Power Plant Emissions, Carbon Tax and Cap and Trade Legislation


How One Utility Struggles to Meet California's
Tough Standards

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needed to make your home energy greenhouse gas emissions "neutral" and adds that amount to your monthly bill. This voluntary arrangement will cost the average homeowner around $5.00 more a month, which will be invested in restoring and conserving greenhouse gas-absorbing forests in Mendocino and Santa Cruz counties, or capturing methane gas from landfills and dairy farms to generate electricity. This allows customers to offset their home's carbon emissions and become "carbon neutral". These offsets count toward PG&E's meeting the state requirements.

Solar Thermal Power PG&E encourages homeowners to convert to solar power and heating, as well as wind turbines, and the state of California, through the California Solar Initiative, currently provides incentives for installing solar electric systems on homes and businesses. PG&E also has plans to develop its own unique solar generating facility. Instead of a series of photovoltaic panels mounted on a roof or on ground facing the sun, this will be a solar thermal project in which thousands of mirrors will focus sunlight on towers in which water will be heated to 750 degrees to generate steam that turn turbines to produce electricity. While using groundwater, plans call for cooling and reusing the water to generate more power.
     These facilities will be built in the Mojave Desert, noted for its intense summer heat, which coincides with the peak power demand for air conditioning. Several solar thermal projects have already been generating power in the Mojave by using oil-filled tubes to generate steam for turbines.
     This $2 billion dollar project will generate 553 megawatts, enough to power 400,000 homes, and will be completed by 2011. It is estimated that solar thermal will produce electricity at about one third the cost for photovoltaic panels -- 10 cents per kilowatt hour compared to 30 cents per kilowatt hour. However, while this system requires direct sun, solar panels can generate power on cloudy days. Other California utilities plan to purchase power from an as yet untested system in which mirrors reflect the sun to heat hydrogen gas which expands and drives a piston.
     Although the Mojave project will not bring PG&E into full compliance with the target of 20% of power from renewables, and will not be on line until 2011, it will increase the 12% already generated from renewables to a respectable 14%, with other projects to make up the difference. One of these is a federally-approved research project to explore generating electricity from ocean waves off the north coast of California.

Not in My Back Yard In spite of the state mandates and consumer support of cleaner and hopefully cheaper energy, all of these projects face local opposition. On the north coast, the fishing and tourist industries, along with some environmentalists, oppose the wave-generating project, while county supervisors want a piece of the action in terms of creating a publicly-owned utility and generating their own electricity. Given PG&E's less than sterling environmental record, locals fear the worst.
     Despite its record as the smoggiest area of the country, there is also opposition to the Mojave Desert solar thermal project in Southern California, not to the method of generating clean power per se, but to the high voltage transmissions lines that will have to be built through densely populated areas. Despite studies that have found no connection, many public groups believe there are power transmission poses potential health hazards.

Think Tank Meanwhile, in an effort to counteract global warming, the California Public Utilities Commission has announced the creation of a $600 million think tank -- the California Institute for Climate Solutions -- to bring academic and private laboratories together to find ways to cut greenhouse gas emissions. The funding will be derived from a $.25 to $.35 surcharge on gas and electric bills.
      - Tony White

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With Cars Going Electric, There's This Roadblock: The Battery

