In January 2009 Dick Cheney leaves the Vice President's office.  Let's imagine that he becomes the CEO of ExxonMobil.  Shortly after he takes over, ExxonMobil discovers a low-cost way to sequester CO2, essentially solving the global climate problem, stabilizing CO2 at 350ppm, exceeding the wildest dreams of Joseph Romm and Al Gore. The discovery increases the value of ExxonMobil many times over and makes Dick Cheney the richest man on earth.  

So is this scenario acceptable?  Isn't the argument all about saving the planet?  (BTW - I know that ExxonMobil is actually working on something very interesting which might do what I just said.)  

--- G.R.L. Cowan, H2 energy fan 'til ~1996
http://www.eagle.ca/~gcowan/boron_blast.html

Oil supply is up, and demand is down, Sean.
google.com/search?q=%22there+is+no+gas+shortage%22

When confronted over issues of reliability of offsets, supporters insist 'but its an effective mechanism to contain the cost of permits.'  This completely misses the point.  You could contain the cost of permits by allowing companies to offset a certain percentage of their emissions by buying me a Big Mac, and it would be even more effective at containing costs.  So the question is really how many actual, additional, verifiable, and permanent tons of carbon sequestration some of these offsets would really produce.  Unfortunately, the answer is not so encouraging.

The Boxer cost-containment auction ("offramp") is another measure that would allow the economy to "meet the cap" while actually circumventing actual emissions reductions.  Finally, if we were discussing a carbon tax, as opposed to cap, then certainly a higher carbon price would lead to more reductions than a lower one (all other things equal).  So while its important not to view carbon costs as punishment, its equally important I think not to view them as unacceptable to the point where we rationalize compromising the actual reductions to avoid them.  If we refused that, and carbon prices spiked, then eventually there would emerge a political necessity to identify more low-hanging fruit that doesn't compromise reductions. Then people in power would start listening to your ideas about needed regulatory reform to put CHP on a level playing field with new generation.  

One last thing.  You wrote about the 1990 CAA SOx program "To be fair, grandfather rights given to existing coal plants did artificially depress demand in that market [thus lowering price of permits]."  Grandfathering credits, which was referred to as 'free allocation' during the Lieberman-Warner debate, does not actually affect the price of permits, because it does not affect the underlying supply or demand.  I wrote about it in more detail here:
http://www.washingtonpost.com/wp-dyn/content/article/2008 ...

That article cites lower US demand as if that should dictate US prices.  However, its a global market, so the only demand number that counts is global demand.  Thats where the price is set.

On speculation, he points to how investors are buying up futures contracts, inflating demand because it used to be mostly just companies who deal in oil bidding on contracts.  However, its worth noting that these speculators are only buying futures contracts because they anticipate oil to be worth much more in the future.  Meaning they anticipate a shortage sometime in the future.  

Speculation is buying low and selling high right?  So if they're buying up oil inflating the price when theres not a current shortage, anticipating dropping it back on the market when there is one, they're actually smoothing out the price trend.  It's foolish to insist that current supply and demand should set price independent of prospects for those fundamentals in the future.  Asia used to have a nonexistent auto market, and in a couple decades its going to be the biggest one globally.  India is coming out with that $2,500 'people's car.'  This on top of continuing industrial growth.  If we're eventually gonna hit a shortage, even if we're not there yet, its important that these future fundamentals drive up price now to get the market to reflect that its a finite resource.  Otherwise you're just asking to run headlong off a cliff, if you don't want the market to incorporate any possibility of a shortage until you're smack in the middle of one.

I do agree with your other point though about not filling bills with trapdoors and superfluous offsets.  And to be clear, the point of my post is not to argue against high GHG pricing per se - simply to make sure we don't confuse the price with the goal.  

Can somebody point me to the chemistry surrounding this matter?  I'd greatly appreciate an unbiased opinion.

what I need to know before jumping on the CO2 bandwagon:

1. HOW MUCH energy is absorbed by CO2
   
2. HOW MUCH is converted into radiated heat
   
3. HOW MUCH that affects the surrounding environment

And wolverine, what part of the 'trade' inherently threatens the aggregate level of pollution reduction (if you take out questionable offsets)?  We shouldn't be opposed to economic gain if it is sustainable, i.e. compatible with emission reduction goals.

It's a minor point, but just want to make sure we're clear that the issues is that there is a non-zero price for pollution - not that the price has to be set by an auction per se.

The universe of people who think that the former is a heck of a lot more efficient way to allocate resources is much broader than simply those seeking to "scam money off the issue" as you put it.  Capping GHGs at a government set price is exactly as economically efficient a way to lower GHG emissions as the Soviet model was a good way to provide bread to the citizens of Moscow, and for exactly the same reason.  (And recall that the problem with Russian breadlines wasn't simply the price: it was also the quality and supply.  A centrally planned market for GHG credits will suffer the same problems.)

