Waxman-Markey drops, planet takes little notice

So, it’s 6 pm, and I should be going home, but after spending all day swimming through 600+ pages of climate legislation, I feel like saying something about the much anticipated draft legislation released today by Henry Waxman (D-CA) and Ed Markey (D-MA). I’m sure I’ll be ranting about this bill ad nauseum over the next year, but I just want to throw out a couple thoughts (if you’re antsy in the pantsy for some more expansive thoughts, check out Keith Johnson’s solid commentary over on Environmental Capital).

Aggressive much?: Well, kind of. The bill does require a 25% renewable electricity standard by 2025, which is cool if you’re into that sort of thing and maybe not as cool if you’re unsure of the usefulness of an RES in a cap-and-trade system. Additionally, it caps emissions at 80% of 2005 levels by 2020. For those of you keeping score at home, 1990 emission levels are approximately equal 86% of 2005 emission levels. I haven’t done the math yet, but that’s a pretty significant reduction over the next decade, and even more aggressive than the numbers in President B-Rock’s budget. The bill doesn’t get too cute though, as it caps emissions at 17% of 2005 by 2050, the same levels as B-Rock’s budget indicated.

Industry!: If you are going to design a bill that might actually pass through Congress, you have to throw regulated industries a bone. The bill does that quite well. It is generous with industries it thinks might be at a competitive disadvantages with producers in other countries (i.e. steel, paper, chemicals, concrete, etc.), offering rebates based on direct compliance efforts and indirect carbon factors. Boiled down, it seems to mean that the more energy you use, the more rebates you get. It also appears the President can install a carbon tariff if U.S. players appear to be suffering too much, something that will likely make China the opposite of happy.

Offsets: Woo boy, this bill loves itself some offsets. Its language is a little shady, but it will allow up to 2 billion tons worth of offset credits into the market. That’s quite a bit. In fact, it’s about 42% of the cap in 2012, the first year of the cap. The total will invariably fall, but let’s just say it appears covered emitters will have a fair amount of flexibility to get under the cap.

Missing pieces: Did I mention that the sections about auction and allocation amounts are currently blank? Yeah, no numbers on that front, which is sort of a big deal for businesses who might be having to purchase allowances in the next two years. Also, nary a word about incidence, or spreading the wealth as it were (apologies to Joe the Plumber). Both of those elephants are waiting in the Energy and Commerce Committee’s room. Perhaps we can look forward to a political catfight in the next couple months.

This is the first step in what I’m sure will be a long, arduous, infuriating process that may or may not result with the U.S. walking into Copenhagen in December with nothing but a big smile and a promise to do better.  But for a first shot, it’s not bad. There’s a lot of room for negotiation, there’s a couple other bills floating around right now that could get incorporated into this one, and we still haven’t heard anything from the Senate, so this one is setting the stage for a good show. Get your popcorn ready.

Offsetting Guilt

 

Recently, my dad sent me an e-mail asking if I had ever heard of TerraPass.   After booking a trip on a travel search engine, he was given the option to offset his carbon emissions with the purchase of a trip offset.   Basically his trip could be “carbon neutral” by him just paying a $6 fee. 

I decided to investigate TerraPass a bit more by seeing how much it would cost to offset a fictional business.  After answering a large number of questions about travel , square feet of office space, servers and other big ticket energy expenses, I was presented with an estimate of how much my offset would cost. 

I could see that as a business, I would feel satisfied purchasing the offset and then sticking a little label on my web page advertising my newly purchased climate savvy.   However, I think this mindset has a few fundamental problems. 

First, I’m not a huge fan of the idea that it is equally as good to buy an offset instead of finding ways to reduce consumption.  While TerraPass does not promote this idea, I think this cartoon sums up my how I feel.

 

Basically, voluntary offsets can promote the idea that we can still do whatever we want if we just buy the appropriate offset.

Second, their services completely ignore indirect carbon uses.  Basically, every single product in our lives probably has some carbon associated with its production use.  The glass of orange juice that I drink with breakfast required fertilizers to grow the oranges, petroleum to transport the oranges etc.  This is the same with any product a business might purchase. 

