House Energy and Commerce Committee members Henry Waxman (D-Calif.) and Bobby Rush (D-Ill.) have requested a climate-science hearing in light of a just-released report from the National Academy of Sciences (NAS). This report, “America’s Climate Choices,” however, presents no new science.

Instead, as climate scientist Chip Knappenberger explains below, the NAS document lays out a strategy for manufacturing a crisis by exaggerating the climate threat and artificially raising fossil-fuel prices in an effort to compel American’s to emit less greenhouse gases.

Congress has heard all of this before and has been unmoved to pass legislation which will raise the price of living and doing business in America by taxing our primary energies–Editor.

Plentiful and inexpensive fossil fuels are the preferred energy source, whether it be to run your car, heat your home, or generate electricity. Oil, gas, and coal are relatively safe, readily portable, fairly efficient, and relatively energy dense. While fossil fuels perhaps are not the perfect energy source, they do go a long way towards meeting our current needs, and the infrastructure (and know how) is in place to allow for rapid expansion into the future. So, all in all, fossil fuels are pretty darn good now–and as far as the eye can see.

Hydrocarbon supplies are not depleting–just the opposite. New technologies (such as those used for hydraulic fracturing, tar sands, and deepwater drilling) are expanding our ability to retrieve fossil fuels from the earth, As a consequence, the supply is keeping up with the growing demand and more—a demand driven not only a growing population of humans, but a growing number of existing humans who are wanting more energy to improve their standard of living. Julian Simon lives!

But the final report from a just-completed investigative effort from the National Academy of Sciences (NAS) seeks to interrupt and reverse the natural improvement of human ingenuity applied to the master resource. Theirs is a manufactured crisis—and one that elevates concerns over climate change above energy reality and concern over the energy-dependent economy.

There are other forms of crisis however, such as that posed by an existing (or perceived) threat. From such crises, new technologies can emerge faster than they would have otherwise. Take the atomic bomb or the space race as an example.

For fossil fuels, the potential for a threat-based crisis arises from their role in climate change and the possible risks to our health and welfare there from. Alas (for some anyway), climate change does not carry the same sense of threat as, say that of a foreign enemy with its sights set on U.S. soil. So the notion of a climate crisis, either now or in the near future, has been slow to (widely) catch on.

The NAS Strategy

A committee assembled by the National Academy of Sciences (NAS), seeks to remedy that situation.

The final of a series of reports has just been released by the NAS from its America’s Climate Choices project—an effort commissioned by Congress back in 2008 to “investigate and study the serious and sweeping issues relating to global climate change and make recommendations regarding what steps must be taken and what strategies must be adopted in response to global climate change, including the science and technology challenges thereof.”

In their final report, the NAS reveals the need to manufacture a crisis to drive Americans away from their overwhelming reliance on using fossil fuels to meet their energy needs, and lays out a strategy for lawmakers and policy makers to do so.

The NAS strategy is a hybridization of two types of crises. Establish a threat from climate change resulting from our use of fossil fuels, and at the same time simulate a fossil fuel shortage by artificially driving up the price of fossil-fuel based energy.

A sort of 1-2 punch.

The NAS strategy first leads with an uppercut:

Climate change is occurring, is very likely caused by human activities, and poses significant risks for a broad range of human and natural systems. Each additional ton of greenhouse gases emitted commits us to further change and greater risks. In the judgment of the Committee on America’s Climate Choices the environmental, economic, and humanitarian risks of climate change indicate a pressing need for substantial action to limit the magnitude of climate change and to prepare to adapt to its impacts.

And then follows with a roundhouse aimed for the knock-out:

Emission reductions can be achieved in part through expanding current local, state, and regional-level efforts, but analyses suggest that the best way to amplify and accelerate such efforts, and to minimize overall costs (for any given national emissions reduction target), is with a comprehensive, nationally uniform, increasing price on CO2 emissions, with a price trajectory sufficient to drive major investments in energy efficiency and low-carbon technologies. In addition, strategically-targeted complementary policies are needed to ensure progress in key areas of opportunity where market failures and institutional barriers can limit the effectiveness of a carbon pricing system.

Fighting Back

The problems of this strategy are immediately obvious:

1) Not everyone buys into the idea of an impending climate crisis,
2) It is virtually impossible to prove that any actions have alleviated the crisis,
3) It is impossible to even theorize alleviating the crisis from the actions of Americans alone,
4) Not everyone wants the price of their energy to go up.

In fact, currently, there are probably many more Americans who are more concerned with the price that they are paying for gasoline than about trying to manipulate the climate to produce some undocumentable alteration that may or may not have any direct impact on their lives. Sure, the April 26th-28th tornado outbreak was a tragedy, as is the ongoing flooding along the Mississippi river. So too was hurricane Katrina. But the role of anthropogenic climate change in those and every other weather event is largely unknowable. Even more unknowable is the role that any reduction in fossil fuel will play in future climate catastrophes. When the next Cat 4 or 5 hurricane makes direct landfall in Miami (just as one did in 1926 and 1992), what will mankind’s role in the meteorological conditions be and how will that role be influenced by the which type of fuel is used to meet our daily energy needs? Are we to be blamed or credited?

The answer is, is that it will be impossible to know. As it will be for all future tornado outbreaks, floods, droughts, heat waves, etc.

But the NAS committee sees things this way:

In the committee’s judgment, the risks associated with doing business as usual are a much greater concern than the risks associated with engaging in strong response efforts. This is because many aspects of an “overly ambitious” policy response could be reversed if needed, through subsequent policy change; whereas adverse changes in the climate system are much more difficult (indeed, on the timescale of our lifetimes, may be impossible) to “undo.”

Great. In their opinion, it is easier to fix the economy than it is to fix the climate (not sure that the current Administration would agree). But, in the eyes of many, the economy needs fixing, while the climate may or may not. I would imagine that for the majority of Americans (as well as folks the world over), the former is more pressing than the latter, and likely always will be.

In the opinion of the NAS committee, which is primarily aimed at lawmakers and policymakers, concerns over climate risk should supercede those of risks to the economy.

But other folks get to offer their own opinions to lawmakers and policymakers as well.

Come future elections, I am sure many will be offered to those running for office who have, or have not, taken the NAS recommendations to heart. The outcome will be telling.

The August 11 edition of Climatewire (subscription required) featured interviews with Exelon Corp. VP Betsy Moler and Resources for the Future President Phil Sharp, who lament that Republican lawmakers, the “inventors” of “market-based” environmental policy, turned against their own “invention.” Moler and Sharp are trying to spin GOP opposition to cap-and-trade as self-contradictory, hence as unstable, hence as reversible. As Climatewire reports, Moler is not ready to “throw in the towel” and Sharp entertains the hope that a “new kind of coalition” will emerge in the next Congress.

Now, let’s look at this notion, peddled by Moler and Sharp, that Republicans flip-flopped and trashed their own legacy by nixing cap-and-trade.

Climatewire offers the following account:

In an interview, Moler said that her deep disappointment was the rejection by Republican leaders in Congress of a market-based strategy for raising the price of carbon emissions, to speed transitions by power plants, industry and consumers to cleaner energy.

The Democrats called it “cap and trade.” Republicans labeled it “cap and tax,” and the change in one word proved lethal.

“The thing that just amazes me, confounds me, surprises me is how successfully the Republican leadership and a lot of the people who would be potentially negatively impacted have been in vilifying what have historically been market-based solutions,” Moler said.

Inventors Turn on Invention

“Cap and trade is really a Republican instrument that grew out of a lot of the Republican thought leaders as a market-sensitive, market-friendly, anti-command-and-control mechanism” to reduce sulfur- and nitrogen-based air pollution in the 1990 Clean Air Act amendments. “Now, some of the same people who invented it have turned on it as an energy tax,” she said. “It’s a huge missed opportunity. I don’t know where you go next.”

Moler’s regret is seconded by Philip Sharp, president of Resources for the Future, who, as a Democratic House member from Indiana, stood with Moler in the 1990s in the energy deregulation campaign. Sharp was a pivotal factor in Congress’ adoption of the 1990 Clean Air Act amendments and the 1992 Energy Policy Act, which opened the way for FERC’s electricity market orders four years later.

“I’m not here to say cap and trade is the only way to do this,” Sharp said in an interview. “It worked magnificently with SO2 and a couple of other instances.” Scaling it up massively to deal with economywide carbon emissions is another question. “We don’t know we can manage it as effectively,” he said.

“But what is really unfortunate in the public debate is that the current Republican leadership has overthrown one of the great Republican successes in this country [under President George H.W. Bush], to capitalize on the flexibility of the marketplace” in achieving regulatory change, Sharp said.

“I don’t think people appreciate the extraordinary challenge that represented and the difficulty of getting it done” in the 1990s, he said. Now, with the demise of that approach, Congress has invited U.S. EPA to step in on the climate front “and regulate the living [daylights] out of everything and see how well a modern economy works doing that.”

Moler and Sharp miss several key points.

