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  1. I agree that we should have a carbon tax with dividend. I would like to point out that it isn’t really a tax because the atmosphere is already the property of humanity in common. A carbon levy is really a user fee, the enforcement of our common property right to the atmosphere, the establishment of a market.

    A cap-and-trade system with 100 percent auctioned credits, which I believe we will likely receive from the Obama administration, approximates a carbon levy but does it less efficiently without the clear, stable cost signal for emissions and with the opening wiggle room for speculators.

    Either way, the money is best returned to the people to reward innovation that meets their personal situations, instead of federally funding alternative energy research, which I also think is most likely from the Obama administration. And hey, a dividend would probably also be very effective to combine with any economic stimulus package *hint hint*.

  2. Interesting show Rod, however I must take issue with your opposition to cap & trade. To be sure the Warner-Lieberman bill was a mess, however, a simplified cap & trade system involving only the electric generation sector shouldn’t require extensive new federal agencies or even any significant market speculation which seems to be your principal concern. The cap would be limited by the tax a.k.a. the “fine” for exceeding the cap say $50 per ton scheduled to increase at specified intervals (e.g. $50 in 2010, $100 2020, $200 2030).

    33% of US “GHG” emissions derive from the electric generation sector, 80% coal from 500 power plants. Power plants are big things with smokestacks and metered output which is already monitored and known to high precision. In comparison the entire US transport sector (all cars, trucks, aircraft, boats) are responsible for only about 28% of emissions.

    Rebating the proceeds of a $50/ton universal carbon tax would raise about $300 billion or about $1000 for every US resident, or $2000 per US taxpayer. But what would people do with this dividend? Consumer spending today is already directed largely to imports (nearly all textiles and consumer electronics are imports). China which now emits MORE GHGs than the US would thus be the big beneficiary of a carbon tax and net global GHG emissions would increase as 80% of the PRCs electric sector is coal fired. And US manufacturers who emit less (as a % of GDP) would be perversely penalized by the imposition of a carbon tax. Good luck getting the PRC to impose such a carbon tax!

    In contrast a focus on an electric sector cap and trade system, AWARDING FISSION ITS SHARE OF TRADABLE CREDITS per rata its 20% share of US kW/h, would effectively re-invest coal cash into non GHG energy sources, 75% of which is nuclear fission; thus rapidly incentivizing our favorite source of primary energy.

  3. Aaron:

    First of all, I disagree with the idea of limiting the carbon tax to electric utilities. It is certainly easier to measure their emissions, but that is not what I would advocate doing. Instead, we can make a reasonable assumption that most of the carbon that is in fuels like coal, oil and natural gas, no matter who purchases them, will eventually be released to the atmosphere in the form of CO2. Instead of devising ways to measure exhaust, we can simply add the carbon tax to the fuel based on knowledge of its chemical composition.

    It would also not make sense to limit the refunds to “taxpayers”. They are not the only people who have a birthright to the common atmosphere. Though you might have been encouraged by various media sources to disrespect the decision making ability of individuals and worry about “what will they do with the money”, I am pretty certain that most people will find good uses for the couple thousand dollars per year that their family would receive back as their share of the fee for dumping pollution into their portion of the atmosphere.

    In a system where carbon based fuels are taxed under the assumption that the deadly waste that they produce will rather rapidly end up in the atmosphere, there would be no need to pay fission producers. They would prosper simply because their production costs and regulatory costs would be far more competitive because they would not be subjected to much of the tax for carbon based fuels. Investors would realize a greater return on an investment in a fission plant than in a combustion plant and that return would continue in a predictable way out into the future.

    There is, of course, a risk that taxing fuels in one country would lead to a production shift to a country that did not have a tax on carbon based fuels, but the law could include provisions for adding the carbon tax for the manufacturing energy input and the transportation of the goods at the port of entry. That might add some computational complexity and be subject to much political discussion about the right level of tax for specific goods, but I feel reasonably confident that good algorithms can be established. I will readily admit this is one of my biggest worries about a carbon tax – it MUST not disadvantage American production in comparison to production from other countries.

