust markets so much that you think that model is better than so be it - but we have a pretty fundamental difference of opinion on human nature.

Note that I'm all for not picking winners, nor for paying people to do anything that doesn't lower our GHG emissions.  I'm simply arguing that as a matter of economic efficiency, you cannot expect people to invest in GHG reducing capital if we don't provide them with an incentive to do so.

Your tomato factory who uses less fuel to make tomato paste helps us towards the second goal.  So does my tomato factory who uses less fuel to make tomato paste.  Whether 'twas better to filter or to install an efficient boiler is a choice that I trust the tomato manufacturer to make on their own, recognizing that both have an economic incentive to minimize their fuel costs and capital recovery regardless of how we price in the externality of carbon emissions.  

But the way you advocate pricing that externality does make a choice.  You provide  a carrot in one case, but not in the other, in spite of the fact that both save EXACTLY the same amount of fuel.

It is, of course, possible that there will be the odd exceptions that don't quite align perfectly, but compared to the massive problems with L-W or cap & dividend, this issue seems fairly slight.  If your process requires you to evaporate water, you're going to need something like 1000 Btus/lb of water thus evaporated.  If your process requires mechanical power, you're going to need 2544 Btus per horsepower-hour by simple units conversion.  And we ought to be preferentially encouraging folks who use as few fossil Btus to meet that 1000/2544 need.  That's what the output-based approach does.  This puts the incentive squarely upon the individual who can do most to control the emissions.

To your example, if a tomato processor suddenly finds that they can dry paste by filtration rather than evaporation, that's wonderful, so long as the electric load on the pumps isn't causing more upstream fossil pain than the fuel load on the boilers.  And they can factor in the relative costs of boiler fuel and purchased electric power to figure out whether it's economically justifiable.  The point of the output based standard though is that in all cases, the individual who is making the decision to burn fuel (the boiler operator in the evaporation case, or the upstream power plant in the filtration case) has an economic incentive to minimize that fuel combustion per unit of useful output.  

By contrast, in a cap & dividend approach, both sources may well pay for carbon, but that doesn't necessarily mean that both costs factor into pricing.  (I've got another post in the queue on this issue.)  The upstream power plant may or may not be able to pass those costs along to the electric consumer - but the tomato plant definitely has to pay for the costs associated with their boiler.  This can lead to bad outcomes (for example, if it creates the opportunity to replace fueled-heaters with electric heaters).  And worse, C&D provides no incentive to deploy new, more efficient capital - it simply slaps a penalty on the old dirty stuff, thereby repeating the same mistakes that were made in the Clean Air Act.

Sean: If your access to saturated fat required you first to feed cattle, shovel out their stalls, milk them, separate the cream and churn the butter, you didn't find yourself for time on a lot of other things.  And at the risk of putting too fine a point on it, you and I would not have the time for this particular conversation

"There are two spiritual dangers in not owning a farm. One is the danger of supposing that breakfast comes from the grocery, and the other that heat comes from the furnace." ~Aldo Leopold

if you accept my premise - namely, that standard of living has always been accompanied by our access to useful energy

I vote we continue with that.

Anyway, the last post in this series will go up tomorrow, and believe me, it's kind of weak, so there will be plenty to bash and hash over!

grist.org

If this is a regulatory it does not have to happen. In my area we've had our electric company granted a rate increases on very short notice as costs increased. If we put a price on carbon we can specifically require that regulators allow that price to be passed along.

I will note that when it comes to saving electricity emissions, the only direct incentive you give is to electric generators. If emission reduction and permit costs can't be passed along, then there is no added incentive for stuff like more efficient lighting and more efficient pumps and motors. If that is not the case, if these costs can be passed along in your system, then there is no reason they can't be passed along with a carbon tax as well.