Price Volatility

The cap-and-trade programs enacted under President George H.W. Bush are not ”magnificent” successes, if predictable compliance costs, which businesses need for long-term planning, are a criterion of success. As Yale University economist William Nordhaus points out in Life After Kyoto: Alternative Approaches to Global Warming Policies (Dec. 2005), sulfur dioxide (SO2) allowance prices have been highly volatile: “SO2 trading prices have varied from a low of $70 per ton in 1996 to $1500 per ton in late 2005. SO2 allowances have a monthly volatility of 10 percent and an annual volatility of 43 percent over the last decade.” For perspective, Nordhaus notes that, during 1994-2005, SO2 permit prices were more volatile than either crude oil prices or stock-market prices.

Source: Nordhaus, Life After Kyoto (Dec. 2005)

In Economic Issues in Designing a Global Agreement on Global Warming (Mar. 2009), drawing on more recent experience, Nordhaus reiterates that “quantitative limits [i.e. cap-and-trade schemes] have proven to produce severe volatility in the market price of carbon under an emissions-targeting approach. The volatility arises because of the inelasticity of both supply and demand for permits.” He continues:

I have reviewed the history of the market prices of tradable permits for both the SO2 trading system in the U.S. and for the CO2 system in the EU. These prices have shown an extremely high level of volatility. I found that the prices of U.S. SO2 emission allowances have been approximately as volatile as oil prices . . . .The volatility of CO2 allowances in the EU ETS is similarly large: in the period from October 2008 to February 2009 alone, ETS carbon prices have varied between €9 and €24 per ton of CO2 . . . .

Source: Nordhaus, Economic Issues (Mar. 2009)

Note also that, according to Nordhaus, “the volatility of allowances is not due to policy errors. It is inherent in this kind of instrument. The high level of volatility is economically costly and provides inconsistent signals to private-sector decision makers.”

Federal Energy Regulatory Commission (FERC) data also reveal high price volatility under cap-and-trade. SO2 permit prices fell from about $500 per ton in January 2008 to about $100 per ton in July. NOx allowance prices jumped from about $800 per ton in June 2008 to about $1,400 per ton in August, then declined to less than $100 per ton in late 2009.

In short, if predictable costs are a criterion of success, then it is hype to describe the SO2 and NOx trading programs as “magnificent.”

CO2 Is Different

However successful the SO2 trading program may have been, it is a dubious model for climate policy, because SO2 and CO2 are different. Utilities participating in the SO2 emissions trading program could meet all or part of their obligations by purchasing low-sulfur coal and/or installing scrubbers, a commercially-proven emission control technology. In contrast, as Kenneth Green, Steven Hayward, and Kevin Hassett of the American Enterprise Institute point out, there is no low-carbon coal, and no commercial technology to “scrub” carbon dioxide (CO2) emissions out of power plant exhaust streams. Thus, unlike an SO2 trading program, a carbon cap-and-trade program has a high potential to become a job-killing energy-rationing scheme.

The greater economic risk of carbon cap-and-trade schemes derives from another key difference as well. Unlike sulfur, which is an impurity in coal and oil, carbon is intrinsic to the chemistry of fossil fuels. Consequently, whereas capping SO2 does not logically entail an unlimited agenda aiming at the abolition of fossil fuels, capping CO2 does imply total suppression as an ultimate objective. The abolitionist impulse is audible in the apocalyptic rhetoric of the global warming movement, in petitions demanding that EPA establish national ambient air quality standards (NAAQS) for CO2 at 350 parts per million (not even a global depression lasting several decades would be sufficient to attain such standards), and in Al Gore’s campaign to “repower America“ with “zero-carbon energy” within “ten years.” Triggers for pull-out-the-stops, sky-is-the-limit regulation also lurk in the Waxman-Markey and Kerry-Lieberman bills’ escalator clauses, which all but ensure that the explicit emission reduction target (83% below 2005 levels by 2050) would be superseded by more aggressive requirements.

Climate Change Is Not Air Pollution

The health effects of SO2 and other air quality contaminants depend on short-term — annual, monthly, or even daily — emission levels. Thus, in theory, setting quantitative targets and timetables (caps) can produce significant, measurable public health benefits, making it reasonable to accept price volatility as an unavoidable risk. The same does not hold for climate “forcing” agents such CO2. The health effects of greenhouse gas emissions (if any) depend on the total stock of greenhouse gases in the atmosphere, not annual emissions.  Thus, observes Willaim Pizer of Resources for the Future, “It cannot matter whether a ton of CO2 is emitted this year, next year or ten years in the future if all we care about is the total amount in the atmosphere.”

Indeed, not only is there no plausible public health rationale for capping annual greenhouse gas emissions, the costs would likely far exceed any public health benefits. As Chip Knappenberger shows, based on IPCC climate sensitivity assumptions, reducing U.S. greenhouse gas emissions 83% below 2005 levels — the Waxman-Markey bill target — would have a negligible impact on global climate change, averting a mere 0.05°C of global warming by 2050. Even if one considers global warming to be a serious problem, the benefits of capping emissions are too paltry to justify the risks, which in addition to volatile compliance costs include rampant opportunities for corruption, creative accounting, and rent-seeking.

Unsurprisingly, Pizer, Nordhaus, Green, Hayward, and Hasset all argue that carbon taxes (price-based constraints) are more efficient than cap-and-trade (quantity-based constraints) as a method for limiting the total stock of emissions over time. Carbon taxes are administratively simpler, the costs are more transparent to the public, there is less opportunity for corruption and rent-seeking, and, most importantly, the costs are fixed and therefore entirely predictable. Of course, nobody would accuse Republicans of being inconsistent for opposing energy taxes. A greenhouse cap-and-trade program, however, is just a sneaky, implicit, less efficient form of taxing carbon-based energy. 

Means Are Not Ends

Fourth, just because “market-based” approaches are more efficient, in principle, than command-and-control regulation does obligate Republicans to support Waxman-Markey or Kerry-Lieberman. Moler and Sharp confuse ends and means. Only if Republicans want government to raise energy prices, make coal uneconomical as an electricity fuel, or, more broadly, restrict Americans’ access to carbon-based energy would they be inconsistent to oppose a “market-based” strategy to accomplish those objectives. But those are the environmental movement’s goals, not the GOP’s.  

Moler and Sharp overlook the obvious — most Republicans oppose both market-based and command-and-control climate change mitigation strategies. For example, all 41 Senate Republicans voted for the Murkowski resolution to block EPA regulation of greenhouse gases via the Clean Air Act. Of the 154 co-sponsors of Rep. Marsha Blackburn’s legislation (H.R. 391) to preclude greenhouse gas regulation via the Clean Air Act, only one (Dan Boren of Oklahoma) is a Democrat. More tellingly, of the 125 House Members who have signed the discharge petition to allow a floor vote on the Blackburn bill, not one is a Democrat.

So it’s silly to say that Republicans “invited U.S. EPA to step in on the climate front ‘and regulate the living [daylights] out of everything. . .’” President Obama threatened to veto both the Murkowski resolution and the much weaker Rockefeller bill, which would merely postpone EPA regulation of stationary sources of greenhouse gases for two years. It’s the Democratic leadership, not the GOP, that has “invited” EPA to make climate policy through the regulatory back door.

The Dumb Party Ain’t that Dumb

Finally, Republicans betray themselves (ask former President George “Read My Lips; No New Taxes” Bush) when they advocate raising taxes. Because carbon is intrinsic to the chemistry of fossil fuels, a carbon cap-and-trade scheme is a virtual broad-based energy tax. The same cannot be said of the SO2 program, which was merely a virtual pollution tax. 

Moler and Sharp would like GOP lawmakers to believe they can win elections by becoming the Party of Energy Taxes. Fortunately, most Republicans don’t need much coaching to realize that is complete bunk.

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.

On the plus side — from a climate perspective — CLEAR doesn’t allow any offsets and it auctions all of the allowances.  Politically that would be fatal, of course, since it means little or no support for Cap-and-Divide from the utility industry, from the states with significant coal use, and from the agricultural states.…

The CLEAR Act does offer some token efforts to achieve regional equity, as the FAQ explains, but given the political uproar over even a small amount of (mis) perceived inequity in the Waxman-Markey allocation formula … this is one more reason the CLEAR Act approach is a political nonstarter.  And again, the allowance formulation in the House bill is far more reasonable than is widely understood (see also Robert Stavins: “The appropriate characterization of the Waxman-Markey allocation is that more than 80% of the value of allowances go to consumers and public purposes, and less than 20% to private industry”).

It is interesting that Romm relies on Robert Stavins to bolster his point on this issue. In a previous post, when Stavins had the temerity to disagree with Romm’s position vis-a-vis greenhouse gas legislation, Romm wrote a post titled, “Robert Stavins can’t walk and chew gum at the same time.” Presumably Stavins is always sitting down when he writes things with which Romm agrees.

