Waxman-Markey: "1400-page absurdity... hatched in Washington after energetic insemination by special interests"

That's James Hansen's euphemism for "we got fook'd".

This post is on Hansen's latest blogpost (well it's not really a blog, but it sort of functions like one), titled "Strategies & Sundance Kid":

http://www.columbia.edu/~jeh1/

One of the main arguments, one which Hansen and others have been pursuing incessantly, is the superiority of a direct carbon tax over a convoluted cap-and-emissions-trading-market system. The function of a carbon tax is simple: it alters market perception of prices, in such a way as to match the hidden "external" costs (that is, the damages of anthropogenic greenhouse gases, which are not privately-borne loses and do not figure in the market pricing of fossil fuels). The mechanism is overwhelmingly powerful - it converts public interest into self-interest. When clean energy is cheaper than fossil fuels, no sane person or company will buy fossil fuels - and mission accomplished! (unlesss of course there is uncertainty in the long-term price advantage - perhaps from political uncertainty - and read on).

Quoting Hansen:

The alternative approach is Cap & Trade, or perhaps more honestly Tax & Trade, because a ‘cap’ increases the price of energy, as a tax or fee does.

This is easy to see if you think about it a bit. To 0th order, an emission cap and an emission tax are the same thing: they both effect the same result.

(Note that this is a picture for ONE product, whereas there are multiple energy sources with DIFFERENT CO2-intensities. This leaves out the main point, which is that over long periods of time, there is competition between energy sources, and a carbon policy would change the balance of market. This is just a short-term picture.)

Basically, the carbon tax model is that you internalize the external/social cost directly, as a tax (Pigou economics); whereas the cap model is, well, obvious.

Going off topic, there's another fundamental difference - what is flexible, and what is held constant, fixed? A carbon tax fixes the price difference: absolute emissions are flexible, they can adjust to market forces (new technologies). A tax induces a sort of "virtual" cap, that is flexible. The carbon cap is exactly the mirror: it holds emissions fixed (in theory...), whereas the prices are free to fluctuate. It induces a "virtual" tax, except it is unconstrained and will vary. This seems to introduce an uncertainty to the market: can you predict in advance what CO2 will cost in 10 years' time? Well, probably not. So an unnecessary element of risk is introduced: say if carbon prices collapse (as they have in the EU), then your clean energy investments will lose money, and you will be less competitive than the CO2-heavy investor, perhaps going out of business. So you could expect utilities to be overconservative, emitting more CO2 than is optimal because of the uncertainty/risk element.

Back on topic. Hansen continues:

Other characteristics of the “cap” approach: (1) unpredictable price volatility, (2) it makes millionaires on Wall Street and other trading floors at public expense, (3) it is an invitation to blackmail by utilities that threaten “blackout coming” to gain increased emission permits, (4) it has overhead costs and complexities, inviting lobbyists and delaying implementation

(1) is what I just said earlier: in an emissions market, carbon prices will vary greatly (volatility), and this is a major risk for clean-energy investment.

(3) is another important point. In a carbon tax, energy price will not exceed a constant (the tax rate) above the market rate. There is no risk of price spikes - beyond the risks already in the market (e.g. supply cutoffs). But a cap can introduce unbounded price increases, which is very bad. Bad in two ways: one, a major price spike is bad in itself, and its economic damage. But additionally, it gives fossil-fuel businesses a powerful leverage (or blackmail, as Hansen sees it) to control the carbon policy. The backdoor is this: since a carbon cap is potentially unstable (price spikes), it must include a pressure valve (term?) to temporarily grant exemptions, to avoid economic damage. And this is abusable! But with a carbon tax, there is no possibility of sudden price spikes, so no need for pressure valves: the policy can be simple and strict enough to avoid any and all forms of political interference.

A more cynical variation is that utilities could delay clean energy builds and intentionally induce a carbon-policy disaster, eroding political support of climate policy in general.

For example, I spoke with a German Minister. We found that we were in good agreement with the startling conclusion that we are already moving into dangerous levels of atmospheric CO2. Yet Germany plans to build more coal-fired power plants. His rationalization was that they could “tighten the carbon cap” on cap and trade. I pointed out that, if coal emissions continued, that cap would somehow have to force Russia to leave its oil in the ground. I asked how he would convince Russia to do that. He had no answer.

They are building 25 gigawatts of new coal plants (attached figure, from Der Spiegel). It's an inevitability because they are phasing out the nuclear ones. Note that ex-chancellor Gerhard Schroeder is now working for (literally) Gazprom, the Russian fossil fuels giant (Washington Post).

The correct fundamental approach is a rising price on carbon emissions, as needed to achieve these objectives. The Waxman-Markey bill fails the test in the same way as the German plans: it builds in approval of new coal-fired power plants! There is no need for these plants except to enrich utility and coal special interests – they are included only because the monstrous 1400-page absurdity was hatched in Washington after energetic insemination by special interests.

"Energetic insemination" indeed.

Fee-and-rebate, in contrast, spurs innovation and works hand-in-glove with increased building, appliance, and vehicle efficiency standards. A rising carbon fee is the best enforcement mechanism for building standards, and it provides an incentive to move to ever higher energy efficiencies and carbon-free energy sources.

Really, what stronger incentive is there than monetary self-interest? Of course it's a great idea to encourage building efficiency, but to what degree do you rely need to legislate every step of the process, when the free-market approach is so straightforwards? (I'm not going off on a tangential rant. Not this time. Staying on topic. Watch me!)

Some environmental leaders have said that I am naïve to think that there is an alternative to cap-and-trade, and they suggest that I should stick to climate modeling. Their contention is that it is better to pass any bill now and improve it later. Their belief that they, as opposed to the fossil interests, have more effect on the bill’s eventual shape seems to be the pinnacle of naïveté.

