Nonetheless, a reader will see that that means taking up at least one quite theoretical issue in the economic part of the paper: carbon taxation versus a cap and trade arrangement. But the choice between a tax and a cap is very much before policy-makers and legislatures right now. It is an important fork in the road, so it gets a good deal of discussion here, which I suggest is worth slogging through.
Admittedly the draft is rather long -- shortening it may well be part of the onward work on it -- but the "takeaways" are:
Physical/Technical: We should continue and hasten the long trend that is shifting almost all energy use to the form of electricity, notably now changing transportation away from petroleum, a step made possible by the "plug-in hybrid vehicle." We must then, of course, decarbonize electric power generation, for which the first step is building an essentially national level high-capacity intelligent grid, which will buy electricity from many sources and sell it to many users, at a price and availability structure that will favor energy efficiency and conservation. We should feed the grid as much as possible with renewable energy, and as much as necessary with nuclear power, which has to be expected to be a good deal of nuclear power.
Economic: The shift away from fossil fuels should be supported by giving carbon emissions, which are now a market externality, a price. This is much better accomplished by a tax than by a cap and trade arrangement. Through international forums, we should seek an internationally coordinated carbon taxing program, probably at about $10 per ton of CO2, in essentially all countries. The tax should be 50% revenue neutral, and 50% used, worldwide, to support carbon reduction policies and investments.
Political: I have less to say about the politics of climate protection, except that in modern democracies politics is unavoidable, and that its steadfast object must be to obtain public understanding and support for the physical and economic work just mentioned.
Notes on Climate Protection Policy
Global Warming is a real physical crisis — Let’s focus on it
Greenhouse climate change is a relatively new phenomenon in American public consciousness. It has broad and deep historical and ethical overtones, but it is first and foremost a real, concrete, here-and-now physical challenge, of which the basic mechanics and causality are well understood. We have to understand the breadth and the cultural implications of the climate change problem, but we must also see its narrowness, the very specific physical “engineering” character of how the global warming problem arose, how it can be resolved as quickly as possible, and how the resolution can be paid for. It is not time to take evasive refuge in great moral abstractions and reforms of humanity. How we concretely manage the climate change issue — or fail to manage it — may well make a major difference in the lives of our children, grandchildren and future generations that descend from them.
Those who can do something about climate change, and are therefore responsible for whether the climate is protected or whether warming accelerates beyond control, are the people and societies who are living at, or aiming for, the modern standard of production and consumption which is now based on the use of fossil energy. We in the United States are certainly in this group.
Certain framework convictions are both true, and necessary for action. Green-house climate change is a genuine and major danger, but it is also solvable. The threat is real, but the damage is not inevitable. This is a question not of fate, but of human understanding and responsibility. If we are capable of acting decisively and cooperatively, we can contain a grave problem which we have inadvertently caused. The worst damage -- which is very bad indeed—can be avoided. This is not a fad, or a practice drill, it is the real thing, and for Americans a test of our capacity as a society to keep our focus on something important and to act effectively against a grave threat.
We are doing very badly so far, but we should not be daunted. The job can be done, and not at overwhelming cost—certainly well less than a doubling of energy costs in the short run, and almost certainly, after a period of investment in new energy sources, at broadly lower long-run energy costs than now.
The America of fifty states and 300 million people is now finally speaking about global warming and thinking about how fight it, despite the shameful Bush-Cheney see-nothing, do-nothing response that continues in the Federal executive branch. The rising level of public talk and political action has so far been mainly about setting targets for reducing carbon emissions, such as California’s Assembly Bill 32, under which this large state and economy intends to reduce its carbon emissions by about 30% (to their 1990 level) by 2020, and by 80% by 2050. But climate change will not be stopped by announcing targets. Carbon emissions to the atmosphere come predominantly from using fossil fuels (coal, petroleum, and natural gas) for energy in our collective life as modern producers and consumers. The real work is to make physical changes in our sources of energy and how we use it. As a society we now must develop and carry out new policies to do things differently in the energy sphere, and to manage the physical and economic cascades of changes and adjustments which will be needed. The action proposition is to to decarbonize our economy without giving up the hard-won benefits of modern life, which certainly includes modern energy use. There is no choice about preserving modern life because if present day society is forced to choose between saving the climate and pursuing the modern, fossil energy-based way of life, very regrettably, it is long-term climate stability and the welfare of future generations that almost certainly will be sacrificed.
Responding to global warming is a challenge to all of society — there are important roles for the private sector (the market), for government, for the cultural and educational worlds and for civil society. Fighting over who should do what, particularly ideological efforts to exclude a role for government or deny a role for a properly-oriented market, can only waste time when time is precious.
This article takes up climate protection policy in the United States, which emits a quarter of the world’s carbon dioxide, but the issue, of course, is a worldwide one due to the global diffusion of CO2 in the atmosphere. That means both that a serious effort is needed from all countries, and that the United States, in addition to its work at home must be ready to practice vigorous international leadership for climate protection and commit itself to serious international cooperation.
The central task in the United States, that is to say, ending virtually all fossil carbon dioxide emissions from energy use, will go forward on three roughly parallel and simultaneous paths. This article offers thoughts on the main center line of each: the physical path, the economic path, and the political path.
The physical-technical path
The physical/technical, or engineering path consists of two very large steps: 1) making the conversions necessary to distribute and use virtually all energy in the form of electricity, and 2) producing an augmented national supply of electric power without fossil fuels. The latter means ending coal-fueled electric generation, which now provides half our power. If these two very broad steps are followed, on a time scale of fifteen to twenty five years, we can approach, not the inadequate and essentially temporizing goal of “stabilized carbon” that is often discussed, especially in the vocabulary of “stabilization wedges,” but an effectively “zero carbon” United States.
Electricity is a highly-processed and expensive form of energy, but in a little-noticed but steady trend, since the days of Thomas Edison, decade by decade we use more and more of our energy in this versatile and easily transported form. Steel-making has gone from coal-based open hearth furnaces to electric arc plants, for example, and large new energy uses, such as illumination, air conditioning and computing, have used electricity from their inception. Continuing a long quiet trend, we will continue to take more and more of our energy in the form of electricity. The plug-in hybrid car, of course, which shifts away from gasoline to electricity, is an important part of that trend.
A moment’s reflection tells us that all the energy an ordinary American uses in 2007, comes, or could easily come, as electricity, with two exceptions, gasoline for cars, and natural gas to heat houses and apartments in winter. Can we shift motor transport and space heating to electrical supply? Both are massive and important uses, and automobile and truck transportation, in particular, is a multi-trillion dollar complex of worldwide industries. Understanding that big technical transitions take time, (although not a leisurely indefinite time), how would we change these two major energy services to electricity?
Transportation and plug-in hybrid vehicles (PHEVs)
Technology is now available to electrify all petroleum-based transportation except aviation. For automobiles, the solution is the plug-in hybrid electric vehicle (PHEV), of which dozens of prototypes are working. Regular hybrid cars already on American roads by the thousands show that an automobile can perform just fine while being driven by electricity from a rechargeable battery. All the battery’s power in such present hybrids comes from an on-board gasoline engine. But, as models advance, the engine can become smaller and the rechargeable battery can become bigger. The car becomes a “plug-in hybrid” that gets most of its current from a wall socket in the garage at night. It can also be recharged while parked in the daytime, for example, at work.
Electricity as auto fuel costs the equivalent of $1 per gallon of gas or less. No new generating capacity needs to be built right away to supply it, since a plug-in car draws mainly from existing power plants that are now half-idle at night.
Unlike a purely electric car, the plug-in hybrid does not have a limited daily driving range, because its small engine comes on automatically if the battery runs low. The auxiliary engine can be a regular piston motor, or one of the new, greatly improved small diesels, a Wankel rotary, or a small gas turbine. Any of these can burn bio-fuel, preferably one of the new bio-fuels under development which will not compete for the use of food crops like corn. Alternatively, the back-up for the main battery could be performed by a hydrogen fuel cell, or a special quick-charge battery. Vehicles that go only a few miles per day, say a mailman’s jeep, could omit the auxiliary engine or power source —its modular bay left empty— for weight and energy savings in operation.
To replace fossil petroleum in local transportation the key technical questions have been answered and the state of the art in batteries is more than adequate to get started on mass production, especially for fleets. Once that is underway, the vehicles’ electric range will improve, as the ongoing shift continues from nickel metal hydride (NiMH) to lighter and more compact lithium ion (Li-ion) batteries as their remaining technical problems in this application are resolved. Dozens of prototypes are working now, and Ford, GM and Toyota are getting closer and closer to bringing out plug-in hybrid cars. At the moment, GM, is perhaps ahead by a nose, with its “Chevy Volt” already being advertised, and scheduled to begin testing in 2008, and full marketing in 2010.