Some people might just say I’m nitpicking at a generally good idea, and that we should be thankful that some businesses care about these issues.  While that is partially true, I’m still a bit bothered that by attaching a simple price to offsetting emissions.  Instead of people evaluating how they might reduce their current emissions, it becomes tempting just to cut a small check and offset their guilt.  

The British are coming

Most of us involved in climate  research and policy have thought seriously about the impacts of  ”climate refugees” from Least Developed Countries (LDCs) or Small Island Developing States (SIDS) from the perspective of basic human rights, national sovereignty and international relations. Driven from their homes by rising sea levels that swallow up entire countries or devastating droughts, these thousands or millions of poor individuals could starve, initiate violent conflict or generally disrupt global peace and security. Many developed country leaders are genuinely concerned about this, as they should be. However, there’s one other potentially disastrous source of refugees that has not received much consideration (at least outside of this blog): the UK.

Getting a little too hot and stuffy in old London? Why not set sail (flying’s too expensive because of the EU ETS) for the wild, untamed land of hobbits, orcs, elves and children-biking-friendly-neighborhoods that is New Zealand. Once the British Isles succumb to the rising tides and descend into chaotic, steamy tribal warfare between Manchester and Chelsea supporters, you’ll certainly have the last laugh…on another island.

Anyway, my point is not to belittle the British (as much fun as that is), or make light of the truly dire situation faced by many threatened countries, it is really to call attention to the vast disconnect that still exists between developed and developing countries over the impacts of and solutions to climate change. For LDCs and SIDS it’s not a matter of a slightly higher electricity bill or our inalienable right to consume, it’s a matter of survival. Of course that’s easy to say from a cubicle in Washington, but I think it’s a message often lost in the crunch of “political feasibility”. But god forbid anybody in the US or EU should be asked to give up part of their lifestyle (not “sacrifice” because that’s misleading). I am starting to feel the heat here in DC…Canada anybody???

Bubbling with Anticipation

For all you wonky folks out there who get excited about such things, tomorrow appears to be the day when Chairman Henry Waxman is going to drop his much-anticipated cap-and-trade bill. While there have been a few climate bills released in the 111th Congress (including a carbon tax bill from CT Rep. John Larson), this one is probably going to dominate legislation discussions much like Lieberman-Warner did last session, and has already begun to define the debate in the Senate. Originally, Senate Majority Leader Harry Reid said he wanted separate bills to address energy and cap-and-trade, but changed his mind after some hardcore lobbying from Waxman. What does that mean? It means you can expect a big, hulking bill that will spawn spectacular histrionics from Republicans and the Wall Street Journal about how the country will suffer under the boots of  the government’s carbon fascism. There will be plenty to talk about over the next few weeks and months, but here’s a quick list of some things to keep your eyes on (for a more complete and eloquent review, check out Daniel Hall’s RFF swan song):

Allocation: Sorry industry, but auctions are going to definitely going to be a part of this bill. The question is how many many credits are going to be on the block. Lieberman-Warner started over auctioning around 27%, then gradually increased up to 70%. President Obama, however, has said he wants a 100% auction and planned for a lot of revenue in his budget ($646 billion over 10 yrs, which even in our post-TARP world, is not a trifling amount). Since the House is not restrained by to passing bills with a super-majority, expect some aggressive auctionable credits totals.

Incidence: Incidence is a fancy economic word that means ‘how much are people going to have to pay.’ Whatever revenue is generated by a credit auction is going to be tugged at by approximately 301,345,892 different interests, and not everyone will get what they want. Congress members are definitely going to fight to ensure their favorite hometown industries don’t take a big hit, but they also need to worry about their constituents as well. No one is going to want to enter the 2010 elections saying they voted to put a price on carbon without being able to also say how they plan to put money back in people’s pockets. How the bill divvies out auction revenues could become a critical argument point and may provide a lot of ammo for opposition to climate legislation.

