Category — Carbon Tax

George Carlin once asked, “Is it really possible to have a civil war?” Readers of Joe Romm’s pronouncements on greenhouse gas legislation would answer in the negative. Romm has always been a caustic critic of the “anti-science disinformers” who do not toe the line on the alleged scientific consensus, but lately he has turned his fire on former allies who dare to question the legislative developments in Washington.

An illustration of this internal squabbling is Romm’s recent post on the “cap and dividend” proposal put forth by Senators Cantwell and Collins. Here’s Romm’s take (emphasis added):

Climate politics can be very strange indeed.  Because cap-and-trade bills like Waxman-Markey are seen as having no chance of passing the Senate, some enviros appear to be shifting their support to bills that are politically even less attractive and environmentally even less adequate.

The latest misguided missile is the Carbon Limits and Energy for America’s Renewal (CLEAR) Act put forward by Maria Cantwell (D-WA) and Susan Collins (R-ME) — full text and info here.  Supporters call it “Cap-and-Dividend,” but right now I think the best term for it is, “Cap-and-Divide,” since it has no chance whatsoever of becoming law but is serving to undercut the tripartisan effort by Graham, Kerry, and Lieberman to develop a bill that might get 60 votes….

Cap-and-Divide…doesn’t even pass the environmental viability test, as the first-rate researchers at World Resources Institute have shown…. And while W-M is far from perfect environmentally, as I’ve said many times,  it would enable a global deal.  W-M’s biggest problem is that it can’t get 60 votes in the Senate or even close.   But “cap-and-divide” is certainly less politically viable than Waxman-Markey or Kerry-Boxer. [Read more →]

In Part I of this two-part post, we presented our observations of a power generation industry that will likely become more dependent on natural gas as a source of fuel for new power plants constructed in the coming years. Other fuel-based technologies (principally nuclear and coal) don’t seem to have the wherewithal to grab a larger piece of what should be a growing demand for electricity in the U.S. Both will be lucky to maintain their market share in the future. Renewables, with high levels of production tax credits, coupled with legislative mandates, will continue to grow in installed capacity but will contribute little to peak demand reduction. And should politically correct renewables (not hydropower) lose part or all of its government support, say as part of a deficit reduction program, then market share will actually be lost.

What follows is what we believe to be the future path of the remaining fuel-based power generation alternatives in 2010 and beyond.

Nuclear power, the last best hope for zero-carbon emissions from baseload generating plants, was many analysts’ early pick for a generating revival in the first decade of the 21st century. If one accepts the conventional view of climate change, the rational case for nukes appears unassailable. If you want low-carbon generation, you must go nuclear, period. (Gas-fired capacity to firm intermittent sources of power makes carbon-free wind and solar an illusion.)

The first decade of our new century has passed. After years waiting for the nuclear renaissance, it doesn’t look as if the second decade will bring the nuclear industry closer to revival. Indeed, the horizon may be receding. Literature Nobel laureate Samuel Becket could not have had U.S. nukes in mind when he wrote his iconic 1953 play, Waiting for Godot. But some of its dialog is eerily on target. The character Vladimir in the second act comments, “What are we doing here, that is the question. And we are blessed in this, that we happen to know the answer. Yes, in this immense confusion one thing alone is clear. We are waiting for Godot to come.”

In the U.S., we are into the second decade of the 21st century, waiting for the nuclear renaissance, after the market collapsed in the 1970s. Waiting and waiting.

Nuclear power plants won’t pick up U.S. generating market share in 2010, by all accounts. That’s despite prior federal government policy aimed at jump-starting new nuclear generation, including allegedly streamlined federal regulations and a longed-for candy jar of additional subsidies, such as major loan guarantees, pledged in the Republicans’ Energy Policy Act of 2005. Those have yet to materialize.

Some in the Obama administration and Congress are contemplating additional loan guarantees and other nuclear subsidies, to be included in pending climate change legislation. Arguing for $50 billion in additional federal loan guarantees, Exelon CEO John Rowe told a Senate committee in late October, “Deployment of new nuclear plants simply will not happen, given the large up-front capital costs, without a much more robust federal loan guarantee program than currently exists.” There doesn’t seem to be much enthusiasm on either side of the partisan aisle for committing that kind of money to nuclear power.

