Carbon Tax, CAFE Standards and Cap-and-Trade: An Economist's View

One Answer to Global Warming: A New Tax
September 16, 2007 -- By N. Gregory Mankiw, The New York Times

In the debate over global climate change, there is a yawning gap that needs to be bridged. The gap is not between environmentalists and industrialists, or between Democrats and Republicans. It is between policy wonks and political consultants.

Among policy wonks like me, there is a broad consensus. The scientists tell us that world temperatures are rising because humans are emitting carbon into the atmosphere. Basic economics tells us that when you tax something, you normally get less of it. So if we want to reduce global emissions of carbon, we need a global carbon tax. Q.E.D.

The idea of using taxes to fix problems, rather than merely raise government revenue, has a long history. The British economist Arthur Pigou advocated such corrective taxes to deal with pollution in the early 20th century. In his honor, economics textbooks now call them “Pigovian taxes.”

Using a Pigovian tax to address global warming is also an old idea. It was proposed as far back as 1992 by Martin S. Feldstein on the editorial page of The Wall Street Journal. Once chief economist to Ronald Reagan, Mr. Feldstein has devoted much of his career to studying how high tax rates distort incentives and impede economic growth. But like most other policy wonks, he appreciates that some taxes align private incentives with social costs and move us toward better outcomes.

Those vying for elected office, however, are reluctant to sign on to this agenda. Their political consultants are no fans of taxes, Pigovian or otherwise. Republican consultants advise using the word “tax” only if followed immediately by the word “cut.” Democratic consultants recommend the word “tax” be followed by “on the rich.”

Yet this natural aversion to carbon taxes can be overcome if the revenue from the tax is used to reduce other taxes. By itself, a carbon tax would raise the tax burden on anyone who drives a car or uses electricity produced with fossil fuels, which means just about everybody. Some might fear this would be particularly hard on the poor and middle class.

But Gilbert Metcalf, a professor of economics at Tufts, has shown how revenue from a carbon tax could be used to reduce payroll taxes in a way that would leave the distribution of total tax burden approximately unchanged. He proposes a tax of $15 per metric ton of carbon dioxide, together with a rebate of the federal payroll tax on the first $3,660 of earnings for each worker.

The case for a carbon tax looks even stronger after an examination of the other options on the table. Lawmakers in both political parties want to require carmakers to increase the fuel efficiency of the cars they sell. Passing the buck to auto companies has a lot of popular appeal.

Increased fuel efficiency, however, is not free. Like a tax, the cost of complying with more stringent regulation will be passed on to consumers in the form of higher car prices. But the government will not raise any revenue that it can use to cut other taxes to compensate for these higher prices. (And don’t expect savings on gas to compensate consumers in a meaningful way: Any truly cost-effective increase in fuel efficiency would already have been made.)

More important, enhancing fuel efficiency by itself is not the best way to reduce energy consumption. Fuel use depends not only on the efficiency of the car fleet but also on the daily decisions that people make — how far from work they choose to live and how often they carpool or use public transportation.

A carbon tax would provide incentives for people to use less fuel in a multitude of ways. By contrast, merely having more efficient cars encourages more driving. Increased driving not only produces more carbon, but also exacerbates other problems, like accidents and road congestion.

Another popular proposal to limit carbon emissions is a cap-and-trade system, under which carbon emissions are limited and allowances are bought and sold in the marketplace. The effect of such a system depends on how the carbon allowances are allocated. If the government auctions them off, then the price of a carbon allowance is effectively a carbon tax.

But the history of cap-and-trade systems suggests that the allowances would probably be handed out to power companies and other carbon emitters, which would then be free to use them or sell them at market prices. In this case, the prices of energy products would rise as they would under a carbon tax, but the government would collect no revenue to reduce other taxes and compensate consumers.

The international dimension of the problem also suggests the superiority of a carbon tax over cap-and-trade. Any long-term approach to global climate change will have to deal with the emerging economies of China and India. By some reports, China is now the world’s leading emitter of carbon, in large part simply because it has so many people. The failure of the Kyoto treaty to include these emerging economies is one reason that, in 1997, the United States Senate passed a resolution rejecting the Kyoto approach by a vote of 95 to zero.

Agreement on a truly global cap-and-trade system, however, is hard to imagine. China is unlikely to be persuaded to accept fewer carbon allowances per person than the United States. Using a historical baseline to allocate allowances, as is often proposed, would reward the United States for having been a leading cause of the problem.

But allocating carbon allowances based on population alone would create a system in which the United States, with its higher standard of living, would buy allowances from China. American voters are not going to embrace a system of higher energy prices, coupled with a large transfer of national income to the Chinese. It would amount to a massive foreign aid program to one of the world’s most rapidly growing economies.

A global carbon tax would be easier to negotiate. All governments require revenue for public purposes. The world’s nations could agree to use a carbon tax as one instrument to raise some of that revenue. No money needs to change hands across national borders. Each government could keep the revenue from its tax and use it to finance spending or whatever form of tax relief it considered best.

Convincing China of the virtues of a carbon tax, however, may prove to be the easy part. The first and more difficult step is to convince American voters, and therefore political consultants, that “tax” is not a four-letter word.

We Need to Bring Climate Idealism Down to Earth

Excerpts from:
We Need to Bring Climate Idealism Down to Earth
April 30, 2007 -- By Larry Summers, commentary, Financial Times via Economist's View

With the accumulation of scientific evidence and its persuasive presentation to the public, the global warming debate has reached a new stage. ...

The real question for debate is not whether something should be done – that debate is over among the rational. The crucial question now is what should be done so as to leave our descendants with the highest possible quality of life. ...

There is a very real danger that the global cap and trade approach ... enshrined in the Kyoto protocol – now favoured by most European governments – could be ineffective or even counterproductive by substituting for more realistic approaches to the problem. Kyoto is now the only game in town for those who do not want to be ostriches with respect to global climate change and so one has to hope for its ultimate success. But it is surely useful to try to be clear about the potential pitfalls...

First, the Kyoto approach depends on the questionable premise that nations will, in fact, be bound by binding targets or penalties for not meeting them. It is instructive in this regard to consider the history of the Maastricht Treaty within the European Union. It addressed fiscal targets ... within a group of countries that had already achieved a high degree of cohesion. It broke down almost immediately when it looked like the targets would not be binding for big countries, with the goals abandoned and no payment of even the modest penalties.

There is to date little evidence that Kyoto is driving behaviour. Whatever evidence there is of impressive emissions reductions comes from countries such as the UK, Germany and the former communist states, where coal use was being phased out for other reasons. The limited impact of Kyoto is evinced by the fact that carbon permits are now selling in the range of a negligible one euro a ton.

Second, carbon markets are invitations to engage in pork-barrel corporate subsidy politics on a massive scale. If greenhouse gas emissions are to be substantially reduced, the value of the associated emissions rights will be in the tens of billions of dollars. While in principle emission permits could be auctioned, in practice they are always allocated administratively. ...[In addition]..., the clean development mechanism has resulted in substantial payments for emissions reductions that would have occurred anyway or could have been achieved at negligible cost. There is even reason to think that certain industrial gas emissions may have been increased so that credit could be claimed for their abatement.

Third, the most serious problem with the Kyoto framework is that it is unlikely to generate substantial changes in developing country policies. ...[D]eveloping country policymakers are not likely to accept binding targets ... that fall way short on a per-capita basis of emissions levels in the industrial world. ...

The truth about climate change policy is that developing countries are where most of the future action has to be. They will account for 75 per cent of the increase in emissions over the next quarter century and are now making the infrastructure investments that will shape their future economies. ... The 1997 vote cast by all the Democrats in the Senate suggests that approaches that do not involve the developing world are unlikely to command political support in at least some parts of the industrialised world.