With electricity at the equivalent of $1 per gallon or less, the market would likely switch by itself to plug-ins over twenty or so coming years. But to harvest the greenhouse benefits of the change (and to cut immediately our lethal dependence on Middle Eastern oil) we must put the muscle of serious social purpose and governmental action behind the switch to plug-ins, and encourage the market to accomplish the change-over much sooner. Petroleum and transportation account for a third or more of our carbon emissions. That makes speeding up the spread of plug-in electric hybrids a major front in the war against global warming.
Plug-in hybrid technology applies as well or better to farm and construction equipment and to local trucks and buses. Present diesel-burning railroad transportation, both freight and passenger can be electrified by the use of overhead wires, which are already dominant in Europe, and used in the United States, and much of our long-distance heavy truck traffic (18 wheelers) should be moving by a more flexible, computerized rail system in any case. It would be probably be tolerable if aviation, which consumes about 8% of the petroleum used in the U.S., remained based on fossil fuel, but research, notably pushed by Richard Branson of Virgin Airways, is now being done on liquid but non-greenhouse bio-fuels for aviation. The prospects are good that flying, although not convertible to electricity, can be substantially decarbonized.
Space heating and heat pumps
In thermodynamic terms, electricity is a high quality or intense form of energy. As a consequence, two thirds of the energy content of the fuel used to make electricity in traditional plants is lost in the generation process, which makes electric power intrinsically very expensive. It is uneconomic to use such a highly processed and high quality product for an elementary function which could be performed by a lower-grade form of energy. Raising a room in Minneapolis from 20o F to 72oF in January is such an undemanding function, which does not need the high quality of electricity. Indeed, if electricity is used directly for heating in a resistance device, like a toaster whose electrified wires glow with heat, it is extremely wasteful. Electric resistance heating could not remotely be proposed for an entire house for a long winter in a cold part of the United States.
An electric refrigerator or air conditioner, however, also deals with low-intensity heat, but in a fundamentally different way, and far more efficiently. We focus on their cooling sides, but these are heat pumps, in which electric compressors circulate a heat- absorbing and heat-releasing fluid between an inside space and an outside space—remember the discharge of warmth that can be felt on the outside of an airconditioning unit. Heat pumps can move heat in either direction, and thus can heat rooms as well as cool them. At an energy efficiency three to four times greater than electric resistance heating, they can use electricity to warm an average American house at the same cost as heating it with natural gas, now the most common form of energy for home and space heating in the United States.
Heat pumps do everything a home furnace does, but entirely with electricity, rather than a fossil fuel, and at about the same final cost. They are in common and increasing use in Scandinavia, and early use in the United States. Heat pumps are difficult and costly to install as retrofits in existing buildings, but they can and should be installed in all new construction, where normal construction and turnover rates will progressively bring them to a substantial share of the space heating market. New houses and buildings will no longer need to have trenches dug and natural gas pipelines installed.
In a greenhouse perspective, natural gas is the least harmful of the fossil fuels—about half as carbon-emitting as coal. If coal and petroleum are virtually eliminated, as they can be under fossil-free electrification policies, the rather long survival of natural gas for heating in existing, already piped, houses and worksites, is relatively tolerable.
Decarbonizing electric generation
Half the electricity in the United States is now generated by burning coal, with the balance generated by natural gas, nuclear reactors, hydropower, biomass waste, wind turbines and thermal and photovoltaic solar means. For greenhouse climate change, it is the generation from coal and, to a lesser extent, natural gas, which emits carbon into the atmosphere, and thus is the problem. As the price of natural gas rises, there are currently at least 120 new power plants in the planning stage in our country that will use coal, by far the worst fuel for greenhouse emissions.
It is imperative to end the use of coal to generate power. Today’s most urgent operational focus is that no new coal-burning electric generation be built in the United States. Each new plant will emit a staggering amount (xxx tons) of greenhouse fossil carbon dioxide over a forty-year life, and it is incredible that new ones would be built in America today. There must be a pitched battle, a huge one if necessary, to stop the construction of new coal power plants anywhere in the United States. The importance of the coal front, and especially the new-plant issue, is recognized by key players in the carbon struggle. The non-profit policy group, Environmental Defense (ED), scored a remarkable, and perhaps tide-turning, victory in February 2007. After attacking with lawsuits, ED’s intervention as the giant Texas utility TXU was being sold persuaded the new owners to cut back sharply TXU’s plan to build eleven new coal plants. The new TXU has now announced plans to build three gigawatts (3,000 megawatts) of wind capacity, a signal step forward for climate protection.
Vested coal defenders are talking up two new processes, pre-combustion gasification of coal, and removing coal’s carbon dioxide and sequestering it underground, rather than releasing it to the atmosphere. In the long term climate change framework, both proposals are mainly temporizing sophistries, best disregarded. Coal must go. (Use here EPRI graphic on comparative generating costs by fuel?)
Fossil carbon-free electricity
But, where will non-greenhouse electricity come from? We will need to mix new power from three main sources: efficiency gains, “renewables” (wind and solar power), and nuclear generation. The major instrument that is indispensable to balance and link the contrasting power sources, is the “intelligent grid.”
1) Energy efficiency means getting more useful work from existing power flows. When a wasted watt-hour is eliminated, that is as useful as providing a new watt-hour. Many engineers, led by Amory Lovins of the Rocky Mountain Institute, believe that a quarter, or even a good deal more, of our present power usage is waste that can be cut. Cutting energy waste is generally not free, as when we have to buy a $7 screw-in fluorescent light bulb, but there is a lot of fat in our energy system and reducing it is usually a bargain, sometimes with a remarkably short pay-back time. A cousin of energy efficiency is energy conservation, that is to say simply refraining from energy use or using less energy by changing a task, as when one sweeps a floor rather than vaccuuming it, or buys a smaller, lighter automobile. If the cost of energy rises for a time as we invest in a non-carbon energy system, energy efficiency and some reasonable measure of conservation, both of which result in buying less energy, are major ways for consumers to hold their overall energy bills down, or to keep them at a level that is constant, or even lower than what they are now accustomed to paying.
Valuable as practiced by individuals, energy conservation as a public policy goal often comes as part of a cultural theology implying that Americans would be better people if they used less energy. I certainly think that is true, and so do a lot of environmentalists and ascetics in the Blue states, but it makes many other Americans, probably a national majority, feel they are being looked down upon and threatened with freezing in the dark. The majority considers the Birkenstock ethos elitist and politically quaint. It would be better for the cause of real climate protection if confusion were eliminated: ending carbon emissions is not the same thing as energy efficiency or energy conservation, and does not rest on the same philosophical basis. It is quite possible to provide and to use abundant non-fossil non-greenhouse energy, even stupidly, materialistically, and extravagantly, in a post-carbon world if people want to pay for it. Supporters of climate protection in principle should have no objection to this. It will not contribute to global warming, which is what matters, even as it remains vulgar and wasteful.
2) Photovoltaic (PV) panels, solar heat-based generation, and wind turbines, are often grouped as “renewables.” By comparison with an old-style coal or a nuclear power station, the energy of PV, solar thermal, and wind comes in a trickle. For all, the apparatus is expensive in relation to the amount of power produced, although the running costs are virtually free. Renewable (and also nuclear) generation is highly equipment (meaning capital) reliant, while a coal power plant is highly resource dependent, meaning that it is cheap to build, but expensive to fuel over all the years of its working life. These structural differences in the investment patterns are significant, and play out throughout the issue. Significantly, when we decarbonize power generation, we are necessarily moving to systems that are more capital-intensive, and less resource-intensive than present systems based on fossil fuels. This is a usually ignored, but extremely important, aspect of calculating the cost of climate protection.
That need for new capital is the main reason that decarbonizing is “expensive;” but it is not expensive in the usual sense because the equipment being purchased, unlike an operating resource like coal, is not being consumed in a day, but instead is a durable investment which will be productive over many years. The initial investment in such equipment is indeed a lot of money being spent now, but once in place, a wind turbine, unlike a coal plant, will produce power for an extended time with no fuel cost at all, and after the capital is repaid, the power generated will be cheap, since the operating expenses are very low.
Of course, when the sun is not shining or the wind not blowing, PV, solar thermal and wind do not produce power. This highlights a particular characteristic of electricity among the forms of energy: it is miraculously clean, versatile, and easy to transport, but difficult and costly to store, even for a few hours. Contrary to the public’s impression, hydrogen is not an energy source, but rather is a storage medium for electricity. As such, it may come to play a very significant role, but like all power storage, hydrogen systems are expensive. The intermittency of the main renewable power sources is dealt with primarily not by storing power, but by mixing sources with each other in the grid (wind can be available at night when the sun is not; a windless day may be sunny) and with other power sources, such as hydroelectric or nuclear power.
