Carbon tax, please!

Since "tax" is such a politically charged word, perhaps it should come as no surprise that no Democratic candidate came out in favor of a carbon tax in Saturday's debate. Nobody wants to go down like Kerry who was lampooned for his gas tax. But in my opinion, the case for a carbon tax is strong.

It is clear that we need to do something to confront climate change. Assuming you agree with the previous statement, please continue. If not, please read the footnote. So the question is: how to most efficiently reduce GHG emissions?

A carbon tax and a system of mandates designed by legislators are the leading options. If we let politicians design the code of mandates to reduce carbon taxes, the laws will be vulnerable to lobbyists, political groups such as the Iowan corn farmers, and the basic ignorance of Congressmen on the changing complications of energy technologies. For example, the past two years have seen politicians run towards ethanol as our savior, but the next two years will hopefully see legislators run away from ethanol even faster. The EPA has gradually learned that environmental problems are solved through markets much more efficiently than through mandates, which is why increasingly more of their regulations are designed around economic incentives rather than mandates. Our tax on SO_x and NO_x emissions reduced the emissions at much lower than the predicted cost, and proved to be the best example of how efficient a tax can be at achieving lower pollution. This is why Europe now is using a market to meet its Kyoto obligations.

A carbon tax, by raising the price of conventional power, would incentivize the supply renewable power like solar and wind. It would discourage the use of inefficient equipment, wasteful processes, dirty cars, and coal power.

The externalities produced by pollution should be internalized via a pricing scheme that makes polluters pay for the damages caused by their pollution. Just as we would want a company that ejects its toxic waste into a river to pay to clean it up, we should make companies that emit greenhouse gases into the atmosphere to pay for the costs they impose on society. Economists favor Pigovian taxes like a carbon tax because they tax a "bad" (e.g. pollution) rather than a "good" (e.g. income). The levy of a tax tends to reduce the production of what is taxed, so we'd prefer to tax pollution rather than income. In fact, the carbon tax can substitute for some of the income tax, payroll tax, or other taxes that tax "goods". Alternatively, revenue raised from the carbon tax can be used to pay for research for green technologies, reducing the deficit, bailing out social security, or other programs.

The common objections to a carbon tax are: 1) it would cost us too much to impose a tax on emissions. 2) A carbon tax will let the big polluters continue to pollute by simply paying more money. 3) Who would pay the carbon tax? 4) Would a carbon tax be regressive? I'll address each of these concerns.

1) Cost
To the contrary, there are a number of economic arguments for doing something now. First, prevention is usually cheaper than the cure. It would be far costlier to let climate change run its course than to try to stop it. According to the Stern Report, the effects of climate change may cost us 10-20% of global GDP, making it the biggest market failure in history, while the cost of avoiding that climate change will cost on the order of 1% of GDP. Second, because we've done so little thus far to reduce our carbon footprint, the first carbon reductions can be done at no--or even negative--net cost. Green buildings usually pay for themselves within a few years. California's Global Warming Solutions Act will reduce California's 2020 emissions to 1990 levels at zero cost, according to three separate studies¹. Third, any emissions-saving technologies we put in place now will benefit us in all future years by lowering future emissions. The faster we move, the sooner we see the benefits. Finally, developing clean technologies will be a major driver of economic growth in the 21^st century. Far from being a drag on our economy, clean technologies can be exported all over the world. If we hesitate in developing these technologies, Europe will steal a march on us, because they aren't waiting to develop solar power.

2) Big Polluters
The biggest polluters are not immune to economic incentives. If they find themselves paying the biggest share of the carbon tax, they will adjust their operations to reduce the tax they owe. They will either clean up or be forced to take on other projects to offset their emissions. And letting each company decide how to most cost-effectively reduce their carbon footprint will be more efficient than a one-size-fits-all system designed by Washington DC.

3) Who Pays?
There seems to be some confusion in how one would measure and administer a carbon tax. Really, it is quite simple in practice. Every fuel contains a known amount of carbon. A price on carbon emissions can easily be translated into a surplus fee on the sale of fuel, be it gasoline, coal, oil, or natural gas. The utilities that pay a higher fee for fuel would pass that fee onto the consumers. Consumers, seeing rates go up, would be encouraged to minimize their consumption, which is exactly the purpose of the carbon tax.