The 2005 congressional vision (perhaps a hallucination) was of a modest new fleet of nukes—a dozen or so—that would come into the U.S. market and revitalize the stagnant industry. New reactor designs from U.S., Japanese, and French companies; interest from multiple utilities; applications for more than 30 units under the streamlined approach of the Nuclear Regulatory Commission’s (NRC) licensing reforms of the 1990s; and the Energy Policy Act of 2005 all led to irrational exuberance among nuclear power developers. The 2005 loan guarantees would jump-start the market, the legislation assumed and the industry agreed.

More than four years later, [Read more →]

A recent NYT article discussed a proposal by economist Ross McKitrick to tie CO2 taxes to global temperature increases. McKitrick’s overall aim is to offer a compromise that, he argues, should satisfy those who think the government needs to take drastic action and those who think carbon emissions pose no serious long-term threat. Although McKitrick’s idea is clever, it has theoretical difficulties and (in my opinion) would certainly not work in practice.

McKitrick’s Proposal to Tie CO2 Taxes to Temperature

The NYT story does a good job summarizing the idea:

[McKitrick] suggests imposing financial penalties on carbon emissions that would be set according to the temperature in the earth’s atmosphere. The penalties could start off small enough to be politically palatable to skeptical voters.

If the skeptics are right and the earth isn’t warming, then the penalties for burning carbon would stay small or maybe even disappear. But if the climate modelers and the Intergovernmental Panel on Climate Change are correct about the atmosphere heating up, then the penalties would quickly, and automatically, rise.…

Specifically, [McKitrick] proposes tying carbon penalties to the temperature of the lowest layer of the atmosphere (called the troposphere, which extends from the surface of the earth to a height of about 10 miles). He suggests using the readings near the equator because climate models forecast pronounced warming there.…

The carbon tax might start off at a rate that would raise the cost of a gallon of gasoline by a nickel — or, if there were political will, perhaps 10 or 15 cents. Those numbers are all too low to satisfy environmentalists worried about climate change. [Read more →]

One of the ugliest battles in the blogosphere climate wars has involved the newly released Superfreakonomics, sequel to the best-selling Freakonomics. In the new book’s final chapter (available here in pdf), economist Steven Levitt and journalist Stephen Dubner set out to challenge the view that massively restricting carbon emissions is the only hope for averting planetwide catastrophe.

In this post I will link to some of the major commentary on the book so far, and then focus on U.C. Berkeley economist Brad DeLong’s specific claims that Levitt and Dubner’s arguments in support of geoengineering are somehow “bad economics.” As we’ll see, Levitt and Dubner might be wrong, but if so they are wrong because of the numbers. DeLong is painting their views as self-evidently absurd, but that’s only because he himself is overlooking a basic economic point.

The Background

Not surprisingly, the climate scientists and economists who are most vocal about the need for drastic emissions cutbacks were furious when the book’s contents began circulating. Joe Romm got the ball rolling with this fiery post; his ally in such matters, Paul Krugman, soon followed suit. Dubner defended himself and co-author Levitt against Romm’s accusations of intentional distortion in this post, and one of the primary sources for the chapter, physicist (and all-around guru) Nathan Myhrvold, defended himself from Romm’s accusations of ignorance here.

In the present post, [Read more →]

Editor Note: Robert Murphy’s peer-reviewed article in The Independent Review, “Rolling the DICE: William Nordhaus’ Dubious Case for a Carbon Tax”, is available online [.pdf].

When I first began working for the Institute for Energy Research, my preliminary research indicated that William Nordhaus (now a co-author of Paul Samuelson’s famous economics textbook) was a great representative of the mainstream case for a Pigovian carbon tax. I have gone on to study his case, presented in articles and a book, in great detail. What I have found is an eager willingness to spot “market failure” coupled with a naive faith in government “solutions.” The full article deals with these big picture issues, but this post will dwell on the narrow technical results–using Nordhaus’s own numbers–that should give average economists pause when it comes to the typical recommendation of a carbon tax to “internalize the externality” of greenhouse gas emissions.

Most Damages Come From Ill-Specified “Catastrophic” Outcomes. In Nordhaus’s DICE model [Dynamic Integrated Model of Climate and the Economy], he relies on a simplified model of the global climate system and economy, calibrated to the latest numbers put out by the IPCC and other groups. The model can then simulate the climate damage impacts of a marginal ton of emissions on human welfare, allowing Nordhaus to derive the “optimal carbon tax.”