3) Nuclear power, which now generates 20% of U.S. electricity, is capital intensive and slow to build, although ultimately cheap and plentiful, as in France. It is interesting that the reliability and the output of existing U.S. nuclear plants have continued to strengthen in past decades, even as no new plants have been built. Technical and engineering work on the design of new reactors has continued as well, such that the danger of major plant accidents, such as those at Chernobyl and Three Mile Island has been effectively eliminated. Nuclear power nonetheless presents real dangers, especially for used-fuel disposal, and these dangers, both the real ones, and the subliminal ones based on an justified fear of nuclear weapons, have made this energy technology highly controversial and politically thorny in many countries. These dangers are difficult to eliminate in the U.S., and much more difficult if nuclear power were to be used wholesale worldwide. Are these dangers convertible into technical and political challenges which can be successfully met? Probably yes, at least enough for new nuclear power, which emits no greenhouse gas at all, to make a significant and much needed contribution to climate protection. An excellent 2003 study from MIT (http://web.mit.edu/nuclearpower/ ) discusses these issues, warning against the reprocessing of fuel, and recommending a commitment to “once-through” fuel technology.
Almost certainly, as demand continues to grow, and as existing coal plants that supply half the country’s power are replaced, substantial new nuclear baseload power will be needed to supply the concentrated metropolitan regions where more and more Americans live. It should be built with a maximum provision for safety, and a full willingness to pay for such precautions in the final cost of power. Such safety strategies could include siting new nuclear plants (apart from many which will be located next to existing nuclear plants) in large heavily protected concentrations in remote, sparsely inhabited locations, and being ready to transmit their power considerable distances. An example of such siting would be putting baseload nuclear generation for the Los Angeles megalopolis in a highly protected configuration, perhaps even underground, at the desert “Four Corners” where Arizona, New Mexico, Colorado and Utah meet.
Since the dangers from nuclear power very much include vulnerability to terrorists’ use and diversion to weapons use, nuclear technology would be much more available to substitute for fossil fuels if the relationship between civilian use for energy production, and military/terrorist use of nuclear weapons, could be minimized or severed. Progress on policies of non-proliferation and international nuclear materials accounting, as carried out through the IAEA and otherwise, is important for climate protection as well as for human security. It would be of the greatest value if the United States, in addition to supporting strengthening of the IAEA, working hard against proliferation, and abstaining from the development of new nuclear weapons, made clear its long term commitment to work not only for step-by-step reduction of nuclear weapons, including our own, but prepared our public for a goal of eventual full nuclear disarmament, including our own. The MIT study mentioned above makes policy and organizational recommendations in this domain, and there have been remarkable views on nuclear weapons along these lines published in the Wall Street Journal by established foreign policy experts including Henry Kissinger, and sustained and important anti-proliferation efforts by former Senator Sam Nunn and a group of associates.
An “intelligent” high-capacity power transmission and distribution grid
Almost certainly, substantial new nuclear power will be needed to supply the concentrated metropolitan regions where more and more Americans live. At the same time, the greatest possible running room should be left for efficiency and renewables to fill as much as they can of the inescapable national need for energy. To integrate such very disparate sources, and to avoid prematurely choosing between them, a heavily upgraded “intelligent” national electric transmission and distribution grid is not an option, but a necessary investment. Planning and building an intelligent high-capacity grid should be going on from right now; it is clearly indispensable, and is not the sort of investment decision that needs to await debate over public vs market technology choices.
In the United States, power is produced by generating plants of different sizes in different locations under different ownerships, and configured differently to specialize in expensive “peak” power for the high demand afternoon and early evening hours, or “baseload” power for steady 24 hour operation. A grid of wires and switching points “transmit” power over long distances and “distribute” it over more local ones to consumers who may take it at different times of day in large wholesale quantities at high voltages or in small household units at voltages reduced by local transformers. As the grid aggregates and harmonizes the power production of very diverse sources on its intake side, it must pass power on its output side to recipients with a whole range of diverse needs and schedules. A very capable grid (or set of grids) working at a high level performs a critical function in the national energy system. Service interruptions are costly to a modern economy (the U.S. grid is less reliable now than Europe’s), and the network must continuously satisfy many additonal technical requirements to assure uninterrupted electricity of unfluctuating voltage tailored to the needs of each consumer, delivered when the consumer needs it.
An upgraded grid will be able to move power long distances in large volumes with the lowest possible costs and power losses that the most advanced technology permits. The best wind to operate wind turbines is not evenly spread across the country, but is concentrated in parts of Texas and the upper Midwest. To take advantage of it, it will be necessary to transport the power, for example, to Chicago and New Orleans, and indeed, to mix it on an essentially national grid or set of grids. Similarly, if we increase our nuclear power, it may well be a safety measure to use large, heavily protected nuclear plants, or clusters of them, at remote locations from the densely settled population centers they will serve, which again means a long distance transmission capacity. The grid may need some storage capacity built into it as well.
There is a long-standing debate in the power engineering world between centralizers and decentralizers. Centralized, large-station electricity generation has certainly dominated actual construction in past decades, and now is the status quo for public utilities across the country, utilities which themselves are well into the financial and organizational revolution of “privatization.” Centralization is based on the pronounced economies of scale in power production, a case that has improved with the progressive reduction in transmission costs and losses, and the rise of large regional grids. Decentralizers, like Amory Lovins, believe that the system of large generating stations conceals a lot of waste and unused capacity, that it is inherently unreliable, and politically and socially authoritarian rather than democratic. The important consideration is that a high capacity, intelligent national grid, or “team” of regional grids, with both “strong arteries” and “fine capillaries”can handle and reconcile both centralized power generation with distant transmission, and local production with its economies of proximity. If the computer-controlled grid performs well its task of aggregating and reconciling, it can allow both the centralized and decentralized approaches to complement each other, and can minimize their liabilities. This will be one of the upgraded grid’s most important functions.
Where the present power grid carries mainly electricity, the needed intelligent grid will carry both electricity and large amounts of information, in both directions between suppliers and consumers. A new level of information will also be used as well in the management and power despatching work of the grid itself and its set of supplying plants. The new grid will be based on relatively recent advances in “power electronics,” which have allowed computers and chips operating internally on infinitesimally small flows of electricity to switch and control massive flows of wholesale power. Making the grid “intelligent” will permit selling power at different prices at different levels of demand and times of day, and will allow a consumer (or an automated consuming appliance, say a large restaurant refrigerator) to know the price of electricity that is available on the line at any given moment, and to opt not to take it at the peak hour, but to postpone drawing power until the middle of the night, when the cost will be lower.
The intelligent grid will buy power as well as sell it, as from a photovoltaic array on a customer’s roof, and the grid’s computerized information management system will be able to give the customer a monthly bill that reflects both the power the householder has drawn from the grid, and the power he has supplied to it, each flow charged according to the appropriate rate for the time it was used or supplied. A plug-in hybrid vehicle, with its large battery, which it will normally charge mainly at night in its home garage also represents a reserve of stored electricity, collectively a very large reserve. The modernized grid will be able, in case of need, to draw electricity from cars that are plugged in during the day, buying power from them in a system called V2G, or “vehicle to grid” supply. Such a car will have in effect an electricity account number and a computerized recording apparatus incorporated into its plug that will help tally what it has taken and what it has supplied, not only in its home garage, but when parked and plugged in during the daytime at the driver’s worksite, or even at a parking meter on the street. The plug-in vehicle will be able to decide whether to buy or sell power, according to pre-set instructions from the owner matched to the price offered by the grid at a given moment and place. Powerfully computerized, from large-scale to small-scale the grid will be continously reconciling diverse power suppliers with a multiplicity of diverse power users, sharing many resources across time and space to minimize expensive unused generating capacity by shaving peaks and filling valleys of demand.
The high capacity intelligent grid is obviously in itself a large and complex project, and at the national scale, a huge undertaking. It is, however, a critical component of the post-greenhouse, electrified national energy system.
As the United States moves toward a new and different energy system and set of energy policies, many large decisions lie ahead. Two of them are the degree of centralization or decentralization in our future energy system, and, secondly, to what extent we will use nuclear generation, versus energy efficiency investments and renewables. Reasonable technical, economic and political debate on both of these large issues centers more proximately, on what should be the sequence of decision-making among them, and whether they should be decided by “government” or “the market,” or what mixture of the two.
The national high-capacity intelligent grid, although it may appear to develop piecemeal, can and should be built before resolving the centralization and nuclear issues. A fully modern grid can handle both nuclear and renewable sources, and centralized and decentralized ones. When a high capacity grid is doing its work, it can reveal over time to what extent nuclear power is unavoidable, and to what extent large-scale centralized generation is more advantageous than decentralized, or vice versa, since the new grid can shelter both. If the grid is built soon, we can avoid premature decision making on the nuclear and centralization problems. Without danger of “the government picking solutions” that are later seen as sub-optimal, nor of making the decarbonizing mission hostage to market’s pace and special interests, the intelligent, high capacity grid can be developed immediately for its own essential functions, and also to serve as a hospitable framework for the objective, pragmatic resolution of critical issues such as the place of nuclear power.
Considerable work is now going on for the design of intelligent grids under both private (utility companies, such as American Electric Power, (A.E.P.), computerization firms, such as IBM) and public (governmental) auspices. Intelligent grids are being designed and tested abroad, notably in Italy. Grid development work has a computerized modelling aspect which should be pushed, but also, sooner rather than later, real test applications and trials of various grid options, such as longer distance transmission and variable pricing, should proceed in selected sites.