Perhaps these problems and others, like the difficulty of establishing emissions targets given the magnitude of economic uncertainties, can be overcome with goodwill and extensive thought. But next month I shall suggest approaches that, while less dramatic in their immediate claims for emissions reductions, may over time provide a more secure foundation for the progress that the world must have.

Costs Shrinking For Solar Thermal

Shrinking the costs for solar power
May 11, 2007 -- By Michael Kanellos, CNET News via Peak Energy

One of the big problems with solar power has been that it costs more than electricity generated by conventional means. But some experts think that, under certain circumstances, the premium for solar power can be erased, without subsidies or dramatic technical breakthroughs. A sufficiently large solar thermal power plant (also called concentrated solar power, or CSP) could potentially generate electricity at about the same cost as electricity from a conventional gas-burning power plant, experts say.

It's not easy. The plant would also have to come with a large energy storage system, be built next to others and be located close to users. To date, no one has completed a facility that comports to all of these parameters, said Fred Morse, an energy analyst who has studied the issue. "Solar thermal is available at much more attractive prices than solar photovoltaic. The land mass isn't huge, but it does take a while to build these," said Stephan Dolezalek, a managing partner and co-head of the clean tech practice at venture firm Vantage Point Venture Partners, an investor in Bright Source Energy, which builds solar thermal plants and components.

Both Dolezalek and Jiang Lin, who heads up the China Energy Group at the Lawrence Berkeley National Laboratory, said that solar thermal is likely the most promising technology in the entire alternative-energy field right now. When asked when solar thermal can hit parity, Lin responded "now." Conventionally generated electricity ranges between 5 and 18 cents per kilowatt hour (the amount of money to get a kilowatt of power for an hour) but in most places it's below 10 cents, according to the Energy Information Agency. Solar thermal costs around 15 to 17 cents a kilowatt hour, according to statistics from Schott, a German company that makes solar thermal equipment.

A solar thermal plant would need a facility to store the heat harvested in the day by its sunlight-concentrating mirrors so that the heat could be used to generate electricity at night. "You need the kind of system that can run in the evening," Morse said. At some sites, such as Nevada Solar One, excess heat is stored in molten salt and released at night to run the turbine. The plant, ideally, should be capable of generating about 300 megawatts of electricity. Those plants can churn out electricity at about 13 cents a kilowatt.

That's still a relatively high price, so utilities would need to group two, three or more 300-megawatt plants together to share operational resources, Morse said. "They could share control rooms or spare parts," he said. That would knock the price closer to 11 cents a kilowatt hour. "Under 10 cents is sort of the magic line," he said.

Dolezalek puts it another way: the plants need to be around 500 megawatts in size. Most solar thermal plants right now aren't that big. The 22-year-old thermal plant in California's Mojave Desert is 354 megawatts. Utility company Southern California Edison is erecting a 500-megawatt plant scheduled to open in 2009. By 2014, solar thermal plants located in the Southwest could crank out nearly 3 gigawatts of power, estimated Travis Bradford of the Prometheus Institute for Sustainable Development, a nonprofit based in Cambridge, Mass. That's enough for about 1 million homes.

Costs can then be reduced further by building the plants close to consumers. It costs about $1.5 million per mile for transmission lines, according to statistics from Acciona Solar Power, which owns solar thermal plants. Solar thermal plants work best in arid deserts that get little rainfall. Since some of the fastest-growing cities in the world are located in sun belts, that's less of a problem than it used to be. ...

Even if all of these factors could be completely optimized, solar thermal power plants would likely not produce electricity at a level that would compete with coal plants. Coal plants, however, will likely be hit with carbon taxes in the near future, which will make solar thermal more competitive. Still, at less than 10 cents a kilowatt, solar thermal would be competitive with electricity from gas-powered plants.

Utilities will also likely work hard to lower the costs of solar thermal in the coming decades, Morse added. Utilities are under mandates to increase their renewable energy sources. Citizen groups often complain about wind turbines and the wind doesn't blow at a constant, predictable rate. Several companies are intent on tapping heat from under the surface of the earth to generate power. Geothermal power, however, works best only in certain locations.

"There is an enough flat, unproductive land in the U.S. to power the U.S.," Morse said. "We just don't have the wires to get there. Eisenhower built the national highway system. Some president will build the national grid."

Tackling Climate Change: A bargain

Tackling Climate Change: A bargain
May 4, 2007 -- The Economist (Subscription)

About 0.1% of world GDP would do it

The Intergovernmental Panel on Climate Change (IPCC), set up under the auspices of the United Nations to establish a consensus on global warming and what to do about it, has now completed its fourth assessment report. The first two parts, published earlier this year, about the science and the impacts of climate change, were designed to spread gloom. Change was happening, they said; it was mankind’s fault; and it was going to be damaging. The third part, released on Friday May 4th in Bangkok, is about mitigating climate change, and is designed to spread hope. Just as mankind caused the problem, it says, so mankind can stop it—and at a reasonable cost.

In some areas of economic activity, emissions could be cut with no cost to consumers or taxpayers. The heating and lighting systems of many buildings, for instance, are startlingly inefficient. Improving this would cut both emissions and bills. Economists are troubled by this, for it implies that people and businesses are not maximising their economic self-interest; yet the low take-up of energy-efficient lightbulbs suggests this is indeed the case. Governments are therefore beginning to tighten regulations on the energy efficiency of buildings, and to talk about, for instance, banning incandescent lightbulbs. The IPCC reckons that such measures could cut 30% of projected emissions from this sector at no extra cost.

Transport is trickier, because car ownership is rocketing and the demand for fuel is fairly inelastic. If people want to drive they are going to drive, unless governments jack up petrol prices to levels that are politically unacceptable. So for emissions to fall in the transport sector, new technologies, such as more efficient biofuels or electric cars, are needed. Given a big R&D effort in this sector, there is a good chance that those will be forthcoming.

Similarly, in power generation, there is scope for cutting emissions. The cost of renewable energy, such as wind and solar, has been falling. Nuclear generating technology has improved. Carbon capture and storage, which involves taking the carbon dioxide (or C02) out of power station flue gases and injecting it back into the earth, is also a possibility, though that technology is at an early stage.

Technological solutions to climate change, then, are available. But most of those on offer in the power and transport sectors cost more than fossil-fuel generated energy. Fortunately, economics comes to the rescue. Burning fossil fuels imposes a cost to society that is not reflected in their price. Economics says that it should be; and if it were, the price of using fossil fuels would rise in relation to the price of using renewable energy.

Unfortunately, the social cost of carbon is hard to calculate. Plenty of economists have tried, with unconvincing results. It requires estimating the impact of climate change on economic growth, which involves too many unknowns. So the IPCC report starts from the other end. Rather than trying to work out the social cost of carbon, and letting it feed through to reduce greenhouse-gas concentrations in the atmosphere, it starts from a manageable greenhouse-gas concentration and works backwards to a carbon price. Conveniently, it says the “social cost of carbon is at least comparable to, and possibly higher than carbon prices for even the most stringent scenarios assessed by the IPCC”.

And what is the right price? The report says that to stabilise greenhouse-gas concentrations at 550 parts per million (a level most scientists think safeish) would require a price of $20-50 per tonne of carbon by 2020-30. That is along the lines of the carbon price established the European Emissions-Trading Scheme, which varied between $6 and $40 in 2005-06. It has not bankrupted the European economy so far. The IPCC’s economic models reckon, on average, that if the world adopted such a price the global economy would be 1.3% smaller than it otherwise would have been by 2050; or, put another way, global economic growth would be 0.1% a year lower than it otherwise would have been.

The world would barely notice such figures; so one might think that climate change can be easily sorted. The problem, of course, is that the numbers work only if they are applied globally. If a few countries—even a few big countries—adopt a carbon price, it will make little difference. All the world’s big emitters need to do it. Which brings the world straight back to the problem that sank Kyoto. No country alone can make a difference, and it is in every country’s interest to ensure that everybody else bears the burden. As the IPCC report convincingly argues, the technology and the economics of this problem are easily soluble. It is the politics that is so difficult.

