The Cost of Getting Rid of Fossil Fuels

The climate change narrative goes something like this:

The burning of fossil fuels such as coal and oil emits large quantities of CO₂. That CO₂ traps heat from the sun that would otherwise be radiated into space. The trapped heat is causing higher temperatures on average as well as more intense droughts and storms. The changing climate is causing extinctions, diseases, and deaths. Glaciers and polar ice caps are melting and will flood our coastal cities unless we do something. We have to stop burning fossil fuels in order to avoid flooded cities, huge storms, terrible droughts, and other terrifying consequences. The economic costs of changing our energy infrastructure will be huge, but we have to save our coastal cities and ecosystems.

This climate change narrative is wrong.

Melting icecaps and droughts are predicted by the most recent Intergovernmental Panel on Climate Change Report. This report is based on sophisticated computer models which use more than a century of weather data. It was extremely thoroughly peer-reviewed and vetted. I'm not arguing with that.

We should stop burning fossil fuels because it will help the economy.

A revenue neutral carbon tax would both help stop global warming and improve the economy. A carbon tax is a tax on CO₂ emissions. Those are the emissions that cause global warming. A revenue neutral tax is a new tax which is offset by a decrease in other taxes. In the case of a revenue neutral carbon tax, the government would refund an equal share of the tax revenue to each American.

Coal miners and S.U.V. mechanics would lose their jobs, but solar technicians would gain jobs. So where does that leave us economically? According to Keynesian fiscal multiplier theory (review your macroeconomics 102 here), right back where we started. The carbon tax would depress economic output (lost jobs in the coal industry). Americans would spend their carbon tax refund checks disproportionately on solar and wind power (more jobs in those industries). Because the amount of the tax is equals to the amount of the refund, the effect on economic output (GDP) is neutral.

The carbon tax and tax refund puts money into the pockets of Americans who produce less CO₂ than average (those who consume fewer carbon intensive goods and services) and takes money from those who produce more CO₂. On average, the wealthy produce more CO₂ than the poor (when is the last time you saw a poor man with a private jet). The poor spend more of their income than the wealthy who save more. The monetary redistribution of the carbon tax and refund would stimulate the economy, increasing GDP and with it employment.

But we can do better. There will need to be improved energy infrastructure necessary to support the changes in energy production. Someone will have to build a new energy grid. Because the grid will support the new power sources that will sustain everyone, it makes sense that the government should pay for it. And low and behold, the government has a great source of revenue in the form of the carbon tax. It could take a portion of that tax and use it to build an improved grid. The increased spending would stimulate the economy even more than refunding the entire carbon tax. (Some percentage of the refunded tax is saved. That saved portion does not stimulate the economy.)

Have you seen the flaw in my argument yet? On its own, a carbon tax would make American industry less competitive. A factory in India would be able get its energy from the cheapest source possible (assuming India does not also implement a carbon tax) whereas a factory in Ohio would have to pay a carbon tax or buy more expensive clean energy. Companies would move production overseas. The carbon tax would be exporting both jobs AND pollution. Bad news. But it's easily fixed. The U.S. could simply slap onerous tariffs on goods from countries whose carbon emissions policy was not at least as progressive. As the largest consumer market in the world, every country will fall in line and adopt a carbon tax or something similar.

So there you have it. Of course, climate change is a great reason to implement a carbon tax. The scientific consensus is clear. Humans are causing the climate to warm and that warming will have dire consequences. We will have to address climate change in order to preserve our way of life. But if you don't believe that, fine. No problem. We should tax carbon emissions anyway. It will help the economy. The climate skeptic's economic argument falls flat on its face. Getting rid of fossil fuels won't cost us money. It will be a huge boost to the economy.

Climate Change? An Easy Solution!

Okay a Relatively Easy Solution

Okay an Incredibly Hard Solution That's Better Than All the Alternatives

Recently I posted some simple math showing why we need to address climate change. But how, you ask? Big thorny problem, right? Well, yes and no. The solution looks like this:

STEP 1: Move to a carbon neutral economy

STEP 2: Remove greenhouse gases from the atmosphere

STEP 3: (Maybe) employ other cooling mechanisms

As usual if you want to skip to the to TL;DR Summary, I won't begrudge you your sloth.

A Carbon Neutral Energy Economy

Step 1 is the easy part. Humans emit lots of greenhouse gases, primarily as a result of food and energy production and transportation. We need to move to carbon neutral ways to heat our homes, commute to work, and grow our food. All of human activity should produce little to no greenhouse gases. We will likely have to use solar power, nuclear power, electric cars, non-traditional fertilizers, and many other technologies. In fact, we don't know what technologies will advance fastest or if there will be new technologies that we can't imagine. The government could subsidize these technologies, but it might choose the wrong technologies or the wrong companies.

A Carbon Market

We should let the market choose the technologies that will save the planet. Friedrich Hayek showed that markets (usually) allocate resouces and set prices more efficiently than central authorities, so we'll let the a market save the planet.