The Economic Path
In every debate about cutting CO2 emissions, a central and controlling question from public and private decision-makers before taking climate protective action is always: “What will the economic impact be, what will it cost?”
Climate protection policy indeed raises many economic questions. Three will be directly discussed here. The first two have to do with the generally agreed need to “put a price on carbon,” in order to curb “externalities,” and manage a “market failure.” In that domain, the first issue is whether our policy should be quantity-based (a cap on carbon emissions), or price-based (a tax on them). The second issue is setting the level of the carbon price. The third economic issue is outside the context of a carbon price. It considers how costly climate protection is likely to be, assuming the physical/-technical path discussed above, looking more concretely than is customary at the actual prospective expenditures. After discussing these economic issues, this article proposes a specific, programmatic approach to national and international carbon taxation and post-fossil energy investment.
Why put a price on carbon?
From the point of view of society as a whole, unintended social damage from an economic activity, such as deterioration of the climate from burning fossil fuels, is called an “externality” of the actual buying and selling of a product. When such damage persists unremedied or uncompensated, the situation is described as “market failure.” Britain’s Nicholas Stern, who headed the team that wrote the Stern Review in 2006, called the emission of CO2 from fossil fuels and the consequent global warming, which are “externalities” of the normal fossil energy markets, the greatest “market failure” in history.
To curb social damage from an economic “externality”, action must be taken from outside the market, normally meaning by government. The usual governmental responses are 1) to bring an activity under regulation, for example, placing a limiting cap on how much of a harmful good can be traded. By restricting supply, this normally causes the offending commodity’s price to rise, thereby reducing its use. Alternatively, 2) a government can adjust prices within the market, commonly by imposing a tax on an offending product. A tax raises the price to the consumer of the harmful product, and thereby makes buying it less attractive (and makes non-damaging substitutes for it more attractive). The tax (and also a cap system if permits are auctioned) generates funds which can be invested in climate protection steps to remedy the damages of fossil carbon use, or can simply be returned to the public if the tax is legislated to be revenue neutral.
This leads into the question of how big the tax (or how stringent the cap) should be. The economist’s response is often that it should be heavy enough, but no heavier, to match or compensate for the damage being done by the market activity, in this case, the economic damage done by the climate change caused by the CO2 emissions. However, while the principle, from the British economist A.C. Pigou, of restraining an externality through regulation or taxation certainly applies to carbon emissions, there are insuperable problems in measuring the present and future damage of climate change, and further major problems with expressing that damage as an economic cost, and with using the resulting number to set the level of a carbon cap or tax. The quantity of future climate damages, certainly in the form of a dollar figure, are undetermined, and almost certainly undeterminable. Climate protection costs would be paid (or not paid) by one group (say, the American middle class), while climate damages will be suffered by an unknown and probably different group (say, the Inuit or the Darfuri). Apart from that, trying to determine and quantify damages in this way leads to potentially very serious philosophical errors, such as comparing the easily measured value of economic products with the services to human beings of nature and the environment, which are a prior reality of a very different order than monetary gains and losses within the economy.
Among other further issues, to set a Pigovian price level it would be necessary to decide not only how big are the climate damages, in dollars and cents, of emitting a ton of carbon now, but also whether the tax should reflect an effort to charge for past and future damages as well as current ones. In fact, the real carbon emission economics is not a standard, present-oriented cost-benefit calculation, but rather the economics of “a stitch in time saves nine.” Moreover, this is not an equilibrated status quo, but a “catch-up ballgame,” which requires a different kind of effort. In that light, the future climate change damages to be avoided can be seen as infinite, or at least far larger than present effects. Beyond these considerations, trying to set a Pigovian carbon price level by attempting to quantify the unquantifiable will lead above all to endless politicized argument (which in reality will be interest-based, rather than fact seeking), with the effect of delaying or immobilizing policymaking when prompt and expeditious policymaking is intensely needed.
So we should take from Pigou’s welfare economics the well established principle that society, through government, can and should intervene against externalities, or in this case, add to the familiar market price of fossil carbon energy a new increment or addition to the price, the price of the carbon’s damage to the atmosphere. But, acting on behalf of our goal of climate protection, we should set the level of that price pragmatically, in relation not to an unpriceable environmental injury, but to the economic possibilities of paying it, and perhaps even set it politically (which is what will actually happen, since the tax setting must be done by Congress), rather than trying to establish and use a true Pigovian tax level, which is an unknowable value, a chimera, at this point. Debate on a carbon price will be cleaner and better if the chase for that red herring can be abandoned.
Pricing carbon's damage— by a cap or by a tax?
It is in fact very broadly agreed that a “price of carbon” should be imposed, aimed at reducing the use of fossil carbon energy, and possibly at generating funds to remediate its effects. Either a carbon tax, or a government imposed cap on the amount of fossil carbon burned in the United States, would put a price on carbon. A cap would take the form of requiring that energy corporations have a government-issued permit to emit each ton of carbon, and making the total number of such permits smaller than the amount of carbon now being emitted. A cap’s tendency to hit firms and individuals inequitably would be removed by allowing carbon permits to be traded among users, so that a policy of regulating by quantity is usually referred to as “cap and trade.” Both taxation and capping systems are in what might be called “mild’ use in some countries and regions now, but at this early stage of actually taking action against global warming, “cap and trade” is clearly the more commonly applied approach: it is embodied in the Kyoto Protocol, the European Trading System, and in the U.S. is the main line of thinking in California and the federal Congress.
Nonetheless, on a harder look, is a carbon tax, or a “cap and trade” system, better for protecting the climate? A broader way of putting this is to ask how a government seeking to restrain an environmental externality gives its signals to the market. Is a quantitative tool (such as a cap), or price instrument (such as a tax), to be preferred? To reduce smoking, for example, would it be better for the federal government to put a cap (state by state, let us say, or even person by person) on the maximum number of cigarettes that could be smoked per day or month or year, or would it be better to put a tax on cigarettes which would drive up their price to the point that smoking would drop across the country to the same level as the target level under the proposed cap? In the case of cigarettes, the taxation approach was used. It was effective, and clearly, a cap and trade method on smoking would have been impossibly cumbersome. A cap and trade method was applied to sulfur emissions from large coal-burning power stations by the United States in the 1990 revision of the Clean Air Act. It is commonly considered to have been a success, but some observers believe that it sub-optimized—that more sulfur could have been removed under different, less self-limiting arrangements than the “cap and trade” that industry accepted in the 1990 CAA.
A comprehensive analytic answer to the tax versus cap dilemma was given in 1974 by economist Martin Weitzman, then at MIT, in a classic article, “Prices versus Quantities” (Review of Economic Studies, 41, 4) Weitzman makes it clear that the issue is a little like quantum indeterminacy in physics. If a fixed tolerable quantity of the pollutant is set as a cap or ceiling, there is no way of knowing with precision ahead of time what it will cost to forego use of the pollutant, or to find non-polluting substitutes, in order to bring the pollutant down to a level under the cap. This cost uncertainty (in the legislative process, costs will be predicted to be very high, bogey-man style, by opponents, while they will be minimized by supporters) is in itself is a major reason not to join a capping arrangement—it is the main reason the U.S. did not join Kyoto. If, on the other hand, a prospective participant must know ahead of time only how much he will be obliged to spend, then he can agree on a carbon tax which will fix the costs of the emission reductions effort. He will know that he will not have to spend more than an agreed amount, but he will not know how much pollutant reduction the effort will achieve—that will be determined only by the actual cycle of operations. Which method then, working through quantities or through prices, should be applied in a given case?
To know fully the results of his proposed action, the regulating policymaker must know how big a reduction of the pollutant he will bring about, and he must know what that reduction will cost. But in practice in the real world, as he embarks on his policy, he can know, and can state in his policy, only one of these, the quantity or the price, and the other has to be left open to be worked out or discovered in the process of carrying out the policy itself. In a world of perfect and complete knowledge, in which the cost of reducing carbon were known ahead of time, it would not matter which route the policymaker took, since he would reach the exactly same reduction result by using either quantities or prices to influence the market and bring it to the desired point. But the world of energy policy and climate protection is not remotely one of perfect and complete knowledge of future quantities and future costs. Therefore, an unavoidable unknown remains: either you know how much carbon reduction you want, and have to accept a risk with regard to how much you pay for it, or you know how much you are willing to pay, and have to take a risk with regard to how much carbon reduction you will get. On which side should you take your certainty, and on which side should you take your risk?
One case is quite clear: if the pollutant is not important up to a certain amount but then becomes castastrophic, we should regulate it by quantity, and set the tolerated quantity a safe distance before the catastrophe is unleashed.