I completely agree that we need to cut down primary use per capita.  Where we may disagree is the extent to which we believe that the efficiency of conversion is immuatable.  In the US, that efficiency of conversion is a paltry 12.5%.  By comparison, Denmark is over 30%.  That means that if  we did nothing more than convert the US to Danish efficiency levels (a place where the standard of living isn't so shabby), we would immediately reduce the environmental footprint of every American by a factor of 30/12.5 = 2.4 - and we would have done so without any degradation of our standard of living/access to useful energy.  And frankly, I'm willing to bet that even the Danes could do better.  Have they maxed out on their use of CFLs, hybrid vehicles, CHP or any other efficiency technology?  I doubt it - but I'm patriotic enough (you reading, BioD?) to believe that us Americans ought to be able to kick some Danish ass.

The central failure of our energy and environmental policy is it's utter failure to encourage, reward, or even contemplate enhanced energy efficiency (which I would define broadly as anything that increases our useful energy per unit of fossil fuel combustion - this is as valid a point for renewables as it is for variable speed motors).  And if I doth protest too much on these issues of carbon policy, it is only because there are an awful lot of ideas being kicked around on the GHG policy front that will continue that shoddy policy rather than breaking with the past and instead trying to keep up with the Danes.

I agree with the efficiency bit, but would temper it w/ more cooperation rather than competition. Further still, I would put it to you that even w/ all our advancements in efficiency in recent history, we still continue to set record energy consumption numbers in the face of record droughts! We need to delineate a multi-pronged approach here.

A little sick, now that I think of it.  

Could explain a lot.

I know you don't like markets, and won't try to convince you otherwise anymore.

But to be clear, I am not suggesting that a carrot is going to anyone I prefer - only that effective GHG policy puts the same price on positive changes in GHG emissions as it does on negative ones.  If a policy comes along under which GHG emissions suddenly cost $20/ton, it better impose a $20/ton cost on every ton that gets emitted.  But equally, it better give a $20/ton payment to every ton that gets reduced.

That sounds great except that reductions in emissions are so much harder to price than the emissions themselves. Two more examples; solar panels and home heat.

Where up-front incentives are offered for solar panel installation they can distort the emissions reductions of two different installations. My mother's HOA has solar panels installed over their car-ports. These panels are frequently dusty and occasionally shaded due to their close proximity to some trees. A similar sized installation on a flat, third-story roof would get more sun and less dust. An up-front credit gets the panels installed but feed-in tariffs might encourage better placement and maintenance. Both reduction credits are expensive to quantify accurately due to labor costs. If distributed solar PV was just cheaper overall we could just let the building owner worry about it.

Locally, people outside of the city proper frequently heat with propane or heat pumps. In many cases the buildings they are heating lack adequate insulation, air infiltration barriers, windows, doors and use poor heating equipment. Depending on altitude summer cooling needs vary from none to extreme. Here each building is a unique problem. Some buildings are best served by geo-exchange HVAC and others just need a pellet stove and a layer of housewrap. Another building entirely might be best served by replacing the roof with something thermally reflective. Quantifying actual emissions reductions would be a nightmare as some are heated both by propane and wood in the first place. We can't even talk about the futility of using single case meter reductions due to the vagaries of weather.

Tax the inputs and let the building owners decide how to fix their heat problem.

This, at core is the way that all economic activity outside of government happens - and the great problem with our GHG conversation is that we presume that you can incentivize behavior in a model that creates buyers without sellers.  

 Consider: if you have 10 cent/cup lemonade and I want lemonade, I pay you 10 cents for a cup.  +10 cents/cup for you, -10 cents/cup for me.  Easy system that gives us both what we need.

 By contrast, a "cap & dividend" approach to lemonade distribution replaces this model with one that stipulates that as a lemonade buyer, I'm still out 10 cents a cup.  But instead of buying lemonade from you, I pay it to the feds, who then see to it that I get my lemonade allowance.  Meanwhile as a lemonade seller you get... what, exactly?  Your pro rata share of all those 10 cent cups as distributed through the population?  What possible reason would you have to build a lemonade stand under that paradigm?  The only way that model works is if you think that the the Federal Department of Lemonade Provision will do a better, cheaper, faster job of getting lemonade to the masses than you can.  If you distrust markets so much that you think that model is better than so be it - but we have a pretty fundamental difference of opinion on human nature.

