Greg Mankiw, when it comes to cap-and-trade, is more or less on the side of the angels: he’s quite right that permits should be auctioned rather than given away to polluters. But is the tax code really the best way to compensate consumers for the higher energy prices they’re going to end up paying? Mankiw writes:

From the standpoint of economic efficiency, the price of carbon emissions should be passed on to consumers in the form of higher energy prices, so that consumers can make optimal decisions regarding energy consumption. Consumers should be compensated for paying these higher prices via cuts in income or payroll taxes. Those tax cuts would be financed by the revenues received from the auctioning of carbon rights (or, better yet, a carbon tax).

The first sentence is right, it’s the second I take issue with. If you cut income or payroll taxes, you end up giving more benefit to high earners than to low earners, and people who pay little or no taxes at all (eg the unemployed) get precious little benefit at all.

Better would be a flat refundable tax credit: the government essentially gives every taxpayer a flat amount each year, passing on the revenues it gets from the carbon auction.

Even that, however, would create inequities: three college roommates sharing a small city apartment would get three times the amount going to a single mother trying to raise three kids in the countryside — someone whose energy consumption would naturally be much higher.

There isn’t a simple and fair way of doing things — even channeling fixed payments through the energy companies themselves would unfairly advantage people who use say electricity and natural gas and heating oil. Instead, I fear that the fair method is going to be complicated, based on ZIP codes and size of household at the very least.

But the compensation should certainly be capped at no more than the average energy bill for the area. If people use less energy than the average, then it’s fine for them to profit from that. But there’s no reason to use a carbon-pricing mechanism to give high earners yet another tax break.

Many thanks to Andrew Leonard and Alok Jha, who have discovered the Philips Econic. Here’s the relevant bit of their flyer (warning: 9.9MB PDF):

Yes, that really does say “dimmable”. And Jha says that this is the “new bulb that will hopefully make the doubters shut up”.

When I moved into my new apartment in 2005, we ended up needing a huge number of 40W reflectors, all on dimmers, which between them consume an insane amount of electricity. What’s more, they need very frequent replacing, which is non-trivial. If I can just replace them with dimmable LEDs which last for 25 years, I will be a very happy person indeed.

There’s something rather odd about Thomas Crocker’s opposition to cap-and-trade and his support of a carbon tax instead: all of his arguments why a carbon tax is preferable to cap-and-trade are exactly the same as my arguments why cap-and-trade is better than a carbon tax!

Let’s take Crocker’s arguments one by one, with the proviso that they’re coming second-hand, via the WSJ, rather than directly from Crocker himself.

First, Crocker says that a carbon tax “would be easier to enforce” than a cap-and-trade system. But it’s hard to see why that should be the case: both of them involve measuring the same carbon emissions. It’s certainly easier to enforce when you measure upstream rather than downstream, but that applies equally to carbon taxes and to cap-and-trade.

Crocker then gets into the meat of his argument:

Mr. Crocker sees two modern-day problems in using a cap-and-trade system to address the global greenhouse-gas issue. The first is that carbon emissions are a global problem with myriad sources. Cap-and-trade, he says, is better suited for discrete, local pollution problems. “It is not clear to me how you would enforce a permit system internationally,” he says. “There are no institutions right now that have that power.”

Yes, cap-and-trade is better suited for local pollution problems than it is for global pollution problems. But that doesn’t mean that a carbon tax is better for global pollution problems than cap-and-trade is. Indeed, the opposite is true. In theory, once a number of jurisdictions implement a cap-and-trade system, carbon traders will start arbitraging the various different carbon permits, and we will end up with something approaching a global system. Carbon taxes, by contrast, are ever and always local. Crocker is right that a US cap-and-trade system wouldn’t necessarily slow global carbon emissions if China and India refuse to play ball. On the other hand, neither would a carbon tax. But at least a cap-and-trade system has the ability to scale into China and India.

But moving on:

The other problem, Mr. Crocker says, is that quantifying the economic damage of climate change — from floods to failing crops — is fraught with uncertainty. One estimate puts it at anywhere between 5% and 20% of global gross domestic product. Without knowing how costly climate change is, nobody knows how tight a grip to put on emissions.

In this case, he says Washington needs to come up with an approach that will be flexible and easy to adjust over a long stretch of time as more becomes known about damages from greenhouse-gas emissions.

Agreed, 100% — which is exactly why we need a flexible cap-and-trade system rather than an inflexible carbon tax. A cap-and-trade system can be tweaked much more easily than a carbon tax, both in terms of the level of the cap and in terms of the proportion of the permits which is auctioned off rather than given away. Crocker says it’s hard to adjust a cap once it’s in place — but he neglects to mention that it’s harder still to adjust a tax once it’s in place.

