it would help create a stable, predictable investment environment.

How, praytell?  Putting a price on carbon emissions does nothing to create an investment thesis, as I pointed out here.  Trust me - I've got a pile of money looking to invest in GHG reduction, and this model simply doesn't provide an investment thesis.

Second, your whole argument strikes me as (uncharacteristically) intellectually lazy.  You seem to be saying that doing the right thing is politically hard, and therefore we should settle for second best.  OK... but do you apply that logic anywhere else outside of the policy realm?

Good writing is hard.  Does that mean we should fire our editors?  Good food takes time.  Does that mean we should only eat at Dennys?  Good music takes talent and practice.  Does that mean we should just listen to Brittany Spears?

Good policy is also hard.  But that's no reason not to demand it.  

   Sean, I would like to hear your thoughts on what would constitute a good policy for GHG investment. IMO, I would prefer tax and dividend, i.e. a carbon tax whose proceeds are distributed. This would provide a known future cost of carbon, which should aide investment. If tax & dividend is deemed politically risky, say because of the demonization of the word TAX, then cap and dividend comes in a poor second.

It wouldn't direct it to certain technologies--the market would do that--but would create huge amounts of investment in non-carbon based energy & efficiency.  Price carbon and the rest follows.  Public funds can then be used to supplement investment.

The issue with carbon policy that only includes a stick is that the investment thesis depends substantially on the degree to which the price of that stick ripples through the system.  Suppose that a coal-utility tomorrow had to pay $1 billion for their carbon emissions.  How does that affect your incentive to deploy a technology that will lower GHG emissions?  Very indirectly.  First they have to decide whether or not they can afford to (or be allowed to) pass that cost along to their customers.  Then there is the question of which customers they pass it along to - they might, after all, choose to apply the costs disproportionately amongst their rate payers.  And even once that's done, there's the question of how that cost will be averaged out amongst other supply.  For example, if the coal utility also owns hydro assets, the cost they incurred for CO2 emissions will only increase your cost of electricity by some proportionality reflecting the mix of all the kWh they sell.  (We can see this issue today, where new coal-fired power plants are massively more expensive than the average, but are only slowly driving up the average price of power - creating the perverse situation where if your plant is cheaper than that new coal plant, but more expensive than the current grid, you have no incentive to build.  That's not a carbon issue, but the same thing happens any time you have a price paid at the margin against a large installed base.)

In short, it is extremely indirect.  And I for one, cannot tell my investors truthfully that a mechanism in which polluters must pay to pollute will be guaranteed to create any additional return on their investment in GHG-reducing technologies.  And so we end up in a situation where we say "look, if we get upside, that's great.  But don't make an investment expecting it."

So a good policy for GHG investment must have a visible mechanism where people who reduce GHG emissions can get paid for so doing.  Tell me that I can get paid $10/ton for any GHG I can verifiably reduce and I will immediately factor that into my calculus.  Tell me that my only upside is that I don't have to pay $10/ton that the other guy has to pay which may or may not be fully reflected in his price and I punt.

Second, I find it very difficult to believe that C&D would not induce investment. The entire business and political community would know that the tax on carbon was going to steadily rise, for at least 50 years. Sure, margins could be squeezed for a while, but not forever. Maybe not as fast as if we plowed money directly into it, but sooner or later investors would start casting about for long-term ways to avoid the carbon vise. No?

grist.org

Your thesis just does not pass the sniff test and am surprised that you've stooped to name-calling David as "lazy".  

Of course a steadily reducing carbon cap & mechanism for pricing carbon will drive investment in green technologies.

Just the hint of one, is driving billions in investment now.  

Can you really think that investors wouldn't respond to a law that would get us to 80% by 2050?  That priced carbon without creating safety valves?  

I think most investors are smart enough to understand that there is a pile of money to be made in producing carbon free energy-- some already get it.  The rest will join once they see that the world is serious about phasing out carbon...

But after Pearl Harbor, there was certainly "political buy-in", and even though it would prevent the worst of global warming, there is no political buy-in for massive government spending at this point.  But people should understand that direct government spending is much faster and more straightforward than carbon pricing.

Apparently Sean thinks that people should have the incentive of a reward if they reduce emissions.  So we're back to the European problem were the biggest polluters are rewarded when they finally get their act together.  

The market system is a stick.  As Adam Smith observed long ago, any self-respecting capitalist (and Sean pointed out somewhere) would gladly be a monopolist.  But because of the discipline of the market, they can't.  Same thing with carbon pricing -- if you want something market-based, it needs to be stick-based, otherwise it becomes an opportunity to game the system.

There's lots of ways to provide carrots to accompany a cap and dividend system -- start with decoupling, so that utilities are not rewarded according to output of commodity but rather according to service provided.  Then use a differential ROI so that they are allowed to earn a higher rate of return for low and no carbon assets than on high-carbon assets.  A state PUC could even steal Sean's idea and apply it for all rate cases:  Set the desired carbon efficiency for the electric utilities as the crossover point (which can be adjusted through time).  Increase the ROI for all capital assets that produce power at or above that carbon efficiency level; reduce ROI allowed for all assets that produce power with a lesser carbon efficiency.  Allow them to capitalize efficiency investments -- that is, to treat $1B invested in Pay-As-You-Save type programs (like Berkeley's) as if it were invested in a $1B low-carbon piece of hardware.

Utilities are so grossly overcompensated (on a risk adjusted basis) as it is that there is plenty of room in the rates to increase the rewards for them to treat efficiency (negawatts) as a resource and to produce more low carbon power while shedding high carbon power.