Congestion Pricing

Excerpt from:
Don't Drive, He Said
May 7, 2007 -- By Elizabeth Kolbert, The New Yorker via Greg Mankiw's Blog

The case against congestion pricing is often posed in egalitarian terms. “The middle class and the poor will not be able to pay these fees and the rich will,” State Assemblyman Richard Brodsky, of Westchester County, declared after listening to the Mayor’s speech. In fact, the poor don’t, as a rule, drive in and out of Manhattan: compare the cost of buying, insuring, and parking a car with the seventy-six dollars a month the M.T.A. charges for an unlimited-ride MetroCard. For those who do use cars to commute, eight dollars a day would, it’s true, quickly add up. And that is precisely the point. Congestion pricing works only to the extent that it makes other choices—changing the hours of one’s daily drive or, better yet, using mass transit—more attractive.

Big Oil on Peak Oil

Big Oil on Peak Oil
April 19, 2007 -- The Wall Street Journal Energy Roundup Blog

Energy Roundup and several other energy bloggers participated in a conference call yesterday with Red Cavaney, president and CEO of the American Petroleum Institute. Topics included peak oil, ethanol, the Canadian tar sands, refinery capacity and greenhouse-gas emissions caps.

Some highlights:

Cavaney is sanguine about the prospect of peak oil. He believes that, even after the world’s oil production hits its peak — whenever that happens — the downward slope of production will likely be gradual, rather than sharp. He also thinks much of the world is “under-explored,” suggesting the peak can be put off a little while longer with more exploration overseas. He also thinks hydrocarbons will always be with us, in one capacity or another. “Man left the Stone Age not because he ran out of stone. We’ll leave the age of oil, but it won’t be because we ran out of oil. It will be because other technologies have come in that will be more reliable and cost-effective.”

He claimed his industry is agnostic about the controversies surrounding global warming. “We’re not scientists or experts in that area,” he said. “But we have concluded there are sufficient signals that it’s important we get on with trying to mitigate the outcomes that may flow from path we’re on.”

He also expressed no preference for any of several potential congressional actions to limit greenhouse-gas emissions. But he also said he doubted a carbon tax would be imposed any time soon. “Most economists…say a carbon tax would be the most efficient way to maximize reductions,” he said. “But…if you talk to political advisors, that’s the last vote they’ll take.”

He was a little more heated in defending his industry against charges that it is standing in the way of a broader rollout of ethanol in the U.S. The Wall Street Journal reported earlier this month that oil-company policies make it harder for many service stations to stock a fuel called E85, a blend of 85% ethanol and 15% gasoline. And earlier this year, representatives of auto makers and the Clean Fuel Development Coalition told the Journal that oil companies weren’t doing their part to make ethanol more widely available.

Cavaney said such critics “have their own agenda.” The auto industry, he implied, has not taken ethanol use seriously, using flex-fuel vehicles and E85 primarily as marketing tools. He said his industry is doing everything it can to encourage ethanol use, but that corn-based ethanol will never be a widespread substitute for gasoline and cellulosic ethanol is still years away from commercial viability.

He also warned against relying on any one substitute for fossil fuels. “There is no one silver bullet,” he said. “Anybody that focuses that way will miss a lot of opportunities.”

Fuel taxes: An important instrument for climate policy

Fuel taxes: An important instrument for climate policy
July 14, 2006 -- By Thomas Sterner, Energy Policy, Vol. 35, Issue 6, June 2007 via Greg Mankiw

Abstract

This article shows that fuel taxes serve a very important role for the environment and that we risk a backlash of increased emissions if they are abolished. Fuel taxes have restrained growth in fuel demand and associated carbon emissions. Although fuel demand is large and growing, our analysis shows that it would have been much higher in the absence of domestic fuel taxes. People often assert that fuel demand is inelastic but there is strong research evidence showing the opposite. The price elasticity is in fact quite high but only in the long-run: in the short run it may be quite inelastic which has important implications for policy makers. Had Europe not followed a policy of high fuel taxation but had low US taxes, then fuel demand would have been twice as large. Hypothetical transport demand in the whole OECD area is calculated for various tax scenarios and the results show that fuel taxes are the single most powerful climate policy instrument implemented to date—yet this fact is not usually given due attention in the debate.

Gore, Gandhi, and Dioum

Al Gore at TED

March, 2008







Here is an excellent presentation on issues pertaining to the new environmental movement--global climatic disruption and resource constraints (in comparison to the previous environmental movement--biodiversity, toxins, air/water quality, and population). In the past, I have been skeptical towards Al Gore for a few reasons. The most prevalent being that he flies around the world, after leaving one of his mansions, to tell the general public to reduce emissions.



"You must be the change you wish to see in the world."

-Mohandas Gandhi



However, I am beginning to think less about his vanity and more about his ability to promote ideas in a compelling way.



"For in the end, we will conserve only what we love. We will love only what we understand. We will understand only what we are taught."

-Baba Dioum



He is one of many voices that need to be listened to as humanity attempts to reduce the tragedy of the commons and improve the living conditions for all of life.

Green shoots of growth

Green shoots of growth (Subscription)
December 7, 2006 -- Editorial, Nature

Energy from biomass is an idea whose time has returned.

Until the twentieth century, biomass was humanity's principal source of energy, heating our stoves and feeding our draught animals. Even today, roughly 10% of all our energy comes from biomass — far more than from any other renewable energy source or, for that matter, from nuclear fission.

But this use of biomass for energy supply is accompanied by many challenges. For one thing, it is often not all that renewable — the biomass sources that provide firewood to the world's poor, for example, are not being replanted. For another, it is very inefficient: gathering firewood takes a long time. The history of the past couple of centuries has been in large part one of people moving away from biomass as soon as they can afford to do so.

Three recent developments have spurred renewed interest in biomass, however. One is the need to reduce greenhouse-gas emissions. The requirement for other external energy inputs during biomass processing means that it often involves some net carbon emissions — but the amount of carbon dioxide given off by burning biomass is the same as that taken from the atmosphere by photosynthesis in the first place. If biomass projects could sequester carbon, either by enriching the soil beneath plantations or by storing any carbon dioxide produced in combustion, they could even be carbon negative — a unique selling point for this energy source.

The other two developments are the upward movement in the prices of oil and natural gas, and the related revival of concerns about the security of their supply. Most nations are seeking home-based energy sources that do not rely on political stability in the Middle East or Russia.

It seems unlikely that these factors will provide sufficient impetus to propel biomass energy to the very front rank of possible alternatives to fossil fuels. But biomass clearly has a potential role as part of a portfolio of energy sources for the twenty-first century.

If that role is to be fulfilled, two things need to happen. Nations have to build regulatory mechanisms that recognize the carbon benefits of technologies such as biomass — through emissions pricing, a carbon tax or a combination of the two. And intensive research needs to be conducted into both the efficient production of biomass and its conversion into useable energy.

One focal point for such research should be finding ways to grow biomass quickly and in an easily processed form while minimizing external inputs, such as fertilizer and pesticides. Another is the systems engineering of farms and ecosystems, finding ways to fit biomass projects into and around present land use and possible changes in farming practice.

A major attraction of biomass is that it is likely to benefit poorer countries, which tend to be in tropical regions where plants grow quickly. There is plenty of scope for more collaboration between developing countries on biomass research and development, both to meet local needs and for export.

But this requires consideration of the local and global ecological impact of biomass expansion. Vast tropical monocultures eating away at primary forests — as exemplified by the production of palm oil in Indonesia — will benefit no one, except those who profit from selling the fuel. In effect, such approaches take green subsidies from richer countries, and use them to despoil the tropics.