However, in general, Weitzman found that if each additional increment of the pollutant does not make much difference in the damage done, or if the amount of added damage from each marginal emission is not known, the price, or tax, mechanism, is more effective. This applies in a particular way to greenhouse gas emissions, whose effects are buffered because it is not the annual emission itself which does the damage, but the stock, or the concentration of carbon in the atmosphere. This stock grew over two centuries and is not immediately related in a decisive way to a current year’s emissions. The moral of the price/quantity story for greenhouse gases is that regulation by price is likely to be more efficient (perhaps several times over) than regulation by quantity. William Pizer of the Washington think-tank Resources for the Future, has suggested that price mechanisms can produce gains five times higher than even well designed quantitative targets, and William Nordhaus, the authoritative Yale economist, as well as Gregory Mankiw, former Chairman of the Council of Economic Advisers in the second Bush administration, have made clear their preference for price approaches (that is, taxation) over cap and trade arrangements.
What, then, is the appeal of cap and trade? The American political phobia against taxation is certainly significant, and a second main element is that even on a short term basis many environmentalists, such as Eileen Claussen of the Pew Center on Global Climate Change, want to be certain about the amount of reduction to be achieved. This is understandable after the vogue of unquantified voluntary carbon reductions, which have achieved little or nothing.
In group negotiations about climate protection, as at Kyoto, or in a legislative process, the anxieties about actually achieving reductions that Ms. Claussen articulates are usually intensified because no participant or firm wants to commit itself until it knows how far other participants are proceeding. This is the “sidelong glance” phenomenon. Each emitter wants to pin other emitters down not to promise a certain effort against carbon emissions, but rather to promise certain results. That, of course, is a riskier commitment, taking more courage from any corporation to sign on to — or suggesting to a corporation afraid of runaway costs that it should press for mild caps and lenient trading arrangements. This in the group process, a strong response against climate change is attenuated and diluted, in part because a quantitative (targets and timetable) method is being followed, rather than a price/tax based one (programs and policies).
Box: Beforehand Indeterminacy of Costs of Emission Reduction
Weitzman, in his article Prices vs Quantities, sees that a regulator choosing between the price and quantity instruments does not know in advance the costs of reducing an externality, in this case, carbon emissions. If the regulator did know costs, he could reach the same desired carbon reduction equally well by raising the price or cutting the allowed quantity. But that exact correctness of a beforehand cost estimate is not very likely; in the real world there will be many and varied estimates from various interested (and likely politicized) parties, who will be wrangling vigorously. The actual cost outcome, which itself may be influenced by unpredictable accidental or localized factors, will undoubtedly be above or below almost all of the estimates. The expected negotiating results if the real cost proves to be higher or lower than the estimated cost, can be shown in a simple matrix:
If you regulate by:
And costs are
higher than expected:
I. Less carbon reduction than expected is achieved; the system can be adjusted to increase the tax, or to lower carbon reduction expectations in next cycle.
II. Gov’t must pay high costs to meet target, dam-aging its economy, or must renege on commitment or leave pact.
And costs are
lower than expected:
III. More carbon reduction achieved; in next cycle, tax can be adjusted in either direction, to slow down climate protection, or to press harder since costs have been seen to be low.
IV. Carbon reduction stops when stipulated quantity reduction is achieved; some available reduction gains go unharvested. (US sulfur case)
Fear of the outcome in quadrant II, when binding quantitative targets have been accepted and costs come in high, leads participants to resist accepting major quantitative commitments, and generally impels them to seek an unambitious international arrangement if the arrangement uses quantitative commitments as Kyoto does. In quadrant IV, lower than expected costs under a system of quantitative commitments leave carbon reduction gains “on the table.” This is what happened in the sulfur reduction trading system under the U.S. Clean Air Act Amendments of 1990. If the commitments are by price, higher than expected costs hurt only the first round climate protection results in quadrant I, and lower than expected costs permit full harvesting of windfall de-carbonization gains. The less risky and preferable system is price regulation.
Imagine you are an observer looking over the shoulder of the regulator as he chooses between price and quantity signals. If you believe that the costs will be lower than the estimated costs, which environmentalists generally do believe, and which was dramatically true in the sulfur case, you will want price regulation because under it you will get more pollutant reduction. If you are a pessimist, and believe that costs will be high, you still do not want quantitative regulation, which is likely to “bust the bank,” producing a painful outcome which could discredit climate protection arrangements significantly into the future.
How high should the carbon tax be?
Our second question is, “How do we set the level of a carbon tax?” assuming that an initial level, possibly quite low, has served to start it off and afford an administrative warm-up and de-bugging interval.
We observed earlier that in choosing between quantity and price as means of carbon regulation, if a level of atmospheric carbon existed at which catastrophic environmental effects would take place, then the regulatory system should be quantitatively based, and should assure that that pollution ceiling is not approached or breached. In a relatively short, operational span of time, such a quantitative ceiling is not known with regard to greenhouse emissions. But, interestingly, there may be a potential for economic disaster if a certain cost ceiling is exceeded. This ceiling exists at the point where raising the costs of energy causes not just effects in the energy sector (such as fuel conservation or substitution), but has injurious effects in the economy as a whole (inflation, recession and unemployment). Such effects were felt from the energy revaluations of the 1970s, and perhaps in the 1990s as well. For every political leader, such damage to the general economy, particularly in the form of unemployment, is a nightmare to be avoided at all costs. If such economic disaster were to be visited on society by hastily over-ambitious climate protection efforts, decarbonization of the economy and the climate protection task, which should take place on a steady, somewhat longer-term rhythm, would likely be fatally discredited.
There should be no need to pay the price of a depression, or even recession, to decarbonize the world economy. Therefore, if a control mechanism, price, is chosen which permits economic authorities to navigate cautiously with regard to this frontier of danger, it is a far safer course for the durability of the whole long-term climate protection effort. It seems likely that an initial tax level of $37.50 per ton of carbon (equivalent to ~$10 per ton of carbon dioxide) is well and safely short of this frontier. A body comparable to the Federal Reserve or IMF should advise on setting carbon taxes at their maximum level that would stop safely short of negative macro-economic effects. In principle, the tax level will fall within a band of which serious macro-economic damage would define the upper boundary, with the lower boundary being that level of augmented carbon cost which would make it unmistakably economically irrational to build a coal-fired power generating facility, and perhaps even a natural gas generating plant.
What will it cost to de-carbonize energy?
Before we can talk about what it will cost to be served by non-fossil energy, let’s consider what actual investment and construction tasks have to be achieved. Remaining in the all-electrification framework discussed earlier, here are some major elements of the work:
1. Build 700 gigawatts of non-fossil electric generating capacity. The United States now has a little less than 1,000 gigawatts of generating capacity of which about 500 are coal-fired, and 187 are natural gas fueled. (About 200 are nuclear, and 65 are from large hydropower.) Apart from construction costs, staff in substantial numbers must be developed and trained to operate the new plants. This could be expected to be a mixture of governmental and market funding.
2. Build the high-capacity intelligent grid throughout the country, and, again, develop staff to operate it. Probably should be a government outlay, partly for speed of execution, but there will be efficiency gains that can be recouped through the market to pay off, for example, government issued bonds.
3. Increase energy efficiency throughout the economy. All new buildings will be constructed (and sited, see point 4 just below) to ambitious LEED sustainability targets, and many will be heavily insulated. Illumination evolves from incandescent lighting to compact flourescent, to light emitting diodes (LEDs). Much heating of space and water will be handled in all new construction by geo-thermal/heat pumps, and other energy efficiency measures will also be applied in building design and construction. Such designing for energy sustainability generally represents an additional expense in building, over and above normal costs. It is this extra spending only that can be counted as a cost for the national de-carbonization account, bearing in mind that in general it will be paid by those constructing buildings, rather than the government, and the it is a cost only at the moment of construction, in reality being an investment which will generate a real return in energy savings over the life of a building of facility. Most of this outlay could be from the market, but guided by government regulation.
4. Apply “Smart Growth,” or, as much as possible, “walkable transit-oriented development (WTOD)” city planning principles in metropolitan regions nationwide. This involves well-thought out increases in urban and suburban density, while greenness and local open space is preserved. It means investments (and likely technical innovations) in mass transit (electrified heavy and light rail, rapid electric, hydrogen or bio-fueled bus services), and encouragement of pedestrian and bicycle mobility. Smart growth will also require an increase of high-rise construction, for apartment or condominium living as they are practiced in Europe, and construction of underground parking. Humane growth at higher densities needs technical and architectural advances, and providing further amenities is needed to manage and palliate the widely feared aspects of density. It also involves major changes of attitudes and tasks to percolate through thousands of city, county and state governments, and changes in culture and attitudes in the population in general, as well as measures to mitigate risks that people associate with urban density, such as crime and violence. The imperative to shape our metropolitan regions in a “smarter” direction comes primarily from population growth, rather that the need for climate protection, but if carried out well, it will make a major contribution to climate protection. “Smart growth” and climate protection are clearly complementary and mutually supportive policy directions, even after automobile transportation is electrified and is no longer a massive emitter of CO2 from the internal combustion engine. The expenditures here are largely private market ones, perhaps conducted under local government regulations.