    We have to become a production based economy again; an economy built on debt-based consumption is destined to be an economy in a death spiral.

    I read a great description of that kind of economy the other day – it is analogous to a large poker game where the players keep moving piles of chips around. After every round they send out for some more beer and snack food paid for by cashing some of the chips. Some people get rich – temporarily – and some get poor, but as the night progresses, the total value of money in the room decreases because no one is making anything, they are simply competing over an ever shrinking pile and getting fat in the process.

  4. Rod:

    You are a man of strong convictions, however all of the news that I am getting about the policy makers in the next administration and congress talk about cap & trade. I do not think that the Dems fresh in power are either going to start off with added federal gasoline taxes, heating oil taxes, diesel taxes, etc (I support an import tariff on OPEC oil as it would incentivize domestic production and jobs but it isn’t likely to happen) or carbon import tariffs , which I’d also support even more strongly (especially vis-a-vis the PRC) but is even less likely to happen as admin policy makers are not going to pick a trade war with the PRC as the Dems want to run up another trillion dollars in deficit they need the PRC to buy all the added debt.

    Politically in this context I think it is best to aim for the attainable and a limited sector carbon “cap” and “trade” could be kicked off by the TVA’s own production assets mix of coal, fission, and hydro and could finance new construction at Watts Bar (site of the recent coal sludge-slide) and Bellefontaine.

    What we must be prepared to fight for is fission’s proper share of emissions credits when they are handing them out as part of cap & trade legislation — all of the usual suspects are going to be united in seeking to disenfranchise fission, and if WE don’t unify in support of our cleanest, safest, and least expensive form of energy fission is going to be passed over for ultimately wasteful and unsustainable “soft-path” boondoggles.

  5. Aaron:

    It is too early in the discussion to cede the high ground. Several important theorists from a number of different viewpoints are pushing for various versions of a carbon tax. I have mentioned Jim Hansen’s open letter and just the other day I saw an op-ed in the New York Times written by Arthur Laffer and former congressman Bob Inglis titled An Emissions Plan Conservatives Could Warm To.

    I thoroughly dislike the idea of lobbying for something that will be perceived as a giveaway to large corporations at the expense of everyone else. As you say, I am a man of strong convictions, low desire to climb corporate or other hierarchies and a great love of the common man. (Those are my kind of people, the kind that I love to work with, play with and hang out with.)

  6. Rod:

    Thanks for the suggested link. I read the NYT op-ed by Laffer. As the lead architect of Reaganomics I’m not sure how influential he’ll be with Obama nonetheless his criticism along with that of others seems to focus on the notion that cap & trade would be veiled and too byzantine and subject to manipulation and volatility. In reality cap and trade has already been tried and tested in the US and succeeded beyond initial expectations as a result of the 1990 Clean Air Act SO2 emissions are well below mandated levels. See the Environmental Defense Fund.

    I think Laffer and Heritage Foundation’s real concern would be an economy-wide inflexible and arbitrary “cap” that could seriously derail the national economy. However the cap doesn’t have to be hard and inflexible, emissions beyond allowance level would be taxed or fined and the revenue would be collected by the gov’t for whatever purpose. But a system of tradable carbon credits proportional to the nation’s electricity production portfolio would internalize a direct financial incentive (and disincentive) to the sector most responsible for the emissions in question. I estimate with a $50/ton cap & trade system we’d have 100GW of fission on-line or under construction by 2020.

    Some numbers: how big would the tax have to be in order to replace FICA taxes as Laffer suggested? FICA now raises approx. $trillion/yr. That would require nearly $200/ton tax on all significant GHG sources: a coal kW/h would increase by $0.20 (they’d be paying Hawaii rates for electricity in OH, WV and KY) and every gallon of gasoline would have to be taxed at $0.50. These numbers are non-starters. Also I thought the basic idea is to get rid of this pollution why would the nation want to encourage a societal dependency on continued C02 emissions?