In the first instance, the important thing is to get something in place, which can then be improved over time. A cap-and-trade system fits the bill perfectly; a carbon tax, by contrast, doesn’t.

China is likely to block the acquisition of Hummer by Sichuan Tengzhong:

Hummer, as an expensive, gas-guzzling sports utility vehicle, would not fit in with the government’s policy of encouraging energy-efficient vehicles, the radio said.

Could this be the beginning of the end of China importing carbon emissions from the US?

I was offline most of yesterday attending a high-intensity series of presentations hosted by Esquire magazine in the magnificent suite of rooms at the top of the new Hearst tower. GE’s Eric Loewen was there, talking about nuclear power, and specifically what he calls a PRISM reactor — a fourth-generation nuclear power station which runs on the nuclear waste generated by all the previous generations of nuclear power stations.

PRISM is GE’s name for an integral fast reactor, or IFR, and it’s a pretty great technology. The amount of fuel which already exists for such reactors would be enough to power the world for millennia — no new mining needed. Fast reactors also solve at a stroke the problem of what to do with the vast amounts of nuclear waste which are being stockpiled unhappily around the world. They’re super-safe: if they fail they just stop working, they don’t melt down. And they can even literally replace coal power stations:

One nice thing about the S-PRISM is that they’re modular units and of relatively low output (one power block of two will provide 760 MW). They could be emplaced in excavations at existing coal plants and utilize the same turbines, condensers (towers or others), and grid infrastructure as the coal plants currently use, and the proper number of reactor vessels could be used to match the capabilities of those facilities. Essentially all you’d be replacing is the burner (and you’d have to build a new control room, of course, or drastically modify the current one). Thus you avoid most of the stranded costs. If stranded costs can thus be kept to a minimum, both here and, more importantly, in China, we’ll be able to talk realistically not just about stopping to build new coal plants but replacing the existing ones, even the newest ones.

And best of all they’re eminently affordable: Loewen showed that they could be profitable selling energy at just 5 cents per KwH — which means that you don’t need to price carbon emissions at all to make these power stations economically attractive. With pricing on carbon emissions, of course, they become even economically compelling.

So what’s the problem? They’re untested, and the regulators in the US will take many years and many billions of dollars before they will approve such a project. And legislation is needed, too — including legislation allowing the use of nuclear waste as a fuel. But mainly all that’s needed is political will. It’s unclear the degree to which Steven Chu, the US energy secretary, supports this technology. But if he puts the weight of the Obama administration into supporting this technology and trying to make it a reality, then a lot of private capital will start flowing into the area. And it might be much, much easier to achieve ambitious carbon-emission reduction targets than many people currently think.

Kaid Benfield has a great wonky post on the connection between carbon emission reductions and land-use regulations. It turns out that the latter can have an enormous effect on the former: in a number of cities and states, the cost of implementing things like transit-oriented development and growth boundaries can actually be negative, thanks to the resulting reduction in vehicle miles driven. (And that’s not even including the fact that household carbon emissions, as opposed to vehicle emissions, are much lower in high-density developments.)

The problem of course is one of political will. The state of Georgia, for instance, could save more than $400 billion over 30 years if it started getting strategic about infrastructure investment, while saving 18 million metric tons of CO2. But will it? I very much doubt it.

I am very happy that the CBO has finally gotten around to costing out Waxman-Markey, so that we don’t have to put up with pseudoscientific scaremongering any more.

The Congressional Budget Office (CBO) estimates that the net annual economywide cost of the cap-and-trade program in 2020 would be $22 billion—or about $175 per household… households in the lowest income quintile would see an average net benefit of about $40 in 2020, while households in the highest income quintile would see a net cost of $245… Overall net costs would average 0.2 percent of households’ after-tax income.

A reasonable price to pay, I think, for massively reducing the economy’s reliance on oil imports and working to curtail the potentially catastrophic tail risk associated with global climate change. Note that ancillary benefits, such as economic and competitiveness advantages which flow from the private sector making significant investment in clean-energy technologies, are not included in this calculation; it doesn’t even include $22 billion a year in energy savings which will result from the act.

Note also that if there’s a faster-than-expected move from giving permits away to auctioning them, the scheme could in and of itself generate significant net benefits: the CBO assumes that only 17% of allowances would be sold in 2020, while fully 83% would be given away.

So yes, the ideal cap-and-trade bill would be much better than Waxman-Markey. But Waxman-Markey is vastly better than what we’ve got right now, which is nothing.

(HT: Avent)

How to structure a gas tax? You could make it a flat X cents per gallon; alternatively (and this is essentially what a cap-and-trade system does, too) you could make it Y%, with the tax increasing with the price of gasoline.