The big effect though of those programs in my experience though is a second order one.  By shifting all the responsibility for pollution-reduction to new plants, it raised the cost of power construction & generation from new facilities, thus raising the market clearing price for electricity.  Meanwhile, the old grandfathered plants got to keep running with an artificial, legislatively-gifted economic advantage.  This caused a slowdown in the rate of new plants, affecting supply/demand considerations in power markets just as it did in SOx markets.  And since construction slowed down, we again see a slowdown in demand for SOx credits.

All of this is of course tangential to the larger point, which is that - flawed as that model may have been - we still saw more SOx reduction at lower cost than anyone thought possible at the outset, which is a good thing.  And which means that - if we roll back the clock - the arguments for why we must grandfather to protect those old plants were almost certainly based on a flimsy house of economic cards.  This is worth bearing in mind as we hear the same requests for grandfathering from those same coal plants in our current GHG debate.

Ultimately, the price is set by demand for credits (and supply, which is set by the cap).  Demand is set by the aggregate level of production of emissions-intensive goods, as well as the level of emissions intensity of course.  So if the decision on whether to produce or not is not affected by allocation, it doesn't affect the price.  And production levels are decided based on Marginal Cost (and Marginal Revenue, which isn't affected by what we're talking about here), and the MC is the same (market price for a credit) whether the permit is free or allocated (allocated carries same opportunity cost, as described before). So the allocation doesn't affect production levels, and so doesn't affect price.  Unless of course you give them conditionally, like on a per kwh produced basis or something.

I happen to believe (now I'm going off on my own, but I think my theory here is well grounded) that there is in fact a second order problem, that causes free allocation to affect demand.  While it doesn't explicitly affect incentives on level of production, it does in one very important respect.  It affects the decision on whether or not to shut down, because you have to stay in business to keep collecting your allocation windfall every year.  But to this extent, it actually increases demand, because it artificially preserves these old dirty plants that if they were operating "rationally" would shut down in a carbon-internalized market because they demand too many allowances.  

So your point about the second order problem causing a slowdown in new plant construction is a good one, I think you just looked at it the wrong way.  Ultimately this didn't lead to less demand for permits because of fewer new plants; it led to greater demand for permits (and thus higher prices) by artificially preserving the old plants.  If the system were more neutral, more of those old plants would have been turned over for new ones, which would have been more efficient and demanded fewer permits.

And you're certainly right that we saw SOx reductions at lower cost than projected, and that that's a good thing.  As I understand it, this was in large part due to 2 major sources of cheap reductions: 1) moving to lower-sulphur coal, and 2) firms found they could build scrubbers that were half as effective as the old ones for 1/4 the cost, because the old ones had highly redundant protection to comply with the prior regime's command and control regulations.  The 1/2 and 1/4 fractions I just made up, but the point being that they could make scrubbers that made fewer absolute reductions, but more cost-effective ones.  

And since neither of these two sources of cheap reductions were predicted, it is another argument for not picking winners, which I gather we agree on.  We don't want to "promote tomorrow's solutions" at the risk of biasing the market against taking the truly lowest-cost ones that we might not have figured out yet.

And since neither of these two sources of cheap reductions were predicted, it is another argument for not picking winners, which I gather we agree on.  We don't want to "promote tomorrow's solutions" at the risk of biasing the market against taking the truly lowest-cost ones that we might not have figured out yet.

It's just that simple.  The complication of various cap and giveaway, auction, dividend, trade, benefits only status quo energy producers and traders.

Even if 100% of the cash raised by permit sales could be returned fairly to each energy consumer, trading of the permits would inflate energy prices still more.  But in reality government/corporate partners will soak up a large portion of the permit money.

Give the subsidies now going to big oil, nuclear, coal, and agribizz to consumers who invest in renewable/conservation energy devices, of their own choosing, and a real free market will decide which technology is best.  10 cents per GHG free kwh or kwh saved through conservation would be a good starting point.

http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin

This would provide the current American nuclear-power industry with an $80 billion/year subsidy.

Your analogy about selling and buying milk is totally inapposite.  We're talking about greatly reducing emissions that are messing up global climate by polluting our atmosphere, not selling food.  A correct analogy would be to the Clean Air Act, which sets limits on pollutants.  As Gar Lipow points out above, simply setting limits on pollutants produces better results than convoluted schemes that obviously prioritize something other than emissions reductions.

And the latter is the problem here.  Once again, discussion of a major environmental problem has degenerated into an economic discussion.  As an environmentalist, I don't give a damn about economics until human society stops destroying the Earth.  After humans lower their numbers greatly and begin living in an environmentally friendly manner, then we can discuss economics.  Even if you don't care about other species or the land, air, or water for their own sakes, your economically driven models will have everyone eating, drinking, and breathing their money.

Unless human-creativity were also lowered, what might prevent human numbers from springing back up?