  7. Aaron:

    Many people point to the SO2 cap and trade success as evidence that a CO2 cap and trade system would succeed, but they fail to mention some of the major differences in the quantity of the two pollutants, the wide difference in the menu of potential solutions to each challenge, and the differences in the effects of emitting each of the two pollutants.

    First of all, SOX is only produced by accident – if the fuel used is not contaminated with sulfur, you can produce all the power you want and not release any SOX. One of the major effects of the SOX cap and trade system was to shift the economic value of various fuel sources to favor those with the lowest sulfur content. Powder River Basin coal – which happens to be inferior from a heat content point of view – gained a major market share because it happens to have very little sulfur and can be burned without adding the enormous initial capital cost of scrubbers. Scrubbers also add a fair amount of ongoing operational expenses. Gas also won increased market share.

    In contrast, CO2 is an inevitable product of hydrocarbon combustion. There are some rather slight variations among choices of coal, natural gas and oil at the burner, but when you include the variations in the transportation infrastructure, the differences decrease significantly. (LNG, for example, releases almost exactly as much CO2 per kilowatt hour as coal because of the energy required in the refrigeration and transportation portions of the cycle.)

    SOX production was also many orders of magnitude lower than CO2 production.

    Economically speaking, the effect of the ever lowering caps on SOx have also started to cause more problems now than they did when relatively easy changes could be made. I am keenly aware, for example, that the recent shift to ultra low sulfur diesel fuel has made what appears to be a permanent shift in the economic value of diesel fuel compared to gasoline.

    For at least the past 7-8 years, on the US East Coast, one could depend on diesel fuel prices being a few cents lower than regular gasoline in the summer and a few cents higher than premium in the winter due to the cyclic effects of the home heating oil market. For the past 18 months, diesel has carried a 30-50% price premium over gasoline, partially because of the shift to ultra low sulfur fuel.

    The actual amount of sulfur per gallon change is tiny – the previous standard was 300 parts per million, the new standard is 15 ppm. That sounds like a major change, but it takes out less than 10 grams of sulfur per gallon. That means that diesel fuel consumers are now paying about $50,000 – $100,000 per ton (the current price premium is roughly $0.50 – $1 per gallon) penalty for sulfur content. I have not succeeded in a quick Google search to find a good source of SOx market price data, but I suspect that price is much higher than the current market price for allowances. Since all of our over the road trucks burn diesel, the nation’s transportation sector is being far more heavily taxed than the electric utilities that produce far more SOx.

    Sulfur Dioxide also has a major, relatively immediate, deadly effect on many plants and animals because there is no natural response available to rapid acidification.

    I also disagree with the notion that the goal of putting a cost on CO2 is to get rid of a pollutant. CO2 is not a pollutant under normal circumstances, it is a natural part of life on earth. It only becomes a pollutant when its release rate overcomes all of its natural absorption and use rates so that instead of achieving some kind of steady state concentration, its concentration increases rather continuously. Adding a permanent, reasonably predictable cost to its emission will send the right market signal to slow down its production to the point where the rate of production is more in line with the rate of consumption by plants, algae, etc.

    A better example for whether CO2 cap and trade can work is found in the European system. Their cap and trade has been in effect for several years; it has yet to produce market price signals that encourage major investments in low CO2 electrical power production. Changes in the weather have resulted in dramatic drops in CO2 prices; so has a general market recession.

    Completely eliminating the FICA tax would be costly; that is not my goal. My goal is to allow a revenue neutral restructuring of FICA so that it is no longer the world’s largest pyramid scheme. As currently structured, because it applies to the very first dollar of wage income, but not to a single dollar of interest, dividend, capital gains, bonus income or wage income over $102,000, FICA is the most regressive portion of the US tax code. The first step would be to provide a “standard deduction” for FICA that is not linked to family status. (Some argue the the Earned Income Tax Credit removes most of the FICA below certain income levels, but it is complicated and requires certain tests that leave out hardworking, but poor single people.)