Similar problems afflict existing biomass programmes in the United States, where ethanol refineries often burn fossil fuel and are reliant on subsidized corn monoculture. More innovative approaches would include firing the refineries with agricultural waste, and feeding them with plants of many different species. Biomass energy should be developed energetically, but within the context of appropriate environmental policies, and using approaches that are both sustainable and cost-effective.

Do We Tax Energy Enough?

Here is the link with audio and video of this great discussion as well as related papers by Hassett and Parry. I would recommend signing up for a free subscription to Resources by Resources for the Future as well as reading Greg Mankiw's blog. Below is an introduction to the discussion.

Do We Tax Energy Enough?
March 29, 2007 -- American Enterprise Institute For Public Policy Research

What are the advantages and disadvantages of carbon and gasoline taxes? Ian W. H. Parry of Resources for the Future and AEI’s Kenneth P. Green, Kevin A. Hassett, and N. Gregory Mankiw will examine the pros and cons of carbon and gasoline taxes, discuss possible levels at which they could be set, and compare taxation to regulation as an alternative way to address environmental concerns.

Is It Time for a New Tax on Energy?

Is It Time for a New Tax on Energy?
February 9, 2007 -- By Phil Izzo, Wall Street Journal

Economists Say Government Should Foster Alternatives – But Not How Bush Proposes

The government should encourage development of alternatives to fossil fuels, economists said in a WSJ.com survey. But most say the best way to do that isn't in President Bush's energy proposals: a new tax on fossil fuels.

Forty of 47 economists who answered the question said the government should help champion alternative fuels. Economists generally are in favor of free-market solutions, but there are times when you need to intervene," said David Wyss at Standard & Poor's Corp. "We're already in the danger zone" because of the outlook for oil supplies and concerns about climate change, he said.

A majority of the economists said a tax on fossil fuels would be the most economically sound way to encourage alternatives. A tax would raise the price of fossil fuels and make alternatives, which today often are more costly to produce, more competitive in the consumer market. "A tax puts pressure on the market, rather than forcing an artificial solution on it," said Mr. Wyss.

President Bush has made a strong push on energy initiatives over the past month but he has steered clear of proposals that would raise taxes. In his State of the Union address, Mr. Bush set targets that call for a 20% reduction in gasoline use over the next 10 years. He proposed regulations to tighten gas-mileage standards and force fuel suppliers to use more alternative fuels. In addition, his budget proposal presented to Congress this week provides substantial funding for biofuel, clean coal and renewable energy programs.

In the survey, which was conducted Feb. 2-7, just two economists recommended regulations that require energy companies use more alternatives, one of the keys of the Bush plan, while six advised subsidies for producers of alternative fuels. "With subsidies, the government chooses the market solution," said Diane Swonk at Mesirow Financial. "I'd favor taxes in this area."

Other economists in the survey, though, said the smartest course for the government is to let market forces determine the future of alternative energies. "The more we mess with things the more problems we create," said Brian S. Wesbury of First Trust Advisors. "Government interference in the marketplace can do damage to long-term development of alternate energies."

Biggest Economic Risks

Although crude-oil prices have eased from levels hit last year, the economists said dependence on fossil fuels remains a threat. When asked to pick the greater geopolitical threat to the economy, by almost an 3-to-1 margin the economists chose a disruption in crude oil supplies caused by tensions in the Mideast over the impact on spending and confidence that could follow a major terrorist attack. "The economy has already proven it can survive terror attacks. It had a harder time with almost $80 per barrel oil," said Ms. Swonk.

The economists generally expect oil to remain below $60 a barrel for the remainder of this year. The average forecast puts crude oil futures at $57.98 a barrel in June and $58.72 in December. That roughly matches the price at which crude futures have traded in New York this week, but is well below the nominal highs set last year at around $77 a barrel.

"Demand for energy is going to grow, and energy likely to come from existing sources isn't going to grow fast enough," said Daniel Laufenberg at Amerprise Financial. "It's not a crisis today, but higher prices are telling us now is the time the start preparing."

Sarbanes-Oxley Fallout

The survey also gauged economists' sentiment on concerns expressed by business leaders that Sarbanes-Oxley rules, other regulatory enforcement and litigation are hurting the competitiveness of U.S. financial markets. Twelve of 51 economists who responded to the question said they feel these forces are hurting market competitiveness "a lot and are a serious threat to the economy." Thirty-six of the economists said markets are being hurt some but not enough to be a major economic worry.

Regarding Sarbanes Oxley specifically, a majority – 26 of 50 economists – said they believe the rules have had a "more negative than positive" impact on the economy. Four others said the impact has been entirely negative. In contrast, 19 economists deemed the impact "more positive than negative" and one said it has been an entirely positive influence on the economy.

Among other findings in the survey:

• Economists, on average, increased their forecast for first-quarter gross domestic product growth by three-tenths of a percentage point to 2.5% following the release of the government's first estimate of fourth-quarter growth last week. That report put growth for the period at a 3.5% rate. GDP is the broadest measure of economic output. Expectations of modest improvement in growth for the rest of the year were changed little. For the fourth quarter of 2007, the economists forecast growth at a 3% rate.

• The economists are skeptical that the federal budget will be balanced by 2012, a goal that is shared by President Bush and Democratic leaders. The economists put the probability of attaining that goal at 32%.

• There is a split on where the Federal Reserve's federal-funds rate is headed this year. Some 69% of respondents expect the next move to be a decrease, while 31% see a rate increase on the horizon. However, most don't see any move until some time in the summer.

• Sentiment improved a bit on the outlook for home prices. On average, economists expect a closely watched index calculated by the Office of Federal Housing Enterprise Oversight will show that prices rose 3.52% last year, up from an earlier forecast of 2.76%. Ofheo's report on 2006 prices is expected to be released early next month. For 2007, the economists see a price decline of 0.18% compared to an earlier forecast of a 0.49% decline. However, when one outlier, who forecast a 20% drop, is removed, the economists expect a modest gain in home prices this year.

Make Green Pay, Davos 2007: CNBC video

Make Green Pay is a discussion coordinated by CNBC at this years Davos meetings. The link provided will take you to the video for the entire program. The topics discussed are as follows:

MOTION 1: Nuclear energy and cleaner coal are the only workable alternatives to oil

James Rogers, President and Chief Executive Officer of Duke Energy argues for the motion that nuclear energy and cleaner coal are the only workable alternatives to oil. Today’s needs can only be met with today’s resources he says. Mr Rogers sees emission-free nuclear and advanced-coal technologies as the energy workhorses for the short-to medium term. Vinod Khosla, Founder and Partner of Khosla Ventures argues against the motion puts forward the case against the motion. He focuses on the hidden costs of nuclear and coal – the clean-up costs. Factor those in, he insists, and clean renewables start to look a whole lot more competitive.



MOTION 2: Markets are superior to regulation in leading corporations towards greener operations

In the board rooms and in the corridors of power there is increasing acknowledgement that the way in which we consume energy is damaging the earth. For most corporations though, changing attitudes are yet to translate into radically different practices. Reverend Nicholas Frances, Chief Executive Officer of Easy Being Green, puts forward the case for motion 2; that markets are the most effective influence on company behaviour. He says that a government’s ability to regulate will always lag the entrepreneur’s talent to innovate. Professor Daniel Esty, Hill House Professor at Yale University puts forward an opposing view. Professor Esty argues that business must be motivated to find solutions. Regulation, he points out, gives business the stability required for the risks associated with policy changes.



MOTION 3: A global carbon tax would do more harm than good

Professor Jose Goldemberg of Sao Paulo University reminds us that the developing world is unlikely agree to sacrifice economic development for an environmental agenda. He not only says that a global tax would do more harm than good but that to even aim for one would be unrealistic. Sir Nicholas Stern of the UK treasury and author of the Stern review stands against the motion. According to Sir Nicholas, companies must face with the full social cost of their actions and that, in economic terms, a common global carbon price would be the most efficient way of achieving this.