5. Electrify freight railroads and strengthen their role in relation to long-distance trucks. Trackage, controls, rolling stock improvements are needed in addition to electrification. Build high speed passenger rail linking metro regions situated at the appropriate distances from each other. The capital investments for passenger high-speed rail would likely largely be governmental.
6. The additional cost of plug-in hybrid cars over present gasoline internal combustion engine cars, which can be estimated at $1,500 per vehicle. This could be subsidized directly, or through tax deductions, like those now applied fitfully to ordinary hybrid vehicles. The supplementary cost for plugs-ins should decline over time, quite possibly to zero, as technical advances and economies of scale influence this large market. This cost could be supported by the market (car purchasers) who would recover it over time through fuel economies, although it could be the object of government subsidy, as mentioned above.
7. Liquidation expenses of the old fossil system. Write-offs of heavy equipment such as mechanized coal mining gear, oil refineries, tank trucks. Compensation in various forms for economic “losers,” for example, coal miners and coal railway workers, gas station owners and workers, refinery workers. To what extent compensation will take place, through what channels, how much by groups and how much as individuals, all remain to be worked out. If decarbonization changes are gradual, that will tend to mitigate this set of issues. If it is made clear from the beginning that many unavoidable decarbonization losses will be compensated, there will be much less political resistance to decarbonization.
Before we assign monetary figures to these projects, we have to think about what “spending” means in this sort of technical/social change. What was the cost of the transition from LP records to CDs, and what was the return? How long did it take, and would it have been better to have been done more or less quickly? Did the change have a purpose other than the improvement of a good or service, and was it related to the marketed goods only, or to externalities? Was government involved in the transition, and, if so, in what kind of role: a planning, instigating, subsidizing role or a regulatory role? A central role, or a peripheral one?
What were the governmental and market roles, and what were the the investments (from whom), costs (to whom?), and the payoffs (to whom?) in the transition from film to digital imaging and cameras, which certainly created rough years for the Kodak Corporation and regions like Rochester, New York that it dominated. Was it handled differently (better or worse) in Europe or Japan? Similarly, who initiated, who invested, and who benefited in the ending of the Bell telephone monopoly, or the privatization of electric utilities? Jobs created and jobs lost? Gains and losses of private goods? Gains and losses of public goods? What are the governmental and market roles, investments, costs and payoffs (material, immaterial) in a large defense budget, or in the declaration of a war and its prosecution?
In the case of changing the energy regime and investing for climate protection, we can say that the overall, driving purpose is the creation of a global public good: avoiding the danger of a greenhouse-changing climate. Apart from greenhouse gases being externalities, the fact that we seek to create a public good, rather than a private, marketable good, suggests that a substantial role for government(s) will be unavoidable in getting individuals’ and sub-groups’ motivations lined up in such a way that the public good will in fact be achieved. How substantial, and how configured, the governmental role will be remains to be worked out.
With those caveats in mind, and without specifying what will be governmental and what will be private spending, let’s tally up the major projects, thinking of possible annual expenses, in billions of dollars, understood to be part of a ten year program:
700 gigawatts non-carbon generating capacity-add’l cost over coal equip’t
High capacity intelligent grid
Energy efficiency in new and retrofittable buildings
Smart growth—mass transit, density, density palliation
Electrify freight railroads and ports
High speed passenger rail (electrically propelled)
Extra costs of PHEVs over standard vehicles — @ $1,500 per vehicle
Liquidate old energy infrastructure & compensate economic losers
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An annual cost of $160 billion may be compared with the $400 billion per year currently being spent by the United States Government on the war in Iraq. The ten year cost of such a program, $1.6 trillion, may be compared with an expectable ten year GNP over the period 2009 to 1219 of $130 (to check) trillion,
What could be some sources of these investment funds?
The proceeds of an internationally coordinated carbon tax, discussed below, will be $60 billion per year in the United States, of which $30B will be remitted directly back to the population for revenue neutrality, and $30B will be available for climate protection investment. Understanding that half of that will be spent within the United States gives $15B of carbon tax revenue per year for the programs above, or a little short of 10%.
A much more substantial contribution should be drawn from the savings from reducing and then ending the use of petroleum, now 60 % imported, to drive cars and other vehicles. Let us assume that the United States has 150 million vehicles, and that each uses 600 gallons of fuel a year (15,000 miles at 25 miles per gallon) which at $3. costs $1800 per year. If the vehicle switches to a regime of 20% gasoline or other liquid fuel at $3 per gallon, and 80% electricity, which costs the equivalent of $1 or less per gallon, an annual saving is realized of $1,000 in round figures. If two thirds of U.S. vehicles, or 100 million vehicles, are operating this way at the end of a ten year program of replacing present vehicles with plug-ins, there is a saving of $100B per year. That goes a long way to cover a very large ($160B per year) climate protection program. It is also a massive, boost to our foreign exchange balance, our energy independence and geo-political position. Swept away at home are environmentally noxious features of the landscape such as oil refineries, gasoline tank trucks on the road, most gas stations, and the public health hazards of most highway and road fumes.
The saved expense in the gasoline case, which is huge in itself and has not begun to receive the attention it deserves, illustrates a very important point, which has analogs throughout the subject. Expenditures for climate protection, even apart from the climate protection itself which is achieved and the direct climate dangers which are averted, will generate many other forms of revenue, or savings of present expenditures. Most outlays for climate protection, and sustainability in general, are not consumption spending, (even if we consider a good climate a consumption item) but are genuine investments. If they are seen in that light, funds should be more easily made available, and the work more quickly done.
A programmatic approach to national and international climate protection
This paper’s concluding economic observation is a proposed programmatic approach to protecting the climate. It is centered on actions and decisions by the United States, but indicates where and how the U.S. should reach out internationally, as is required by the global nature of the CO2 problem. Operating internationally is also essential to finding the most economical solutions, since many, even most, low cost decarbonization opportunities are abroad. This is because the many new energy facilities in the developing world can be built carbon-free much less expensively than existing plant in the developed countries can be replaced or retrofitted.
The program’s main elements are an internationally coordinated fossil carbon tax at $37.50 per ton of carbon, (~$10 per ton of CO2), after the internationally coordinated elimination of present national fossil energy subsidies. Half of the tax’s proceeds collected in each country are to be returned to national economies in the form of reductions in other taxes (i.e., the new tax is are revenue neutral), while the second half of a carbon tax’s revenue should be internationally administered to advance energy decarbonization on a worldwide, cheapest-first basis.
Among the greenhouse gases, only carbon is massive enough in its presence and economic role to be a political issue requiring mass public understanding and support. Methane, nitrous oxide, the CFC substitutes and other significant gases such as sulfur hexafluoride (SF6), as well as valuable measures such as tropical and temperate forest preservation and no-till farming, should be dealt with actively and vigorously at the administrative level, generally less in the public eye and not needing the glare of media attention. This can readily be done, using carbon tax revenues as needed, in the wake of public conviction and readiness to act against the marquee issue of CO2 .
Carbon energy de-subsidization: The United States should work to lead all countries, by example and through international consultation, toward revising their legislation and budgeting to de-subsidize fossil energy over, say, a period of eight years, through 2016. A system of international reporting and advice, comparable to the more general one on energy use set up by the Framework Convention on Climate Change (FCCC), will guide countries in fulfilling this commitment, and in making each country’s work as internationally transparent as possible. Technical assistance from centers of expertise such as the IMF, the World Bank, the IEA and WTO, and the technical branches of the UN will be available both to countries and to a new international office to be set up in the UN system to monitor de-subsidization. While in a sense de-subsidizing fossil energy is merely a housekeeping step necessary to make the carbon taxation discussed below evenhanded and effective, removing longstanding subsidies will undeniably be a socially and politically controversial, complicated and very difficult process, in the United States as elsewhere.
Internationally coordinated carbon tax The United States should impose at home, and should lead, by example and diplomacy, all countries to impose, an internationally coordinated national tax or permit fee on the use of greenhouse fuels of about $37.50 per ton of carbon emitted (~$10 per tCO2). This could be done over a period of three years, aiming to be fully achieved as soon as possible after 2012. If the tax is paid upstream by large energy producers and importers, government regulators would deal with a limited number of entities (say 2,000 in the U.S.) and their task would be administratively quite simple. The costs of the permit/tax, would, of course, be passed downward to be reflected in prices to end-users of energy products. $37.50 per ton of carbon emitted is equivalent to nine cents per gallon of gasoline, or about a 3 % increase of the U.S. retail price—quite small when compared to current market fluctuations in world oil prices. A carbon tax of $37.50 per ton would cost about $19. per ton of coal, equivalent at present to about 60% of the cost of coal to a power generator, and to about six tenths of a cent (to verify) per kilowatt hour of coal-generated retail electricity to a householder. A main purpose of setting the carbon tax level is to assure firmly that it is no longer economic to build new coal-based power generation plants. Many are planned, and ending construction of new coal power plants in the United States is the most critical immediate policy goal of all.