When I delved into the numbers behind Nordhaus’s damage function–which related a given increase in global temperatures to a percentage loss of global GDP–I was quite surprised. The DICE model (at least as of the time I wrote the paper) assumed that a warming of 2.5C would yield a loss of 1.5% of global GDP, averaged across various sectors. For example, the agricultural sector (worldwide) would contribute to a 0.13% reduction in global GDP, the toll on coastal regions would yield another 0.32% of GDP in damages, and so forth.

The single biggest contributor, however, was a 1.02% GDP loss attributed to a “catastrophic impact.” (See Table 2 on page 209 of my paper, hyperlinked above.) So to repeat, Nordhaus’s optimal carbon tax was based on a damage function that said 2.5C of warming would yield 1.50% GDP losses, and 1.02% was due to a “catastrophic impact.”

Now this in itself is a bit disturbing, since the lion’s share of Nordaus’s recommended tax is coming from the nebulous “catastrophic impact” category. In other words, it would be one thing if careful, sectoral studies assessed the likely impact from various amounts of warming, and then Nordhaus rounded up the final number because of the “kicker” of ill-defined catastrophic impacts. But that’s not what happened–fully 68% of Nordhaus’s damage function (calibrated at the 2.5C warming level) results from this one category of impacts. [Read more →]

Paul Krugman has been on the warpath lately regarding climate change economics. He has devoted his last two NYT columns (here and here) to the subject, as well as back-to-back blog posts (here and here). True to form, Krugman accuses those who disagree with him of abject stupidity and evil intent; for Krugman it is impossible that any decent economist who cares about human beings could actually think the costs of cap-and-trade legislation will be high. But as we’ll see, Krugman’s own figures don’t jibe with the narrative he’s pushing.

In his September 27 blog post, Krugman takes up his familiar theme of denouncing those who dare to say that Waxman-Markey carries a large price tag. After using a diagram to explain the textbook distinction between the compliance costs of a new tax (or mandate), versus the “deadweight loss,” Krugman excoriates economist Martin Feldstein for allegedly spreading lies:

[Feldstein] took the CBO’s estimate of “compliance costs”, which was $1600 per household in an early report (it’s now down to $900, but who’s counting?), and implied that this was the economic cost of the legislation. But “compliance costs” are basically the sum of the blue rectangle and the red triangle; the true economic costs are just the triangle, and are much smaller.

OK now, this is quite simply hilarious, if you can follow me through the argument. I really don’t think Krugman realizes just how much his pants are down on this one.

First off, Krugman is correct that there really is a distinction between the impact of a new tax in terms of paying extra revenues, versus the overall loss to the economy because of distorted incentives. But when the public wants to know “how much will cap-and-trade cost?”, it is quite reasonable for them to wonder, “How much will my electricity bill, or gasoline prices, go up because of this?” Most people do not realize that Krugman & Co. are netting out the gains to the recipients of free allowances and government expenditures when computing the “net burden on U.S. households.”

For an analogy, consider the debate over health care reform. [Read more →]

In two previous posts, “Green” China and CO2 Cap-and-Trade Meets the (China) Dragon, I described China’s rising greenhouse gas (GHG) emissions as a “one-country negation” to the Waxman-Markey climate bill (HR 2454). “The expected growth of coal-fired generation in China over the next 20 years will result in a net increase in CO₂ emissions from their power sector of more than ten times that of reduced U.S. emissions due to coal constraints,” I concluded.

This is good, not bad, insofar as dung and wood are terrible things to burn. Moreover, China has now committed to using better combustion technology in its power sector, including more coal gasification and high pressure (supercritical) coal-fired thermal power plants. To top things off, China has apparently committed itself to substantial growth in its renewable energy output by 2020.

This is generally to the good, and represents four key influences on Chinese energy and environment policies:

1. The market – if you have to pay world prices for fuel you can no longer afford to waste it using poor technology;
2. It is good diplomacy to be seen as “progressive” on the subject of climate change (and it takes trade sanctions off the table);
3. There is probably a good market in all the Kyoto/Copenhagen adopter countries for lower cost (i.e., Chinese) solar, wind and CO₂ capture technologies (why should “green tech” be any different from toys, clothes and electronics?); and
4. The people of China – better coal combustion technology will improve air quality in China’s urban areas (that’s real pollution, the kind that politicians are rewarded for reducing).