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technology, however, is still inadequate.
     If we want to switch to green power, that is electricity generated from clean sources — solar, wind and perhaps, wave power — then we need to improve on its transmission to consuming centers as well as develop a means of storing power until it is needed. From a generating perspective, both solar and wind power are either intermittent or limited by daylight and location. They are also handicapped since the most ideal locations for generating electricity from the sun or the wind are not close to population or industrial centers. Transportation Revolution      Thanks to rising fuel prices, as well as the threat of “peak oil,” and for many, the fear of the consequences of global warming, we have already seen many innovations in the design and manufacture of new cars and trucks. In the rush to reduce our dependence on imported fuels, and win presidential primaries, Congress encouraged and subsidized ethanol production, but neither it nor any other of the proposed agrofuels offer an effective solution for a clean, cheap and efficient fuel, and all have negative side effects.
     While hybrids have made major inroads in the automobile market, it looks like plug-in hybrids (PHEVs) or all-electric cars (EVs) may have a brighter future, banning any major breakthroughs in hydrogen cells or other biofuels. In the case of hybrids, they are certainly more fuel-efficient and reduce carbon emissions, but most current models are expensive – two power sources instead of one engine -- and given the economic downturn, are less affordable.
     Most hybrids and all-electric vehicles, however, are limited to 40 miles on purely electric power. The current nickel-metal-hybrid batteries are large, heavy and expensive, and require a long time to charge. At this point, the future of both PHEVs and all-electric cars is increasingly more positive, however, given that most Americans drive less than 40 miles a day and the advertised models could be recharged off home electrical outlets. When residential power is generated from wind or solar power, this would greatly reduce fuel consumption and emissions and would reduce the cost of electricity or fuel for homeowners. Roadblock      The next step, therefore, is to create an emissions-free car which could travel longer distances on electric power while reducing the costs of operation. While this would mean consuming more electricity, the demand for which increases annually, the major drawback is the limited storage capacity of current batteries.
     Although the Toyota Prius uses a large, heavy nickel-metal-hydride battery to store power on board, it now appears that the ubiquitous lithium-ion battery (LED) used in cell phones and computers may provide the solution. Numerous firms, therefore, are already investing in what they anticipate to be a lucrative market for lithium-ion batteries for the latest PHEVs, the first of which may hit the market in 2009.
     The advantages of lithium-ion batteries are that they are much lighter than the current nickel-metal-hydride batteries and are unaffected by the memory effect, in which a battery loses its capacity when it is recharged without being fully depleted. Though lithium-ion batteries are currently more expensive than nickel versions, it is estimated that lithium batteries will become cheaper, once they are mass produced.
     However, lithium-ion batteries can be unstable when overheated or punctured, causing cellphones or computers to burst into flames -- what engineers call "thermal runaway”, a problem that would be compounded by the much greater size of an automobile battery or the danger of an explosion caused by a collision.
     Since it also takes time to recharge both lithium-ion and nickel batteries, thereby limiting the range of a PHEV or hybrid, the research emphasis has been on eliminating the danger of overheating and reducing the time required to recharge them. Since the early 1990s, researchers have tried different combinations of metals in order to increase the performance of lithium-ion batteries, as well as reducing their costs.
     Though the perfect battery technology for use in cars and trucks is still evolving, Toyota, GM, Ford, Nissan and Daimler have all announced that they will produce and sell PHEVs and all-electric cars by 2010. Since each is developing its own technology or in joint ventures with other firms, it is not known what system or battery will be used in these cars. Though there is some uncertainty about all these plans because of the economy, in all likelihood they will employ some version of a lithium-ion battery pack. Revolutionary Breakthrough at MIT?      Recently, researchers at MIT may have come up with a major breakthrough in terms of reducing the time required to recharge lithium-ion batteries. Using lithium-maganese oxide, which is more stable and safer than the lithium-cobalt oxide used in cell phones and computers, MIT researchers have modified the structure so that it can be recharged in 10 minutes -- ten times faster than current batteries. Although the production process of the new battery is expensive, it combines nickel and manganese, which are cheaper than cobalt, and have the potential for multiple uses beside electric or plug-in hybrid cars. While more research and testing is required to make it commercially viable, this lithium-nickel-manganese amalgam may be the breakthrough we have been waiting for. Who has the Lithium?      If the future of storage batteries, at least for cars and trucks, is in some variation of the lithium battery, the demand for that material will obviously increase, and the major sources, Bolivia, Chile and China, may experience economic booms. While China will probably become a major producer of new lithium based batteries, neither Chile or Bolivia have that potential.
     In the case of Bolivia, which has almost half of the world’s deposits of lithium locked up in its salt deserts, President Morales has already nationalized foreign-owned sectors and passed a nationalistic constitution to benefit the majority indigenous population. Since their constitution says that the Indians control the natural resources in their region, they hope to win concessions from foreigners wishing to exploit the lithium deposits. Already Japanese firms and a conglomerate led by a French entrepreneur are seeking mining leases.
     Negotiating access to these deposits, therefore, may require some careful diplomacy and contracts beneficial to all Bolivians, thereby avoiding past experiences of intrigue, bribes and covert action. Meanwhile, the government agency which oversees mining projects is planning its own plant to process powder-white lithium into carbonite for use in batteries. As in their estimates of oil reserves, geologists also disagree in their estimates of global lithium deposits. Opportunities      Because the stakes are so high, and the potential so great, the development of safer, cheaper and more efficient batteries will not lack investors or technicians. Since the decision of GM to abandon its all electric car a decade ago, and the failure of Detroit to innovate, Asia not only led the development of hybrid cars, but also managed to capture the market for batteries. It leads in advanced battery technology. While the federal government and some states offer tax credits for purchasing hybrids or installing solar or wind power equipment, they should also actively support the research and development of new battery technology in government or private labs. If not, the United States will simply exchange its dependence for energy from one set of countries to another.
     Although the emphasis seems to be on developing more efficient batteries for automobiles, if we are to switch to renewable sources of power, there is also an urgent need to develop storage capacities for wind and solar power, given the gap between hours of peak production and peak consumption. Since size and weight are not important factors, public utilities are experimenting with truck-trailer size sodium-sulfur batteries for giant wind or solar installations. To take homes or even small businesses off the grid, new, smaller and cheaper storage batteries are also needed. Encouraging Developments      In spite of the delays in developing new battery technology, thanks in part to the laws of physics and chemistry, battery technology is improving. Investment capital has been flowing into firms specializing in the research and development of more efficient storage batteries and there are encouraging signs of breakthroughs. The hybrid/electric car market alone offers tremendous potential for growth. Since there is an estimated $71 billion global battery market, major firms like GE and Exxon Mobil are also investing in battery development.
     Given the stakes, in terms of geopolitics, climate change and profit, it seems, therefore, it will not be for the lack of investment or effort should the development of new advanced battery technology not be forthcoming. Its realization will not only revolutionize energy generation and use, but also potentially change our society and economy, and bring about a significant reduction in carbon emissions.
      - Tony White