As far as Romm’s use of the term “cap and divide” to refer to the policy that is no doubt based on the proposal of Al Gore’s mentor James Hansen, I’ll let one of Romm’s disappointed fans explain the irony: “Joe, when you relabel Cantwell-Collins as “cap-and-divide”, you lower yourself to the level of the Republicans who refer to cap-and-trade as “cap-and-tax”.”

Other commenters were disappointed too, such as John Passacantando who wrote:

Joe, as a longtime reader of your blog I find your hostility towards an innovative approach perplexing and your blanket endorsement of WRI’s analysis out of character. We count on you to screen this stuff for us and WRI’s analysis is now in question as it appears it counts emissions reductions under the ACES bill in a perfect scenario and not so for the CLEAR Act….Further, I don’t think a legislative alternative to what appears to be a dead approach (cap and trade with its giant givebacks to the coal industry and its proposed creation of a new, unregulated trading bubble) is in any way divisive. Cap and dividend (the CLEAR Act) is a smart policy alternative, a real Plan B, filling in the current vacuum.

The various alliances in the pro-intervention camp have intrigued me. I disagree strongly with his recommendations, but the writings of James Hansen make sense to me. If I actually believed the world needed to sharply curtail global emissions very soon or risk catastrophe, I would be railing against Waxman-Markey (and the other political photo ops) from the rooftops too.

In contrast, it seems that many of the people in support of Waxman-Markey are incapable of seeing that even on their own terms it won’t achieve what they say is necessary to avert disaster. Global political leaders will not collectively take actions to sharply curtail fossil fuel use, when cheating will allow their own economies to flourish. The proponents of Waxman-Markey keep hoping against hope that a political compromise here, a backroom deal there, a concession until year XYZ … will all be worth it in the end, because the experts running the campaign will make sure of it.

Of course, interventionists who propose a straightforward globally-harmonized carbon tax are being similarly naive. But at least their policies are still abstract, and have not yet been codified into actual bills in Congress that we can analyze and see will clearly not achieve what their proponents claim. From the environmental left’s perspective, Waxman-Markey (and Kerry-Boxer) are very flawed bills indeed, and the only way Joe Romm (and Paul Krugman) can defend them is to dismiss any rivals as “politically infeasible.”

Romm and Krugman could very well be right when they tell their allies that a “better” bill is impossible.  Yet this acknowledgment shouldn’t cause environmentalists to embrace Waxman-Markey–when they know it is a bad bill from their own point of view. It should instead lead them to reconsider their strategy of running to Washington, DC to save the world.

The civil war over cap and trade is how the political process works; its results are always crooked and counterproductive. In the debate over manmade climate change, the interventionists typically contrast a flawed, real-world market economy with a textbook vision of a benevolent and all-wise global dictator setting emission caps.

Such is a rigged comparison. When trying to decide whether to support new regulations coming out of DC and other legislative bodies, we must bring a healthy skepticism and indeed cynicism. How could anyone look at the history of politics and do otherwise?

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 Editor Note: MasterResource has a category under Climate Change, Left Civil War, with posts of related interest:

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, the presumably vibrant market for new nukes in the U.S. is becalmed at best. That’s a factor of the worldwide economic collapse of 2007–2009, combined with U.S. regulatory and technical difficulties afflicting the new, putatively safer and more efficient nuclear reactors, plus the industry’s inability to deliver on promises of new reactor designs that will be easier, quicker, and cheaper to build. Then there is the unwillingness of anyone with real money to finance new plants.

The NRC has been unable to certify the latest new reactor designs under its “combined operating license” reform, for reasons indicting both the industry and the regulators. The French AREVA evolutionary design is facing its first round of NRC scrutiny while experiencing major cost overruns and schedule delays in construction of a new unit in Finland. U.S. regulators at the end of the year rejected a modified advanced reactor design from Westinghouse for the AP1000 that they had earlier approved. Westinghouse made changes in the shield building to protect the reactor from airline strikes, earthquakes, hurricanes, and tornadoes. The NRC said those changes raised new licensing issues. General Electric, according to the NRC, never provided design details for its advanced boiling water reactor sufficient to judge the safety of the machine (Figure 6).

Figure 6. New nuclear queue grows. The location of planned new nuclear plants in the U.S. Source: U.S. Nuclear Regulatory Commission

Given regulatory uncertainty and the conditions of current capital markets, no rational investor is likely to commit major private-sector resources to building new nuclear plants, according to several investment bankers who talked to POWER on background. If new nukes are to be built, they argued, the effort will require large commitments of federal dollars, probably in the form of loan guarantees vastly exceeding those in the 2005 act. That’s an unlikely prospect. Even with much larger federal loan guarantees, it isn’t clear that Wall Street will commit the capital necessary to build units at $8 billion to $10 billion a pop, the latest estimates.

In Congress, feckless Republicans are calling for a fleet of 100 new nukes within 20 years, at a $700 billion price tag. That’s pure politics, or else they are smoking some powerfully atomic wacky-weed that induces weird policy visions. There is no U.S. capacity to license or build that many plants. Maybe the system could support three, or six, new nukes, but that’s a guess. A hundred? Fugetaboutit.

Waste Storage Discussions: A Waste of Time. Another blow to the prospects for U.S. nukes was the White House decision last year—no surprise—to euthanize the Yucca Mountain, Nev., project for permanent underground storage of spent nuclear fuel and other high-level nuclear wastes. The Obama administration, fulfilling a deal with Senate Democratic Majority Leader Harry Reid of Nevada, zeroed out Yucca in its budget submission early in 2009. The funding decision will stick. Sic transit gloria Yucca.

The U.S. finds itself in the embarrassing position, not for the first time, of having no practical idea about nuclear waste storage. Spent fuel rods will remain at reactor sites for the unforeseeable future, probably past the lifetime of anyone reading this article. In the wake of the administration’s decision, the NRC last September began a rulemaking that would give regulators the authority to approve at-reactor waste storage for 40 years, up from the current limit of 20 years.

The administration says it will appoint a “blue-ribbon” commission to study options for nuclear waste disposal. That’s classic D.C. talk for, “We are clueless.”

Nuclear Merger. The only positive glow for nukes was the NRC decision last October to allow Electricité de France (EDF) to buy a major share of Constellation Energy’s two-unit Calvert Cliffs nuclear plant. Baltimore-based Constellation, swimming upstream against most energy analyses, and burdened with a heavy load of debt, wants to build new (merchant) nuclear capacity at its existing Calvert Cliffs, Md., site. The only way that can happen, Constellation admits, is if it has access to EDF’s deep financial pockets, which reach into the French government’s endless treasury.

The Constellation-EDF deal won Maryland Public Service Commission approval at the end of October, but with caveats, including a commitment to invest $250 million in the company’s distribution company, Baltimore Gas and Electric (BG&E), and a $100 rate rebate to every BG&E customer, a one-time, $110 million hit for the merged company. Constellation has agreed to those conditions.

Other than the Constellation-EDF parlay, U.S. nuclear projects appear to be waiting for the nuclear Godot that will lead them into a new day of robust construction and profitable prospects. We’ve seen that play before. As Becket’s Vladimir says to Estragon, “On the other hand what’s the good of losing heart now, that’s what I say. We should have thought of it a million years ago, in the nineties.”

Skyrocketing Costs Dampen Enthusiasm

At the end of last October, the San Antonio City Council was stunned to learn that the price tag of the two new reactors at the existing South Texas Project (STP) had increased by $4 billion. The two existing reactors at STP are owned by NRG Energy (44%); CPS Energy (40%); and Austin Energy, the municipal utility of Austin, Texas (16%), although the San Antonio municipal utility had recently reduced its share in the two new nuclear projects to 20%, effectively leaving 20% of the plant unsold. CPS Energy is responsible for finding a buyer for that 20% slice of the project.

According to a knowledgeable source, the new cost estimate from the project’s primary contractor, Toshiba, is up to $4 billion higher than estimates made public by CPS in late July, which predicted a project cost of $10 billion, or $13 billion including financing.

The fate of the new units at STP is being closely followed by the industry as the STP new addition is one of only three nuclear projects that the Energy Department selected in 2009 to receive a federal loan guarantee, which will cover a good portion of the plant financing costs. NRG Energy has said it also will seek financing help from Japanese export agencies due to the role of Toshiba and other Japanese firms in the project.

The STP project would also benefit from a legislative change that the Nuclear Energy Institute (NEI) is pushing to Congress. That change would let municipal nuclear plant owners (like CPS) transfer nuclear production tax credits to private sector partners (like NRG Energy). Because munis are tax-exempt, the credits would otherwise go to waste.

The San Antonio City Council isn’t the only prospective plant owner struggling with jaw-dropping cost estimate increases. Florida Power & Light’s Turkey Point addition of two new 1,100-MW units is said to cost between $12 billion and $18 billion, Duke Energy’s Lee Nuclear Plant was last estimated at $11 billion for two 1,100-MW units at a “greenfield” plant (the estimate, by Duke in June 2009, was quoted in 2008 dollars), and Georgia Power’s two new units at Plant Vogtle are estimated at $14 billion.