Cost containment: Last I checked, markets and prices can be volatile. Carbon price volatility seems to frighten industries, which in turn frightens legislators. A smooth price path, especially one that doesn’t go too high, is what emitters want. There are reasonable and unreasonable ways to deal with this issue. For a potentially disastrous solution, look at H.R. 1666, which sets up a Climate Oversight and Coordination Board in the Treasury Department that would set carbon prices for the first ten years of a cap-and-trade market. If Congress gets too cute and clever with their solutions, it could seriously muck things up.

Offsets: Industry loves them because they are cheap and easy. Environmentalists like them because they can protect forests and lead to restoration. Does Congress believe they have a role? Some legislators seem pretty skeptical, but 21 reps sent a letter to Waxman last Friday asking him to include offsets in the bill.

There are obviously many more issues I’ve left out that will crop up over the next little while, but I think these ones will be some of the most contentious/infuriating/amusing. It feels a little bit like Christmas Eve, and yes, I am fully aware of how nerdy of a statement that is. Don’t kill my excitement. That would be like telling me there’s no Santa Claus.

Earth Hour

Now I don’t really consider myself “crunchy” at all, but I thought I would just bring to everyone’s attention that saturday the 28th from 8:30-9:30 (local time) is earth hour.  Basically people are asked to turn off their lights and any other nonessential electronic equipment for that hour.  

You can read about it here 

I’m not sure how I feel about such events in general.  I think it is really interesting to think about just how reliant we are on electricity all the time.  However, the statement on the web site saying  ”Switching off your lights is a vote for Earth, or leaving them on is a vote for global warming,” really kind of annoys me and I think is a bit insulting.   I’m against global warming, but what if I wanted to keep my lights on? I could go on for a while why I think that is a stupid idea, but it’s friday and I’m tired.  

In the end I plan to try it out, but I’m mostly just going to shape my night around it by having friends over for drinks in the dark.  What are you going to do?

Offsets and Algae

After spending a lunch seminar listening to a number of knowledgeable Europeans talk about the ETS, I feel a bit overwhelmed by how many potential strange side effects there might be in a huge cap and trade system.  These might not be preplanned nor malicious, but I have a feeling there will be some unintended consequences.

With this on my mind, one article caught my attention about biofuels producing algae under a U.S. cap and trade system.  If algae biofuels are eligible for offsets, we might see some strange side effects.  Right now algae based biofuels are years away from commercialization.   However, if the right offsets are granted and carbon prices are high enough, the biofuels algae industry might find itself on a perverse fast track of sorts.  One quote sums it up.

At a high enough carbon price — maybe $40 to $50 per ton — producers could sell the environmental attributes of their fuel for more than the actual fuel. “You could make biodiesel, pour it down the drain, and make a lot of money,” Ballentine said.  (E&E subscription required)

While I am in favor of putting a price on carbon, I don’t think I could find anyone who likes the above situation.  My first reaction is to say we shouldn’t have offsets, but I am in no way an expert on this topic and won’t pretend to be.  All I know is that I constantly hear about the problems they cause and not much about the benefits they might have.  So I leave it as an open question, what do you think about offsets?  Could they provide enough advantages  to make them worth it?

 

Passing the torch

Hey readers,

So, anything new happening with you? Not much going on here at CT, except that within six weeks we’ve lost the mighty brain trust that built this blog from the ground up. As a result, you may have noticed a drop in the volume of posts. The new management (Josh and Danny) wants you to know that we are not going anywhere. CT will continue to be an outlet for young, starry-eyed environmental economists to post their thoughts and observations and foment discussions with far more learned individuals floating around the blogosphere. We’re currently recruiting some new blood to provide some different perspectives from outside the beltway, as well as gearing up to provide more of our own brand of irreverent commentary, so you might notice a few changes over the next couple weeks.

Additionally, let’s us reiterate that this blog does not represent the views of RFF in any way. In fact, despite the fact that Josh and I work here, this blog continues to have no association with RFF. This might be made even more obvious by the fact that many of our (potential) new contributors do not even work here. While some of us might occasionally post about papers we are working on here at RFF, the opinions we express here are ours alone, so let’s not pretend like we’re making any grand statements of organizational purpose or philosophy. We’re a bunch of (kind of) smart kids with a cool blog that we hope you’ll keep reading. If you have any thoughts, let us know. Otherwise, we’ll see you on the blogging pages.