“Clean Coal” Is an Oxymoron; Thinking We Can Do Without It Is Also Not Too Bright

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industrial emissions below 2005 levels by 2020 and 83% by 2050. Tugging in the other direction is the all but guaranteed increase in demand for power. Even if Americans learn to conserve, the population is destined to grow a third by 2050, and the demand estimates do not take into consideration the possible added burden of electric cars.
     So the question is: What clean energy sources could allow the power utilities to produce more electricity while cutting back emissions? There is the serious question of whether renewables such as wind, solar, hydro, etc. can, in forty short years, be scaled to feed the power lines now supplied by the over six hundred coal-burning power plants across the nation.
     So, odious as environmentalists find it, reality tells us we’d better be doing our utmost to see what can be done to clean up coal. It may well be needed, and the United States has a 200-year supply.

Wanted: Applied Technology
     The first step is to make coal burn cleaner, and a favored technology is “integrated gasification combined cycle”, or IGCC. This process converts coal into a gas before burning, which reduces the pollutants that lead to smog and acid rain, and more significant from the standpoint of global warming, should make it easier to separate CO2 from the gas stream. That is because the burning of coal results in 160 times more gasses for the separation process to deal with.
     But an MIT study disputed that IGCC would be better, saying that, short of a great deal more research, it is not clear whether pre-gasification or the burning of raw coal offers the better opportunity to fraction CO2 from the gases.
     And utility officials are against IGCC because it costs more. As with every other developing technology, the cost to those who currently walk the Earth is the dominant criterion. That our generations would have to pay more always trumps the concern for the health of the planet for all the generations to come.

Just Do It
     China has taken a different approach. Cost does not prevent them from forging ahead.
     The country has become the world’s biggest emitter of CO2, using the third largest coal reserves in the world after the U.S. and Russia. But China has become increasingly aware that building a new coal-fired power plant every week to ten days threatens to blanket the nation in a cloud of pollutants, so rather than just debating the technology – that MIT study was over two years ago – they have simply plunged in.
     In their case it is a process that uses super-heated steam that makes for a less-polluting and more efficient plant, a technology in which they have become the world leader, building one such plant a month. Back in the USA, the Bush administration cancelled the construction of the one prototype plant in the country from which to learn the IGCC technology – once again because of cost. The new Energy Secretary, Steven Chu, has said that the Obama administration might revive one power plant of this type. We take note of “might” and “one”. There seems to be no sense that a law that would clamp down on emissions without equal emphasis on replacement technologies could lead to a power gap emergency.
     Whichever process proves best for separating CO2 from the coal gas stream,