The rising construction costs for new nuclear power do not necessarily translate into rates that are uncompetitive with other technologies in the future. In a commentary published in The Energy Daily, Richard J. Myers, vice president of policy development at the NEI, made the case that new nuclear plants can be cost competitive:

The National Research Council’s recent analysis shows a 6–13¢/kilowatt-hour (kWh) cost range for new nuclear plants. The low end represents a nuclear plant financed through the DOE’s loan guarantee program. This is better than coal-fired capacity with carbon capture and storage (CCS) at 9–15¢/kWh, and significantly more stable than gas-fired combined-cycle generation, which could be the lowest- or the highest-cost option, with a range from 4¢/kWh (unrealistically low gas prices, no carbon controls) up to 21¢/kWh with high gas prices and CCS.

Using the capital cost assumptions built into its annual energy outlook, the Energy Information Administration calculates that new nuclear will have a levelized capital cost of $107.30/MWh in 2016. Advanced coal with CCS is at $122.60/MWh; gas-fired combined cycle at $115.70/MWh; onshore wind at $141.50/MWh (cost of gas-fired back-up power not included).

In the 2009 update to its 2003 report, The Future of Nuclear Power, the Massachusetts Institute of Technology shows nuclear energy at 6.6¢/kWh absent the “technology risk premium” (i.e., when the first few plants have been built). Coal-fired and gas-fired plants are at 6.2¢/kWh and 6.5¢/kWh without CCS, 8.3¢/kWh and 7.5¢/kWh with carbon controls, respectively.

Upgrades Sustain Nuclear Industry

The nuclear power industry enjoyed another banner year in 2008 and, although the data isn’t in on 2009 yet, expect the data to be similar to 2008. The industry’s average plant capacity factor remained above 90% for the second year in a row in 2008, and the 104 U.S. nuclear power plants (35 boiling water reactors and 69 pressurized water reactors) produced more than 800 million MWh—just a tenth of a percent less than in 2007.

The early EIA data shows that 2009 will become the third straight year that the industry produced more than 8000 million MWh with more record-breaking performances by many plants. In 2008, sixteen of these plants recorded capacity factors greater than 100%, which is a phenomenal achievement. Exelon Corp., for example, reported that its 17 reactors finished the year with a fleet wide average capacity factor of 93.9% and operated above 93% for the sixth consecutive year. In comparison, the industry average for coal-fired plants is about 70%, and for wind turbine plants it was slightly less than 25% in 2008, according to the U.S. Energy Information Administration.

Equipment and controls upgrades at nuclear plants have also increased the rated power output of selected plants over the past few years. During 2008 alone, the Nuclear Regulatory Commission (NRC) approved a combined 726 MW of power uprates, which are normally unavailable to coal-fired plants, given the limitations of New Source Performance Standards.

Since 1977, the NRC has approved some 124 nuclear power plant uprates, representing about 5,640 MW of added capacity—roughly equivalent to constructing another five complete nuclear power plants.  If you consider the enormous increase in the industry’s average capacity factor over the past 20 years, improved plant operations are equivalent to at least another dozen plants (Table 2). The nuclear industry received an “A” on its 2008 report card in plant operations.

Table 2. Expect another “A” for 2009, although the final data is not yet available. Source: EIA

The nuclear uprate program that is driving these upgrades will remain strong in 2010 and beyond. There are currently nine power uprate applications in the NRC queue awaiting approval that total another 949 MW. In addition, the NRC expects nuclear operators to submit a total of 40 uprate applications between now and 2013, representing another 2,075 MW of installed capacity. For example, Exelon announced in late September a series of power uprates across its fleet that will increased the rated capacity of its plants between 1,300 and 1,500 MW within eight years “without turning a spade of earth,” said Exelon Nuclear President and Chief Nuclear Officer Charles (Chip) Pardee at the press conference. “With these uprates, we will be able to produce the equivalent output of a new advanced nuclear reactor, and we’ll bring it to market in a timeframe commensurate with the fastest new construction.”

Slow but Steady: King Coal Keeps on Keepin’ on

Then there is coal, the Rodney Dangerfield of generation: It just doesn’t get any respect. Surprise: New coal-fired projects, unlike the nukes, are actually under construction in the U.S., and some are likely to start pushing out power soon. Despite deep political opposition from environmentalists and competing technologies, coal still generates more than half of U.S. electricity. It’s a reminder of Billy Joe Shaver’s 1950s bluegrass hit, “I’m just an old lump of coal (but I’m going to be a diamond someday).”

According to the Department of Energy’s National Energy Technology Laboratory, in June 2009, 36 coal-fired plants were either under construction (23), near construction (4), or permitted (9), for a total of 19.4 GW of new capacity. That’s in the face of a heavy assault on coal by environmental groups concerned with carbon dioxide emissions. Also joining the no-coal chorus in Appalachia are local opponents of mountain-top mining and others challenging coal ash waste disposal at power plants, in light of the Tennessee Valley Authority’s 2009 major ash dam collapse.

Not all of those coal plants the EIA identified will actually join the grid. It’s not a walk in the generating park. For example, in November, MDU Resources Group Inc. announced it was canceling its planned 600-MW Big Stone II coal project in South Dakota. The reason was that its partners in the project were unwilling to pony up the cash for the plant. But some new coal projects will succeed, as coal continues to be the pragmatic least-cost approach to baseload power.

Financial results demonstrate coal’s staying power. West Virginia–based Massey Energy Co., the fifth-largest U.S. coal producer, and the largest producer of central Appalachian coal, at the end of October reported profits for the third quarter of 2009 of $16.5 billion (19 cents per share) on revenues of $536 million, a bit below third quarter 2008 figures. For the first nine months of 2009, Massey’s EBITDA (earnings before interest, taxes, depreciation, and amortization) was $374 million, compared to $242 million for the first three quarters of 2008. This is not the picture of a dying industry.

Coal has many overt enemies but also lots of grassroots support. Miners and other union workers in the industry support the dusky diamonds (“dirt that burns,” as some have described the mineral). Coal mining, both underground and on the surface, creates high-paying jobs in places where there often are few other opportunities for work. Those jobs translate into economically viable communities, as miners and their families support local businesses from grocery stores to car dealers to dentists. In southwestern West Virginia and eastern Kentucky, flat land is hard to find, and mountain-top removal has plenty of friends, not just miners but also business folks and local consumers. That translates into political power for coal-state politicians.

Will generating and anti-pollution technologies impact the coal equation? Industry hype about coal claims it can be “clean,” citing as-yet-unproven technologies for gasification, carbon capture, and CO2 sequestration. At the same time, environmentalists claim that “clean coal” is an oxymoron, akin to “military intelligence.” Neither side has made its case. Nor is it likely the verdict will come in 2010.

The coal industry and the DOE are subsidizing projects to strip CO2 out of coal-fired plants and stuff the greenhouse gas into places yet untested. Carbon dioxide, of course, was once thought to be a beneficial byproduct of burning coal. Now, quite the opposite.

So far, nothing in the world of capturing CO2 from coal and storing it somewhere else approaches commercial scale. Indeed, some analysts are suggesting that coal plants should not be the major focus of attempts to reduce U.S. CO2 emissions. Instead, they argue, as reported in a fine New York Times article, there are more emissions bangs for the buck in working on capturing CO2 at “oil refineries, chemical plants, cement factories and ethanol plants, which emit a far purer stream of it than a coal smokestack does.”

Look for further carbon capture technology research in 2010. This technology is a long way from commercial development and may slow investment in further large-scale coal plant projects in the year ahead.

Congressional energy legislation in 2010 could pressure coal, as Congress searches for ways to reduce greenhouse gases. Those political moves against coal may prove quixotic. Coal is too powerful in Congress to take a major hit. In addition to generating 55% of U.S. electricity, coal is found (although not necessarily mined) in more than half of the U.S. states and used to generate electricity in far more than those. Coal has major political muscle in both business and labor camps.

The new head of the AFL-CIO, Rich Trumka, former chief of the United Mine Workers of America, is a western Pennsylvania coal miner who worked his way through college and law school with a miner’s helmet and lamp on his head. It’s unlikely coal will see its business or political position eroded in the year ahead if the savvy Trumka has anything to do with it. There’s a good bet he will be behind the political stage and helping to direct the drama.

The (Slim) Green Machines

It isn’t clear these days which technologies—coal or nukes or water—are the environmental movement’s true bête noir (dark beast). Nukes are out of the question for some because of waste. Coal attracts loathing because of conventional pollution, CO2 emissions, and land-use issues. Hydro kills trout and smaller fish you have never heard of.

What’s left are wind, solar, biomass, geothermal, and conservation (and who can argue with conservation?). Maybe Die Grunen just don’t like any kind of centrally-generated electricity? Light up the candles.