Grassroot Environmentalism Shifting American Policy

Waking up and catching up
January 25, 2007 -- The Economist

Belatedly, and for many reasons, America is embracing environmentalism

WHEN Jim Webb, the new Democratic senator from Virginia, replied to George Bush's state-of-the-union message, he could bear to endorse only one of the president's proposals. This was the idea of cutting America's petrol (gasoline) consumption by 20% in ten years, by increasing ethanol production to 35 billion gallons a year and raising fuel-efficiency standards for cars.

Such a plan would reduce America's dependence on imported oil from dangerous places (as would Mr Bush's plan to double the country's petroleum reserves). But it would address global warming only tangentially. The Democrats in Congress are weighing much more dramatic measures, including across-the-board cuts to the greenhouse gases that are heating up the planet. At the state level, politicians of all stripes are already taking more radical steps. Even big business is coming round. Mr Bush may be dragging his feet, but America is greening fast.

The Democrats' victory in last year's elections means that Congress's stance on environmental issues has changed dramatically. In one race for the House of Representatives, a Democratic consultant on wind power defeated a Republican ally of the oil industry. Barbara Boxer, an ardent advocate of firm action on climate change, has taken over the chairmanship of the Senate Environment Committee from James Inhofe, who often described global warming as “the greatest hoax ever perpetrated on the American people”.

Since Congress convened earlier this month, the Democrats have got to work fast. The House has passed a bill that would eliminate a tax break for oil production in America, and would impose penalties on firms that refuse to renegotiate the absurdly generous leases the government accidentally granted them in the late 1990s. The proceeds—perhaps $15 billion over the next decade—would be used to fund renewable energy schemes.

Nancy Pelosi, the new speaker of the House, is now turning her attention to global warming. She is setting up a committee to address both that issue, and America's dependence on imported fuel. She wants to see legislation before July 4th, so that she can declare “energy independence” on the same day that the founding fathers severed political ties with Britain.

Meanwhile, some half-dozen bills on global warming are circulating in the Senate. Several propose cap-and-trade schemes, whereby the government would create a fixed number of permits to produce greenhouse gases and then auction them or allocate them to businesses. Firms without enough permits to cover their emissions would either have to pollute less, or buy up spare ones from firms that had managed to cut back.

John McCain, a leading Republican presidential candidate, and Joe Lieberman, a former Democratic one, are behind the most prominent cap-and-trade scheme. Barack Obama, one of the Democrats' current presidential aspirants, is a co-sponsor. It is the most ambitious of the bills with serious backing: it would cut carbon emissions to 2004 levels by 2012 and then mandate further reductions of 2% a year until 2020. Although these targets are less onerous than those of the Kyoto protocol, the United Nations' treaty on climate change, most analysts reckon they will prove too exacting for Congress.

An alternative cap-and-trade scheme, sponsored by Jeff Bingaman, chairman of the Senate Energy Committee, suffers from the opposite problem: excessive modesty. His plan would aim to slow the growth of emissions, and ultimately stabilise them at their 2013 level by 2020. It includes a safety valve, under which the government would automatically issue more permits to pollute if the price of those permits rose too far. The economic impact would be much smaller than under the McCain-Lieberman plan but so, too, would the reductions in emissions.

Dianne Feinstein, a Democratic senator from California, is proposing a third approach. She wants to create cap-and-trade mechanisms within industries rather than across the economy as a whole. She has, for instance, proposed legislation that would cut power companies' emissions by 25% of their projected levels by 2020.

All these initiatives face an uphill battle. The previous Senate rejected the McCain-Lieberman plan twice—by a bigger margin the second time around. Any bill that involves mandatory caps on greenhouse-gas emissions would need 60 of the chamber's 100 votes to succeed, since Mr Inhofe has pledged to filibuster all such measures. In the House the Energy Committee is chaired by John Dingell, a Democrat from the carmaking hub of Detroit who has long opposed mandatory caps. Mr Dingell, who says Ms Pelosi's new committee is “as useful as feathers on a fish”, will still have a big say in any legislation. And even if a bill overcomes all these obstacles, it would risk a presidential veto.

A matter of security
But whatever the fate of these proposals, the political climate is changing faster than the weather. Almost all the leading presidential candidates favour emissions caps. One of them, Hillary Clinton, has condemned the Bush administration's failure to act as “unAmerican”. That is a remarkable change since 2000, when Al Gore toned down his environmental rhetoric during his presidential campaign for fear of sounding pious and obsessive. Indeed, activists are so convinced that the next president will be greener than Mr Bush that they are debating whether to settle for immediate but modest measures on global warming, or wait for a new administration to take bolder steps.

The Democrats have always been the greener party, but environmentalism is budding among Republicans too. Take Saxby Chambliss, a moderate senator. He voted against the McCain-Lieberman bill in 2005, but changed his mind after visiting Greenland to view the melting ice cap. “There really is something to it,” he now says.

Many factors lie behind the party's shift. Most have to do not with sudden sentimentality in the face of Nature, but with national security (a motivation that lies, too, behind Ms Pelosi's new committee and Mrs Clinton's patriotic posturing). Fiscal hawks fret about the impact of growing oil imports on the dollar. Military types fear global conflict for dwindling resources in the event of catastrophic global warming. Neoconservatives worry about America's dependence on oil imports from unstable if not openly hostile countries in Latin America and the Middle East. Some think the solution is simply to pump more oil at home, but others argue that America needs to move away from oil altogether. One such figure, Jim Woolsey, a former director of the Central Intelligence Agency, pointedly drives a Toyota Prius, a famously fuel-efficient car.

At the same time, a growing number of evangelical Christians are beginning to see global warming as a moral issue. They argue that mankind, as steward of God's creation, has a duty to protect the environment. One outfit, the Evangelical Climate Initiative, encourages prominent pastors and theologians to sign a “Call to Action”. Another group, the Evangelical Environmental Network, runs a website called “What would Jesus drive?” Last year Pat Robertson, a prominent televangelist, told his flock, “We really need to address the burning of fossil fuels.”

The Republican Party has a strong, albeit fitful, tradition of environmentalism. Teddy Roosevelt expanded America's national parks. Richard Nixon created the Environmental Protection Agency (EPA). Mr Bush's father, when he was president, signed off on America's first nationwide cap-and-trade scheme to control emissions of the gases that cause acid rain.

But the strongest force propelling environmentalism among Republicans is self-preservation. Arnold Schwarzenegger, the decidedly green governor of California, was one of the few luminaries in the party unaffected by last year's electoral meltdown. Republicans in other western states, where a Democratic tide is rising and a pristine landscape is a major tourist attraction, are following Mr Schwarzenegger's moves with interest. They fear the party may lose ground with moderate middle-class types who dislike urban sprawl and unfettered oil-drilling.

The destruction wrought by Hurricane Katrina in 2005 had a big influence on voters, according to Jonathan Lash of the World Resources Institute. Americans seem to view the increasing incidence of freakish weather as proof that climate change is real. Many of them paid to see Mr Gore's film on the subject, making it the third-most-successful documentary of all time (and now a candidate for an Oscar). Polls show that Americans are gradually growing more exercised about global warming, although they are still less anxious than Europeans or Japanese.


The business view
Even big business, which stands to lose most from stricter environmental regulation, is beginning to accept that change is in the air. Exxon Mobil, led until recently by a fierce sceptic of global warming, now concedes that there is a problem, and that its products are contributing to it. Last year four-fifths of utility executives polled by Cambridge Energy Research Associates, a consultancy, expected mandatory emissions caps within a decade.

If regulation is indeed on its way, many firms would like Congress to fix the rules sooner rather than later, to help them plan investments in factories and power plants with long lifespans. Earlier this week ten companies, including Alcoa, Caterpillar and DuPont, called for Congress to set up a cap-and-trade system for greenhouse gases as quickly as possible. Since most of the firms involved produce clouds of emissions, they would obviously like to influence future legislation.