the question remains of how to dispose of it.
     It is generally agreed that sequestration – burying CO2 underground, or even under the seabed – is the only way to keep it out of the atmosphere. Even so there is the risk that it may not stay put. Pumping the CO2 into oil wells to boost production or into depleted oil fields are often proposed as examples, except there are not enough in the world and there is the risk that the gas would leak from the abandoned wells.
     The technology of sequestration is daunting, and it seemed that no one had actually attempted it. But there is such a U.S. plant and “60 Minutes” found it in a recent report on coal. The Basin Electric Power Cooperative in North Dakota was part of Jimmy Carter’s prescient energy program of 30 years ago. The plant’s objective was to convert coal into natural gas, but the CO2 had to be removed, being an impurity, so it is turned into a liquid and pumped underground. Carter’s program was subsequently cancelled by the Reagan administration, but the Dakota plant carries on and is there for Secretary Chu to study.
     But here again is the cost issue. “60 Minutes” pointed out that the plant cost $1.5 billion to build in the late 70s, and that would be an insupportable $4 billion now, leaving the implication that all such plants would cost a prohibitive amount, so they are beyond consideration.
     Well of course one-off designs that invent a new technology on the job are expensive. Right now even an advanced technology nuclear plant being built in Finland by the highly experienced French company, Areva, is experiencing heavy cost overruns. But again we turn to the Chinese example. By standardizing the design and building many copies of the “super-critical” steam plants, they have mastered the technology, driven down the cost and have already taken the lead in this technology. Standardization is the same approach taken by the French at home, where uniform nuclear plant designs have supplied 80% of the nation’s power for decades (and without incident).

No Time to Lose
     It remains to be seen whether the Obama administration recognizes that the flip side of a long sought climate bill reveals problems of its own. If they are left to the industry to solve, no utility company can be expected to pioneer the risk of building experimental IGCC and/or sequestration plants. Yet James Hansen, the NASA climate scientist renowned for his prediction of climate change in the 80s, has said, “We are going to have to phase out emissions from coal within the next 20 years if we hope to prevent climate disasters”. Every avenue needs to be taken in the fight against global warming, and that includes finding ways to clean up coal. The question is whether the government, in all its stimulus spending, will be taking an active role in concert with the power companies, in the rapid development of experimental plants.
     The task the world faces is immense. Joseph Romm, a physicist with the Center for America Progress, puts it starkly when discussing the sequestration solution: “If the world did this at scale, it would be the equivalent amount of CO2 going into the ground as now comes out of the ground”, and that would call for retrofitting a power delivery infrastructure that was built up over a century.

- Stephen Wilson

Cap and trade is still the right call

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House Democrats just lofted energy and climate legislation to create a "cap and trade" system for carbon dioxide. But then, stunningly, they ran the right play in the wrong direction – contending that cap and trade is somehow more politically plausible because it won't look as bad as a direct tax on emissions.
     Republicans, sensing a fumble, have piled on. Ignoring the fact that cap and trade, which relies on market incentives, is essentially a conservative idea, GOP leaders have assailed it as a costly national energy tax. Other critics see a boondoggle for bureaucrats that will burden American industries. The administration is already giving ground to utilities, suggesting it might auction only a portion of pollution permits.
     The stakes — to our national security, to our economy, and yes, to our environment – are too high for this sound policy to be undermined by a sidelines skirmish. Cap and trade is the only play that can work.
     Cap and trade is a market, not a tax. It sets a hard limit on total emissions. Then a regulated exchange of tradable permits gives enterprise a choice: Invest in efficiency and better technology — or buy credits from more efficient players, underwriting their cleaner practices. Simple.
     But advocating cap and trade largely because "it won't look like a tax" is a head fake that plays right into the hands of opponents.
     The next time cap and trade defenders face a tax blitz, they should stand their ground on these points: Cap and trade is the only efficient way to contain emissions. It's more effective than a tax, because it creates real incentives for the right behavior. It engages the self-interest of individuals and industry in service to a greater public good — something both sides of the aisle can support. And it's more realistic and simpler to deploy than a carbon tax, politically and practically.
     Why? Because a carbon tax, as seductively simple as it sounds, has never actually happened. Cap and trade has already been proven to work.
     In 1989, environmental and market-oriented players from both sides of the aisle set up a cap and trade market for the emission of sulphur dioxide (SO2), a cause of acid rain. Remember acid rain? Greens groused that tradable permits were a license to pollute. Industry wailed about the cost. But within five years, SO2 was under control, down 45 percent. And the cost to utilities was only 0.6 percent of operating expense.
     Cap and trade beats the taxing tradition of Washington's "make it so" command-and-control. It strips power from bureaucrats,