P.S. This a formal announcement that we intend to retire the number 16. No other author of this blog will be allowed to wear the number again. There will be an official retirement ceremony soon.

CT better retire my number*

Rich’s decision to end his time at CT got me thinking about my future as well.   I’m also trying to decide on a grad program, wrap up my projects at RFF, re-learn a bunch of math, and enjoy my last months in DC.  My posts have already been sporadic for the past several months; in light of the upcoming changes in my life, I can’t see blogging leaping to the head of my priority list.

So I think it’s time for me to go as well.  It’s been a great run, and the blog has helped me organize my thoughts while fostering a false sense of intellectual superiority and importance.  It’s been a good opportunity to thoroughly explore the universe of topics within energy and environmental economics and policy.  It’ll be valuable (and probably embarrassing) to have a record of my thoughts from this stage in my life.  I’ve really enjoyed the discussions, jokes, and links that have been shared here and on other blogs.

As the last original CTer standing, I hope I’m not turning out the lights (Josh and Danny will have to decide what they want to do), but if so, that’s the nature of the internet.  2 years is honestly quite a run for someone with a 10 second internet attention span.   Anyway, thanks to everyone who’s contributed to this blog, and thanks especially to Rich and Daniel for joining me in spawning this ridiculous endeavor.

* It’s 16.

And I’m spent

This is going to be my last post on CT. I’m gonna take some time off to focus on my own research and to get ready for grad school in the fall. Thanks to everyone who read, commented on, or linked to my posts over the past year and a half.  It’s been fun, and I learned a lot.

Peace out yo.

I was gonna respond to Grist but then read Env Econ

And saw that Tim already posted a great response. So I just stole his:

Relative prices, lump sum transfers and Carbon Cap and Trade

Dave Roberts at Grist asks:

How would rebating carbon revenue to taxpayers give anyone incentive to reduce emissions?

Since Dave is such a fan of economics (and me in particular), I thought I would take a shot at explaining this one (given my past sarcasm, I know that might sound condescending.  No condescension is implied.  This is an interesting and important question and something to which I think economists can add valuable insight).

The short answer to that question is ‘it depends.’  I know, I know, that sounds like a cop out, but really the truth here is that the effect of revenue redistribution on carbon emissions depends on the form of the rebate.

The proposal to which the question refers is the President’s proposal for carbon cap and trade with full auctioning of permit and rebate of auction revenues either in the form of a lump sum transfer to taxpayers or lower employment taxes.  So effectively, the program would increase the relative price of carbon intensive products and then give additional income to everyone.  But, by giving the income back to people who buy carbon intensive products won’t that counter the effect of the price increase?

Or, as Dave puts it:

It’s like if we put a $5 monthly tax on NetFlix use, and then sent every NetFlix customer a $5 check each month. Who would ever rent any fewer movies? It looks like you’re just moving money around to no end. Can someone explain what I’m missing?

To answer the questions:

Who would ever rent any fewer movies?  No one under this scenario.

Can someone explain what I’m missing?  Blockbuster.

Not to be too flip about it, but what’s missing in the NetFlix example are the other goods for which prices didn’t increase thereby making them relatively cheaper than NetFlix.

Back to carbon.

The carbon price (through cap and trade or tax or whatever) will increase the price of carbon intensive products relative to less carbon intensive products.  Without the tax rebate, the effect is unambiguous, consumption of carbon intensive products will decrease (and emissions will decrease).  But what happens if we add in the effect of the tax rebate?

This is where ‘it depends.’

For the tax rebate to not mess things up, the rebate can’t be proportional to the amount of tax paid.  In other words, the rebate has to be designed in such a way that the amount of additional income you get is independent of the amount of carbon intensive products you consume.  This is what economists refer to as a lump sum transfer.  The easiest example would be to take the auction revenue and divide it by the number of people in the U.S. and everyone gets $Total Revenue/Number of people (like the original $1,200 stimulus checks last summer).