But the firms' bosses claim to see emissions caps as an opportunity, not a threat. GE, a member of the group, wants its executives to use their “ecomagination”. By the same token Rick Wagoner, the head of GM, the world's biggest carmaker, recently hoped aloud that oil prices would remain high, so that his firm would keep its incentive to develop fuel-efficient cars. Wal-Mart, America's biggest retailer, hopes to double its sales of low-watt lightbulbs.

Lots of firms are growing healthily on the back of America's sudden enthusiasm for alternative energy. Americans invested almost $30 billion in the sector in 2006, according to New Energy Finance, a research firm. American venture capitalists lavish seven times more on greenery than their counterparts in Europe. Ethanol production was expected to double in the next few years, even before the latest boost from Mr Bush. Wind and solar power are also booming. And the bigger green firms become the more influence they will have over politicians.


States to the fore
At the very least, businesses want to avoid a patchwork of conflicting local regulations on environmental matters in general, and greenhouse-gas emissions in particular. There is already a bit of a muddle, since several states have taken much bolder and more experimental steps than the federal government. California, the boldest of all, has taken on carmakers, electricity companies and the EPA, to name a few. Its politicians vie to out-green one another. Some 40 of its legislators drive hybrid cars. Mr Schwarzenegger, not to be bested, has converted one of his fuel-swigging Hummers to run on hydrogen.

Congress may be thinking about tackling greenhouse-gas emissions, but California has already done it. Its Global Warming Solutions Act, which was passed last year, aims to cut them to 1990 levels by 2020—an ambitious target for a state that has grown rapidly in the past 15 years and will probably continue to do so. The details have yet to be fleshed out, but the reductions will come from both a cap-and-trade scheme for industry and regulations of various sorts.

Mr Schwarzenegger issued the first such regulation earlier this month, obliging producers of petrol and other fuels to cut the emissions of carbon dioxide from their products by 10% by 2020—presumably by mixing in more ethanol and other biofuels. It is not California's first attempt to reduce emissions from transport: its legislature voted for stringent cuts in 2002. That move has become snarled in a court battle over whether states have the right to set fuel-economy standards. Meanwhile, the politicians keep trucking. In September, the state showily sued six car manufacturers, alleging they had damaged its climate. It is also suing the EPA, for failing to regulate greenhouse-gas emissions.

California's politicians are keen on renewables too. State law requires utilities to generate 20% of the power they sell from sources such as windmills and biomass plants by 2010, and 33% by 2020. Solar power has won even greater favour: under the “million solar roofs” scheme, the state plans to spend more than $3 billion over the next decade subsidising the installation of solar-power panels.

California has also pioneered the practice of “decoupling”, which deprives power firms of their incentive to sell as much electricity as possible. Instead, the local regulator has devised a formula to reward firms whose sales are lower than expected, and to allow the recovery of the costs of energy-efficiency schemes.

Such measures (along with high power prices to pay for them) have helped California rein in its electricity consumption—although lovely weather and a relative lack of heavy industry have also played a part. Power use per person has remained roughly stable in the state since the 1970s, even as it has doubled in the rest of the country. As a result, California's greenhouse-gas emissions per person are on a par with those of Denmark. Relative to the size of its economy, they are lower.

But California is not America's only green enclave. Nine states in the north-east have combined to reduce emissions from power generation through a cap-and-trade scheme. Two of them plan to auction all the permits, unlike the countries in the European Union's Emissions Trading Scheme, which handed them out for nothing. Ten states have signed up to follow California's standards on car exhaust, including its requirements on greenhouse gases. Many more promote ethanol, or renewables, or energy-efficient buildings.

On the whole, left-leaning states are keener on greenery than right-wing ones, which tend to be more energy-intensive. But politicians of all stripes in the Midwest are keen to promote ethanol for the sake of local farmers, who grow the corn from which it is made. And Texas recently overtook California as the country's biggest generator of wind power.

Greenery is also popular at the local level. Almost 400 cities have devised plans to curb or reduce their greenhouse gas emissions. Many buy only fuel-efficient cars for their municipal fleets. Laura Miller, the mayor of Dallas, has spoken out against the plans of local utilities to build 17 new coal-fired power plants. What is the point of her city buying police cars fuelled by natural gas, she asks, when they will soon be overshadowed by clouds of soot?

Despite all this grassroots environmentalism, America remains the biggest contributor to global warming, accounting for roughly a fifth of all the world's emissions. The federal government's recalcitrance on the subject remains the biggest obstacle to an effective global scheme to tackle the problem. But whereas in Europe or Asia new ideas often flow from the centre to the regions, in America the states are the incubators of big shifts in policy. This means that change is coming—fast.

Davos Day 2: The Future Depends on Increasing Energy Efficiency

The Future Depends on Increasing Our Energy Efficiency
January 25, 2007 -- By Lester R. Brown, The Huffington Post

Two panels that I will participate in today focus on the future of energy.

One of the primary motivations for writing my most recent book Plan B 2.0 - which can be downloaded for free at the Earth Policy Institute's web site -- was confronting the dangers of our current, fossil-fuel based energy economy and its role in catastrophic climate change.

A major chunk of the book, along with much of the work we do at the Earth Policy Institute, focuses on describing a viable alternative-energy economy.

The good news is that solutions do exist.

We see the 21st century, alternative-energy economy already emerging in the growing reliance on wind-energy in Europe, where 40 million people get their residential electricity from wind, the use of geothermal energy to heat 87 percent of homes in Iceland, the expansion of solar energy in Japan, and the growing fleet of hybrid cars here in the United States.

Another major solution is seen in the development of biofuels. I recently posted this piece regarding the dangers of the over-reliance of ethanol from corn. While that danger is very real, a rational and thoughtful approach to biofuels, which includes a greater reliance on cellulosic ethanol, should be an important part of our 21st century energy economy.

One crucial area of focus, a step we can take essentially immediately, is raising energy efficiency -- especially in the United States.

When the Bush administration released a new energy plan in April 2001 that called for construction of 1,300 new power plants by 2020, Bill Prindle of the Washington-based Alliance to Save Energy responded by pointing out how the country could eliminate the need for those plants and save money in the process. He ticked off several steps that would reduce the demand for electricity:

* Improving efficiency standards for household appliances would eliminate the need for 127 power plants;
* More stringent residential air conditioner efficiency standards would eliminate 43 power plants;
* Raising commercial air conditioner standards would eliminate the need for 50 plants;
* Using tax credits and energy codes to improve the efficiency of new buildings would save another 170 plants;
* Similar steps to raise the energy efficiency of existing buildings would save 210 plants.

These five measures from the longer list suggested by Prindle would not only eliminate the need for 600 power plants, they would also save money. Although these calculations were made in 2001, they are still valid simply because there has been so little progress in raising U.S. energy efficiency since then.

One simple energy-saving step is to replace all remaining incandescent light bulbs with compact fluorescent lamps (CFLs), which use only one third as much electricity and last 10 times as long. In the United States, where 20 percent of all electricity is used for lighting, if each household replaced the still widely used incandescents with compact fluorescents, electricity for lighting would be easily cut in half. The combination of greater longevity and lower electricity use greatly outweighs the higher costs of the CFLs, yielding a risk-free investment return of some 25-40 percent a year. Worldwide, replacing incandescent light bulbs with CFLs in, say, the next three years would facilitate the closing of hundreds of climate-disrupting coal-fired power plants.

A second obvious area for raising energy efficiency is automobiles. If over the next decade the United States, for example, were to shift from the current fleet of cars powered with gasoline engines to gas-electric hybrids with the fuel efficiency of the Toyota Prius, gasoline use could easily be cut in half. Higher gasoline prices and mounting climate change worries are driving sales upward.

This is but one area of focus, but in theory its application is among the simplest in the short term.