I disagree, with cap and dividend I pay the capped price for lemons (like I do now with wild salmon), 10 cents, plus the "citric acid tax" 2 cents. Now that I know my costs are 12 cents I charge 14 cents for the cup of lemonade. You, as a drinks buyer have your original 10 cents plus your 2 cent dividend and whatever other money you have. You can choose to buy my 14 cents per cup lemonade or possibly the kid next doors' 12 cent a cup iced tea. You still get to choose lemonade if you can't stand iced tea but it costs you more. Just like at Trader Joe's I now buy tilapia, as a result of a regulated market on salmon.

Note that I'm all for not picking winners, nor for paying people to do anything that doesn't lower our GHG emissions.  I'm simply arguing that as a matter of economic efficiency, you cannot expect people to invest in GHG reducing capital if we don't provide them with an incentive to do so.

If you don't think price is an incentive ask GM how those big trucks are selling. Or if you don't think it's an incentive to capitol please explain where all that farmed tilapia, trout, salmon and even caviar has come from; that stuff can't be produced in a backyard tank. The market responds to price by bringing new products to the market as well as reducing purchases of price challenged products. You can now purchase diesel aircraft engines as well as Zeppelins due to the cost of aviation fuel. Some people just quit flying.

Regulated markets work to produce new competition to provide services but not neccesarily by providing the same product.  Cap and dividend penalizes unwanted emissions, provides a political incentive to voters, and allows greater competition for the services that are now being met by GHG emissions.

Put the Carbon Back

Are we almost there yet, David, are we almost there yet.....I have to go to the bathroom....

Have a look at my post on output based standards.  I agree that complication is bad - and that too much government involvement is complicated.  But the beauty of an output based approach is that there are only two numbers that matter: how much fuel you bought, and how much energy you produced.  Neither are susceptible to gaming.  Simplicity is to be encouraged if it stays that way.  And that's exactly the purpose of an OPS.

Re: your distrust of energy markets, that's sort of like distrusting tall midgets.  Energy "markets" are among the most subsidized in the world, and therefore not markets.  I don't suggest that those are worthy of emulation.  But I do suggest that if we set our sights on removing the inefficiencies in those bastardizations of competitive market principles (to make them look more like our metaphorical lemonade stand) we would unleash a flood of profitable GHG reduction.  That ought to be the primary goal of any sensible energy or environmental policy.  Anything else is a distraction.

The additionality debate and the gap between electric and thermal output leaves a bad taste in my mouth. Personally, I was for a Carbon Tax for years. Seems ideal if simplicity is your goal. Honestly, I'm tired of dragging that debate though the mud. The financial intermediaries frenzied by visions of cap-and-profit have effectively locked up the debate for so long, I'm now leaning towards expediency w/ NRDC in spite of my intuition.

If the debacle w/ additionality & offsets is any sort of gauge, why would I trust a system simple enough to allow for even more maneuvering by the intermediaries, prospectors, and lawyers.

Utilicorp buys a short ton of coal at $57 from which they expect to get 11,800 BTU's. The carbon tax authority slaps a $100 tax on that ton of coal as it's loaded on the train at the mine. Rolling up to the Utilicorp power plant that ton cost $157.50 or whatever. The power plant people are authorized to pass on 90% of that cost to the ratepayers.  The ratepayers are paying a lot more for their electricity.

Now in the mail the three rate-payers gets two envelopes each. The $200 electric power bill and the $100 carbon dividend check. Ratepayer Jane doe decides to kit out her house with CFL's for $60 and kicks the rest to Utilicorp. Ratepayer Jim Bob applies the dividend check to the the Utilicorp bill and ratepayer Joe Bob puts the cash towards an electric hub for his bicycle. Two out of three make choices that reduce their fuel consumption reducing the use of coal or gasoline. Cost to the regulatory agency is minimal.