Since the amount of money you get is not tied to the amount of carbon intensive products you consume, the rebate won’t affect the relative choice of carbon versus non-carbon intensive products.  Since carbon intensive products are relatively more expensive, they are less attractive than they were before and people will substitute away from them, independent of the rebate.

But, you ask astutely, since people have more income won’t the demand for all normal products increase–normal in the sense that they are desirable?

Yes.  We call this the income effect.  But, it is very unlikely (verging on absurdly impossible) that the income effect will come close to countering the full substitution effect.

Think of it this way.  When the price of carbon intensive products goes up, you are made worse off.  You lose something –satisfaction, happiness, utility whatever.  Suppose the government were able to design the rebate in such a way that you receive the exact amount of income necessary to make you just as happy as you were before the price of carbon intensive products increased.  What would you do?  Keep in mind that you now have enough money to make you just as happy as you were before, but carbon intensive products are relatively more expensive because of the cap and trade.

Unless you are really screwed up, you would adjust their basket of consumed goods so that it includes more of the relatively cheaper goods.  Even with the income effect, the change in relative prices will cause reduced emissions.

So why doesn’t the NetFlix example work?  Two reasons:  1) the tax rebate is tied to buying movies from NetFlix and 2) Substitutes whose prices aren’t changing were assumed away.  Put an untaxed Blockbuster in the picture and people will take the $5 NetFlix rebate and rent movies from Blockbuster.

It’s relative prices that matter.

WRI’s got my back

At risk of inviting another WSJ hissy fit, one more word on the regional incidence of cap and trade. The data that the editors used in their initial editorial, and which I subsequently took issue with, came from the World Resources Institute. Now WRI has weighed in on the matter, and here’s what they have to say:

In arguing against cap-and-trade policies, opponents often try to have their cake and eat it too, using contradictory logic and selective use of statistics to make their case. Take the latest op-ed from the Wall Street Journal, which basically argues that cap-and-trade policies are inevitably regressive.

The WSJ starts off with a fairly standard observation:

Once the government creates a scarce new commodity – in this case the right to emit carbon – and then mandates that businesses buy it, the costs would inevitably be passed on to all consumers in the form of higher prices.

Okay, that’s economics 101. But then comes this observation and chart (using WRI data), which suggests that some states will benefit at the expense of others:

California is the No. 2 carbon emitter in the country but also has a large economy and population. So the average Californian only had a carbon footprint of about 12 tons of CO2-equivalent in 2005. The situation is very different in Wyoming and North Dakota—paging Senators Mike Enzi and Kent Conrad—where every person was responsible for 154 and 95 tons, respectively.

This is where the Journal starts cherry-picking the data. While many factors can explain a state’s relatively high or low per-capita emissions, one of the most significant ones is electricity exports between states. In particular, Wyoming, North Dakota and West Virginia are huge electricity producers that export at least 60% of their electricity to neighboring states. On the other side, New Jersey, California, and Florida are huge importers: 41%, 38% and 20% respectively. But emissions are “charged” in the states where the fuel is consumed, which means states that produce more electricity than they use have disproportionately high emissions—especially in per-capita terms.

In other words, the chart in many ways reflects production rather than consumption. And as the Journal points out, production costs would “inevitably be passed on to all consumers.” Owing to inter-state trade (especially for electricity), that means that all states—rich and poor—will share the burden of a cap on carbon.

There will no doubt be regional differences in the economic impacts of cap-and-trade. That’s why nearly every cap-and-trade proposal includes some form of cost mitigation, either directly to taxpayers (such as “cap-and-rebate”) or to “end-use energy consumers” (as in the US-CAP proposal). But to suggest that a few states will bear the lion’s share of the burden while other states benefit is disingenuous and deeply misleading. The Journal can and should do better.

And they didn’t even call the newspaper an idiot*.

* Note: Anyone who read my post would see (I think) that I wrote the WSJ is an idiot** for refusing to publish my letter, not for their initial confusion about carbon emissions from production.

