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The Copenhagen meeting on global climate change failed in part because economists’ blather about “efficiency” distracts from the real issues. 

After the failure in Copenhagen to reach an agreement to save the planet, pundits are grappling with the question, "Now what?" Typical are this op ed by Joe Stiglitz and this post by Robert Stavins. I react below to Stiglitz's (perfectly mainstream) suggestion that we proceed by getting every nation to adopt the same "carbon price" (whether by taxes, tradeable permits, or otherwise), and he suggests $80 per ton of CO2. Essentially, I'm saying—for the nth time—that economists don't understand the real world.

In addition to the very real political problems, there is a very practical problem that I guess is too mundane and simple for the pundits, economists, and other policy experts to discuss: At no point in time can there be a single carbon price that makes sense for both coal and petroleum. A carbon price that will kill off coal entirely will make no noticeable dent in petroleum consumption, and we need to reduce both dramatically. Here's the arithmetic.

According to EPA (see Figure ES-6), combustion of fossil fuels in the electricity generation and transportation sectors accounted for 62% of all US CO2 emissions in 2006. (Industry was 19%, and agriculture, commercial and residential were all single digits.) Electricity generation is overwhelmingly a coal problem—accounting for 83% of CO2 emissions from this sector. A ton of typical steam coal contains about 1400 lbs. of carbon, which will turn into 5,133 lbs. (2.57 tons) of CO2. If CO2 is assessed at $80 per ton, the price of a ton of coal would increase by $205. Since the national average coal price was $31.26 in 2008 (EIA link), that price increase would cause electricity generators to close their coal-fired plants as soon as possible and switch to natural gas, renewables, and (maybe) nuclear.

In contrast, $80 per ton for CO2 would raise the price of gasoline by only $0.80 per gallon (a gallon of gasoline generates ~20 lbs. or 1/100 of a ton of CO2). Obviously, that won't discourage use of highway fuels very much even though it would cost $110 billion per year in the aggregate. (EIA says US gasoline consumption is 138 billion gallons per year.) That's almost $1,000 per family per year and almost as much as the AIG bailout, and there's no substantial benefit. According to CBO, even a CO2 price of $191 per ton would not significantly reduce US gasoline consumption, in the short term or the long term, leaving its current 28% contribution to CO2 emissions to continue unabated.

Economists are guilty of setting a "perfect" efficient market-based system at war with "pretty good" solutions for the CO2 emissions problems. The most affordable solution for petroleum is CAFÉ standards (but if we make them as stringent as we need to, we'll have too much refining capacity, not a congenial thought for those still in my former industry). The most affordable and politically possible way to deal with coal may be to buy the mines and turn them into parks because anything else that comes close to making coal uneconomical will result in massive, protracted litigation about compensation for a "regulatory taking." The whole legislative conversation about markets, offsets (preserving rain forests, etc.), and carbon capture and sequestration ("CCS") grows out of the fantasy that we can achieve adequate CO2 emissions reductions without shutting down all coal mines and closing many refineries. We can't. Deal with it.

A version of this post appears as a comment on Mark Thoma's blog here.

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Reader Comments (2)

Transportation is low hanging fruit. For example: Passenger Miles per Gallon for a bus is something like 160, the equivalent of taking 5-6 cars off the road for each bus load.

January 7, 2010 | Unregistered Commenterken melvin

The employment lifestyle is destroying the world and our health, physically, emotionally and spiritually. The only sustainable and reasonable solution is to "retire." We can turn to a garden paradise lifestyle with trees, plants and pets that provide fresh food around us. That solves "climate change" and pollution of our air, land, water and food, disease, energy crisis, war, immigration, financial crises, and social problems at the same time. Any other solution causes other problems, takes away our freedoms and is not even a good delay. Leviticus 26 God promises rain in due season for the obedient.

The goal is not delay or bribery and corruption opportunities via Copenhagen.
The goal is not jobs, financial opportunities, or new technology.
The goal is survival, good health and healthy food and peace.
The goal is a lasting solution; a garden paradise lifestyle gives that.

Marie Devine
God has solutions to world problems we created by ignoring His wisdom.

January 8, 2010 | Unregistered CommenterMorie Devine

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