because all of us tend to be smarter than any of us. It sets the right aggregate goals and incentives, makes a market in outcomes, regulates carefully, monitors diligently, and gets out of the way. And it's simpler than a carbon tax because it enlists private sector creativity in finding efficiencies rather than funding lawyers to make flamboyant end runs around the tax code.
     Opponents cynically paint a market for carbon emissions in shades of credit default swaps (a fictional red herring, since that game of fantasy baseball was entirely unregulated). A carbon emissions exchange pegs prices to what a real, regulated market will pay – not a tax rate engineered by oil and coal lobbyists outbidding each other to manipulate members of Congress hustling for campaign cash.
     A flat tax on carbon is a corrupt fix on a losing game. It inflicts expense with no defined emissions objective. And given the interests in play, volatility in fuel prices and shifting costs to contain emissions, there will be nothing "simple" about fixing a tax rate, untethered to some market reality. People have never been willing to pay a tax to breathe cleaner air. To imagine they will now, to address a climate threat that many feel is abstract, is to make hope a strategy.
     Detractors try to spin cap and trade as a tax. By that standard, health insurance, workplace safety, and health inspections are taxes. They aren't – any more than minimal and effective regulation is socialism. And unlike a tax, industries such as health insurance, safety equipment, and environmental technology don't break windows to fix them – they create companies that generate real jobs. So along with being more efficient and fair, cap and trade outperforms any tax in terms of economic growth and employment.
     Set up an exchange properly and even China might play. That's far more plausible than putting tariffs on carbon-intensive exports, hoping Beijing will reciprocate. We might as well tax the wind that blows smog across the Pacific.
     The administration should stick to its convictions and explain why cap-and-trade is the right answer for the right reasons. Don't play to the shadows on the wall. Credit the public's intelligence. Set aggressive goals and support a carefully regulated exchange, a market that responds to real demand signals. That is the only way we'll keep the game clean, contain carbon emissions, and generate real jobs.

- Mark Lange

Often Referred to, Never Explained:

What's Wrong with the Energy Grid?

The newspapers have been full of stories that mention the sorry state of the utility grid network in the United States, but without much explanation. What has caused the grid to degrade to this state and what needs to be done about it?
     High tension (voltage) transmissions lines (the grid) are expensive to build and maintain. They also need contiguous land to go from one specific place to another (right-of-way). Obtaining this right-of-way is difficult at best and usually expensive. Also, the fact that some people do not want lines anywhere near their property because of aesthetics triggers the “not in my back yard” response. So when such power lines are contemplated, citizens in the affected areas usually go to court to stop the lines coming near them, causing delays and added cost.
      The problems started some years ago due to deregulation of the utilities by Congress. With deregulation many utilities were broken up, so now, instead of a utility having generation (generating the electricity), transmission (moving the electricity from the source of power to the source of the customer distribution network) and distribution (getting the electricity to the home or business) responsibilities, they have only one of these three.
      Those in the transmission business did not see that extending or building new transmission lines was in their financial interest. Previously, transmission had been necessary if the utility wanted to get electricity from its generating plant distributed to their customers who paid for its use. Thus, for a long while after de-regulation was passed by Congress, the transmission business (the grid) did not spend any money on upgrades or maintenance and the grid fell into disrepair.
     That has now changed. Regional transmission organizations (RTO’s) having jurisdiction over areas that include several states, have taken over the grid. However, it is still just as difficult and costly to get people to allow transmission lines on or near their property, especially in urban areas. Therefore the upgrading of the grid to eliminate choke points, (where the lines currently available are overloaded during peak usage) and to add interconnecting points (where one area connects to another area) so they can transmit the needed amounts of electric power without overloading or overheating the wires becomes a problem. This lack of capacity at choke points makes the rerouting of the grid not always possible in case of a failure due to natural or