Niche generation, widely known as “renewable energy,” a term without a rigorous definition, accounted for about 8% of U.S. energy consumption in 2008, according to the EIA. That portion of the market should grow in 2010. Renewables may be able to increase their market share through state renewable energy portfolio standards and various state and federal subsidies. Any federal legislation mandating a renewable standard would be unlikely to have any impact in 2010 or 2011.

The self-proclaimed “green” generating technologies will continue to occupy small market opportunities, not supplanting conventional baseload generation such as coal and nuclear, or dispatchable generation such as coal, hydro, and gas. That’s clear from government statistics.

What is renewable? The definition is important. Many environmentalists conveniently ignore large hydropower as “renewable,” an omission that makes some political-correctness sense (the opponents of hydro don’t like falling water that kills fish. Historically, some of the environmental movement’s deepest roots—those connected to John Muir and David Brower—are intimately bound to opposition to hydroelectricity dams. Hydro is, for these folks, out of the question when it comes to substantial energy generation.

Eschewing water power is nonsense in terms of renewable electric capacity. The EIA says that of the 372 billion kWh of generation from renewables in 2008, 248 billion kWh came from “conventional” hydroelectricity, meaning big water such as Hoover Dam, Glen Canyon, the Missouri River system, the Columbia River system, the Lower Colorado River Authority, and others. By contrast, wind, the next-largest contributor to renewable generation, provided only 52 billion kWh. Solar checked in at a tiny 843 million kWh, last place among the EIA renewable technologies.

Wind and solar will continue to grow exponentially in 2010. That’s easy. They start from a very low base, so exponential growth remains trivial. Will wind and solar make major contributions to electric generation and electric supply in 2010 and displace statistically significant amounts of fossil generation? The chances are slim and none. Slim just left the room.

Which Way Is Wind Blowing?

The American Wind Energy Association (AWEA), the Washington lobby for wind power, reported that its industry installed some 1,200 MW of new capacity in the U.S. in the second quarter of 2009. That’s a solid performance, bringing the wind total for the first six months of 2009 to 4,000 MW, well ahead of the first six months of 2008. In a press release, AWEA acknowledged that it is “seeing a reduced number of orders and lower level of activity in manufacturing of wind turbines and their components.” AWEA said this is “troubling in view of the fact that the U.S. industry was previously on track for much larger growth.”

However, translating pure installed capacity into useful generation leaves much to be desired. The Electric Reliability Council of Texas (ERCOT), where wind turbine construction leads the world, now sports 10% of its installed capacity as wind against 65% natural gas. ERCOT’s annual summer assessment reported that there are 8,135 MW of installed wind capacity.

However, when calculating the portion of that capacity that is available to help manage peak demand, ERCOT takes a very pragmatic view: “For summer peak capacity, ERCOT counts 8.7 percent of wind nameplate capacity as dependable capacity at peak in accordance with ERCOT’s stakeholder-adopted methodology.” So for every 1,000 MW of wind power installed, only 87 MW are predicted as available to trim the summer peak. ERCOT’s installed generation capability is 72,700 MW. A summer peak demand of 64,056 MW is predicted for 2010.

The wind supply chain, noted AWEA, is experiencing troubles as companies “have stopped hiring or have furloughed employees due to the slowdown in contracts for wind turbines. Wind turbine component manufacturing investment was one of the bright spots in the economy in 2008, with over 55 facilities added, expanded or announced that year.” No more, it appears.

Denise Bode, AWEA’s CEO, said, “Manufacturing investment is the canary in the mine, and shows that the future of wind power in this country is very bright but still far from certain. The reality is that if the nation doesn’t have a firm, long-term renewable energy policy in place, large global companies and small businesses alike will hold back on their manufacturing investment decisions or invest overseas, in countries like China that are soaring ahead.”

Deconstructing Bode’s canary metaphor, if the future of the U.S industry is bright, the canary must be doing quite well, and singing gleefully. It doesn’t appear that the canary is gasping for air in her scenario, although the implication of her statement is that Tweety Bird has a raspy cough. The windy canary, it seems, is neither a positive nor a negative indicator.

One of Bode’s previous jobs was serving as head of a lobbying group promoting natural gas, a product that will kill canaries quite quickly (and people, too, under the right circumstances). Her AWEA statement is further evidence that Washington lobby-speak is often incoherent.

Scoping out wind’s prospects, Shane Mullins of Industrial Info Resources (IIR) said in late September, “After a record-setting year in 2008, wind power is on target for a mediocre 2009, but prospects for 2010 and beyond are extremely bright. Last year was a great year for wind power installations, so good, in fact, that a lot of projects scheduled for construction in 2009 were pulled into 2008. But last year’s collapse of the tax equity market cut new wind construction in half.”

In 2008, said Mullins, construction began on more than 9,000 MW of new wind power capacity in the U.S., but through mid-September 2009, construction had begun on only 4,162 MW of new wind projects, according to data collected by IIR. “For all of 2009, we’ll be lucky if we see construction begin on a total of 4,500 MW of new wind projects,” said Mullins. For 2010, who knows?

Slow Slog on the Solar Road

Solar electric generation has become the stepchild of politically correct renewables. While wind has boomed, relative to its starting position, solar has seen a much slower path to gaining market share and much less attention in the news media. Solar’s consistent problem has been cost. With generous subsidies and tax benefits, wind has reduced its nominal (including subsidies) upfront costs to below those of coal and nuclear. No so for sun power.

Solar energy, both photovoltaic (PV) and thermal, has seen capital cost reductions. A recent Lawrence Berkeley National Laboratory study of grid-connected solar PV technology found a substantial trend of cost reductions, averaging over 3% per year for a decade, mostly driven by government subsidies. But the starting point was so high that the solar generating technologies remain uneconomical for most uses.

A McKinsey and Co. analysis of solar’s prospects is cautiously bullish about the sun. Says the review, “A new era for solar power is approaching. Long derided as uneconomic, it is gaining ground as technologies improve and the cost of traditional energy sources rises. Within three to seven years, unsubsidized solar power could cost no more to end customers in many markets, such as California and Italy, than electricity generated by fossil fuels or by renewable alternatives to solar. By 2020, global installed solar capacity could be 20 to 40 times its level today.”

But the McKinsey report, featuring its conditional verb—“could”—notes that the technology is starting from a tiny base and “is still in its infancy. Even if all of the forecast growth occurs, solar energy will represent only about 3 to 6 percent of installed electricity generation capacity, or 1.5 to 3 percent of output in 2020.” The places that McKinsey projects that solar could be competitive are already extremely high-priced markets.

The Bottom Line: What You See Is What You Get

Where does all that leave generating markets in 2010? Looking not very different than they did in 2009, with the exception that natural gas has jumped onto the fuel stage in a big way. Coal perks along, with new plants under construction and some likely to come online. New nukes are ephemeral. Renewables can nicely fill generating niches but won’t dent the big generating market. They will make money but won’t change the U.S. generating mix.

Only gas looks likes a game-changer, given the emphasis on drilling in shale in the U.S. and elsewhere. The new exploration and production technologies and new gas reserves in shale probably won’t make a big impact in 2010, given lead times. They might in 2011. If they do, gas could alter the way the world looks at energy and electric generation. Stay on board for what could be a wild ride

—Dr. Robert Peltier, PE is editor-in-chief of POWER. Kennedy Maize is Executive Editor of MANAGING POWER

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.

But if the climate models are correct, Dr. McKitrick calculates, within a decade his formula would cause the tax to at least double and possibly sextuple — with further increases on the way if the atmosphere kept heating. The prospect would give immediate pause to any investors trying to decide today what kind of cars, power plants and other long-range energy projects to finance. To estimate future profits, they would need to study climate.

“The best results will accrue to firms incorporating the most accurate climate forecasts into their decision making, precisely the kind of forward-looking behavior environmentalists want to encourage,” Dr. McKitrick writes. “Consequently, it’s not the case that we have to wait until it is ‘too late’ to respond to global warming. The market will force investors to make the best possible use of information and to press for improvements in climate forecasting in the process.”

McKitrick’s proposal is interesting, and I applaud his attempt to come up with policy suggestions that can (in principle) satisfy the concerns of most of the experts on the issue of climate change. McKitrick is trying to call the bluffs of people on both sides of the controversy, since (if calibrated correctly) his tax will stay low if temperatures do not rise in accordance with the IPCC’s favored models, while the tax will go up if those warning of large spikes turn out to be accurate. Yet despite the superficial solution to the dispute, I think McKitrick’s idea doesn’t really work.

Theoretical Problems With McKitrick’s Proposal

A crucial problem with McKitrick’s approach is the proper calibration of the carbon tax, for a given amount of measured tropospheric warming. If the IPCC consensus is correct, then carbon emissions constitute a “negative externality” (in economics jargon) whereby individual behavior imposes harms on others. To achieve a more efficient use of society’s resources (including the environment), it is optimal (at least in simple models) for the government to impose a tax on each unit of greenhouse gas emissions, to force the emitter to “internalize the externality.”