In the end China’s output of greenhouse gases (GHG), mostly CO₂, will continue to rise at a rate that is well above any decreases in the US or the EU. In fact, we looked at the actual output of CO₂ from this aggressive plan and found that, even with complete adoption of high efficiency technology for all coal fired power plants completed after 2015, China’s increase in CO₂ from power generation would be more than fifteen times the expected reduction in US CO₂ output. [Read more →]

The Wall Street Journal recently ran an interesting story explaining that the two economists who invented the “cap-and-trade” approach to regulating pollution do not think it is an effective mechanism for dealing with manmade climate change. As with so many other economists (including those at the CBO [.pdf]), the creators of cap-and-trade think that an explicit tax is a much more efficient way for the government to limit greenhouse gas emissions.

To avoid confusion, let me stress that I am not endorsing a carbon tax myself–indeed I have a forthcoming article [.pdf] in The Independent Review that critiques the standard mainstream case for government pricing of carbon emissions. Nonetheless, it is interesting to see just how tepid the academic support for Waxman-Markey is becoming. It’s not simply “shills for Big Oil and Big Coal” who oppose it, as many activists would have us believe.

On the contrary, even hardcore alarmists such as James Hansen have come out strongly opposed to Waxman-Markey. And, as the Wall Street Journal story details, even the economists who invented cap-and-trade itself don’t think it’s useful in the global warming context. [Read more →]

In this month’s article at EconLib, I provide an introduction to the economics of climate change, and discuss some of its major controversies. Follow the above link for the full story, but in a nutshell here are the main issues:

(1) The Discount Rate. Economists give wildly different estimates of the “social cost of carbon” and hence the “optimal” tax on an additional unit of emissions.  These differences are not primarily due to the assumptions about climate systems or human vulnerabilities to warming. On the contrary, the main difference between, say, the policy recommendations of the Stern Review (very aggressive) and William Nordhaus’ DICE model (very moderate) is that Stern uses a very low discount rate, while Nordhaus plugs in an estimate of the market’s rate of return on capital.

Efforts to mitigate greenhouse gas emissions impose large, upfront costs on the economy (in terms of forfeited potential output of goods and services), while the benefits will not accrue until decades in the future (in the form of avoided climate change damage). Thus, the lower the interest rate used to evaluate present and future events, the greater the perceived net benefits of mitigating emissions.

(2) Modelling Uncertainty. One of the most popular lines of attack against the conventional carbon-pricing models concerns the treatment of uncertainty, or how they handle small-probability worst case scenarios. [Read more →]

Longtime MasterResource readers know of Chip Knappenberger’s post on the negligible climatic effects of unilateral adherence to Waxman-Markey. Across the board, the response from supporters of Waxman-Markey was not to deny Knappenberger’s calculations, but rather to insist that the U.S. had to show leadership. The (perhaps unspoken) premise was that if the whole world adopted the steep emission cuts proposed in Waxman-Markey, then the climatic benefits would clearly outweigh the economic costs.

In an earlier post, I tried to show that this view is simply false. According to the Intergovernmental Panel on Climate Change (IPCC) Fourth Assessment Report (AR4)–the very document showing the “consensus” on the physical science basis of manmade climate change–the best estimates of climate change damages do not justify the aggressive limits contained in the current Waxman-Markey bill.

Then in a follow-up post, I documented that a recently released summary paper from Resources for the Future (RFF) reached the same conclusion: Using standard cost/benefit analyses, the peer-reviewed literature cannot justify the aggressive emission cutbacks in Waxman-Markey. In order to justify the bill’s 83% cut (relative to 2005 levels) by 2050, proponents must stipulate that there are climatic tipping points beyond which it is too dangerous to proceed. But the actual expert models of the global economy and climate system cannot themselves spit out these “tipping points” as the efficient policy choices. (In general, many proponents of aggressive government action have repudiated cost/benefit analysis altogether when it comes to climate change policies.)

In the present post, I want to show the contradictions in Paul Krugman’s recent advocacy for Waxman-Markey, and then comment more generally on the implications of a cost/benefit result. [Read more →]