Burned!

The truth is, the climate course set by Waxman-Markey is a disaster course. It is an exceedingly inefficient way to get a small reduction of emissions. It is less than worthless, because it would delay by at least a decade or two the possibility of getting on a path that is fundamentally sound from economic and climate preservation standpoints.

That's another "feature" of Waxman-Markey. It (as far as I've understood) leaves off major action to the distant future, leaving several decades with essentially no carbon policy - business as usual. Worse than nothing, it exists in place of a real carbon policy. You can no longer do anything - "we already have a carbon market!".

Al Gore probably has the strongest voice that the President would listen to, so assessment on that front is useful. Last year Al called for rewiring America within 10 years – a national electric grid with renewable energies and energy efficiency replacing 100 percent of coal use. Now he supports Waxman-Markey, which locks in negligible movement in that direction – indeed, the progress in that direction might be greater without Waxman-Markey, and surely would be greater with a rising carbon price. Perhaps “100% carbon-free in 10 years” was only meant as an idealistic goal to be abandoned.

Al Gore too? What a politician.

The route to success is a rising carbon price, with rebate of the money to the public. That is what is needed to allow energy efficiency, renewables, and other carbon-free energy to compete most efficiently against fossil fuels. The rate at which the carbon price increases can be debated. Also it could be argued that some of the money collected should go to energy R&D rather than rebate – I favor 100 percent rebate because of the economic stimulus it provides and because the size of the rebate would make most people supporters of a rising carbon price. [I have received notes from conservatives who say that they would support a carbon price, rather than Waxman-Markey, but they want me to drop the uniform rebate, which they say is income redistribution. That may be so, but it seems to me that the amount of carbon “tax” that would be paid by wealthy people, even if they have multiple houses and cars, is still small to them – indeed, the fact that personal energy costs are modest is the reason we still need efficiency standards in addition to a rising carbon price.]

Gilbert Metcalf

See for instance economist Gilbert Metcalf:

A Green Employment Tax Swap: Using a Carbon Tax to Finance Payroll Tax Relief

Highlights the potential economic and environmental benefits of a revenue neutral tax reform where a national tax on carbon emissions is paired with a reduction in the payroll tax so the reform is both revenue and distributionally neutral.

Somewhat unfortunately there's a political catch. As Hansen points out, it's not obvious how the 100% dividend should be given out - uniformly by person, or by tax dollar? And unfortunately this is a classic political debate - progressive vs. flat taxes. To make it worse, the rebate pretty much has to be progressive, to counterbalance the carbon tax itself, which is heavily regressive. So there is no way to avoid the debate. The politics could seriously hurt the implementation. :(

In all countries first priority should be energy efficiency, which has tremendous potential. After that comes renewable energies and improved low-loss smart electric grids. Everybody hopes that will be enough, but I cannot find real world energy experts who believe that is likely in the foreseeable future, even in the United States. This is all the more true in India and China, which are even more dependent on coal and have faster growing energy demands.

This is what I keep saying! Renewables are extremely unlikely to work, at least by themselves. To claim they are is destructive self-delusion.

The current fleet of (2nd generation) nuclear power plants is aging. The 3rd generation plants that are likely to gain construction approval soon have some significant improvements over the 2nd generation, using less than 1 percent of the nuclear fuel, leaving the rest in longlived (>10,000 years) wastes. If that were the end of the story, I would not have any enthusiasm for nuclear power. However, it is clear that 4th generation nuclear power can be ready in the medium-term, within about 20 years. Some people argue that it could be much sooner – however, the time required for its implementation is of little importance.

The reason that 4th generation nuclear power is a game-changer is that it can solve two of the biggest problems that have beset nuclear power. 4th generation uses almost all of the energy in the uranium (or thorium), thus decreasing fuel requirements by two orders of magnitude. It practically removes concern about fuel supply or energy used in mining – we already have fuel enough for centuries. Best of all, 4th generation reactors can “burn” nuclear waste, thus turning the biggest headache into an asset. The much smaller volume of waste from 4th generation reactors has lifetime of a few centuries, rather than tens of thousands of years. The fact that 4th generation reactors will be able to use the waste from 3rd generation plants changes the nuclear story fundamentally – making the combination of 3rd and 4th generation plants a much more attractive energy option than 3rd generation by itself would have been.

The Experimental Breeder Reactor II - prototype for IFR research

That is, fast reactors such as the IFR, and thorium reactors. Both destroy - burn, fission off - the intermediate-length radioisotopes, which are actinides - plutonium, neptunium, and so on. The point is, shorter-lived isotopes are easily contained for their lifetime, and longer-lived ones aren't radioactive enough to matter: it's the intermediate, thousand-year-halflife ones which are problematic. Both reactors destroy them - in thermal (thorium) reactors, directly by fission, and with fast reactors, usually by a multi-step process where they are first transmuted several times until they become an exceptionally fissionable isotope, and then fissioned. Thorium reactors have the added advantage of not producting minor actinides at all (or at least very few) - it's a long way from 233 nuclei to 240 or more (what, 7 neutron captures?). (Readers who are NEs - is this paragraph reasonably correct?)

I always make clear that energy efficiency and renewable energy should have first priority, and if they can do everything, great. But we would be foolish to take that as a presumption or to remove options for our descendants. It was a mistake to terminate the R&D on 4th generation nuclear power at Argonne Laboratory in 1994, but we still have the best expertise in the world. They deserve much more support, and we should be working in full cooperation with China, India, and other countries.

Referring to the "Integral Fast Reactor" (IFR) project at Argonne, then cancelled by Congress, lead by energy secretary Hazel O'Leary and Sen. John Kerry. I think it was the same congress which killed the superconducting supercollider (1993?). Assembly of luddites.