The difficulty with this, of course, is our uncertainty over the exact quantitative connection between a ton of CO2 emissions and the resulting damage to future generations. This uncertainty spills over into the proper calibration of the “optimal carbon tax.” What McKitrick’s formal academic paper suggests is that policymakers can induce an approximately optimal tax, given this uncertainty, by making the size of the tax dependent on the observed warming.

Now here’s the rub: The initial tax would need to start out quite low, in case the “skeptics” are right. In other words, if the whole point of McKitrick’s proposal is to satisfy both skeptics and  fans of the IPCC, then it wouldn’t work to start out with a high carbon tax. If global temperatures stayed flat or fell over the coming decades, that means the skeptics were right, but in that case we would have suffered the imposition of a large and inappropriate tax on behavior far out of proportion to the externalities involved. So this is why the initial McKitrick tax couldn’t be too high.

But now if the initial tax starts out quite low, it would need to jump substantially in light of any rise in global temperatures, insofar as this rise gave us more confidence in the IPCC projections. This feature would be necessary to make McKitrick’s proposal appealing to those who right now are certain that human activities are pushing the world towards catastrophe. If the tax rose only modestly in proportion to modest temperature increases from this point forward, then the most alarmist climate scientists would understandably reject McKitrick’s proposal as insane. Economist Alex Tabarrok explained the point in this way after he favorably discussed McKitrick’s proposal on his blog:

As predicted most of the objections (in the comments) are from climate change proponents.  In essence, they argue that the problem is so serious that we must act before the evidence is in.  Aside from the obvious epistemic problems with such a position do note that a) this is a way of getting agreement where otherwise there might be none b) the tax can be non-linear so it rises (in Bayesian fashion) with the strength of the evidence, i.e. the tax need not always lag.

The problem here is that–according to everybody–the earth’s temperature bounces around a lot due to natural variability. So the more “non-linear” we design the tax–for example making it double with a further increase of 0.1C, but making it quintuple yet again with an additional increase of 0.1C–the greater the economic damage would occur if the skeptics are right and yet there happened to be a brief spike in temperatures due to natural causes. It’s true, in this scenario the high tax would wither away once temperatures naturally moved back down, but the damage would already have been done.

On the other hand, suppose the IPCC consensus is correct, and the initial McKitrick tax is far below the true “social cost of carbon.” If the underlying anthropogenic warming trend happened to be masked for an additional five years because of natural factors, then the McKitrick tax would stay far too low and allow devastating further emissions as the window of action closed.

In summary, the debate over taxing carbon emissions is so complex that it is difficult to see how we could design a McKitrick-style tax even in principle that would satisfy both sides. The natural variability of global temperatures would allow for the possibility of significant (and unnecessary) damages–either from hindered economic growth or from climate change–under any proposal that both sides could agree on. But that of course means the value of agreeing to such a proposal is greatly reduced in the present, as we contemplate various scenarios going forward.

Practical Problems With McKitrick’s Proposal

Even if we could come up with a sensible compromise that made sense theoretically, in practice McKitrick’s idea still strikes me as dubious. For example, suppose Congress enacts the McKitrick tax, and within five years tropospheric temperatures rise such that the tax draws in $100 billion annually. At that point, does anyone seriously believe that a sudden and unexpected (by the NASA scientists etc.) drop in temperatures would cause Congress to lower the tax and slash spending accordingly?

I think that once Congress got its foot in the door with a new tax such as this, it would never go away, just like the vast majority of tariffs for “infant industries” survive well into “adulthood” for the protected industries. If and when the temperature measurements called for a tax cut, we can easily imagine senators and policy wonks arguing that it would devastate the solar power industry to roll back the McKitrick tax, or that it would be shortsighted to cut the tax since scientists XYZ argue that the temperature drop is due to smog from China.

Conclusion

Ross McKitrick’s proposal to tie CO2 taxes to observed temperature trends is an interesting attempt to break out of the modelling log-jam, but ultimately I don’t think it will work. Even putting aside the serious theoretical difficulties in properly calibrating the tax, we could never trust the politicians to keep their word once they had enacted it.

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, I don’t want to take sides in the charges of intellectual dishonesty. The interested reader can explore both sides from the links above. The problem with a book like Superfreakonomics–and I said as much of their first book in this review–is that Levitt and Dubner try to (a) synthesize a huge amount of information to challenge the conventional wisdom on some point, be it parental influence on children’s success, the effects of abortion on crime rates, or the feasibility of geoengineering; and (b) write in a snappy, cutesy way that doesn’t tax the average reader’s attention span.

The result is pretty predictable: If the reader agrees with the unorthodox view that Levitt and Dubner are pushing, then their analysis seems wonderful (if incomplete). On the other hand, if the reader happens to endorse the “conventional wisdom” that is subject to their irreverent attack, then Levitt and Dubner will come off as sloppy amateurs, dabbling in an area better left to true experts.

So when it comes to the issue of climate alarmism, I would simply caution fans of limited government to tread lightly in their support for our bestselling authors: Let’s not forget how Levitt dealt with John Lott and his arguments against gun control. Even though Joe Romm et al. are certainly over-the-top in their denunciations, it’s still possible that Levitt and Dubner really did do a slipshod job summarizing the climate science in their new book. I would argue that it’s happened before.

As an economist, I’m not qualified to judge whether they have fairly summarized the state of the climate science per se. However, in the remainder of this post I do want to defend Levitt and Dubner from some of Brad DeLong’s sweeping criticisms regarding their economics.

DeLong Forgets That Time Is Money

In a series of posts (one, two, and three), DeLong heaps extreme criticism on our authors. Under normal circumstances, DeLong’s criticisms would be described as “scathing,” yet compared to Romm’s treatment, it’s kid-glove stuff. For our purposes here, I want to focus on just two of DeLong’s (many) complaints. First DeLong quotes Levitt who said (during an NPR interview):

Mr. LEVITT: …[I]f you look at the history of modern mankind, I think you will be hard pressed to find any particular problem that was serious that was solved by a behavioral change, as opposed to by a technological solution…

DeLong is astounded by this claim, and responds:

That’s just not economics: economics is that incentives change, and as incentives change people’s behavior changes.

DeLong is right, what Levitt said is “not economics.” Rather, it’s a historical claim. Maybe it’s right, maybe it’s wrong, but DeLong can’t trump it by citing a tautology from microeconomics. I am sure that Levitt would concede the narrow point, that if governments around the world instituted a massive carbon tax, and enforced it with draconian penalties for evasion, then global emissions would indeed fall quickly.

But one of Levitt’s main points is that governments around the world are not going to do this, that it is naive to expect them to sacrifice their own economies when (in Levitt’s opinion) the climate science is not nearly certain enough to justify this painful step. Levitt is making a prediction–based on his interpretation of history–that if manmade global warming really does require drastic measures in the next few decades, that the response will involve various forms of geoengineering, which (Levitt predicts) will cost a tiny fraction of what the carbon mitigation proposals would require. To repeat, I’m not saying I necessarily endorse Levitt’s glib proclamations on these points, but DeLong is wrong for dismissing them as somehow “not economics.”

Finally let’s deal with another point on which DeLong completely misses Levitt’s valid argument. He first quotes Levitt:

LEVITT: Now, in the long run, perhaps you’ll want to deal with the [high] carbon[-dioxide] issue [even with geoengineering] because we’re going to have acidification of the oceans and the coral reefs will die if we don’t do something about the carbon. But if you just buy the time to keep the Earth cool for a while longer, I am certain that if we invest we will come up with technology that will allow us much more effectively in the future to pull carbon out of the air than we currently have….

DeLong points out that whatever mechanism our descendants use to suck CO2 out of the atmosphere, it will require power generation. He then argues:

So now we have (a) our normal power plants to power our civilization, plus (b) our atmosphere carbon-scrubbing industry, which is (c) powered by even more carbon power plants to generate the power to break the carbon-oxygen bonds that our first set of power plants made. But plants (c) put more carbon into the atmosphere than plants (a) did.

I know, says Steve Levitt, we can power our carbon-scrubbing industry (b) by power plants (c) that use nuclear or solar or… But then why not power our original civilization-sustaining power plants (a) by nuclear or solar or whatever?

Now this is frankly silly. Let’s be clear, I think Levitt and Dubner made some major goofs in their chapter, and DeLong (as well as Romm and Krugman) nailed them. But here DeLong is making an obvious mistake. He is neglecting the fact that it will be much much (relatively) cheaper to engage in carbon-free energy production the longer we wait. Does DeLong really not see that elementary point, and how it makes Levitt’s argument perfectly sensible?

For an analogy, consider people who contract a terminal illness and then elect to have their bodies cryonically frozen, so that they can be resuscitated and cured in the future. Now maybe that’s a good idea or maybe it’s not, but would it really make sense for someone to say, “That’s just bad economics! Why go to the trouble of having your cancer cured in the future? Just do it now.” ? Yet that is exactly the argument DeLong has deployed against Levitt.