Today, Jim Surowiecki comes up with a third option, where the tax decreases when the price of gasoline goes up:

Rather than leave so much of our fate to chance, we’d be better off doing what politicians always say they want to do: lessen the U.S. economy’s dependence on oil. One step toward that would be to phase in a gas tax designed to smooth out oil’s spikes and plunges by keeping the price of gasoline fixed (the tax would rise when the price of gas fell, and vice versa).

Surowiecki makes a strong case that consumer behavior, when it comes to reducing gasoline consumption, only really changes when there’s a spike in gas prices. As a result, his proposal would seem designed to have the least possible effect on gasoline consumption, and on our dependence on oil. Sure, it’s a sensible way of raising government revenues and reducing the fiscal deficit.

Either you want to effect consumer behavior and reduce gasoline consumption — in which case you actually welcome price spikes. Or else you want to smooth out price spikes, in which case you slowly boil the frog (to use one of the stupidest metaphors ever) and keep consumption high. But you can’t have it both ways. Which is it to be, Jim?

One of the great things about working for Reuters is that I get to pester journalists who actually know what they’re talking about. So after reading Timothy Gardner’s story on the cap-and-trade bill today, I got him on IM, and learned a lot — not least that Waxman-Markey is being considered more of an all-encompassing energy bill, as opposed to simply a way of creating a cap-and-trade scheme. Which on the one hand means that it can be loaded up with enough pork to make it pass, but on the other hand makes everything much more complicated:

Felix Salmon: Your headline says that a cap-and-trade bill is “more likely” in 2010 than in 2009, is that right? And is this a new development?

Timothy Gardner: Well I think a lot of people who are watching Congress closely believe the stars are aligned like never before for action from the U.S. on climate. The EPA has proposed that greenhouse gases are a danger to human health, Obama has set new CAFE standards for vehicles and he also supports a cap and trade market.

TG: But I think too that NGOs, and carbon market developers like the International Emissions Trading Assocation, are beginning to realize that in a lot of ways the compromises have just begun. It’s not new that many people think the bill wont be completed unitl sometime next year. But the complexity of the many of the issues including what to do about nuclear, which is not addressed very much in the bill, and reframing the costs of putting a price on carbon during the recession, are new. The head of the IETA office in Washington, who worked on the Hill for 9 years on climate, said today “there’s not a snowball’s chance in hell” that the bill will pass this year.

FS: Yikes.

TG: There’s still a lot of optimism out there especially because now the White House supports forming a carbon market.

FS: But that was the other thing I wanted to ask you about — this nuclear thing

FS: Obvs nuclear energy has zero carbon emissions, right? So it will benefit from any cap-and-trade bill?

FS: But your story seems to imply that there might be something in the bill to scale back nuclear energy?

TG: Well, it’s close to zero emissions because you would have to build new plants and mine the uranium and dispose the waste. But yes it could benefit from a cap and trade bill but so far it has mostly left out of the process.

TG: I didn’t mean to imply that it would be scaled back. It’s just that any benefit it would get from cap and trade would have to be balanced with a program on what to do with the waste since storing it at Yucca Mountain has run into so many problems.

FS: I’m confused about this. Surely questions about what to do with nuclear waste are questions about what to do with nuclear waste whether or not there’s a cap-and-trade scheme, right? Why should those questions be addressed in a cap-and-trade bill?

TG: Nuclear doesnt necessarily have to be addressed in the Waxman bill, it could be addressed in another bill in parallell, but that could take time

TG: But the bill is first and foremost an energy bill, not just a cap and trade bill. So from what I’m hearing some Senators are looking for funds and loan guarantees to build new nuclear plants. If they get that there would probably have to be some kind of deal or plan on what to do with nuclear waste as well.

TG: It costs $3 to $5 billion to build a nuclear plant, so to build one will take time

FS: Hobbling carbon-derived energy isn’t enough for these guys? They need extra pork for nuclear energy on top?

TG: If the Senate wants to gain a few votes to get to the required 60, particularly if Al Franken doesn’t make it in. There are still more than 20 iffy Democrat Senators and quite a few Republicans that could go either way

FS: Wow, sounds like this is going to end up with more pork than David Chang festival. Thanks for your time!

Couldn’t they have left themselves any leeway at all? The CBO has now costed out the Waxman-Markey act, and has come to the conclusion that over the 10 years from 2010 to 2019, it would raise $846 billion, spend $821 billion, and cost another $50 billion or so in discretionary spending. In other words, it’s at best fiscally flat, and quite possibly will actually cost the government money.

The good news, however, is that fully $693 billion of the $821 billion in direct costs is accounted for by “Outlays Associated with Emission Allowances Freely Allocated”. In other words, if and when there’s a fiscal crunch, any future government can significantly reduce the budget deficit at a stroke just by ceasing to give away carbon allowances. Which of all the different ways to raise taxes is probably likely to be one of the least politically damaging.