To your specific points:

1. I'm not arguing for any convoluted scheme that puts limits on anything other than emissions reductions.  Indeed, you'll note my criticism of the Lieberman-Warner bill was that it horribly confused the goal of emissions reductions with the pork it chooses to dispense on issues that are only tangentially GHG-related.  It's also why I prefer output-based standards, wherein all proceeds and distributions from a carbon policy directly incent or penalize actions that have favorable/unfavorable impacts on our GHG emissions.  We both want a GHG pricing scheme in which the only way to pay or get paid is as a direct function of your actions that impact atmospheric GHG concentration.  My point is that once we agree on that choice, we are vastly better served to let markets allocate resources and determine the optimal allocation of capital than to stipulate it from on-high.

2. The Clean Air Act is a perfect example of this point.  As I noted here, The Clean Air Act inadvertently mandates higher CO2 emissions, by virtue of it's input-driven approach and mandate focus.  (Indeed, I am rather firmly convinced that any GHG bill that does not also include an overhaul of the CAA may trigger massive litigation, to the extent that the two mandate directionally-opposed behaviors on emitters.)  The CAA not only fails to incentivize the lowest-cost approaches to pollution control from a capital perspective, but also mandates technologies - from baghouses to SCRs - that all reduce the fuel efficiency of the plants they are bolted onto, thereby increasing CO2 emissions.  I am not at all suggesting that the CAA has not done wonders for criteria pollutants.   Rather, its mandate-focus has ensured that the most cost-effective approaches to pollution control are never taken.  (Indeed, I have experience in many industrial plants that have consciously chosen not to invest in devices that would increase their fuel efficiency, lest they trigger New Source Review.)  We should not throw out the intent of the Clean Air Act, but we should also recognize that it is in fact a textbook example of the unintended adverse economic consequences of mandates.

3. Finally, I'd argue quite strongly that you cannot maximize the environmental benefit of any policy if you don't factor in the economics.  Let's say you have $1000 to spend on environmental compliance.  If you spend that $1000 on technologies that cost $100/ton to reduce CO2, you'll reduce 10 tons.  If you spend it on technologies that cost $10/ton, you'll reduce 100 tons.  In that simple scenario, ignoring the economic consequences is an implicit decision not to reduce an additional 90 tons of CO2.  But the simplistic example is generalizeable in any case where financial resources are finite. In other words, everywhere.

There's an implicit assumption in much of what you, Sean Caston, post on Gristmill that to meaningfully lower atmospheric greenhouse gas (GHG) levels, we need to lower greenhouse gas (GHG) emissions. The assumption is wrong.

I beg your pardon? In what way could it be profitable for one to lower GHG levels (strangely, you wrote "emissions"; maybe it was a typo)?

Sean Caston wrote: fossil fuel costs money [...] and therefore reducing fossil fuel combustion saves money

en.wikipedia.org/wiki/Syllogism

Syllogisms require two premises. Is fuel-cost the only cost involved in generating electricity from powerplants?

How about seeding clouds to change the pH of rainwater, thereby drawing carbon into solution and precipitating it into the ocean and groundwater?  There to become seashells and limestone...Although, since there is really so little available carbon in the atmosphere, it would take many years of intense effort to impact levels.  

How about growing many large trees and turning them into houses, grand pianos, and upscale piano bars?  

Escrowe "Fool me once, blow your head off..."

Oh Al Gore, Who Art in Washington, Where Shall I Send My Donation?

Be sure to use the properly marked envelopes to track your donations and receive full credit (but sadly, no tax write-off).  

The answer to questions 1, 2 and 3 is LITTLE or NONE.  Likewise to the following question:  What is the contribution of human activity to global climate change?  

Escrowe "Fool me once, blow your head off..."

Any progress must be halted.  Progressive change burns their flesh, they must prevent it at all costs.  No matter how many alternate internet identities they must occupy to do it.

http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin

I see you're getting it from both sides, but you should ignore the anti-environmentalists.  Unfortunately, discussions about energy and global warming seem to really bring them out, but I'm sure you have better things to do than reply to meritless posts.

While I understand your position and agree with some of it, your basic assumption is provably false.  The conflict between the natural environment and economic concerns is this:  All economics are based on exploitation of natural resources.  (Economics 101.)  Exploitation of natural resources is ecologically destructive.  (Ecology 101.)  One must therefore choose a side.  Sorry, you can't have your cake and eat it, too.

The differences between us are caused by the fact that we literally live in different worlds.  I see the world through the natural environment and base decisions on whether to support or oppose something on how it would be impacted.  That's why, for example, I oppose wind generators in otherwise natural areas and transmitting electricity across natural areas, even if the electricity is generated by solar panels.  And it's why I just want to see strict limits on GHG emissions, not convoluted programs like cap and trade.

The problem with the Clean Air Act (CAA) is that it's not strict enough and is very convoluted, not that it didn't recognize CO2 as a problem decades ago when it was written.  As an environmental attorney, I can tell you that the needless complexity of the Clean Air and Water Acts often has me pulling my hair out in frustration over not being able to hold polluters liable.  A clear, strict limit on emissions is by far the best way to realize the intended result of lowered emissions.  A convoluted program like that of the CAA will just lead to more shenanigans.

But on the other side of the coin, as you admit, the CAA did reduce certain pollutants significantly, so it worked very well in that regard.  The unintended consequence of causing more CO2 to be emitted, as you characterize it, could easily be remedied by just adding CO2 limits to the Act.