** Also note that a newspaper cannot be an idiot.

H/T to Mathias in the comments.

Live Green, Go Yellow???

Recently legislation was introduced  that would require 50% of new vehicles in the U.S. to be Flex Fuel Vehicles (FFVs) by 2012.  Flex Fuel vehicles are basically normal cars with stock modifications which allow them to run on E85.  FFV models usually cost between $30 and $300 more than their standard counterparts.

The laughable part is that most FFV’s don’t use E85.  Part of this is due to the lack of E85 stations out there and that it is really only easy to come by in those states which produce corn ethanol.  Nationally, only 1% of filling stations sell E85. 

However, the icing on the FFV cake is that 70% of FFV owners don’t even KNOW that they can use E85.  The same General Motors sponsored study also found that only 10% used any E85 at all .   This has prompted them to launch the “Live Green, Go Yellow” campaign, which, besides making me chuckle to myself a few times, probably won’t make me buy a FFV based on this commercial.

Laughing aside, there are a few serious issues having to do with FFVs.  Most of the 7 million FFVs on the road are there due to loopholes credits  in CAFE standards.  Also, as we move forward with the RFS, we will need something to burn the 36 billion gallons of ethanol in 2022.  Maybe having 50% of the fleet as FFVs will help us correct that blunder attain that target…

 

 

Another BANANA peel for renewables (or more green infighting)

Despite claiming on her website that “today, global warming is my number one environmental priority,” Senator Diane Feinstein moved yesterday to make over 600,000 acres of California desert off limits for renewable energy development (E&E daily, $ub req). In a letter to Ken Salazar, she asked that the Interior stop considering applications for renewable projects in the eastern Mojave Desert, despite the fact that the state is still going ahead with its insane ambitious 33% RPS by 2020.

Quote of the day

The threat of climate change has become as fundamental to national security as nuclear weapons were during the Cold War.

That ominous little gem comes courtesy of Sherri Goodman, who is general counsel for a government-funded think tank called the Center for Naval Analyses.

Her quote can be found, in context, in today’s ClimateWire (sub. req’d).

Links yo

I’m heading out of town again today, and prolly won’t be able to post for a few days. So, til then:

1. Mike Giberson continues to translate empirical data and academic research into succinct critiques of output based renewable energy subsidies.
2. Also on KP, Lynne Keisling picks up on the debate that sprung up in the comments after my cursory dismissal of Sean Casten’s cap and trade post on Grist last week. Most of the disagreement appears to have been the result of loose language choice (price <> cost). While I still think its pretty clear that prices have to go up in the short run because of stranded capital and the current state of cost differentials for renewables, the effect on long run equilibrium energy expenditures is definitely ambiguous (and quite possibly negative), depending on how the program is designed. By the way, I’m still planning on following up on Sean’s response with a longer post on what he would describe as a “real” cap and trade policy. I asked around, and some of my collegues have looked at free allocation of carbon permits to renewable generators, which is essentially what he was suggesting (I think). As for efficiency investments earning carbon permits, that seems a lot trickier to me…..
3. Sticking with Grist, Clark Williams-Derry has a great summary of the recent literature on the incidence of cap and [insert synonym for rebate] proposals. However, he fails to counter the damning “but what about, like, french fries?” critique leveled by the WSJ last week.
4. The NYTimes takes a look at solar subsidies in California, and gets UC Berkeley professor Severin Borenstein to play his now familiar role of Debbie Downer. I love how pointing out that the incentives of a public policy don’t seem to match the stated objectives makes you green enemy number one in California.
5. Finally Washington Monthly takes a look at renewable energy policy in Gainesville, Florida, which has followed ze Germans’ lead and implemented feed-in tariffs.

Most literal spam ever

We get a lot of blog spam, much of it asking for exposure for new “green” products or ridiculous press releases from various PR firms about how some executive rode a bike to work this one time.  We’ve even considered starting a blog spam of the week feature.  Today’s was too good to pass up:

Please be aware that the deadline to submit Proposal Briefs for, “Seeking Value Added Applications of Pork By-products” is Friday, March 20, 2009. Please let me know if you are interested in responding but cannot provide a proposal brief by this date. This reminder does not represent a complete description of the project.