The 5% Project

So why can't we just slap a tax on carbon, and use that money to fund low- or no-carbon energy projects, AND pay a small dividend to individuals who reduce their carbon use.  That way, people get the stick (higher fossil fuel prices) and the carrot (direct financial reward for reducing their carbon footprint). Start-up industries get the financial backing that they need, up-front, without waiting for the markets to pick a winner, and without waiting for sufficient revenue from the carbon tax to come rolling in; the government simply supplies start up costs and pays itself back out of the carbon tax coffers.

Except that conservatives tend to hate all taxes, and government-mandated taxes tend to shift with the prevailing winds, thus eliminating the inevitability mandate. (Do you hear that, Mr. Anderson?)

Would the carrots of 1) a small dividend for reducing personal carbon footprint, 2) energy security, "homegrown" in the USA, 3) green-collar jobs, and 4) saving the planet be enough to ensure inevitability?

Ay, yi, yi.  My hair hurts.

To wit: compliance with the Clean Air Act has driven down the efficiency of US power plants, because it stipulated a set of paths based on end-of-pipe pollution controls that universally drive down plant efficiency.  Had we instead set a goal of lowering pollution, those same plants could have used energy efficiency as a compliance tool.  This means that for thirty years, we have quite literally been mandating more expensive power and more CO2 emissions.  This isn't one of those "aw shucks, well we tried issues".  This is a holy sh*t, how have we managed to screw that up so badly issue.  It is not unique.

Good policy articulates goals, and welcomes creativity.  Go west young man.  Go to the moon.  Bad policy stipulates paths.  What the carbon tax/cap & dividend crowd seems to be suggesting is a preference for paths, and a belief that a small number of bureaucrats are smarter than a mass of creative actors.  They aren't.

That is a broad and entirely unjustified generalization. Nothing inherent in C&D expresses that belief. It just leaves the question of incentives off the table, to be addressed in other ways. There's no reason those other ways could not be goal-based rather than path-based.

grist.org

(And to be fair, I was responding to kmp's specific question "what's wrong with just picking some winners?")  

I perhaps over-generalize to apply this to everyone who likes C&D (my apologies), but the moment you decouple sticks from carrots you create a tremendous economic drag that will slow our rate of GHG reduction.

The goal in a war is to win the war.  The path is to build the machinery necessary to win the war.  (And let's please avoid "A war on global warming")We know that we have to virtually eliminate the use of fossil fuels.  Sure, we'll make some mistakes -- God knows, military budgets are incredibly wasteful -- but climate change government spending can be very transparent, and what does it matter, as long as the goal of mitigating climate change is achieved?

For instance -- you want CHP?  How about telling utilities that they have to have CHP?  How about offering funding for CHP?  How about saying that a utility can't waste 67% of its energy on waste heat, at most, 10%?  Nice and easy.

kmp, another funding option is the "Berkeley" model of providing upfront capital for small-scale renewable energy, with the loan paid back from the savings.  Then, depending on interest rates, it hardly costs the government anything.  And you could always take big chunks from the military budget...

I guess that's my main problem with cap & dividend; I don't see it as a strong enough, or immediate enough, avenue for either promoting R&D for new green technologies, or providing start-up capital for companies that want to provide existing technologies.

Kaela

I've heard proposals for an "infrastructure bank", which could be modeled on development banks that various countries use, to help firms get over the initial "hump" of getting going so that they can take advantage of the consumer funding.

Perhaps a cap-and-auction, or some such, could provide the funds for such an infrastructure bank; or as I argued here, if the government actually starts building much of this equipment -- especially for governmental buildings -- it would be a natural fit with carbon pricing, because the carbon pricing scheme could provide some of the funds, and the government build-up would provide the alternatives that people would need as carbon becomes more expensive.

I think difference is that Sean thinks that means of increasing efficiency other than increasing the ratio of useful BTUs delivered has a trivial potential - that my tomato example was an exception.  But one of the things I documented in cooling it, and that the RMI has documented is that there is a huge potential in reducing the USEFUL BTUs needed to generate output.  I'm not saying that recycling heat, and increasing boiler efficiency are not extremely important - just that that there are plenty of other methods just as important, and that putting incentives into one and not the other is a signficant market distortion. Rynn is right. When you reach the limit of what pricing can do the next step is not more pricing (even negative pricing AKA "carrots"). The answer beyond pricing is public investment and rule based regulation.

The real problem is that it's difficult for government to mandate conservation retrofits of old buildings or systems. That part of the solution is much harder to buy wholesale.

Put the Carbon Back

Now if they had just made something like that to focus of the Clinton campaign...

Second, Sean accuses 30 years of the Clean Air Act as making CO2 levels worse. Prove it! Instinctively, we know that some equipment such as scrubbers, precipitators, catalysts, and all those nice controls did nothing for CO2 and perhaps even was causes some parasitic losses in efficiency, but do you really want smog and toxics befouling the air as a trade-off? If a phosgene plant was modified to lower CO2 to the maximum level but phosgene was leaking all over the community, would that be acceptable? Of course not.

The good old American way is to restore subsidies for alternative power such as wind, wave, solar, and geo-thermal. We want solutions like light bulbs that SAVE money, not a carbon tax. Let's get real here.

Onward through the fog

For more about Revenue-Neutral Carbon Taxes, see Carbon Tax Center at www.carbontax.org.