This is not rocket science.  If you want to lower emissions of something, pass a law that sets strict limits on those emissions.  All else is trying to have your cake and eat it, too, and you'll end up with neither.

Consider the following example.  Suppose a facility emits 100 units of NOx, and the CAA mandates that it must come down to 80.  Option 1 is to install an SCR on the stack, which will drop the NOx to 79, but impose a 5% parasitic load penalty on the plant, driving up CO2 and operating costs (not to mention capital cost recovery for the SCR.)  Option 2 is to double the fuel efficiency of the plant, cutting total fuel use in half, but doing so by boosting combustion temperatures.  NOx release per unit of fuel combustion thus increases - let's stipulate that NOx "only" falls by 40% in this case, relative to the 50% reduction in fuel use.

Let's look closely now at Option 2, recalling that we had 100 units of NOx to begin with.  On paper, this is clearly the better option, since a 40% reduction takes us down to 60, relative to the 79 we got with SCR.  Better still, we have done so by lowering CO2 as well and making the plant more economically viable, with all sorts of ancillary benefits for job creation & the local economy.  Unfortunately, the CAA only encourages option 1.  First, because as an input based measure (e.g., a part-per-million standard), the 50% reduction in fuel - and associated combustion air - means that the regulated metric of NOx in this case is actually increasing, since fuel+air (the "millions" in the ppm denominator) are falling faster than the NOx (the "parts" in the numerator).  Second, because efficiency is not in anyones list of BACT/MACT technologies.  And third because - as noted previously - the efficiency upgrade to this plant would trigger NSR and compel the plant to be held to a more recent - and likely higher - NOx standard than they are held to under their current permit.  In other words, given the choice between reducing 40 units of NOx or 21, the CAA mandates 21 - and an increase in CO2 emissions.

These numbers are only illustrative, but I have numerous experiences with actual plants that faced variants of this theme and almost uniformly ended up making a choice along the lines of Option 1, in spite of the The net result is that the CAA - by ignoring economics - has failed as an environmental policy as well, in the sense that it has directed resources away from the most environmentally beneficial approaches.  And in a world of finite resources, that's a really dumb approach.

Note that you cannot simply meld CO2 into the CAA, since any input-based approach as the CAA is is by design hostile to energy efficiency.  And the only cost-effective way to lower CO2 emissions is to burn less fuel.  (CO2 is much more like lead than NOx in this case, in the sense that the way you get it out of the exhaust is by taking it out of the fuel, not by putting pollution control on the tailpipe.)  What is much more likely is that we will have to overhaul the CAA to build in output-based standards, at which point it will finally preferentially direct resources towards those approaches which are both economically and environmentally beneficial.  Because you can have your cake and eat it, at least with respect to CO2.

As a final note, economics is not about exploitation of natural resources.  It is simply the study of how humans value and trade resources.  It applies just as much to the extraction of oil for money as it does to giving backrubs in the hope of sexual favors.  In all cases, the economic optimum (which we rarely realize) is the one in which the aggregate society realizes the maximum collective value per unit cost.  It's convenient to think about these costs in terms of dollars, but they could just as easily be normalized to any other unit.  But there is nothing innately extractive about that discipline.  A world with zero resource extraction can still exchange goods, and that exchange can still be studied through an economic prism.

The CBO found the carbon tax to be the vehicle for achieving our CC goals quickest and cheapest.
Now, if any fellow enviros know any good reason why we should be pursuing a slower and more costly mechanism in pursuit of these goals, please say why that is.
Achieving the reductions depends on a lot of technology that is not available yet, and that will be in desperate need of serious volumes of dollars - all of which must ultimately come from consumers and taxpayers.
When it comes to solving the CC problem, cost does matter.
And, if we do not address the cost issue, not only the Repugs but also some Dems will prevent us getting serious CC bills passed any time soon.
We need to get started NOW - actually yesterday.
Carbon Tax Now.

1. It's set by the Feds, and always subject to political pressure to change or eliminate.  From a business perspective, this makes it extremely flawed as a planning tool, since any long-term bet on my ability to earn revenues (or pay penalties) based on the carbon tax is implicitly a bet on the vagaries of the political cycle.  Equity & debt markets don't like those kind of bets, and a carbon tax will therefore slow the release of capital into the energy sector - which needs massive capital reallocation to meaningfully reduce GHG emissions.

2. It's a stick without a carrot.  It puts a penalty on polluters, but provides no direct incentive to those who would invest in pollution reduction technologies, except to the degree that the tax is passed through fully and uniformly in prices.  More on that topic here.

3. It doesn't adjust.  The great power of a market-driven mechanism is that markets can respond and shift, proactively driving the price down as businesses seek to meet their obligations (as set by the cap) in the most cost-effective way possible.  A carbon tax, by contrast is reactive, with the ability to move up or down only in response to backwards looking views of what the economy has done in response to the tax.  Taxes, by design are chronically unable to quickly address the inherent fallibility of the mortals who wrote the tax bill.  A market-driven structure by contrast will quickly shift resources toward the most cost effective approaches, exposing fallibility of those who bet wrong on a regular basis (See: Bear Stearns.)

