McKinsey Report Cites $1.2 Trillion in Potential Savings From Energy Efficiency (NYT – Green Inc.)

It’s 3 a.m. Do You Know Where Your Climate Bill Is? (Mother Jones)

A visitor to this site asked, “Do you have analysis saying at what price on carbon the economic dispatch charge for coal will equal and exceed that of other electricity- generation sources such as wind?” Here’s our reply, co-written with our Washington, DC rep, James Handley.

The carbon price level for breakeven isn’t one number, but a continuum.

Start with the demand side: with just a modest carbon emissions price, many steps to improve energy efficiency become more attractive. But the more costly ones obviously require a higher expected price.

Consider driving. There are an almost infinite number of ways for individuals to burn less gasoline. They range from buying a less-gas-guzzling car (which itself occupies a continuum: miles-per-gallon varies across the spectrum of available autos, and drivers can accelerate scrapping their current car for a more-efficient one), to driving less consumptively, driving less (by taking transit, walking, cycling or carpooling), and simply traveling less (by taking fewer and/or shorter trips).

Gasoline use for driving is socially determined as well. Actual and expected gasoline prices strongly affect the choices available to us as individuals and how we relate to them. Decisions to forego discretionary trips — to the faraway mall, soccer game or social occasion — that can appear selfish or bizarre when gas costs a buck-fifty, become more socially acceptable when the pump price hits three dollars. Similarly, rising fuel prices help shift car manufacturers’ engineering and marketing decisions toward fuel conservation. Ditto for voters’ support of local and national governments’ funding of transit and so-called liveable streets.

There is no magic fuel or carbon price threshold at which these changes kick in (and below which, they don’t). This isn’t to deny tipping points. Indeed, we hinted at them just above. But fuel use is so varied and diffuse that there’s a spectrum for tipping points as well as for individual decisions. The carbon price that leads one car manufacturer to push fuel-efficiency to the fore will be different for its competitor, and similarly for transit providers, not to mention the cultural forces that bear so heavily on driving and other energy uses.

The same applies to the supply side, as illustrated by wind power. Wind farms at the choicest sites kick in at a fairly low carbon price. Indeed, the rapid rise of wind-powered generation — it accounted for 1.8% of U.S. electricity output in the first quarter of 2009 — attests to wind power’s steadily improving economics, although the federal Production Tax Credit, now 2.1 cents per kWh of wind output, obviously plays a critical role. According to the American Wind Energy Association, wind farms at high-wind sites are generating at 5 cents per kWh, just a bit above the average “all-in” cost of coal-fired power. On the other hand, falling prices of natural gas recently prompted T. Boone Pickens to delay his highly touted plan to build giant wind farms in Texas.

The point is that wind farms’ generation costs traverse a very broad range. Equally important, so do the costs of the existing coal-fired generators that the wind plants are intended to displace. Rather than operating at a single average cost, the U.S. coal plant fleet generates at a wide range of costs depending on plant efficiency, age, fuel supply and even the hour-to-hour loading level on the individual plant.

Accordingly, we should visualize wind’s capacity (and, solar plants’ as well) to displace coal- and gas-fired generation, not as one “bar” on a graph straining to inch out another, but as a series of curves that will cross and re-cross at thousands of points. The higher the carbon price, the more points at which the renewable sources will undercut the traditional fossil-fuel sources.

Finally, the same will also apply to carbon capture and sequestration. Should it ever prove technically feasible on the large scale required, the costs of CCS will not be one number but a range, due to the influence of site- and process-specific costs.

The takeaway: there’s no market-clearing carbon emissions price to usher in some “breakthrough” and kick fossil fuels into history’s dustbin. A steadily— and predictably — rising price on carbon will do the trick. (To see how far and fast, download our Carbon Tax Impact Model and plug in your own carbon price.)

Photo: Flickr / Sockeyed.

Energy-Intensive Companies Hope to Counter Emissions by Preserving Trees That May Not Have Been at Risk (WSJ– Power Shift)

Climate Loopholes (NYT – Editorial)

IPCC Chief: Benefits of Tackling Climate Change Will Balance Cost of Action (Guardian – U.K.)

Obama Needs a Move to the Middle (Including a Carbon Tax) (WSJ – OpEd)

French Government Panel to Urge Fuel Carbon Tax: Report (Reuters)

Influential liberal columnist (and Nobel economics laureate) Paul Krugman struck back today in his New York Times blog against critics of the Waxman-Markey bill who view cap-and-trade as an open invitation to massive new depredations by Wall Street. Michael Hoexter, Ph.D., a blogger and consultant on policy, energy efficiency and green marketing to businesses and government, and a previous contributor to this page, sent this reply, which we reprint, with Michael’s permission, in full. (The selections of bolded passages are ours. — Editors.)

Prof. Krugman —

I agree with you on many issues and also learn things from you as well. But sometimes you make purely political decisions that you vest with economic authority but not very careful thinking.

I think this post is an instance of economics being shaped by politics rather than being the (maybe) science that it attempts to be. I am personally full-time committed to action on climate change but you seem to be simply throwing your prestige behind an instrument that I believe is flawed, and not only because of an inchoate fear of speculation.

Let’s say we invented a market mechanism that made “health” a tradable commodity. Would you support that? For some reason cap and trade has gotten a pass from so-called progressives for too long.

Here are some problems:

1. Your analogy to wheat and other markets is flawed because these are pre-existing markets that unite multiple sources of supply with multiple sources of demand. A permit market has just one source for permits: the government. Inventing a market to distribute those permits is a needless layer of complexity. The fact that it is a planfully constructed market makes it a different species as well.
2. Martin Weitzman, the MIT economics professor who in 1974 speculated (intellectually) that in certain circumstances one might be able to regulate quantities of emissions rather than tax them or regulate them directly, has said that taxation is better than quantity regulation in the case of carbon. He would recommend quantity regulations only where a particular precise amount of something needs to be achieved … taxation seems better if you want to go in one direction to zero.
3. Price volatility and arbitrage are the inevitable result of markets. Wall Street and others like carbon markets because of the (needless) complexity of carbon trading and the potential to exploit information asymmetries. On the other hand, to reduce carbon emissions we need a lot of long-term investments that on the whole do not benefit from financial market fluctuations. Now try to calculate the NPV [net present value] of an investment with a volatile carbon price … that’s going to be difficult. Far easier if you know what the carbon tax rate will be within the next 5 or 10 years. Yes, there are mechanisms to dampen volatility and regulate the markets but these add still more complexity and sinecures for officials and representatives of market actors. It’s like buying a Cadillac and ripping off the badge, scratching the paint and deflating the tires … why invent the market in the first place?
4. The regulators and actors on these carbon markets are inessential to cutting carbon emissions and will represent an interest group that will dampen and interfere with more serious efforts to cut emissions. All you need to cut emissions is a predictable price on carbon, positive government programs for infrastructure build-out, and/or “command and control” regulations that ban certain activities.
5. Cap and trade is the unfortunate offspring of an era of tax phobia which is fast drawing to a close. We are going to have to raise taxes, including Pigovian ones. Why not a carbon tax? Much more transparent and along with direct regulation a much faster route to the goal.

For some reason, there is a blind spot with regard to cap and trade among so-called progressives … you seem to have fallen prey to it.

Photo: Flickr / daniel.gene

If Only It Were a Tax (The American – Journal of the American Enterprise Institute)