    My basic premise is similar to Laffer’s comment – we should not be taxing something we want more of – income producing work – while we do not tax something we would like less of – CO2 producing fossil fuel consumption. I agree that Laffer will not have much influence on the new Administration, but my point in providing that link was to show that there are voices from all around the political spectrum that are not completely satisfied with the overall effects of cap and trade.

  8. Rod:

    Thanks for the detailed reply. I believe the real cost driver for diesel over the past several years has been EPA mandates not the 1990 Clean Air Act or cap & trade.

    You’re right that S02 is a real pollutant as opposed to CO2 (however the political consensus out there would disagree with us). Ideally these costly mandates should drive future domestic production of coal fed Fischer-Tropsch process diesel or dimethyl ether, a far better use of coal than burning it for baseload.

    You are also correct that the European cap & trade system is a typically bureaucratic mess crippled by excessive grandfathered giveaways that depressed the market for CO2 from the start and thereby provides little incentive for abatement. You avoid the grandfathered giveaway problem by simply awarding emission credits on a pro rata basis (e.g. coal produces 50% of the kW/hrs but emits 80% of the CO2 so it must pay the difference; fission emits essentially no CO2 so it “sells” its credits). As a practical matter there need be no market activity: at $50/ton every coal driven kW/h is assessed $0.01875 and every fission kW/h is credited with $0.035 using the previous year’s production data. As more and more fission is added to the mix their “production tax credit” becomes less lucrative as it should, this encourages rapid new deployments. This shouldn’t be perceived as a giveaway any more than the wind production tax credit (which would also be increased to the same $.035 per kW/h). Fission and the “new renewables” are not dumping into the atmosphere (killing 24,000s of people per year according to Abt Associates) they provide clean energy; I think that is well worth it. Don’t you?

    I need to correct some of my above numbers: the electricity generation sector emits more like 38% of US GHGs, coal alone 30% of US GHGs almost exactly equivalent to the entire US transport sector. At $200/ton gasoline would have to be taxed at $1.94/gallon not $0.50 (I neglected to account for the molecular weight of the O2), diesel would need to be taxed at $2.22/gallon! A mere $50/ton tax would require a $0.50/gallon tax. Also it was Al Gore, not Arthur Laffer, that suggested that all payroll (FICA) taxes be replaced with carbon taxes.

  9. Interesting discussion.

    It is not the CO2 that is killing 24,000 Americans per year. It is the particulates, mercury sulfur cadmium arsenic etc.

    People have been using the atmosphere for a toxic waste dump for tens of thousands of years, and now its capacity is being strained, resulting in serious problems.

    We should treat the atmosphere the way we treat all other waste dumps by charging dumping fees equal to at least the best estimate of the cost of the damage those wastes do.

    I like Hansen’s plan best of all because it is the most fair and transparent. The recommended changes would be to call it a toxic waste dumping fee, not a tax. If Obama made that distinction clear, that idea combined with the rebate would make it an easy sell to the public. I would add fees for all harmful materials being dumped into the atmosphere, not just CO2 and include those fees in the rebate. This would enhance fissions inherent advantage by further leveling the playing field.

  10. OK you’ve both won me over. I now see a way to kill two birds with the same stone here as the idiom goes; pro sua global warming people and national health care people: a universal carbon tax as proposed by Laffer & Hansen assessed @$50/ton would raise $300 billion which approximates the projected cost of covering the 40-50 million uninsured as proposed by the National Coalition on Health Care various scenarios (PDF doc) or with the Romney cum Obama plan. See I should run for office!

  11. Hello guys,

    A tax will have limited impact, only a well designed cap &trade would have an impact on the environment we all share. Taxing would put a price tag on CO2 allowing big polluters to pay their way out.

    C&T mechanism forces the participant to price in the probability of paying very high fee for compliance in case they do not reduce their emission.

    Hansen idea is good and is finally what should be implemented in the long run.

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