There's actually a really good reason to prefer cap/trade vs. carbon tax to deal with GHG pollution.  A carbon tax is "more efficient" because there's certainty about compliance costs, so businesses can plan accordingly and prudently.  But this certainty about compliance cost comes at the cost of uncertainty about the level of reductions incurred.  So its true that a Carbon Tax will achieve reductions more cheaply than a Cap and Trade, its just that you can't know in advance the level of reductions you're gonna get.  You just know, whatever you get, you got it for cheaper than setting the cap to that level.

So since you can't have certainty about both compliance costs and level of reductions, neither one is "better," they're for different problems.  If 1000 units of pollution is only 1000 times worse than 1, then take a carbon tax.  However, if theres a particular threshold you really don't want to get to, than you need a cap/trade, because the point is the point of the program is to ensure you get a certain level of reductions.  

Everyone always insists o we need a carbon tax instead, its more efficient.  Ok, what will you set it to?  Its not just a matter of political haggling, its a real policy deficiency.  No one has any idea what you'd need to set the tax to, and how fast it would need to increase over time, to achieve a 70-80% reduction.  And even if you took political haggling completely out of the picture, the way it would be done (remember in a perfect world, without political haggling) would be by using a CGE model to chart the optimum course of GHG reductions and set the CO2 tax to that cost trend.  This is what Peter Orszag, director of the CBO told Congress, when he testified in favor of a Carbon Tax.  

I'm not even going to get into now how problematic this is, because of how unreliable those models are.  You  really can't reliably model the rate of technological innovation in an industry that basically doesn't even exist yet, at least not in any comparable way to how it would under a Carbon price.  But that's what a Carbon tax relies on, if you want any indication at all of getting near a certain level of reductions.   Its so fashionable to rip on cap/trade and advocate a carbon tax because its "more efficient."  People don't even stop to think that that economic efficiency comes at the cost of the whole point of the program in the first place - ensuring a necessary level of reductions in a certain defined time frame.

RE: SOx and NOx: any standard that is on a ppm or even to some degree on a ton/year basis runs into this problem.  The only way around it is to regulate on an output basis, such that you must achieve X tons/MWh of useful output (or MMBtu, as the case may be).  There are states that have done this, although the feds are lagging behind.  Texas was one of the first states to install an output based standard (I believe for SOx and NOx, but my memory could be fuzzy.)  Other states have since followed, but sporadically, and often rather goofily.  New York, for example, set output standards by technology, such that an engine has a looser threshold than a microturbine.  Dumb.  But the key to such an approach is that it allows emitters to affect both sides of the fraction, essentially using efficiency as a pollution control device.  

Output-based standards are coming - most folks I talk to in DC and in the states will admit privately that the CAA is busted, but that they are politically reluctant to open it up, lest lots of ill intent creep under the rug.  Which is politically legitimate, but it has to happen eventually, and probably once we do get close to passing a GHG bill, to avoid the conflict noted above.  (A point that McCain actually realized several years ago when he started talking about so-called "4P" regulation that would include all 4 big pollutants in a single climate bill.)

An example might illustrate: we are currently working on a project that would pull waste heat off the back of a charcoal manufacturing plant.  The plant was built long enough ago that their permit didn't require them to install a baghouse.  But they have lots of hot gas coming off the back that we could make power out of.  The big concern that has been raised at the plant is that if we install waste heat recovery boilers on the back, to generate fuel-free power, that might trigger NSR and force them to also install a baghouse.  Economically, the project pencils without a baghouse.  Doesn't pencil with one.  And so if we can't get some sort of an NSR dispensation from the local DEP, the upshot is that we will not make fuel-free power, and the plant will continue to buy fuel-intensive power off the grid.  All because of environmental policy!  

But note that the issue here isn't solved with a ton/year reg because the total tons in this case are unchanged at the plant (although making fuel-free power would necessarily reduce SOx, NOx and particulate emissions off-premises by compelling some central station to dial back - but those benefits are not reflected in a CAA-type permitting process).  Since the tons don't change, NSR ends up trumping.  By contrast, if you go to an output approach, the plant ends up coming out better on it's permit, and so the whole issue is avoided - not to mention factoring in, albeit indirectly, the beyond-battery-limits emissions reductions associated with on-site efficiency.

"But note that the issue here isn't solved with a ton/year reg because the total tons in this case are unchanged at the plant (although making fuel-free power would necessarily reduce SOx, NOx and particulate emissions off-premises by compelling some central station to dial back - but those benefits are not reflected in a CAA-type permitting process)."

If the tons of emissions are unchanged but the plant gets to create far more of a commodity that it can sell for extra dollars, without having to purchase extra permits (as it normally would by burning more fuel), the plant is in fact capturing that benefit.  Its not just accruing to society for less SOx and NOx elsewhere.  The plant's decision takes into account marginal costs and marginal revenues to determine whether to go forward.  So even if it doesn't directly reduce the need for permits, if it increases revenue without a comparable increase in liability for needing permits, it still works out.