Conclusion

There is a reason that the energy infrastructure in today’s market economies is so heavily based upon fossil fuels: They are by far the cheapest, most reliable forms of energy, given the needs of modern society. Regardless of their (alleged) sloppy scholarship, Levitt and Dubner raise an interesting possibility that deserves careful scrutiny, not ridicule: Even if it turns out that unfettered use of fossil fuels will spell unacceptable climate damages to future generations, it does not follow that the only solution is immediate and drastic reductions in carbon emissions. Another possibility is to buy a few decades’ worth of “breathing room” (Myhrvold’s phrase in the book) through pumping SO2 into the stratosphere or some other techniques, and then make the transition to carbon-free energy production when it will not be so terribly costly.

It’s surprising that some of the very people who literally warn that the fate of the planet itself is it stake, are so dismissive of what could be a crucial component of humanity’s response to the dangers of which they’re warning.

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.

What’s even more disturbing is the way in which Nordhaus got this figure. It’s too involved to reproduce the whole account here, but I encourage the interested reader to look at pages 206-208 in the journal article for the full story. Here is the summary of the episode I gave in the article:

Nordhaus in 1994 asked experts to estimate (among other things) the probability of global GDP loss of 25 percent in the event of 3.0C warming…The surveyed experts gave him their answers, from which he computed the mean. By 1999, further research had made these scenarios seem more plausible or catastrophic. So Nordhaus and Boyer took the original average of probabilities reported by the experts, doubled it, and then assigned this new figure as the probability for a 30 percent loss of GDP rather than the 25 percent the experts had been told to consider, for a less significant warming of 2.5C rather than the 3.0C mentioned in the original survey. More recent research suggests that at least some of these catastrophic scenarios were false alarms. [Emphasis in original, footnotes and citations removed.]

Before leaving this section, I want to clarify that I’m not accusing Nordhaus of academic dishonesty. I believe part of the reason for the changes described above, was that it was more convenient to fit into his model. (For example, the IPCC’s best guess for the warming from a doubling of CO2-eq. concentrations fell from 3C when Nordhaus originally conducted the survey down to 2.5C when he was re-calibrating his model, so it’s not suprising that he took the experts’ original answers and applied them to the less-severe warming scenario.)

Yet since so much of Nordhaus’s empirical case for a carbon tax rests on the probabilistic damage from an unlikely-but-catastrophic scenario, I think it’s very important for economists to realize the tenuous foundation of those huge estimates of GDP losses.

The Wrong Climate Target Could Be Much Worse Than Doing Nothing. The other finding I want to highlight is that Nordhaus’s own simulations show the extreme danger in trusting politicians to dabble in carbon legislation. It’s true, a theoretically optimal carbon tax–one that is consistently implemented by all governments around the world, and that updates its magnitude to reflect the changing “social cost of carbon” over the years–would, in Nordhaus’s simulation, yield net benefits of some $3 trillion (in present-discounted value terms). The optimal carbon tax saddles the economy with about $2 trillion in compliance costs, but this downside is more than compensated by the reduction of about $5 trillion of expected future climate damages. Thus, on net Nordhaus’s model shows a perfect carbon tax making the world $3 trillion richer than it would otherwise be.

To his extreme credit, Nordhaus also simulated other policies. Since they deviate from the theoretically optimal policy (at least according to an economist’s criteria), these other policies obviously do not yield $3 trillion in net benefits. What should alarm economists, however, is that Nordhaus shows just how destructive some proposed policies would be, at least in the world of his DICE model.

The worst offender in this regard is Al Gore’s 2007 proposal to reduce CO2 emissions 90% by the year 2050. According to the DICE model, this extreme goal would yield benefits of a $12 trillion reduction in future climate damages. However, Gore’s plan would so cripple the economy that the world would suffer almost $34 trillion in compliance costs. (See Table 4 on page 211.) In other words, Nordhaus’s own model shows that Gore’s proposal would make the world $21 trillion poorer than if governments did nothing about climate change.

Conclusion. Even if we stipulate the natural science results in the IPCC, it does not follow that governments should implement interventions in the economy to reduce fossil fuel use as “a move in the right direction.” William Nordhaus is certainly no “denier” or “skeptic” when it comes to climate change and the case for government activism. Yet his own DICE model shows that the empirical case for a carbon tax is much more dubious than many economists realize. Once we consider the possibility that governments won’t implement the “optimal” tax as conceived by economists, I would argue that the case falls apart.

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. Using Krugman’s approach to cap-and-trade, the proponents of reform could say, “We suggest imposing an extra tax of $1 trillion on upper-income earners, in order to provide insurance to all Americans. But the cost to the economy would be quite minimal. After all, every penny of that trillion dollars would be spent on hospitals, doctors, pharamaceuticals, etc., thus recycling that money right back into the pockets of U.S. households. The true economic cost of the tax hike would only be in the form of reduced incentives to work among the super-wealthy, which I estimate at around $75 billion over a ten-year period, which works out to a Slurpee per day for the average U.S. household.”

Would anybody buy the above argument? Of course not. A $1 trillion tax hike is just that, a $1 trillion tax hike. Of course that money “gets back into” the economy when the government spends it, but so what? The reason people dislike taxes is that it’s no fun to pay them, and they have a lot less control over how politicians spend their money once it’s confiscated. And yet, the above argument that I invented for health care is very analogous to how Krugman is saying we should score the “economic cost” of cap-and-trade.

So what’s the true number, Professor Krugman? But now we’re ready for the really fun part. Krugman is saying that because Feldstein focused on the gross costs of compliance–rather than the net “deadweight loss” in terms of altered incentives–he frightened the American people with the scary number of $1,600 per household. So what is the more accurate number, according to Krugman? In the same blog post he tells us:

Now, the cost to the economy of this limit is the benefit the private sector would have gotten by emitting more than is allowed under the cap. It’s shown in the figure as the red triangle labeled “deadweight loss”. CBO puts these losses under Waxman-Markey at 0.2-0.7 percent of GDP in 2020, 1.1 to 3.4 percent in 2050. These costs have to be set against the environmental benefits.

Well hold on just a second! What if we convert that statistic back into a dollar amount per household? Krugman would have you believe it would be a lot lower than $1,600, right? And yet simple arithmetic shows us that he’s way way off.

Let’s convert the range into a single point estimate: We’ll say that Waxman-Markey will cost 2.2% of GDP by 2050 (a little less than the midway point of the range). If we turned that percentage into a gross dollar amount with current GDP levels (year 2008), it works out to about $315 billion. (Current GDP is $14.3 trillion, so 2.2% of that is $315 billion.) Dividing by 117 million U.S. households, that works out to almost $2,700 per household. So already, we’re way above the allegedly dishonest figure put out by Feldstein.

But wait, it gets much worse. The CBO estimate refers to the cost of Waxman-Markey in the year 2050, when GDP will be much higher. As Krugman explains in one of his recent NYT columns: “[T]he budget office also predicts that real G.D.P. will be about two-and-a-half times larger in 2050 than it is today, so that G.D.P. per person will rise by about 80 percent.” (The interested reader can see the CBO’s actual GDP forecasts in the last tab of this Excel file.)

So assuming that the number of people per household stays roughly constant between now and 2050, we need to increase our figure of $2,700 by 80%, allowing us to conclude: Krugman’s own preferred mid-range estimate of the cost of Waxman-Markey works out to $4,800 per household by the year 2050.

Conclusion. By focusing on the “deadweight loss,” rather than the gross compliance costs, Krugman is minimizing the huge spikes in energy prices that Waxman-Markey would impose on consumers. If such an analysis were used to score a simple tax hike, everyone would recognize the chicanery involved–and this is why the politicians are pushing cap-and-trade, rather than an explicit carbon tax.

However, even on his own terms, Krugman’s own statistics yield a mid-range cost estimate of Waxman-Markey of $4,800 per household by the year 2050. So when Martin Feldstein and others throw around figures like $1,600 or even $3,100, they’re not scaring the public enough! When the caps under Waxman-Markey are squeezed as tightly as they will go, the CBO itself admits that the “deadweight loss”–the measuring rod favored by Krugman–will be in a range with a mid-point value of $4,800 per household.

One final point: It would be misleading to conclude, “Oh, so the CBO says the cost of Waxman-Markey’s cap-and-trade program will be $4,800 per household.” That figure applies to the year 2050, when households will be much richer. This is one of the reasons the CBO and other groups express costs (whether from carbon restrictions or from climate change) in the far-distant future as a fraction of GDP, rather than as a dollar amount. However, even if we looked at the mid-point 2.2% of GDP estimate using 2008 numbers, the per-household cost is $2,700, much higher than Feldstein’s figure of $1,600. What Krugman and other proponents of Waxman-Markey are doing is reporting the dollar-cost per household figures for early years (like 2020), when the emission caps are relatively lenient. But then in the later years (like 2050), when the caps are very tight, Krugman and others report the figure as a % of GDP, which means nothing to most Americans.

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.

