Monday, March 9, 2009

Why we really need Cap and Trade

In President Obama’s interview with the NYT he said “We have proposed a cap and trade system, which could create some additional costs, but the vast majority of that we want to give back in the form of tax breaks to the 95 percent of working families.” Now I would like to turn that around, and look at the situation from the other side.

Here we have an Administration coming into one of the worst financial messes of modern times. In order to get things moving again money has to be generated into the system, and the one available entity that can do this is government. And governments around the world are stepping up to the plate to lubricate the path to restore economic health. But one cannot spend money blithely and forever run up deficits, despite the opinion of our last Vice President. So, what to do? Where to find a source that can be tapped for money at the levels that are going to be needed to come close to the amounts that are going to be expended? Where can we look for companies that generate the billions of dollars that are needed, and where adding billions will not be seen as an excruciating tax?

Well the ones that got all the negative publicity last year were in the energy field – lots of money there (at least there was). But the problem is that if we raise the money as a tax, then there are all sorts of advocates that will come out of the woodwork talking about how regressive a gas tax is, how negatively it will influence the economy, etc. etc. But consider, if instead of selling it as a tax, let us adopt the arguments of the Global Warming crowd. Let us garb ourselves in the mantle of the need to collect and sequester carbon dioxide. We put that to industry, and say that all generators of carbon dioxide must pay a fee for the amount of carbon dioxide they generate, say, for the sake of discussion $50 a ton.

Now we don’t sell this as a tax. No it is an incentive for industry to change to non-polluting forms of energy generation. The fact that the solar and wind energy contributions to the current US Energy economy equate to about the energy output of a medium sized coal mine means that it will take years (according to the Hirsch Report at least a couple of decades) before industry can switch over, and renewable energy sources can produce the majority of the energy needs of the United States.

In the interim consider that one ton of coal produces 2.86 tons of carbon dioxide on average – it depends somewhat on the carbon content of the coal, a function of its rank, but we’ll work with the average for now. The United States had around 1,374 mines in 2007, which produced 1.14 billion tons of coal. Let us for the sake of simplicity assume that this all goes into generating power in the United States (as most of it does) and you can see that the coal generates some 3.26 billion tons of carbon dioxide. If the charge-out rate for the CO2 is $50 a ton, then this will generate some $163 billion in revenue per year.

Given that it will take say 20 years to move the industry into other fuels that gives a total income to the Federal Government of $3.26 trillion. Now that does go some considerable way towards repaying all the vast expenditures that are going to be incurred in the next couple of years in getting the economy back onto the right track. Particularly if you recognize that coal is not the only fuel that generates carbon dioxide when it burns, all the fossil fuels do. For example if the United States consumes 21 million barrels of oil a day, this is equivalent to some 1.045 billion tons of oil a year. However, because oil is refined into different products (roughly 44% gasoline; 21% distillate; 9% Kerosine and 5% residual fuel oil) one must calculate the CO2 generated for the different fractions and add. Turns out that doing that will take some 3.15 barrels of crude to make 1 metric ton of CO2. Or that our billion tons of crude will transform to 2.4 billion tons of CO2 per year. So. Over the same time frame, that is a revenue stream that totals some $2.4 trillion.

(Let’s give natural gas a pass, for the moment). Now we are looking at a serious answer to the expenditures that we are in the process of starting to make. In fact we have generated a revenue stream that covers half the national debt.

But think of the benefits to the government, outside of just the money. They are not generating a new tax, no it is an incentive to change to a new form of energy. It appears to punish the energy companies, who have been seen to be making “obscene profits.” And it is not immediately seen as being applied to individuals. Now of course the latter is not true. In the end, the companies, whether the coal company, the oil company, or the utility company that converts the fuel into energy, will pass on the cost. Coal that used to cost say $50 a ton, is now going to cost the utility almost four times that amount when the CO2 cost is factored in. And so electric bills will go up, dramatically. But it will be the power company imposing the increase, and the feds standing there promising regulation to make sure that no fees are improperly charged, and thereby looking (potentially) like heroes.

So does it matter whether climate change is real or not? We can’t get into that debate! The issue is settled! (It has to be otherwise we won’t be able to use this path to getting the money). And so the hymn book is passed out to the Administration spokesmen, and they will all sing dutifully from it. Just don’t expect them to be very credulous to dissenting voices. They can’t afford to listen.

It was ex-Vice President Gore who quoted Upton Sinclair "it is difficult to convince someone of something when his paycheck depends on his not understanding it." (for paycheck read success).


  1. Over at today’s Oildrum, Ugo Bardi posted a review of the impact of peak fossil fuels on atmospheric CO2. Most readers familiar with peak oil would think the various development scenarios of the IPCC were based on consuming unavailable quantities of fossil fuels, a limitation the IPCC did not take into account. Considering the constraints on oil and coal production, the papers reviewed suggest the atmospheric CO2 concentration might stabilize this century at between 480 and 600 ppm.

    Bardi goes on to wonder whether those concentrations are low enough to prevent “dangerous anthropogenic interference with the earth’s climate system”, as it’s called in the UN Framework Convention. There are several troubling uncertainties, whose implications to global climate were well summarised by the British economist Sir Nicholas Stern in 2006.

    But, as Bardi says, it doesn’t really matter whether the predicted CO2 concentrations would have dangerous effects or not. In either event, Cap and Trade would also provide an incentive to delay the peak in fossil fuel production, an equally worthy outcome.

  2. Just a couple of thoughts since I disagree with Ugo on the limits to coal production that he and others see (it was partially why I wrote the piece on Augers on Sunday). The needs for energy in countries such as India, Botswana, Pakistan and Bangladesh are going to mandate that they use their indigenous fuel, since they can't afford now, and won't be able to afford in the future, the gas they currently rely on as its global price rises. (Ugo and I have debated some of these issues off-line) .

    I am no longer sure that the Senate will get to Cap and Trade this year, there are conflicting stories on what the plans are, but I do believe they need the money and the cover.