4) Do the poor pay more?
I don't know if a carbon tax would be regressive or progressive. While the poor may spend a larger fraction of income on gasoline, the rich may take more airplanes, have bigger (or multiple) houses, fancier electronic gadgets, larger SUVs, and buy more products that take energy to produce. According to one study, the highest earning quintile of American households would pay 3.6 times as much as the lowest quintile of a carbon tax, though the lowest quintile would pay a larger fraction of their income. If it turns out that the carbon tax is heavily regressive in practice, part of the funds raised from the tax can be transferred back to the poor in a reduced income tax on lower tax brackets or some such device.

References
¹

• “Economic Assessment of Some California Greenhouse Gas Control Policies: Applications of the BEAR Model.” In Managing Greenhouse Gas
  Emissions in California, ed. Michael Hanemann and Alexander Farrell, Chapter 2.
  University of California at Berkeley: The California Climate Change Center. January.
  
• California Climate Action Team: Climate Action Team Report to Governor Schwarzenegger and the Legislature. March.
  
• Center for Clean Air Policy: Cost Effective GHG Mitigation Measures for California: Summary Report. January 19.

Further Reading

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The Case For Doing Something, Reason #144

As Jared Diamond writes in his recent NY Times article, as the developing world develops, they will consume more and begin to mimic the pattern of the first world. If they come to consume as much as the first world, the world consumption factor would increase by eleven times--equivalent to a global population of 72 billion people at current consumption rates. Optimists argue that we will be able to support the predicted global population of 8 billion in 2030, but we certainly cannot support an effective population of 72 billion people. Jared Diamond's book Collapse argues very effectively that the strains produced by the gap between the haves and have-nots leads to many of the geopolitical problems in the world today. In the future, as demand for resources grows, it will be very difficult to diplomatically allocate the resources without reverting to war. Hence, this year's Nobel Peace Prize was given to the panel studying and urging action to mitigate climate change.

If this still sounds far-fetched, Tom Friedman makes the point that the money we spend on gas goes to the Saudis. The Saudis are the biggest funders of madrasas in Pakistan and throughout the Middle East, and most terrorists come from madrasas.

Food, Ethanol, and Energy

According to an article in The Economist, food prices are near all-time highs in nominal terms, and above recent highs in real terms. This is due to an ensemble of disastrous farm policies encapsulated in The Farm Bill and our obsession with corn-based ethanol. Leaving aside the other glaring problems with The Farm Bill, corn-based ethanol is a monster that needs to be scared away.

While Iowa, Bush, Congress, and the campaigning Presidential candidates are pressing ethanol as our energy security panacea, those of us who don't have to win Iowa know better, including the Wall Street Journal in this article, which spells out the disillusionment with ethanol. Corn is a crop that is hungry for water and fertilizer, and therefore not very efficient, as fertilizer production is one of the dirtiest industries in the world in terms of GHG production. According to various estimates, it takes between 0.78 and 2.2 units of energy from oil to get 1 unit of energy in ethanol. Even according to the optimistic estimate, we aren't doing very well. Worse yet, every dollar we spend to subsidize ethanol is a dollar that can't be spent to develop a more promising technology.

Ethanol, in competing with food as a use of corn, is driving food prices up, which hurts the poor most. According to one estimate, modest ethanol substitution for gasoline will cost the US $1 billion per year. Even if we use all corn production for ethanol, it will only displace 12% of our gasoline usage. At the same time, current Congressional funding for ethanol results in subsidies for oil refineries--is this the industry we should be subsidizing in our pursuit of renewable energy?

I have been in dozens of energy conferences, and I have yet to hear a scientist say a good word about corn based ethanol. The production of ethanol from corn is an inefficient process. A scientist from Eastman went so far as to say that we'd be better off from a carbon-sink standpoint if we grew the corn and buried it rather than turned it into ethanol. Switchgrass and hybrid poplars are popular plants for carbon sinks because they grow quickly and with very few inputs. But corn is way down the list of something we ought to be growing on a global scale to solve our climate change problems. Before we overhaul our farm system and energy economy, oughtn't we consider the options and pick a rational one?

Join me in telling Congress and the Presidential candidates to refuse pandering to Iowa, especially now that their caucus is over.

The Ice is Melting

Nasa released an alarming animation of the melting Arcic ice this year. In their animation they show the extent of ice in the Arctic from January to September of 2007.