Even without the wholesale transfer of US manufacturing industry to China, (called “leakage“) under a stringent U.S. carbon-dioxide régime, the putative positive climate impacts of such unilateral U.S. actions as Waxman-Markey fall into the realm of mere symbolic measures.

When Did Copenhagen Become the Poker Capital of the World?

A lot of the talk surrounding the upcoming Copenhagen conference (actually the UN Climate Change Conference) in December 2009 has turned toward the U.S. and China positions that will be put forward. The EU is already committed to specified CO₂ reduction targets, Brazil and India have told everyone that this is not their issue, and most other developing countries hope to get a piece of the carbon “offset” investment (and maybe a security interest in one of Al Gore’s houses) without any commitment to reducing energy use.

So, Copenhagen comes down to a two-person poker game, at least that is how it is portrayed in the press (see here, here, here and here). The other parties have pretty much put their positions on the table and will negotiate over relatively minor points. But the main show at Copenhagen will center around what China and the US will put forward, what they will accept and what they will demand of others as conditions for an agreement.

The poker game analogy comes, I suppose, from the idea that one of the two main parties will throw in his hand after discovering that the other side has not only a strong hand in the show cards (publicly announced measures), but also a couple of aces face down (concessions on key public relations points or the ability to threaten to ruin the party).

What Are the Show Cards?

A PR moment from China: The Chinese government recently announced its intent to raise the energy efficiency of its economy (GJ/$GDP) by 20%, invest something like $586 billion in renewable energy technologies, improve the power grid and other infrastructure by 2020, and phase out its older, less efficient coal-fired power plants with newer models, including supercritical (higher pressure boiler) technologies. The Chinese program for coal technology looks especially strong, especially in light of the inability of the US to mount any credible permitting process for coal-fired plants, high technology or not.

Importantly and correctly, replacement of older, dirtier coal-fired power plants in China is considered progress. As the New York Times notes, “The most efficient [new] plants achieve an efficiency as high as 44 percent, meaning they can cut global warming emissions by more than a third compared with the weakest plants.” But after noting that China’s new plants are more efficient than those in the U.S. (not true, by the way), the Times article concedes: “The average efficiency of American coal-fired plants is still higher than the average efficiency of Chinese power plants.”

Most of the Chinese renewable plan consists of investments in things that a rapidly developing country should be doing anyways – investing in a stronger electricity grid, improved efficiency in industry, more LNG import facilities – plus about $100 billion or so over the next ten years in solar and wind.

Skillfully adapting part of the vocabulary of the U.S. Health Policy Debate, China promises to “bend the curve” of its GHG emissions trajectory. They promise that out there, sometime after 2030, when they’re rich, they will get really serious about GHG limitations, seriously. The show cards are just a teaser for the major commitment of resources to GHG reduction.

Maybe the Obama People Really Do Hate Las Vegas: The Obama negotiators probably cannot hone their poker sills in Las Vegas, or even Atlantic City, given the attitude of the administration toward such showy destinations these days (they play bridge on the Vineyard). In contrast to the Chinese public commitment and the talk of “bending the curve” the US has nothing specific on the table, mostly because our government cannot just order up some showy investments and announce a policy change. We have markets to perform most of the resource allocation measures that are talked about in climate policy circles and we cannot just order firms to make specific investments, at least not yet. Our markets are not even convinced about the “whether” of global warming, much less the “when” of the policy and investment measures. In addition, our current policy paralysis on power sector investments, especially in coal and nukes, will leave the default option for the US, more electricity from natural gas, a GHG-friendly one, resulting in a net reduction of GHG from the power sector. Such “paralysis” has allowed the US to achieve growth in CO₂ emissions since 1997 at a slower rate than most EU members.

The U.S. will not get any kudos from the international community for falling back on its abundant supplies of natural gas as the primary source for new power generation. Markets get no respect from the climate crowd (except for Bjorn Lomborg, and a few others).

And the Hold Cards?

U.S.: After the Bush years, when even Jihadi terrorism was attributed to our Kyoto policies, the U.S. probably does not have a “walk-away” card face down, and the face up cards do not amount to more than a pair. What else could be on the table: A promise to further annoy U.S. industry with more stringent EPA regulation of energy use? Offshore windfarms? A threat that we will enact punitive “carbon” tariffs to punish India and China? Withhold carbon capture and storage technology from the rest of the world?

None of this looks terribly promising, and could lead to real problems in our bilateral relations with India and China, to say nothing of the implicit threat of a trade war or dollar dumping in retaliation.

China: Because China has put something solid on the table (call it a flush), they have some credibility for their hold cards. What could they be: Walk away and do it on our own schedule (that is actually the country’s policy)? Obtain technology from the West on nuclear power, plus investment and subsidies for nuclear plant construction? Preferential access to natural gas? Dumping dollars (already being done to some extent)?

The international community is invested in a successful outcome – meaning China signs on to something. China will sign on to something.

Cut Out the Poker Analogies – If Carbon is a Problem, Tax It!

As many of the posts on this site have shown, climate change legislation in the U.S. offers little gain for a lot of cost. The U.S. has been more successful than the EU, even in the absence of climate change legislation, in reducing the growth of CO₂ emissions. We have done this because the U.S. still has (sort of) functioning energy markets, especially for primary fuels, something mostly lacking almost everywhere else in the world.

This is a feature of the U.S. system not a bug, and submitting to climate blackmail in Copenhagen will require further government controls over this segment of the U.S. economy, reducing investment, dynamism and stretching out response times as ever-more permits will be required.

In the view of the anthropogenic global warming (AGW) enthusiasts, a promise from an authoritarian government to allocate resources in a certain manner is far preferable to the messy workings of a market even if that market can be far more effective (and conducive to liberty) given appropriate incentives.

The Chinese show cards promise little real reduction in CO₂ emissions. By 2020 renewables will account for 5% or less of electricity generation in China, less than the US. If the Julian Simon thesis of increasing sustainability of hydrocarbon energy use continues to prove valid, then China’s adoption of improved coal combustion technologies will make them more likely to move further in the direction of coal use, for power generation, not less. After all, their fuel costs will fall if less coal is burned per kWh.

If global warming were a real problem caused by hydrocarbon use, and the cost of correction was less than the demonstable climate gains from government policy, then the carbon part should be taxed. Otherwise, we will face a global version of the Waxman-Markey rent-seeking legislation, a major ratcheting up of regulation, corruption, and resource misallocation at a time when we can scarcely afford it.

The market is the real U.S. hold card. Do we have the guts to play it?

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.

Here is an excerpt from the WSJ article:

When he was a graduate student in the 1960s working to reduce pollutants, Thomas Crocker devised a cap-and-trade system similar to one being considered in Congress.…

“I’m skeptical that cap-and-trade is the most effective way to go about regulating carbon,” says Mr. Crocker, 73 years old, a retired economist in Centennial, Wyo. He says he prefers an outright tax on emissions because it would be easier to enforce and provide needed flexibility to deal with the problem.…

Mr. Crocker, who went on to become a professor at the University of Wyoming, is one of two economists who dreamed up cap-and-trade in the 1960s. The other, John Dales, who died in 2007, was also a skeptic of using the idea to tame global warning. 

“It isn’t a cure-all for everything,” Mr. Dales said in an interview in 2001. “There are lots of situations that don’t apply.” 

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.”

To give some historical context: In an effort to combat “acid rain,” the Clean Air Act Amendments of 1990 included a cap-and-trade program for sulfur dioxide (SO2) and nitrogen oxide (NOx). The emission caps on SO2 and NOx originally applied to only 110 sites, and later were applied to a total of 445 sites. Many observers conclude that the program was a success, as SO2 and NOx emissions did indeed go down as their regulatory caps shrank over time, and the emitters in question did not all go bankrupt because of the regulations. Proponents of Waxman-Markey point to this episode as proof that cap-and-trade will work to mitigate manmade climate change.

However, as Crocker and Dales allude to in the block quotation above, the two situations are not totally analogous. For one thing, there are thousands of significant emitters of greenhouse gases in the United States that would need to fall under the umbrella of a successful cap-and-trade program. This stands in contrast to the comparatively few sites that the Clean Air Act regulated to combat acid rain.

But the most important difference is that acid rain was a (relatively) localized problem. In contrast, anthropogenic climate change–to the extent that it truly poses a significant threat to mankind–is a global problem. If, say, the citizens of California successfully limit the emissions of SO2 and NOx in the Golden State, this goes a long way toward improving the quality of the air they breathe and reducing their exposure to acid rain.

In stark contrast, California-specific caps on greenhouse gas emissions (such as AB 32) does virtually nothing to arrest global warming. This is a fatal drawback to government efforts to mitigate greenhouse gas emissions, whether through cap-and-trade or even through an explicit tax. Unless there is coordinated and near-universal participation among all governments, the plans will be incredibly costly in terms of economic output, in exchange for very little benefit in terms of avoided climate damages.

The longer the climate debate drags on, the more skeptical many academics are becoming of Waxman-Markey. Is it time to scrap the bill entirely and look for solutions that do not rely on the political process?