I took a second to document the day and time (2:08pm EDT, March 16, 2009) on which I received a spam soliciting innovation in the actual spam-making arena.

el Disclaimer

It’s been a big couple of weeks on CT, and we’ve had a lot of new readers. So I want to take this opportunity to re-emphasize the disclaimer you see on the lower left-hand corner of the blog. While Common Tragedies was started by a couple of research assistants at Resources for the Future, it is in no way intended to represent the opinions of RFF. In fact, RFF has no institutional opinions, and prides itself on being an independent collection of academic researchers. Moreover, this blog isn’t about serious research or formal academic debate. It’s what we do for fun (yeah, we’re nerds). We ungrammatically call people idiots (past winners include Dubai and the RFA) and use German food policy as an excuse to include pictures of cows with flaming flatulence. We (I) say “yo” a lot. In other words, we act like 20-something bloggers. RFF is obviously a much more serious institution, and occupies a more formal role in the policy arena.

Actually now’s probably a good time to let eveyone know that CT might soon be disbanding. Evan, Erica and I were all fortunate enough to get into really great graduate schools, and will spend at least the next year thinking about nothing but Mas-Colell. I’m hoping that some of the other RAs will help Danny to keep CT going but there haven’t been too many takers yet. Stay tuned.

Write a letter to the editor, and nobody cares. Call someone an idiot on the internet and……

Well:

Who Pays for Cap and Trade? — II

We don’t mind an intellectual fight, and in a nearby letter, two economists at Resources for the Future take aim at our Monday editorial on how the costs of cap and trade will be distributed across regions and income groups. Dallas Burtraw and Richard Sweeney call it “a bait-and-switch argument.” Mr. Sweeney added on his blog that “The Wall Street Journal is an idiot.”

That’s how the global-warming clerisy debates these days, but we’ll try to take their argument seriously. They claim that by citing state-level CO2 production data, rather than CO2 consumption data, we exaggerated regional differences. This is distortion disguised as verisimilitude.

It’s true that discrepancies in per capita emissions — 73 tons in West Virginia versus 12 tons in Rhode Island, for instance — reflect the fact that carbon-heavy power plants and industries are based in some states and not others. It’s also true that electricity crosses state lines, and that — as cap and trade raises prices — a consumer in California who buys a car built in Michigan, say, will bear some of its carbon costs.

However, one reason we didn’t mention per capita consumption figures is that, strictly speaking, they don’t exist. The economic literature on the incidence of cap and trade extrapolates carbon consumption by region from the government’s Consumer Expenditure Survey. But nearly every human activity has some carbon cost associated with it. Consider the emissions of “consuming” french fries at a fast food restaurant:

There’s CO2 in fertilizing and harvesting the potatoes; processing, freezing, then transporting them; and still more when they’re cooked. Now multiply that by the entire economy. One danger of a carbon tax — especially if it is poorly designed — is it that its costs will ripple throughout complex energy chains in ways that economic modeling can’t quantify.

Still, in the spirit of comity, we’ll mention the work of Messrs. Burtraw and Sweeney, who wrote a 2008 paper finding that cap and trade disproportionately hits the poorest households and that those effects are exacerbated in some regions over others. That was our argument too.

Of course, ultimately the incidence of a carbon tax depends on how the revenues it takes from the public are redistributed back to the public. Yet Congress, being Congress, is incapable of designing even a marginally efficient system — and given environmental politics and state carbon realities, the losers will be concentrated in noncoastal regions that rely most on coal and manufacturing.

And therein lies the value of emissions production data. Not only does cap and trade tax at the point of production (even if some of those costs are ultimately borne by consumers elsewhere), but it also shifts economic activity away from those industries. The states that produce the most emissions are going to see the strongest ancillary declines in income and increases in unemployment. The top carbon states — in absolute, not per capita, emissions — include Ohio (No. 3), Pennsylvania (No. 4), Indiana (No. 7) and Michigan (No. 9).