terrorist causes. Therefore, cascading blackouts such as happened in the Northeast United States a few years ago is still a possibility.
     As the country becomes more “green” and demands more electricity generated by renewable or non-polluting sources there is a need for new transmission lines. American Electric power has recently announced it is considering building a 1,000 mile long extra-high voltage (765 kilovolt) transmission line originating at a 2,000 megawatt wind generation project in North Dakota to an extra high voltage grid in the Chicago area. In 2006 alone almost 2,500 megawatts of wind generation was installed in the U.S.A., but like the North Dakota project, wind farms are not usually near the main grid and therefore need transmission lines installed to connect them to the grid.
     Another problem facing the utility industry in the future will be plug-in electric automobiles. If these are bought in large numbers, the public will have to be educated to plug them in to recharge them on off-peak hours. If these cars take more than 6 hours to recharge, this will be difficult to control. Recharging them during peak hours (5pm to 10pm and 6am to 9am) will require the utilities to build more power plants to accommodate the increased peak load, which will largely negate the pollution saving of driving electric automobiles.
     No matter the improvements to the grid that may take place under the public works programs spoken of by President-Elect Obama, there will always be natural disasters that will interfere with the smooth running of the grid. Ice storm, hurricanes and even very hot days can cause outages, brownouts and even blackouts. Furthermore, the grid is highly vulnerable to terrorist attack, whether sophisticated, such as hacker incursion into computer systems that monitor and control power transmission, or a simple explosive attack at a transformer yard. In the latter case, there can be considerable delay in reconstituting because transformers are custom built. A “smart grid” that can self-diagnose and cure problems with re-routing of transmissions will be a better defense against calamity, but again we run up against the problem of choke points, where capacity needs to be expanded. So far it has not, and therefore at present the capacity available to reroute in case of a failure is just not there.
- Herb Whittall.

How One Utility Struggles to Meet California's
Tough Standards

                            And So Goes the Nation. Eventually?

For a preview of what power companies may be doing as soon as the end of this decade, consider the array of steps being undertaken by one of the most forward-thinking and innovative utilities in the USA, namely California's Pacific Gas and Electric (PG&E).
    In late summer 2006, the California Assembly passed AB 32, a law that calls for 25% reduction of greenhouse gases by 2020. Under pressure to meet the deadline, and a state mandate to generate 20% of their electricity from renewables by 2010, California's major public utilities are scrambling to meet these targets through conservation, the development of new renewable energy sources, and customer funded emissions reduction projects.

PG&E's Power Mix Through a combination of hydroelectric and nuclear sources, PG&E, which serves Northern California, already generates 50% of its electric power in a normal year with zero carbon emissions. Renewables, which amount to 12% of this power mix, include biomass and waste, geothermal, small hydroelectric, solar and wind, while natural gas provides 47%, and coal 4% of the electricity produced and distributed by PG&E.

Climate Smart Through its "Climate Smart" program, PG&E customers can now enroll in a program whereby the utility calculates the amount
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We Debate: Which Is Best, a CARBON TAX or CAP-AND-TRADE?

There's movement in Congress to impose a cost on emitting greenhouse gases into the atmosphere. No less than seven bills would introduce a cap-and-trade scheme, whereas only a couple propose a tax.
     What's the difference? How would a carbon tax be applied? What does cap-and-trade mean? Which is better? This is critical legislation, and we attempt to answer those questions with arguments on both sides below.
     Decide for yourself, and then watch what Congress does (or doesn't) do.