Now this may all get messed up by NSR.  That's an interesting point you bring up that I wasn't aware of, and I think a very valid one.  But I see this as separate from the issue of whether a permit liability of total tons is inferior to one based on tons per power output.  In fact, I think to the extent that it is different, it may cede some of the economic neutrality by encouraging further production over end use efficiency.    Sorta reminds me of the 'bonus allowances' for deploying CCS in Liberman-Warner.  It was sold as needing to incentivize CCS.  But just the ability to create extra electricity without requiring new permits is a real economic incentive.  (Although one might argue they're willing to depart from neutrality with CCS b/c of its importance in light of our massive coal system/infrastructure, but I don't see that sort of argument in play here).

Suppose a facility has an on-site boiler, emitting a certain amount of CO2, and they want to replace the boiler with a cogen plant, producing both heat and power.  We'll stipulate that they do a really good job of designing that cogen plant, hitting 80% overall efficiency.  As they generate their energy with that cogen plant, they will pull less power off the grid, which otherwise would have been made at 33% efficiency (US average).  Total MWh demand hasn't changed - it's just that we've replaced an inefficient central generator with an efficient local generator.  Thus, we are now releasing less CO2 per MWh of electricity and - since MWh of electricity consumption hasn't changed - we've reduced global GHG emissions.

On an output basis, this is all perfectly captured and incentivized.  But on a ton/year basis, we get pinched.  The facility installing the cogen unit is locally going to release more tons/year (since they're now making heat and power as opposed to just heat) even as their actions are causing GHG emissions to fall globally.  So directionally, they are treated as an incremental source.  Meanwhile, the local plant that dials back has less demand for their electricity, which causes them to burn less fuel and release less CO2.  So they now find it easier to stay in compliance with their permit, in spite of the fact that their tons/MWh is essentially the same.  (And in spite of the fact that the change that happened was entirely beyond their reasonable control.)  

So while at a macro level the ton/year basis works, at the level of the specific site that is permitted, it can actually end up creating financial benefits and penalties to exactly the wrong parties.

Note also that the math is not unique to CHP - it comes into play in any instance where a combustion source is shifted from one permitted entity to another.  If you replaced an electric heater with a gas-fired heater, you'd have exactly the same problem - or any number of other possibilities.

You take issue with the "political" nature of the tax.
On the one hand you say it is "extremely flawed" `subject to political whim'.
On the other, you say, it doesn't adjust.
Of course, it will be set to adjust, and it will be further adjustable over time.

I assume you have read the CBO study:
"Relative to a cap-and-trade program with pre-specified
emission limits each year, a steadily rising tax could better
accommodate cost fluctuations while simultaneously
achieving a long-term target for emissions.
Such a tax would provide firms with an incentive to undertake more
emission reductions when the cost of doing so was relatively
low, and allow them to reduce emissions less when
the cost of doing so was particularly high.
In contrast, an inflexible cap-and-trade program would require that
annual caps were met regardless of the cost, thereby
failing to take advantage of low-cost opportunities to cut
more emissions than were required by the cap and failing
to provide firms with leeway in years when costs were
higher."
So, I don't get your point.
Unless, it's just that we don't trust the government.

You say it is a stick without a carrot.
I don't understand.
There's a flow of revenues.
Consider the revenue from the Auction option.
Consider the carbon tax.
Same thing. Same size carrot.

What do we do with the revenue?
Incentivize.

"The most efficient approaches to reducing emissions of CO2 involve giving businesses and
households an economic incentive for such reductions. Such an incentive could be provided
in various ways, including a tax on emissions."

"This Congressional Budget Office (CBO) study--prepared at the request of the Chairman of the Senate Committee on Energy and Natural Resources--compares those policy options on the basis of three key criteria: their potential to reduce emissions efficiently, to be implemented with relatively low administrative costs, and to create incentives for emission reductions that are consistent with incentives in other countries."

"The policy options described above differ in their potential
to reduce emissions efficiently, to be implemented
with relatively low administrative costs, and to create
incentives for emission reductions that are consistent
with incentives in other countries. CBO draws the following
conclusions:
A tax on emissions would be the most efficient
incentive-based option for reducing emissions and
could be relatively easy to implement."

So, again, you take issue with the political nature of the tax.

I take issue with the greed-driven nature(highest ROI now) of the market traders who would hold the carbon futures and trade them UP over the next forty years.

I definitely prefer to have the flexibility of watching over the annual review of the level of the carbon tax being set as part of the ongoing "political" business of the country, in which we ALL participate.

That is, as opposed to having the invisible hand of the free-marketeers who have a proven track record of being willing to manipulate any market and any commodity for the good of those doing the betting.

I recognize that debt-and equity markets LOVE those kinds of bets, especially when thy have a forty year market to bet them into. This is precisely why we should never allow those marketers to have the power to set the price of the American people achieving their public policy goals.