Luckily, the Arctic ice floats on water, so the melting ice doesn't raise our sea levels. However, when Greenland melts like the Arctic is melting, watch out.

Energy intensity

Bush's favorite way to discuss energy is in terms of "energy intensity" of an economy, that is, the amount of energy used (or pollution output) per unit of GDP. When I went looking for stats, I was surprised to see that as of 2004, China's economy was actually more efficient than the US (ref 1). I'm sure that has changed in the last few years, but we're still not talking about huge differences between China and the US, just fractions. And this is despite the fact that all of China's recent economic growth has been based on construction and manufacturing, while ours has been in services--consulting, i-banking, dot coms--that are far less energy intensive industries.

I can only account for this because of our horrible leadership. Bush is probably the most backwards leader on the planet regarding energy. None of the candidates for 2008 are anywhere near as bad as he has been. We have stood in the way of climate change agreements (ref 2), and our standards for efficiency are lower than even China's (ref 3, p. 9). At least China and India have the excuse that they have hundreds of millions of people living without access to electricity, and they should be able to expand their infrastructure enough to get those people the bare minimum. Our excuse is that, as the richest economy in the world, we can't afford to adapt? That we developed the Hummer, and aren't about to stop driving it?

Furthermore, I have a philosophical disagreement with the concept of energy intensity. As we learn in high school econ, GDP is made up of government expenditures + investment + net exports + consumption, with consumption being the majority. Why then should we be allowed more emissions since we consume more than other countries? Our standard of living is the highest, our consumption is the highest, why should this give us the right to pollute more?

Finally, the common argument that we can't afford to adapt our economy to be more energy efficient is backwards. Many conservation measures, for example green buildings, will have a net positive effect on our economy. They pay for themselves within a year or two, and then save money for their entire lifetime after that, which, for a building, could be 100 years. Second, developing the skills and technologies to conserve and use renewable energy will be a huge growth factor in whatever economy takes on the challenge. If we let Germany or Japan build the best solar cells, then we are sacrificing a market that is potentially worth trillions of dollars. Shouldn't we try to be the world leader in these new industries? We have seen what happens to our auto industry when they fail to innovate--they become overtaken by more efficient Japanese cars. Let's not let this happen to the rest of our economy.


References
1. http://en.wikipedia.org/wiki/Image:Energy_Intensity.png
2. http://www.nytimes.com/2007/12/17/opinion/17mon1.html?ex=1355634000&en=890e7680d210f8c4&ei=5124&partner=permalink&exprod=permalink
3. http://theicct.org/documents/ICCT_GlobalStandards_20071.pdf page 9

Time for Solar

Our priorities are out of line. In our war in Iraq, we've spent far too much money and too many lives for oil rather than working for a cleaner, more sustainable energy source.

Thomas Friedman published another wonderful article in the NY Times explaining why we need to do something about energy. To illustrate how far we are behind other countries in our fuel effiency, here is a figure showing the current emissions standards in California and the US as a whole compared to other countries.



Please, check my sources:
Iraq: www.informationclearinghouse.info/article15499.htm
nuclear R&D www.ne.doe.gov/budget/neBudgetfY07CongRequest.html
other energy R&D: www.ncseonline.org/Affiliates/Handbook/cms.cfm?id=904#9-2
CAFE standards by country: theicct.org/documents/ICCT_GlobalStandards_20071.pdf

China: general impressions

Economy

Whatever you've heard about the Chinese economy is probably true. Walking around the cities brings home the explosive growth--every block has a crane on it, and even in the "small" cities (it is hard to find a city in China with fewer than one million people) skyscrapers are shooting up like a heroin addict. In this picture, next door to mainland China's tallest building, an even bigger beast is arriving. The Shanghai city palnners' optimism for growth and the agressiveness with which they pursue it is on display in the Shanghai urban planning building. Exhibits there show Shanghai's five year plan to become an international air and shipping hub, and continue to expand their suburbs to become tourist, commercial, industrial, and technological centers. The museum also has a stunning slideshow of pictures taken in the same location in 2004 and ten years ago; many places in the city are completely unrecognizable after even 10 years.

A middle class is emerging due to this success, making their presence known at tourist sites where the majority of tourists are now Chinese domestic tourists as opposed to foreign tourists.