Then next month Jim Bob, tired of his neighbors gloating shades his south wall with some found material reducing his AC bill by 50%.  Down the block a guy signs a contract for a geo-exchange HVAC system cutting his electric bill and freeing up natural gas capacity. Two blocks over the whole block of identical houses is sold rooftop PV and thermal to be installed in one swell foop.

People will get the idea that getting reamed by the power bill each month isn't as fun as avoiding it. We're real good at this in California and improving; the rest of you can learn.

These schemes work even better if fictional Utilicorp is allowed to fold energy saving measures into electric bills. Allow them to bill for negawatts installed from a "best technology" list and people will compete for the right to retrofit large buildings like they do in California.

My point is that the number of ways of penalizing emissions is limited but the number of ways of reducing consumption is near infinite. Since consumption reductions are site specific and the number of sites numbers in the millions it would be a good idea to encourage independent action.

The important thing is that all players understand that the carbon tax is only scheduled to go up. Early adapters should get paid and laggards will benefit from increased efficiencies but GHG emissions have to get squeezed tight.

One experience of "Enron at the light switch" was enough. We're never going to get a competitive market in California because over 40% of us rent. We have limited control over the buildings we live in. Likewise most businesses are in buildings leased from REI companies. They don't have much incentive to make capital improvements either. It's regulation or nothing.

Put the Carbon Back

I actually agree with either cap & dividend or a carbon tax as one part of a three part policy that includes large scale public investment and rule based regulation. That is:

1. Divert most of our military budget into public investment in emissions reduction where we know stuff has to get done -- passenger trains to replace cars, HVDC lines that any renewable grid will need, smart grid and storage ditto. Also put money into speeding up deployment of wind and concentrating solar power, because we know they have to be part of the solution. Ditto weather sealing, insulation, and solar space & hot water heating.

2. Passed rule based regulation to do the stuff we  know makes sense - green buildings and building energy efficiency, more efficient transport, apppliances and office equipment.

3. Put a price on carbon to get the rest of the stuff we need - either via cap & divident or carbon tax & dividend.

Sean: I'm not presuming all carbon price paid will be passed along. But in the abscence of regs preventing us an emissions price will work very much like a sales tax, a Vat, a gasoline tax or the liquor and cigarette taxes - meaning most of the price will be passed along to consumers. Both standard economic theory and empirical studies seem to support this. Also, like you I have some business experience since I do consulting for a lot of small business, and before I had my own consulting business worked for some large and medium sized. And broad based taxes, like a sales tax or an energy tax, do tend to get passed along.  

Cap & Dividend says that I pay the feds that $10, which they then divide up amongst all citizens, giving you - as a person who is doing the right thing - hardly any incentive to continue doing the right thing.  

This is a great deal for those who do nothing to lower GHG emissions.  Money for nothing, checks for free.  But it's a lousy way to encourage GHG reduction, since no one has any direct incentive to invest.

Remarkably, you're overcomplicating what is already pretty complicated.  Lemonade = GHG reduction, not coal.  The analogy is that if you are a GHG reducer and I am a GHG producer, and we agree on a price of $10/ton, I pay you $10.  I have paid to pollute while you have received an economic incentive to install clean technology.

Cap & Dividend says that I pay the feds that $10, which they then divide up amongst all citizens, giving you - as a person who is doing the right thing - hardly any incentive to continue doing the right thing.  

This is a great deal for those who do nothing to lower GHG emissions.  Money for nothing, checks for free.  But it's a lousy way to encourage GHG reduction, since no one has any direct incentive to invest.

Avoiding costs isn't an incentive to invest? Since when? Why do you think people repair their cars? Couldn't they just run them until they failed and buy a new one? People understand that avoiding energy costs puts money in their pockets. Business understands that people will buy cheaper products that provide the same service as more expensive products and invest to provide cheaper products.

People will invest in solar panels, solar water heat, insulation, wind power and efficient transportation. Many people already are and more will join them if GHG emissions present a larger barrier to their desired services than emissions reductions. Other people will come up with a variety of new means of providing the desired services. If those services offer price or feature advantages people will invest there.

Price penalties work.

Put the Carbon Back