Carbon Tax: It's Simpler
and Will Have Immediate

The carbon tax approach to reducing emissions would charge industry and other entities for greenhouse gases they emit into the atmosphere. For all six greenhouse gases, converted to their CO2 equivalents in environmental damage, a levy of $10 to $15 a metric ton is often given as an example, at least in early years.
     It is the most straightforward scheme: It says, if you continue to pollute, you pay a penalty for doing so, and the cost is likely to cause you to take steps to reduce emissions to reduce the tax — exactly the desired effect. And if that doesn't do it, increases in the tax will.
     The money raised could be directed to research and development of clean energy technology and renewable energy alternatives to oil, or other useful purposes — even rebates to low income earners hurt by the passed-on costs.
     Under a cap-and-trade program, allowances to emit carbon dioxide could be sold or auctioned to polluters such as the power utilities to provide the inducements to cut emissions, but the Lieberman-Warner bill now working its way through Congressional committee — the cap-and-trade plan extending from 2012 to 2050 that seems to have won the most favor — would give away half of its allocations free, the other half by auction.
     What's wrong with that? At least the utilities, cement, paper and steel companies will be paying for half, would they not?
     Only eventually, because, at first, almost all the allocations are free: 82% in the 2012 start up year would be simply given away to companies to use or trade for profit. The percentage then declines, to 27% by 2050, but for years, free permits to pollute will give industry little inducement to make any changes. The Windfall      The allocations, often referred to as credits, are bound to have tremendous value. The Congressional Budget Office estimates that emission permits could rise in value from $5 to $65 per metric ton between now and 2050; the Environmental Protection Agency (EPA) estimates $14 to $78.
     The U.S. economy currently emits 7.3 billion metric tons of greenhouse gases annually. If the cap is set at current levels for the 73% of the economy that Lieberman-Warner covers, that would lead to allocations for 5.2 billion tons. As we just saw, 82% of those would be giveaways. Splitting the difference between the early-year estimates above, that's a handout to industry of over $40 billion in the first year alone. Using its price estimates and the sliding percentage schedule, the EPA calculates that 66 billion pollution permits valued at $1.5 trillion will be handed out free of charge under Lieberman-Warner. Too Susceptible to Gaming      Even under an auction format, there are structural flaws with cap-and-trade. Swayed by campaign contributions, Congress will more than likely set an initial cap that matches the nation's current levels of pollution — or possibly higher, to allow industry an early-year cushion. With plenty of credits to go around, they will trade at low prices — as happened in Europe's implementation of Kyoto. Cheaply purchased credits will undercut inducements to cut costs by making infrastructure improvements, and that will lead to a long delay before the year-to-year declining schedule of allocations forces emission reductions.
     A carbon tax, even if low at first, would at least impose a cost for emissions. Penalizing the Pacesetters      Moreover, awarding allocations equal to current emissions gives no credit to companies that have already spent heavily to cut back pollution, while at the same time rewarding the worst offenders who have resisted for decades the Clean Air mandates to install controls. That is what is assumed to have prompted TXU to announce plans in early 2007 to hurriedly build eight coal-fired plants: they wagered that pollution levels would probably be "grandfathered" by any cap-and-trade bill.
     Additionally, cap-and-trade is likely to prove vulnerable to political tampering. Lobbyists and corporate campaign contributions will constantly press for adjusting the caps and percentages as the years pass and costs rise. Trading will need to be closely regulated to thwart market manipulation. A tax, on the other hand, is highly visible and less susceptible to camouflage. The Competition Question      An argument against a carbon tax is that higher costs will make American goods less competitive. So would an auction-based cap-and-trade program, whereas Lieberman-Warner imposes no appreciable costs for years. Nevertheless, in an attempt to eliminate the cost advantages of countries that refuse to penalize emissions such as China and India, and as a concession to labor, this bill sets up a second, parallel cap-and-trade mechanism for imports. That doubles its complexity and presages a still more bloated bureaucracy.
     Much simpler would be a tax imposed at port of entry, based on the amount of emissions imputed to have been released in making the incoming goods.
     There is no point imagining that China or India might someday agree to a cap-and-trade alliance to replace this border contrivance. They would insist on a population-based carbon allowance, and America would find itself paying itself into penury to buy credits to sate its much higher per-capita energy consumption.
      Charging non-compliant nations could lead to a tariff war will be the obvious cry. Yes, it could. But it is time to realize that all such human affairs of the moment - trade pacts, costs, profits, jobs — become petty trifles when at issue is the future of planet Earth. Any scheme adopted should anticipate international application, and a carbon tax works best.       - Stephen Wilson