What really drives cap-and-trade idolaters like Messrs. Burtraw and Sweeney to schoolboy taunts is their fear that the American people might figure this out. Then their dreams of having government command a huge new chunk of the economy might collapse.

What’s ironic is that if the WSJ had simply read our paper in the first place, they’d probably have run their initial post anyways, as we find that there are regional differences in the the initial incidence of pricing carbon (just not not the 154 to 12 spread the editors implied). However, as Dallas testified yesterday, the real name of the game is what you do with the money. A lot of these regional and income level effects could be countered with careful revenue reallocation. Now the question is whether the WSJ really cares about the true net effect of carbon policy on households in states like Michigan and Pennsylvannia, or if they’re simply clinging to any story that will allow them to politically undermine cap and trade.

How the DOE deflated FutureGen

The NYTimes reports that the GAO released a report showing that in calling for the cancellation of FutureGen (the integrated IGCC, CCS, hydrogren demonstration plant), they compared the original estimated cost in constant dollars to a new estimate that was in current dollars.  Now to be fair, just last week I screwed up deflating some data.  To be reasonable, I was not determining the fate of a billion-dollar project:

According to the report, in calculating the costs of the project, the Energy Department mistakenly compared two numbers that should not have been used together. One cost estimate was made in so-called constant dollars, reflecting the purchasing power of a dollar in 2005, and the other in dollars as they would have been spent over the following few years, worth less each year because of inflation.

The Bush administration said the projected cost had nearly doubled, to $1.8 billion from $950 million; the auditors said it had gone to $1.3 billion, up 39 percent.

Ummm…this is not new.  I went to a hearing of the Energy and Water Appropriations Subcommittee back on May 8, 2008.  I never got around to writing a post, but looking through my old notes from that hearing, I can tell you with certainty that both Sens. Durbin and Dorgan directly asserted that the main source of cost overruns was due to inflation accounting.  Then-Secretary of Energy Bodman denied this, and kept claiming he didn’t know what the source of the overruns were, but that the other folks at DOE surely had the answer.

As it turned out, those in attendance only had to wait half an hour or so for the answer.  And it came from FutureGen chairman Paul Thompson.  To paraphrase, he said that the project cost was indeed $1.8 million — in nominal dollars.  That hearing was zeroing in on an answer.  Too bad Bodman left the hearing before Thompson gave his testimony.

Indeed FutureGen’s costs rose — as delays continued, it cost money to hold up construction, interest accrued, and so on.  But 50 percent of the overrun claimed by the DOE was due to a clerical error.  Competence and honesty points abound for the Bush administration.

Question of the day: How much should we care about the regional incidence of climate policy?

I’m super busy today, helping Dallas prepare to testify before Ways and Means tomorrow. So rather than rush a post I want to ask yall a question.

Two days ago I wrote that consumers in some states will experience larger price increases than others after we cap carbon. While carbon consumption doesn’t vary much across states compared to the variation in carbon from production, there is variation nonetheless, and states where per capita consumption is relatively small will experience a smaller energy price increase than states with larger per capita consumption. However, much of the difference in carbon consumption is the result of previous state level initiatives, which consumers have already paid for. The extreme example is California, which has been consistently investing in energy efficiency and renewable energy for decades. Californian’s paid comparatively higher prices for these investments in the past, but as a result they’re energy bills will be relatively less effected by a cap on carbon emissions. Recently many other states have followed suit, most notably through state RPS and regional carbon policies.

If we just look at current carbon consumption patterns and calculate the implied energy increases expected from pricing carbon, California looks like its not bearing its fair share of the burden. But hasn’t California earned its easy pass by preparing for this day of reckoning over the past two decades?

I’m not saying that the discrepency in burden is 100% justified, as different regions have different energy resources available (and the west has a lot). But there’s clearly been a lot of moral hazard involved as well. Anyone who built a coal plant in the past ten years should have factored in considerable regulatory risk. To the extent that that they didn’t, should more prudent investors be penalized?