Shanghai and the other zones that opened up to economic freedom earliest are the leaders in China economic development. Buoyed by financial success, Chinese customs, fashion, and attitudes are transforming most rapidly in these zones and diffusing outward into smaller cities.

When I traveled to China three years ago, I was amused by a number of commonplace occurrences on Chinese streets. First, I used to see men crouching around for hours at a time with nothing to do except gather around any commotion, be it a police officer, an argument, a tourist, or a board game (see right). Second, many men, sometimes the same men, would roll their shirts up to expose their bellies in the hot weather. Next, I was used to being stared at as an oddity and hearing people say "lao wai" (foreigner) to each other as I passed. I saw motorcycles and bicycles loaded with many times as much cargo as I imagined they could bear, presumably because it was more economical than a car or truck. Only three years later, I saw much less of all of that, especially in more urban areas.

Luckily for the sinophiles who've learned to love these quirks, there are still recognizable moments on the everyday Chinese street: naked babies' bottoms, funny Chinglish signs, and busses stopping in the middle of the road to pick up any extra cargo they can carry, be it passengers, rice, or raw meat. This fuel efficient and hyper-capitalist ingenuity is one reason I think China is the most capitalist economy in the world--at least from a tourist's perspective. Or maybe it was decreed from on high, maybe Hu Jintao passed the No Passenger Left Behind Act without my knowing it. So what is the political situation in China?

Politics

It is almost taboo to talk politics in China, but I sometimes dared to broach a few topics with people who spoke English. I love bringing up the uncomfortable issues of the environment, democracy, and Taiwan to see how people react. Across the country, typical responses to any political questions are: "the government has our best interests in mind, they are doing the right thing." Or, "it is not my place to make that decision, so I don't think about it." Perhaps the government can keep people happy by delivering economic improvements and more material goods to storefronts to divert their attention from political matters. If I ever got more specific comments to my questions, the opinions haven't changed much at all since I asked the same questions three years ago. On the environment, the consensus is that the economy comes first, and the environment can be cleaned up later. On democracy, people generally agree that "China isn't ready for democracy yet. All the peasants won't know how to vote." And on Taiwan, it seems as if the younger generation is slightly less militant than the older generation, but everyone insists on the "One Country" label, and nobody seems to be against war to regain Taiwan.

Spurred by my reading of a fantastic biography of Mao, I also asked people's perceptions of Mao. By the way, I highly recommend the book. Very well researched and excellent writing make it a good lesson in history for those who weren't alive during Mao's time, and its behind-the-Iron Curtain look at Mao and Stalin's relationship gives a fascinating account of how geopolitics was handled by the world's worst tyrants. The book's only flaw is that it is too biased against Mao, but I can certainly see that 10 years spent researching Mao would leave one with enough spite for Mao to fill a book.

Fashion

Aside from several bizarre trends, fashion in China is progressing rapidly to rather Western, or even Japanese styles, such as mod. The older generations tend to wear rather drab, formal attire: men usually wear a buttoned short sleeve oxford shirt with slacks and black or brown shoes, but never a suit, even in the morning rush hour in Pudong, Shanghai's equivalent to Wall Street. Younger people are flashier, brighter, and more daring. Again, the trendiness is more pronounced in Shanghai.

I found the most bizarre trends to be:

1. Pantie hose are still very common; even more common are socks made of pantie hose material. These may be worn with shorts, a skirt, and open toed shoes. I don't even remember when they went out of style in the US, but they are sill definitely around in China. Even men may wear socks made of this nylon.

2. Shirts full of English words, even if the words are misspelled or don't make sense (see picture).

What I used to be listening to

'07 Summer picks:
Lady Genius
Sparklehorse

'07 Spring picks:
Volunteer Pioneer
My Morning Jacket
Seu Jorge
Wolf Parade

'06 Winter Picks:
The New Pornographers
Neutral Milk Hotel
The Mars Volta
The Magnetic Fields
Devotchka

Climate Change Primer

The Problem

At its essence, the climate change argument is simple and irrefutable: as humans burn fuels, we emit the products of the combustion reaction into the atmosphere. We learn in high school chemistry that a combustion reaction emits CO₂:

C_iH_jO_k + (−k/2 + i + j/4)O_2(g) → iCO_2(g) + j/2 H₂O_(g)


As we burn increasing amounts of fuel, we are making changes to our environment on an unprecedented level. Measurements of the level of atmospheric greenhouse gases (GHG) since 1000 AD are well known, an example is shown in the figure to the left. Since the industrial revolution, the levels of GHG in our atmosphere have been exponentially increasing along with our fuel consumption.