Cap-and-Trade: Market Incentives Will Spur Innovation

This article presents the view that a system of "cap-and-trade" would be more effective than a carbon tax as a way to bring about reductions in greenhouse gas (GHG) emissions — primarily, but not exclusively, CO2. GHG's are products of burning carbon-based fuels which appear to be changing the heat retention characteristics of our atmosphere and risking significant damage by warming the climate.
     What is cap-and-trade? In the simplest terms, it means that an absolute upper limit on CO2 equivalent emissions is set, based on what is currently taking place, and then the limit is steadily reduced, forcing emitters to a) reduce emissions, or b) buy at market prices certificates of other entities that have provable reductions in excess of their quota, or c) suffer crippling fines. It uses market mechanisms to reduce CO2 in the quickest and cheapest manner. It is hard to implement because the starting position has to be negotiated in a political environment. Also, it needs to be adopted by virtually every country, or it loses its effect. Many prefer it over carbon tax because it cannot as easily be circumvented or changed, as can be a tax. But a tax is easier to implement.
     A key issue when introducing a cap-and-trade system is whether: a) the initial allowances should be "granted" to emitters at near their current levels of emission, giving rise to complaints of rewarding bad behavior, or b) they should be auctioned by the issuing government. The preference is the latter as it provides immediate value for allowances, generates revenue to support clean energy research and defends the government against accusations of offering "giveaways" to big polluters.
     It is important to note that either approach has the potential to be effective, and even both might work well, but if the choice must be one or the other, cap-and-trade is the better alternative. Why? The Profit IncentiveFirst, because it is likely to bring about the largest amount of GHG emissions reduction in the shortest period of time and at the least cost to the economy. When the stakes are as large as they are in this matter, issues of "fairness" and "equity" may need to take a back seat to "effectiveness". Cap-and-trade causes the easiest and least costly reductions to take place early because those who produce such reductions can sell at a profit their surplus carbon allocations to others who are having trouble meeting the reduction targets that are imposed on them.
     In a war where winning is essential, a winning policy employs the most effective available strategies and tactics, not the least expensive or the most fair and balanced. The same logic applies here. Cap-and-trade harnesses the forces of markets to achieve cost-effective environmental protection. Markets can achieve superior environmental protection by giving businesses both flexibility and a direct financial incentive to find faster, cheaper and more innovative ways to reduce pollution.
     Markets provide greater effectiveness than command-and-control regulation because they turn pollution reductions into marketable assets. In doing so, this system creates tangible financial rewards for environmental performance.
     Carbon caps (or taxes) need to be applied as far as possible "upstream" in the supply chain, so that carbon emitted in making gasoline, for example, is capped along with the carbon emissions potential of the gasoline itself when consumed. Europe has learned that capping carbon emissions where the energy is used, such as for an individual car, is not effective. There's Already Proof That It Works Second, cap-and-trade was designed, tested and proven here in the United States, as a program within the 1990 Clean Air Act Amendments. The success of this program led The Economist magazine to crown it "probably the greatest green success story of the past decade." (July 6, 2002).
A Spur to InnovationThird, because cap-and-trade gives pollution reductions a value in the marketplace, the system prompts technological and process innovations that reduce pollution down to or beyond required levels. This point is not theoretical; experience has shown these results.
     Lastly, and perhaps most importantly, a cap on carbon emissions provides a relatively predictable outcome in terms of GHG reductions, with the cost of allocations being unknown and floating with market forces, whereas a carbon tax provides known increases in costs, but allows the reduction in GHG to float with market forces. We need maximum focus on achieving specific end results, rather than concentrating on taxes and revenues. Summary      An active cap-and-trade market enables those who can reduce pollution cheaply to earn a return on their pollution reduction investment by selling extra allowances. It enables those who can't reduce pollution as cheaply to purchase allowances at a lower cost than the cost of reducing their own emissions. It enables all participants to meet the total emissions cap cost-effectively. And it gives all emitters incentives to innovate to find the least-cost solutions for total pollution control.      - Douglas Ayer