Also, you quote the CBO report as saying
"In contrast, an inflexible cap-and-trade program would require that annual caps were met regardless of the cost, thereby failing to take advantage of low-cost opportunities to cut more emissions than were required by the cap and failing to provide firms with leeway in years when costs were higher."

Note "inflexible cap and trade."  Both of these issues can easily be solved with banking of allowances and auction price floors.  The CBO report beats up a totally inflexible straw man Cap/Trade unlike anything thats even been proposed, much less seriously considered for passage.

"On an output basis, this is all perfectly captured and incentivized.  But on a ton/year basis, we get pinched.  The facility installing the cogen unit is locally going to release more tons/year (since they're now making heat and power as opposed to just heat) even as their actions are causing GHG emissions to fall globally.  So directionally, they are treated as an incremental source.  Meanwhile, the local plant that dials back has less demand for their electricity, which causes them to burn less fuel and release less CO2.  So they now find it easier to stay in compliance with their permit, in spite of the fact that their tons/MWh is essentially the same."

Again with the revenue point.  Even though they're an incremental source, if they get more incremental (additional) production, whether heat or power (anything they can use/sell), then they have still benefited from the efficiency.  When a cap/trade makes a source buy a permit for each ton of emissions (CO2, NOx, w/e), you can consider those permits as basically just a factor cost like any other.  A wind turbine plant that finds a way to build wind turbines with less steel per turbine profits from that efficiency, even if they do it by installing a bigger plant that actually forces them to pay more for (more) steel.  Because they take in even more revenue.  So when you add 'carbon permits' to the list of materials you need to build a widget, turbine, or kwh, then the gains of efficiency from carbon reduction (using permits more efficiently, like steel in the previous example) are captured as well.

And your example that the Coal Plant far away dials back production and finds it 'easier to stay within their permit' I think is misplaced.  The coal plant is not gaining from the CHP's efficiency, its losing market share!  "Dialing back" means selling less of its product, because it can no longer compete profitably with the CHP, precisely because the CHP's efficiency gains have been internalized.  There's no 'staying within their permit' issue for the coal plant, because there's no firm-level quota.  If the coal plant could still compete as well in selling its product, it could buy another permit- just like a turbine plant will buy another ton of steel if it could profitably turn it into something to sell.  I think your chain of causation of the CHP powering up and the coal plant powers down (when they're selling the same good basically) proves exactly what I've been saying.

Does any of this seem on target to you?

Thus, the issue with the ton/year number as outlined above is that - on the margin of a carbon policy - it imposes differential permitting costs on the facility doing the right thing and differential permitting savings on the facility doing the wrong thing.  That's why you need an output standard - not because the the GHG revenue is the only factor driving economics, but becuase if a GHG policy doesn't provide a differential (albeit, not an exclusive) incentive to lower GHG emissions, it's a lousy GHG policy.

You would instead have a permit requirement per output?  Would you phrase this as per $ output?  If you did it by specific product output like kwh's, you run the risk of leaving different requirements for different sectors, like the earlier NY example you called dumb.  How exactly do you implement this plan?

1. You're not getting my point, which is that the CAA is grossly convoluted.  You make the point yourself when you say that it's "input-based."  Exactly the problem!  It should be setting output limits, which should also now include CO2 which should in turn include energy use.  Where we totally part ways is that I think electricity use should be limited, as it's extremely environmentally harmful to the Earth and other species, so my model of strict output limits with no exceptions probably doesn't work for someone like you who has other priorities like the economy.  But my model would produce the best results, the economy be damned.

2. You make the false assumption that creating cheap energy is good.  While that might be true in a myopic economic sense that totally ignores the natural environment, the fact is that cheap anything is bad for the environment, because it encourages overconsumption, one of the twin roots of all serious environmental harms (the other is overpopulation).  For the good of the planet, it's far better if things are at least expensive enough to prevent needless consumption.

3. Your example of "giving backrubs in the hope of sexual favors" as an economic activity would be quite humorous if you weren't serious and if people didn't believe this kind of propaganda.  That type of service is an insignificant part of the economy of our planet; the vast majority of the economy is based on natural resource exploitation, which again is taught in any beginning economics course.  While you are technically correct, statements like this amount to sophistry, even if you didn't mean it that way.

" On an output basis, this is all perfectly captured and incentivized.  But on a ton/year basis, we get pinched.  The facility installing the cogen unit is locally going to release more tons/year (since they're now making heat and power as opposed to just heat) even as their actions are causing GHG emissions to fall globally.  So directionally, they are treated as an incremental source. "

Adding a cogen plant will increase local fuel consumption and emissions.  However it will also reduce the plants electric bill by 5 to 10¢ per kWh, which is much more than the cost of fuel consumed to make that power, which in turn is much more than the fee on the emissions produced by making that power locally.  So even though the emissions fee will increase for dumping more harmful material into the environment locally, there is still a huge overall incentive to build the cogen plant.