There is no silver bullet when it comes to replacing our climate-altering, fossil fuel-based economy. But, using technologies readily available today, we can take a massive step towards the diversified, Plan B, alternative-energy economy of tomorrow.

For more Davos coverage -- including news, videos, and blog posts -- visit the Davos Conversation site.

Davos Notes: Considering the Real Costs of Our Energy Economy

Davos Notes: Considering the Real Costs of Our Energy Economy
January 24, 2007 -- By Lester R. Brown, The Huffington Post

Davos 2007 has officially begun. For me, the highlight of the first day consisted of a series of debates, part of CNBC's Make Green Pay panel.

As is true with most events at the World Economic Forum, the topics of each of the event's three panels were controversial, and the speakers on both sides were thoughtful and impressive.

I participated as a featured speaker discussing, among other things, the viability of nuclear energy as a solution to our world's current fossil-fuel-based energy economy.

As concerns over climate change have mounted in recent years, nuclear energy has been touted as a viable alternative to our current dependency on carbon-intensive energy sources.

The truth however, is that when the real costs of nuclear power are considered, the energy source is quickly taken out of the running.

In fact, on a level playing field with no taxpayer subsidies, nuclear power is dead. If utilities pay the full costs of nuclear waste disposal, of insurance against an accident, and of decommissioning plants that are worn out, the cost of nuclear power will far exceed that of other promising alternatives.

This notion of real costs is something that our fossil-fuel-based throwaway economy does not take into account.

In my recent book, Plan B 2.0 - which is downloadable, free of charge from the Earth Policy Institute's website - I urge considering the real costs of all products as we develop the necessary 21st century, Plan B, economy.

What does "real costs" mean? It means including the total ecological and health costs of products on their prices.

Throughout most of recorded history, the indirect costs of economic activity were so small that they were rarely an issue and, even then, only at the local level. But with the sevenfold global economic expansion since 1950, the failure to address these market shortcomings and the irrational economic distortions they create could be fatal.

Our modern economic prosperity is achieved in part by running up ecological deficits, costs that do not show up on the books, but costs that someone will eventually pay.

The burning of coal, for example, results in increased costs for society as citizens are affected by breathing polluted air, as well as for governments that will be forced to deal with the effects of climate change.

Instead of pushing these costs - which will have to be paid at some point - off until the future, it makes more sense to incorporate them at the front end. The method for this, increasing taxes on environmentally damaging goods while decreasing income taxes, is a model I discuss at length in Plan B 2.0.

It is also something that has been proposed by ecologists and economists alike, and, when real costs are included in the pricing of goods, it is the greener, alternative energy sources - like wind, solar, and geothermal - that emerge as the cheapest, most viable solutions to our current model.

The notion of taxing products to include their entire cost to society is something that is being put into practice here in the United States in the form of tobacco taxes.

A study by the Centers for Disease Control and Prevention (CDC) in the United States calculated the social costs of smoking cigarettes at $7.18 per pack. As a result, prices for cigarettes in many states across the country are rising toward this number - a result of increased taxes intended to offset the social costs.

When it comes to energy, the International Center for Technology Assessment has done a detailed analysis, entitled "The Real Price of Gasoline." The group calculates several indirect costs, including oil industry tax breaks, oil supply protection costs, oil industry subsidies, and health care costs of treating auto exhaust-related respiratory illnesses. The total of these indirect costs centers around $9 per gallon, somewhat higher than the social cost of smoking a pack of cigarettes. Add this external or social cost to the roughly $2 per gallon average price of gasoline in the United States in early 2005, and gas would cost $11 a gallon (this does not include projected costs of climate change). These costs are real; someone bears them.

Now that these costs have been calculated, they can be used to restructure taxes--lowering income taxes and offsetting this with a rise in gasoline taxes.

This practice is a necessary component to any energy economy we consider as a solution to our current fossil-fuel-based energy economy.

That being said, nuclear energy with the real costs of insurance, construction, security and waste disposal becomes among the most expensive form of energy in the world.

Conversely, green, clean, renewable energy becomes the most viable; the costs we see today are very close to the real costs we would endure as most of these energy sources have few if any hidden effects on society.

It's time we start being honest about what various energy options actually cost in the long run. It was the failure to do so in the first place that brought us to this juncture in human history, where we must decide on our future. If we are willing to acknowledge the full effects of our actions - including total societal costs of our energy choices - then we may yet avert some of the impending consequences of global climate change.

For more Davos coverage -- including news, videos, and blog posts -- visit the Davos Conversation site.

America's Moral Leadership & Pollution

The Greening of America
January 25, 2007 -- The Economist

How America is likely to take over leadership of the fight against climate change; and how it can get it right.

A country with a presidential system tends to get identified with its leader. So, for the rest of the world, America is George Bush's America right now. It is the country that has mismanaged the Iraq war; holds prisoners without trial at Guantánamo Bay; restricts funding for stem-cell research because of fundamentalist religious beliefs; and destroyed the chance of a global climate-change deal based on the Kyoto protocol.

But to simplify thus is to misunderstand—especially in the case of huge, federal America. One of its great strengths is the diversity of its political, economic and cultural life. While the White House dug its heels in on global warming, much of the rest of the country was moving. That's what forced the president's concession to greens in the state-of-the-union address on January 23rd. His poll ratings sinking under the weight of Iraq, Mr Bush is grasping for popular issues to keep him afloat; and global warming has evidently become such an issue. Albeit in the context of energy security, a now familiar concern of his, Mr Bush spoke for the first time to Congress of “the serious challenge of global climate change” and proposed measures designed, in part, to combat it.


Hot for the time of year
It's the weather, appropriately, that has turned public opinion—starting with Hurricane Katrina. Scientists had been warning Americans for years that the risk of “extreme weather events” would probably increase as a result of climate change. But scientific papers do not drive messages home as convincingly as the destruction of a city. And the heatwave that torched America's west coast last year, accompanied by a constant drip of new research on melting glaciers and dying polar bears, has only strengthened the belief that something must be done.


Business is changing its mind too. Five years ago corporate America was solidly against carbon controls. But the threat of a patchwork of state regulations, combined with the opportunity to profit from new technologies, began to shift business attitudes. And that movement has gained momentum, because companies that saw their competitors espouse carbon controls began to fear that, once the government got down to designing regulations, they would be left out of the discussion if they did not jump on the bandwagon. So now the loudest voices are not resisting change but arguing for it.

Support for carbon controls has also grown among some unlikely groups: security hawks (who want to reduce America's dependence on Middle Eastern oil); farmers (who like subsidies for growing the raw material for ethanol); and evangelicals (who worry that man should be looking after the Earth God gave him a little better). This alliance has helped persuade politicians to move. Arnold Schwarzenegger, California's Republican governor, has led the advance, with muscular measures legislating Kyoto-style curbs in his state. His popularity has rebounded as a result. And now there is movement too at the federal level, which is where it really matters. Since the Democrats took control of Congress after the November mid-term elections, bills to tackle climate change have proliferated. And three of the serious candidates for the presidency in 2008—John McCain, Hillary Clinton and Barack Obama—are all pushing for federal measures.


Europe's good, and bad, example
Unfortunately, Mr Bush's new-found interest in climate change is coupled with, and distorted by, his focus on energy security. Reducing America's petrol consumption by 20% by 2017, a target he announced in the state-of-the-union address, would certainly diminish the country's dependence on Middle Eastern oil, but the way he plans to go about it may not be either efficient or clean. Increasing fuel-economy standards for cars and trucks will go part of the way, but for most of the switch America will have to rely on a greater use of alternative fuels. That means ethanol (inefficient because of heavy subsidies and high tariffs on imports of foreign ethanol) or liquefied coal (filthy because of high carbon emissions).