Although $37.50 per tC is proposed here, the proper level to set this tax initially would be subject both to technical evaluation, and to domestic and international negotiation. For comparison, $25 per tC is the lower of the two levels discussed in the U.S. Department of Energy’s Scenarios for a Clean Energy Future, while $50 per tC is the higher level, also recommended by economist Richard Cooper of Harvard. The mid-point between them, $37.50 is therefore thought of as a moderate starting level to initiate the whole system of internationally coordinated taxing of fossil fuel. At the same time, a great many emission reductions are available in the US and worldwide at a cost of $37.50tC or substantially less. These reductions would rapidly be carried out by emitters because doing so is less expensive than paying the carbon tax.
In the United States such a tax would initially raise about $60B per year (for scale, about ten percent of current U.S. defense spending). Worldwide it would realize about $240B per year. Those rightly concerned with equity should note that this tax, while it has an impeccable “polluter pays” logic of taxing carbon equally no matter what its source, will automatically be most heavily borne by high fossil-using economies. Its bite, particularly its per capita incidence, will be smaller on economies which have lower fossil energy consumption, either through past policy (France) or through emerging from recent underdevelopment (China, India, 3rd World in general). Because the tax will be applied worldwide, the problem of international flight of carbon-intensive economic activity does not arise.
One half of the proceeds of the $37.50 tC fossil energy tax/fee would be considered revenue neutral in each country, and after collection by the government would be remitted back to the domestic population, probably through tax reductions in other areas of each national economy. Each government would determine which existing taxes have the greatest drag on their economy, and which form of tax relief would be the most stimulative and helpful, thus making possible a “double dividend” from this policy. It is with these revenues, as well, that harmful regressive effects of a carbon tax could be offset, country by country.
The other half of the revenue earned by the fossil energy tax would be used to subsidize, incentivize and generally support carbon emission reductions through investment in either energy efficiency or non-greenhouse alternative energy sources anywhere in the world. The criterion for support is to be efficiency in long term carbon reduction. From the United States, at the level initially proposed in this paper, this would generate roughly $30B per year, and from the world as a whole, about $120B. These funds would be remitted to an new international office, probably within the United Nations system, that would apply them to energy efficiency and non-greenhouse energy projects, on a grant or loan basis, wherever the cheapest decarbonization gains were available. The “cheapest decarbonization gains,” could be either in the country where the carbon tax was collected, or in another country, (and in practice, some preference could be given to the country where the funds were generated.) The international climate protection office could also use carbon tax revenues to support research and development work, education and training, and invest in such related projects as a section of intelligent grid or a grid upgrade in any country.
In all likelihood the majority of such projects would be physically in third world countries, since most new infrastructure construction is in developing countries, and the economics of introducing non-fossil systems at the time of new construction are much more favorable than those of retrofitting or replacing existing energy infrastructure capital. Clearly, the existence of the fossil energy tax discussed above would already be giving carbon emitters a strong and steady incentive to seek non-fossil energy sources, and would make the subsidies drawn from a worldwide support fund of $120B annually go a great deal further.
A representative transaction within this system
Let us say that the Tennesee Valley Authority (TVA) or the private U.S. firm A.E.P., or a power-generating entity in China, is planning to build a new gigawatt (1,000 megawatts) of electrical generating capacity. This is the size of a large nuclear plant, or a set of large arrays of wind turbines, for example. The alternatives are a coal-fired plant costing $800 per kilowatt of capacity, or a total of $800M, or a nuclear/renewable facility costing $2,000 per kW, totalling $2 billion.
After the builder’s mobilization of $800M of funding to pay the base costs of the plant in its inexpensive, coal-based form, the international agency would offer the builder $1.2B of international climate protection funding to make its new gigawatt plant nuclear or renewable rather than coal-fired. Of the $1,200M, plausibly $800M could take the form of long term credits to permit the builder to acquire the capital-intensive nuclear/renewable plant. This credit would be repaid by the builder over the life of the plant from the $600M savings on a less expensive fuel supply, and by $200M of regional and local environmental benefits (sulfur, NOx and particulate reduction) which the builder’s local population would enjoy by not burning coal.
$400M would be a straight non-reimbursable grant from the international climate protection fund against the additional cost of the nuclear/renewable facility, justified by the substantial reduction in global greenhouse gas emissions over the 50 year life of a large non-emitting plant. The cost per avoided ton of carbon for this arrangement is about $16.40 (or $4.50 per ton of CO2) for the first twenty years, and the carbon elimination is enjoyed globally at no cost for the succeeding thirty year life of the plant.
It works like this: at 85% availability, a coal fired gigawatt plant produces 7.4 billion kWh/yr, which at 300 grams of carbon per kWh (to check) emits 2.2 million tonnes of carbon per year. Estimating that $36 million per year (9%) is the annual cost of $400 million of capital with amortization in 30 years, we are avoiding annual emissions of 2.2 million tons of carbon per year for $36 million per year, or about $16.40 per ton avoided.
Such calculations of cost-per-ton-avoided would be the basic, but not overly rigid, yardstick for allocating these international carbon reduction funds.
If the builder is in the developing world, note that this supportive intervention in a national energy decision by the international agency fits well with an important characteristic of energy investments: in general the capital costs of renewable/nuclear power plants are higher than the capital costs of a fossil facility, but the nuclear/-renewable installation will have lower operating (fuel) costs. Because of this, over the life of a plant, nuclear/renewable energy is likely not to be more expensive than fossil based energy, although it is more demanding at the up-front original investment stage. It is the third world country’s shortage of capital, not a poverty-based need for a permanently cheaper but dirty solution, that makes the international contribution of capital in the loan component of the package remarkably opportune and useful. The interest on the loan, of course, can be market rate, or can be concessionary to an appropriate degree if that is desired and negotiated.
Send U.S. taxes abroad? Never!
As the international authority lends $800M and spends outright $400M to make a power plant in the United States or China nuclear/renewable rather than coal fired, all sides of the transaction, must realize that the beneficial result of this spending is an improvement of the global atmosphere, which is a world wide public good, participated in by all countries, and not a benefit as such to the recipient country.
Let us assume for a moment that the international authority obtained the funds in this case from carbon taxation in the United States and that it was spent in China, which is now building coal-fired generating capacity at a very high rate, in contrast to the United States, where additions to our power system are going on, but at a lower rate. It can be expected that the U.S. Congress will be willing to tax and spend to reduce GHG emissions, but is reluctant to “send money out of the country.” It is justifiable to spend abroad with regard to the non-reimbursable greenhouse grant of $400M, precisely because of the non-national, global nature of GHG emissions and atmospheric stocks of carbon. China, in this example, will be the locus but not the beneficiary of the $400M grant for a pure greenhouse reduction effect because such spending does not increase the quantity nor improve the quality of electricity that China receives from the plant. A kilowatt hour obtained from a plug in the wall to light a lamp or power a computer in Shanghai is no better for the Chinese consumer if generated by a nuclear plant or a photovoltaic array, than if it comes from a coal-fueled plant. The U.S. Congress has only incidentally sent the funding to China via an international agency. What it has really done is spent the money where it can be the most effective for the least-cost carbon reduction. Congress does have the alternative of setting up a system which would spend the $400M within the United States on plants with a lower cost-benefit profile, but it would have to recognize that it had generated a smaller carbon reduction, and a therefore a smaller benefit for the U.S., than the same funds could generate if they were spent independently of national or geographic location, that is to say, in China in this example.
That is the nature of reacting against a genuinely global danger. Greenhouse warming is a global problem because carbon emissions, due to their long residency in the atmosphere, distribute themselves (and their climate effects) throughout the entire earth’s atmosphere. Climate protection funds spent on the most economical carbon reductions regardless of location are being spent in the most efficient way possible to obtain a global public good, a reduction in greenhouse warming, which is of benefit indiscriminately to Americans, Chinese, and all other inhabitants of the globe. Despite appearances in our example above, there is no transfer of resources or of value from the U.S. to China. The lowered operating costs for fuel, and the local air quality benefits to China of the SOX, NOX and particulate-free plant are accounted for separately (by the $800M loan), and the electricity China obtains from a greenhouse-free plant is in no way an improvement for its consumers over coal-generated power.
Although we have used China and the United States in this example, the climate protection subsidy essentially is generated without respect to location, being paid for through the carbon tax by any user of fossil fuel anywhere. It is spent without regard to location, and the benefit of reduced warming has no location, but is global. The global environmental and economic benefit per dollar spent, indeed, is maximized by the freedom from “where” and “who” constraints on climate protection spending. Governments become administrative agencies that collect the fossil energy tax and forward half of it to the international agency for spending, so political and non-economic considerations are minimized. Built into this system is the maximum form of internationally open emissions trading, which is extremely lucrative and may well cut the cost of worldwide carbon reduction in half or better, by comparison with intra-national trading programs.