" Assuming you agree that the point of any carbon policy is to achieve 80% reductions by 2050, how would you propose doing that with a carbon tax? "

The point of any carbon policy should be to maximize quality of life.  If an 80% reduction causes far more suffering and death than 50% reduction, because of its high cost, it is bad policy.  

That's why the fee on the dumping of toxic waste into the atmosphere should be set equal to our best estimate of the cost of the damage that it causes.

" Where we totally part ways is that I think electricity use should be limited, as it's extremely environmentally harmful to the Earth and other species, so my model of strict output limits with no exceptions probably doesn't work for someone like you who has other priorities like the economy. "

How about priorities like human suffering, starvation, disease?  Are you opposed to non emitting sources of electricity?  If cold fusion worked, would that be a disaster?

" But my model would produce the best results, the economy be damned "

You may think this is a trick question but I'm really serious, Want would your vision of the perfect world be like?

Before the advent of technology, population was controlled by starvation, disease, predation and exposure.  Do you really want to go back to that kind of world?

Humans developed technology to suppress those four mechanisms.  It has been very successful, and human population is exploding out of control.  We need to find ethical and humane approaches to replace those mechanisms.  

Abandoning technology and going back to the natural world is not something I would wish on the human race.


Things Everybody Should Know About Energy

"The point of any carbon policy should be to maximize quality of life.  If an 80% reduction causes far more suffering and death than 50% reduction, because of its high cost, it is bad policy.  

That's why the fee on the dumping of toxic waste into the atmosphere should be set equal to our best estimate of the cost of the damage that it causes."

You're definitely right that the point is to maximize quality of life (I won't take up Wolverine's objections here).  I think you don't take into account though how the notion of a tipping point affects our "best estimate of the cost of the damage that it [CO2] causes."  An 80% reduction may be the better path than a 50% reduction, even if it costs 3 times as much, if it prevents 10x as much damage in global climate change.  This is the nature of having a tipping point you need to avoid.  And I think there's a pretty general consensus that climate change presents such a challenge, where we're trying to get to a very specific PPM in the atmosphere to avoid catastrophe.

A tax would definitely be more efficient for most criteria pollutants, where the damage incurred from 100 tons is basically 100 times the damage incurred by 1 ton.  But when you have GHG concentrations where 100X is wayyy more dangerous than 100 times X if you cross that tipping point, the Carbon Tax argument doesn't pan out.  

There is no way of knowing the future.
Whether by setting a cap, or by setting a tax, or by betting based on output standards, the achievement of the goals CANNOT be guaranteed.

With a Cap/Trade program it is very easy to NOT be achieving the CAP outputs, while paying an exorbitant price to pollute. Technology would need to be available to be invested in by those with a dog in the fight.

Without carbon sequestration, coal plants will continue to operate for the simple reason that Americans are intolerant of power outages. A couple of years out in the "trading" market and those coal plant producers will pay dearly for the allowances they will need to buy, but there will be no option. And the consumers of those kWh produced by those plants will pay dearly for their power.

Can you guarantee that will not happen? Can you insure it?

Ironically, you use this argument against the carbon tax, when it is true for all other options as well.

So, any path toward our carbon goals will be fraught with uncertainty, just like a lot of other things in this world. You are not sacrificing "the whole point of the program" by any stretch of the imagination.

If you want to write the insurance policy for the certainty you describe, "ensuring a necessary level of reductions in a certain defined time frame", then I will be your first buyer.

But it is way over-simplistic to imply that any choice of policy options is going to guarantee your desired goals.

Importantly, the tax level is capable of being decreased if technology is not available to meet the goals.
It is capable of being increased if the options for reduction are right there on the shelf, or in the carbon marketplace like the recyclers.
Banking can occur at any level of this discussion.
What it is not, is certain.
There is no "certain ironclad method" to any of this.
The path to 80 percent reductions over 40 years begins with but a single step.
Massive investments in energy efficiency at all levels.

Now, I am sorry if I misled you with my quote from the CBO study, maxx.
So, just to be clear, the options that were analyzed were:
Carbon Dioxide Tax
Cap With Safety Valve and Either Banking or a Price Floor    
Cap With Banking and Either a Circuit Breaker or Managed Borrowing  
Inflexible Cap

It can be seen that there was no straw man subterfuge either by the CBO or me.
And, contrary to your comment, they analyzed every option that I have yet seen in any of the bills. Not that more work doesn't need doing.

Carbon Dioxide Tax
Cap With Safety Valve and Either Banking or a Price Floor    
Cap With Banking and Either a Circuit Breaker or Managed Borrowing  
Inflexible Cap

The CBO study was prepared in response to the request of the Chair of the Senate Committee  on Energy and Natural Resources, so I guess I can give him a call and ask for an expansion of the analysis.

Below are the comments on the criteria used in the CBO evaluation:
"In this study, the Congressional Budget Office (CBO) compares these incentive-based approaches, focusing on three key criteria:
A Efficiency in maintaining a balance between the uncertain benefits and costs of reducing CO2emissions,
B Ease or difficulty of implementation, and
C Possible interactions with other countries' policies for curbing CO2--that is, the potential to ensure