While it is clear that we are impacting our climate on an enormous scale, the consequences are not all known or universally accepted; the global warming debate is much more complicated than the climate change debate. Global mean temperature records in figure 2 show a striking correlation–increasing temperatures over the same period of increasing GHG concentrations, though including a dip in temperatures in the 1970’s due to global cooling from particulate emissions. The temperature increase of about 1°C over the last 100 years may not sound like much, but only about 8°C separates the hottest recorded years in history with the depths of the coldest ice ages.

Global temperatures fluctuate periodically, and the next figure shows that the correlation between GHG concentrations and temperatures holds remarkably well for the last 400,000 years. The figure also shows that the earth is now hotter than it has been for the last 100,000 years and near the hottest temperatures recorded on earth for the last 400,000 years. Current greenhouse gas concentrations are higher than ever recorded, with methane, a particularly important greenhouse gas,at more than twice its record high.

The climate models cannot explain the recorded temperatures without including the effects of human activity, as shown in the next figure.

Atmospheric concentrations of GHG are integrals of the amount we emit, which is projected to grow exponentially for the near future. Global temperatures take some time to adjust to atmospheric GHG levels, so even if all GHG emissions stopped today, the planet would continue to feel the effect of past emissions for the lifetime of the GHGs in the atmosphere, hundreds to thousands of years.
The vital questions are: 1) as we continue to emit GHGs, what are the effects to our climate? 2) How can we adapt to or mitigate the consequences of projected increasing GHG emissions?

Consequences

There are the known knowns, the known unknowns,and the unknown unknowns. Some consequences of GHG concentrations are known: gases in the atmosphere absorb energy radiated from the earth, trapping some heat in the earth. Warmer ocean surfaces result in more severe tropical storms. A warmer climate leads to expanding deserts but longer growing seasons. Melting glaciers raise global water levels. As glaciers melt, methane clathrates trapped in glacial ice are released into the atmosphere, further increasing GHG concentrations.
Some consequences of GHG concentrations are known to have an effect on the environment, but it is not known if the feedback loop is positive (reinforcing the trend of warming) or negative (pushing back, and cooling the climate). Examples include clouds: warming increases evaporation and thus cloudiness; it is not known whether clouds will increase temperatures by blocking in heat (water vapor is also a GHG) or decrease temperatures by increasing albedo.
The unintended and unknown consequences of climate change could potentially become the worst. Until several years ago, the major heat flows around the world were not understood, and the importance of the slowing of the vital Thermohaline Circulation was not understood. We now know that this ocean current keeps Northern Europe 20 °C warmer than other locations at the same latitude, and as a warming earth shuts down the THC, Northern Europe may quickly resemble Newfoundland. Before literally watching a glacial ice shelf melt in weeks in 2002, we didn't understand how quickly the ice could melt.
A prudent policy would take into consideration major threats due to climate change. What are the consequences of a Katrina every decade or every year? If global sea levels rise quickly, major population centers will be displaced and buildings will be lost.

Economical Solutions

Conservation can be effective and easy. For example, we could reduce the "vampire load" (so called because it sucks you dry at night) which comes from plugged in electrical devices on standby such as TVs and phone chargers and accounts for about 10% of the US electricity consumption. The US policy on auto emissions, which account for 25% of GHG emissions, is reprehensible, as even China is due to pass tougher standards by 2008. As shown in the next figure, increasing automobile power and weight have offset gains in engine efficiency to lower fuel efficiency of new cars sold in the US since 1980.

Market-based solutions such as cap-and-trade systems or taxes on negative externalities have solved similar problems. To deal with acid rain, a cap-and-trade system was implemented for SO_x and NO_x emissions at less than one quarter the projected cost.
Increased funding for research may lead to the much talked about "technological fix.'' Rather than lag behind, if the US takes the lead on global initiatives on GHG emissions, we can create incentives for R&D to solve major problems in the field, and US firms can become leaders in the industry. If we continue to elect leaders who not only drop the ball but kick it farther away, we will fall further behind in important future industries, just as US car makers fell behind Japanese firms as fuel efficiency became more of a factor in the last several years.