The measure of Mr Bush's failure to tackle this issue seriously is his continued rejection of the only two clean and efficient solutions to climate change. One is a carbon tax, which this paper has long advocated. The second is a cap-and-trade system of the sort Europe introduced to meet the Kyoto targets. It would limit companies' emissions while allowing them to buy and sell permits to pollute. Either system should, by setting a price on carbon, discourage its emission; and, in doing so, encourage the development and use of cleaner-energy technologies. Just as America's adoption of catalytic converters led eventually to the world's conversion to lead-free petrol, so its drive to clean-energy technologies will ensure that these too spread.

A tax is unlikely because of America's aversion to that three-letter word. Given that, it should go for a tough cap-and-trade system. In doing so, it can usefully learn from Europe's experience. First, get good data. Europe failed to do so: companies were given too many permits, and emissions have therefore not fallen. Second, auction permits (which are, in effect, money) rather than giving them away free. Europe gave them away, which allowed polluters to make windfall profits. This will be a huge fight; for, if the federal government did what the Europeans did, it would hand out $40 billion-50 billion in permits. Third, set a long time-horizon. Europeans do not know whether carbon emissions will still be constrained after 2012, when Kyoto runs out. Since most clean-energy projects have a payback period of more than five years, the system thus fails to encourage green investment.

One of America's most admirable characteristics is its belief that it has a duty of moral leadership. At present, however, it's not doing too well on that score. Global warming could change that. By tackling the issue now it could regain the high moral ground (at the same time as forging ahead in the clean-energy business, which Europe might otherwise dominate). And it looks as though it will; for even if the Toxic Texan continues to evade the issue, his successor will grasp it.

CAFE vs. Pigou

An interesting issue brief written by the Congressional Budget Office was brought to my attention by the great Harvard economist, Greg Mankiw. This article compares the costs and benefits of both CAFE standards and Pigovian taxes.

This issue brief focuses on the economic costs of corporate average fuel economy (CAFE) standards and compares them with the costs of a gasoline tax that would reduce gasoline consumption by the same amount. The Congressional Budget Office (CBO) estimates that a 10 percent reduction in gasoline consumption could be achieved at a lower cost by an increase in the gasoline tax than by an increase in CAFE standards. Furthermore, an increase in the gasoline tax would reduce driving, leading to less traffic congestion and fewer accidents. This analysis stops short of estimating the value of less congestion and fewer accidents and, therefore, does not draw any conclusions about whether an increase in the gasoline tax would be warranted. However, CBO does find that, given current estimates of the value of decreasing dependence on oil and reducing carbon emissions, increasing CAFE standards would not pass a benefit-cost test.

Geo-Green Patriot Tax

In the June 16th issue of The New York Times, Thomas L. Friedman writes on his hopes for a third party to run in 2008 with a double dividend platform:

What might a Geo-Green third party platform look like?

Its centerpiece would be a $1 a gallon gasoline tax, called "The Patriot Tax," which would be phased in over a year. People earning less than $50,000 a year, and those with unusual driving needs, would get a reduction on their payroll taxes as an offset.

...
The billions of dollars raised by the Patriot Tax would go first to shore up Social Security, second to subsidize clean mass transit in and between every major American city, third to reduce the deficit, and fourth to massively increase energy research by the National Science Foundation and the Energy and Defense Departments' research arms.

Most important, though, the Patriot Tax would increase the price of gasoline to a level that would ensure that many of the most promising alternatives — ethanol, biodiesel, coal gasification, solar energy, nuclear energy and wind — would all be economically competitive with oil and thereby reduce both our dependence on crude and our emissions of greenhouse gases.

Pigovian Tax

The legacy that a society leaves for future generations is always remembered more than the short-term shenanigans that ensued because of shortsighted policies. The baby boom generation's legacy will likely consist of: conflicts with communist nations, the internet, terrorism, Social Security, Medicare and environmental degradation. The last of which might be most damaging and therefore remembered by future generations.

Following U.S. leadership of environmental neglect, the world is experiencing the largest mass extinction in approximately 65 million years, human population is over 6.5 billion -- and exponentially growing -- and the global economy has been incapable of representing sustainable policies.

Carbon as a commodity is an ingenious, yet, extraordinarily complex endeavor that is unlikely to produce the intended results for at least a decade. Until the externalities of pollution can be respected and individuals feel ownership towards environmental degradation, the economy will continue on this unsustainable path. Ironically, the tragedy of the commons could one day represent the legacy of the country that declared war against communism, the U.S.A.

There is no single solution to this problem that has been exacerbated by the children of the 'greatest generation'. Pigovian taxes are likely the best immediate response to curb the enthusiastic consumption by industrialized nations. Greg Mankiw opines that Pigouvian taxes could be the answer to everyone's problems.

The Democrats say they want more environmental protection. The Republicans say they want to make permanent the recent cuts in income, dividend, and estate taxes. Everyone says they want a smaller budget deficit. We can achieve all of these objectives by agreeing to higher Pigovian taxes, such as taxes on gasoline or carbon. The Republicans concede that government revenue will be higher than it is under the President's proposed budget, and the Democrats concede that the President's tax cuts on income, dividends, and estates will be permanent.

The burden of any tax is shared by both buyers and sellers regardless of whom it is levied on. However, the benefits of conserving finite resources using policy will promote sustainable development and healthier living. The comparative advantage of a consumption tax versus a capital tax should be discussed more among economists, politicians and the common citizen. Taxing capital discourages saving whereas taxing consumption does not!

Three Votes For a Carbon Tax

I always enjoy reading Greg Mankiw's Blog and this post was in response to John Tierney's thoughts on the film, 'An Inconvenient Truth.'

"In the March 23, 2006 NY Times, columnist John Tierney discussed the new Al Gore film, 'An Inconvenient Truth.' An excerpt:

Gore doesn't mind frightening his audience with improbable future catastrophes, but he avoids any call to action that would cause immediate discomfort, either to filmgoers or to voters in the 2008 primaries.

He doesn't propose the quickest and most efficient way to reduce greenhouse emissions: a carbon tax on gasoline and other fossil fuels. The movie gives him a forum for talking sensibly about a topic that's taboo on Capitol Hill, but he instead sticks to long-range proposals that sound more palatable, like redesigning cities to encourage mass transit or building more efficient cars and appliances.

Gore shows the obligatory pictures of windmills and other alternative sources of energy. But he ignores nuclear power plants, which don't spew carbon dioxide and currently produce far more electricity than all ecologically fashionable sources combined.

A few environmentalists, like Patrick Moore, a founder of Greenpeace, have recognized that their movement is making a mistake in continuing to demonize nuclear power. Balanced against the risks of global warming, nukes suddenly look good -- or at least deserve to be considered rationally. Gore had a rare chance to reshape the debate, because a documentary about global warming attracts just the sort of person who marches in anti-nuke demonstrations.

Gore could have dared, once he enticed the faithful into the theater, to challenge them with an inconvenient truth or two. But that would have been a different movie.

Tierney is right: To the extent that carbon-based global warming is a problem (an issue on which I do not have the expertise to opine), the best solution is a carbon tax.

An economist who has studied the topic of global warming extensively is Bill Nordhaus. Bill was a CEA member during the Carter administration and is now a member of the Yale economics faculty. In a March 2006 article, he wrote:

As policy makers search for more effective and efficient ways to slow the trends, they should consider the fact that harmonized environmental taxes on carbon are powerful tools for coordinating policies and slowing climate change.

The two issues that Tierney raises--the carbon tax and nuclear energy--are closely related. One effect of a carbon tax is that it would automatically promote nuclear energy. Right now, production of electricity via nuclear power is not particularly cost-efficient compared to alternatives such as coal. But a carbon tax would make coal-produced electricity more expensive, encouraging utilities to take another look at nuclear power.

So here are three votes for a carbon tax: Tierney, Nordhaus, and Mankiw. The first is a journalist who leans libertarian, the second is an economist who worked in a Democratic administration, and the third is an economist who worked in a Republican administration. What do we all have in common? None of us is planning to run for elected office."