The Political Path
The concrete national and international steps against climate change are those which have been discussed above in the physical/technical and economic domains, but in the modern United States following a political path is an unavoidable necessity to make those policies real. In the greenest of all possible worlds, we could electrify transportation, decarbonize power generation and tax carbon emissions purely on the merits. But since controlling greenhouse gas emissions requires governmental action, the road to climate protection policy unavoidably runs through politics. A base of political support must be developed, and then legislation must be formulated, advocated and passed, while complementary governmental action is devised and taken by the domestic and international arms of the executive branch.
The physical and economic policies proposed here were developed on their merits as solutions for the problem, not for their political palatability. It should be the job of the political sphere to seek out the best policies, and not to demand that optimum policy be regularly distorted to pander to the political sensitivities of an electorate or a collection of interest groups.
Going straight for a straight policy is perhaps less quixotic than it might seem. The cheaper carbon reduction is, the stronger the logic of the whole decarbonization exercise becomes. We want to bear in mind the modern truth from James Carville that often the best politics is good economics. By reducing carbon in the least expensive way (or, put a little differently, by getting the greatest carbon reduction for the least resources) we can make climate protection a more achievable policy. To the extent that reductions are cheap and economically sensible, with the least possible spent on political blandishments and various forms of interest group payoffs, the emission cuts should be easier to implement, with less stress and disputation about monitoring, enforcement, cajoling, coercing, and essentially paranoid preoccupations like sealing up every possible avenue for minor free-riding. A more efficient and less expensive road to climate protection in principle should be more acceptable to the public than an expensive and pork-laden one. That can be considered a thesis up for testing (the defense budget is sustained year after year on the contrary back-scratching principle), but it is the approach followed here. It matches the underlying rationale in offering an internationally coordinated carbon tax: the way to pass legislation is to write the best possible policy into a bill, even if not at first sight politically acceptable, and wait for a learning process, and perhaps the passage of several sessions, to bring the legislature to readiness to pass it.
The first need is for public education. There is no proceeding without broad public comprehension of the dangers and the issues raised by climate change. Although over a long time span, the effects of climate change will be massive, on the day-to-day basis on which life is lived by the great majority of a democracy’s population, it is invisible. It is the scientific community which sees out into longer time spans, and can observe and measure developments which the naked eye and other senses cannot reach, such as the amount of carbon dioxide in the atmosphere, or a change in worldwide average temperature, or even phenomena which are geographically remote, as in the Arctic, or stochastic, as Hurricane Katrina. The scientists must communicate their understandings first among themselves for verification and integration into a broad picture, which then must be imparted to the general population. A certain performance is required from institutions of the “media”, and then from the public at large, which of course is segmented numerous ways, but which nonetheless must be able to absorb new knowledge, sift what is believable and important from the daily inundation of information, and be ready to change and to act if change and action are required. This sequence of learnings and actions that are necessary for an adequate response to a major new challenge such as climate change are themselves a real challenge for any society -- Jared Diamond provides examples of societies that failed the test in his 2005 book, Collapse. As an extraordinarily technically and economically advanced society, we in the United States are well equipped in many ways to respond to global warming, but we are also a very big, diverse, complex society, which makes us, like the largest of ocean-going vessels, difficult and slow to change course. Change is probably more difficult, as well, because in broad terms we are a successful society, and it is hard to see any major change as imperative because, on a day to day basis, business as usual is very satisfactory for our large middle class.
After a long lag, great recent strides have been made in public education. Al Gore, and especially his film and book with Laurie David, An Inconvenient Truth, as well as the aggregating and publicizing work of the IPCC, steady attention from the New York Times at the apex of national journalism, the analysis and plain-speaking of the British government under Tony Blair and and Nicholas Stern, the litigation and advocacy work of voluntary organizations such as Environmental Defense, and the effects of Hurricane Katrina in New Orleans, have unquestionably improved the state of public awareness and opinion. The disingenuous public relations ploy of vested fossil interests holding that climate change science was merely a theory, of only possible validity, has exhausted itself. For extraneous reasons, the core opponents of climate protection, President Bush and Vice President Cheney, have lost public credibility and support as their second term continues, and other centers in the American system, such as the Democratic party, state governments, and to a limited extent corporations, have taken up the climate protection baton in quite explicit response to Federal torpor and resistance. The Economist reports that the proportion of Americans who say they worry “a great deal” about global warming has risen from 28% to 41% in the last four years, and those favoring “immediate, drastic action” against it have risen from 23% to 38%, although the magazine goes on to observe that “Voters prefer solutions that are either cheap, or that will be paid for by someone else.”
It is now reasonable to think and plan in the expectation that a Democratic president and congress will be elected in 2008 and take office at the beginning of 2009, an improved political circumstance for climate protection.
After a period of preliminary legislative experimentation that has seen many partial or weak proposals put forward without much prospect of passage, a major bi-partisan bill has just been offered by Senators Lieberman and Warner in October 2007. As introduced, but before debate and horsetrading begins, it calls for a carbon cap and trade system that will cover about 75% of U.S. emissions, aiming to bring them down to 1990 levels by 2020, while directing the carbon permit auction revenues to climate protection work, rather than seeking revenue neutrality.
Since the true physical goal is to eliminate all human-caused emissions of carbon dioxide into the atmosphere, and since policy is so hard to enact, it is important to enact policy that once it is running is capable of “going all the way,” rather than policy that may be an advance over the status quo, but that brings only an incremental, and often self-limiting gain. An example of the latter weak option is the call to rejoin the ancient battle for higher CAFÉ mileage standards for automobile manufacturers. Always contentious, and only rarely successful, the gain of a few miles per gallon leaves the internal combustion engine intact in our fleet, and merely leads to a new battle, likely to be just as difficult and prolonged against the entrenched auto manufacturers, for the next increment of fuel economy. In contrast, getting started on electrifying automobile transportation (as power generation is decarbonized) by means of suitable incentives can, with no further legislation, law enforcement or social struggle, bring carbon emissions from this massive sector to very close to zero. Allowing for diffusion of this technological innovation, which should be propelled by the two-thirds lower fuel cost of electricity over gasoline, and allowing then for turnover of the auto stock, a largely complete changeover should take on the time scale of roughly two decades, or perhaps less.
Making a fresh struggle over CAFÉ standards for the very limited gains they offer is an example of a policy response which is not so much a serious move against the problem, as a expression of politically correct distress that climate change is going on, and an admission that it behooves us to be busy about it. It comes under the heading of “fussing,” in the early stages of problem solving. We all fuss, but it is better to do a minimum of it, especially if the luxury of time is not available. As we familiarize ourselves with a problem, it is always easier to go for the capillaries than the arteries, but nonetheless, we should be careful not to lose sight of the difference between the two, and to keep our focus on main elements, more difficult and less comforting though they may be. Inevitably, but unfortunately, a great deal of the virtuous writing and talking about fighting climate change today still falls in the category of “fussing,” notably the endless advice about what well-meaning people can do as individuals (turn out the lights, set the heat lower and the air conditioning not so low, ride a bike). Energy efficiency and conservation lends itself particularly to the “fussing” response. Although it has value, energy conservation is not the same thing as decarbonization and true climate protection, although it often passes for such.
Setting emission reduction targets has been a widespread and characteristic response (among those who respond!) to the need for action against global warming, notably in California. However, it is likely in many cases that there is less planning and truly informed intention behind the targets than meets the eye. (The mayor of Los Angeles is reported to have raised his target immediately when he heard that San Francisco’s was higher.) But even if they are hypocritical, emission reduction targets represent a tribute to real virtue, and are not to be sneezed at, and in any case, even when bad, they are not so much hypocritical, as unthinking and unsubstantive. Emission reduction targets are a “quantitative” rather than a “price-based approach,” and we learned from Martin Weisman in the economic section of this paper that this is the less effective path for the case of climate change, although easier for the public to understand than taxation. As presented in the matrix earlier, targets also have the danger, a major one, of turning out to be restrictive ceilings on action, rather than minimum, motivating goals if the costs of carbon reduction prove less than expected, as is likely. But targets do, in principle, set a pace, and the pace of action is very important.
What, then, should be the pace? The answer is that at every juncture, it should be “as fast as possible.” Once it was clear at the end of the 1930’s that Britain was going to have to go to war against Nazi Germany, what was the the best pace for preparation and re-armament? Of course for individual programs, there were targets and sequenced timetables, but over all, the answer could only be, “as fast as possible,” and on all possible fronts—troop recruitment and training, aircraft construction, radar development, and so forth. The present situation and the battle against climate change are not of course the same—we do not draw on the ancient visceral human reactions to war that excite an entire population to put its shoulder to the wheel. The prospective extent and duration of the struggle is longer term, and less momentarily acute than it must have seemed in 1939. The positive outcome will not be a clear cut victory, and a defeat, although eventually very evident, will be gradual. In a peacetime like now, important other spheres of life cannot be put aside for a single all consuming purpose as they are in war. In fact, that is not necessary today, but nonetheless, mutatis mutandis, our watchword as regards pace must be not to debate timing speculatively and excessively, but simply to go forward as fast as possible at all points. A national and institutionalized resolve to do just that, to execute the physical and economic programs “as fast as possible,” and without stint, is really all that is required of the political sphere.