Hippies may claim we can save the planet by sitting in unheated mud huts and adopting a diet of grubs and grass, but they can fuck off. No one will do that. The politics of asceticism are a dead-end. The market has been an amazing driver of technological advancement, but those advances aren't guaranteed to be green. Government can fix that by providing the right incentive: a carbon tax.

Tax carbon dioxide emissions and net carbon emissions will decrease. People will find less carbon intensive ways to do whatever they need to do: light their homes, power their cars, grow their food. It really is that simple. Of course you'll need to tax equivalent activities as well (emitting a ton of methane is equivalent to emitting 25 tons of CO₂). There's a downside of course, climate deniers say. A new tax would severely stunt our economy and a lot of people would lose their jobs, right? Not if the carbon is offset with tax credits. At a macroscopic level, an increase in tax receipts decreases economic output, but we won't increase tax receipts. Instead, we will refund every American an equal share of the carbon tax collected. As an added bonus, this will be welcome relief for the poor who (for the most part) are engaging in less carbon intensive activities. Carbon intensive economic industries will suffer. However, the tax used to discourage the activity will be refunded, so low carbon industries will make up the difference. Simultaneously, firms that pollute less will prosper. Firms that pollute more will change their ways or go out of business.

Much of the world already puts a price on carbon emissions either through the carbon tax I just described or through more complex cap and trade system (which works more like the stock market of pollution). I prefer a carbon tax, but a properly implemented cap and trade schema can also work. Skip to the end for more discussion.

What would the tax rate be? It should start low and increase. Not too slowly, but not too quickly. This will give industry time to develop innovative energy solutions. Politicians should NOT be given control over the rate. That would be a recipe for disaster. If Congress ever grows big enough balls to implement a plan like this, they should protect it from future politicians by creating an independent council of economists and climatologists.

Atoning For Our Past Sins

Temperature increases lag CO₂ increases, so stopping CO₂ emissions isn't enough to avoid the worst effects of climate change. We must also remove CO₂ from the air. There are a number of possibilities for doing this. We could bury caron underground in the form of biochar. We could capture it from the air and convert it to methanol. We could fertilize the oceans and let algae do the storage for us. Here's the scary part. We need to reduce atmospheric carbon dioxide by 592 trillion kg (592,000,000,000 kg) to get back to pre-industrial levels. Current carbon capture and storage costs are around $40 per metric ton (1,000 kg). This would give us a cost of $23.7 trillion to return to pre-industrial levels of CO₂. However, that price is likely low for three reasons. First, current carbon capture technology is designed for power plant. Essentially, it's a fitting on a smokestack. Filtering carbon dioxide from the air would be much harder. Second, current carbon storage technology injects CO₂ gas deep underground. There's no way we could inject trillions of pounds of gas underground. We'll likely have to pull the carbon out of the CO₂ and use it for something or bury it. Third, as we suck CO₂ out of the atmosphere, the ocean will start to give off CO₂ gas. This is a good thing. There's too much of it there and it's causing ocean acidification, but we don't know how much is there and we'll have to capture and store a lot of that, too. We can only hope that technology will make it cheaper to deal with our CO₂ problem, but we can assume that the cost will be on the order of worldwide GDPs.

Unfortunately, bringing down the CO₂ levels might not be enough! Temperature changes lag CO₂ changes. We will likely have to employ additional cooling methods. We could seed clouds or stimulate volcanic eruptions to reflect more sunlight. Or we could do something even more creative. These are drastic actions not to be undertaken lightly, but we probably won't have much choice. It is going to be expensive, but I'm not even going to venture a guess how expensive.

Of course, we will have transitioned to an economy based on clean, renewable energy, so these global scale projects will benefit from extremely cheap energy, but they will still be expensive. The sooner we stop spewing CO₂, the less CO₂ we will have to remove and the less the greenhouse effect will heat the Earth. Thus, the sooner we move to a carbon neutral economy (we can do this for free), the cheaper it will be to remove the CO₂ from the atmosphere and cool the planet (if need be). Let's save ourselves some pain and adopt a carbon tax now.

TL;DR Summary

1. Transitioning to a carbon neutral economy can be done for free
2. Sucking the CO₂ out of the air and cooling the Earth will be VERY expensive
3. The sooner we transition to a carbon neutral economy, the cheaper it will be to fix the CO₂ balance and fix the climate

Cap and Trade Vs. Carbon Tax

In a carbon cap and trade scheme, a governmental body allocates or sells a limited number of permits to emit certain quantities of CO₂ (or equivalent polluting activity) per year. Polluters are required to hold permits in amount equal to their emissions. Polluters that want to increase their emissions must buy permits from others willing to sell them.

There are several problems with such schemes. First, during recessions, demand for goods and services decreases. This decreases the price of permits and polluters can pollute cheaply. This increases the competitiveness (such as coal fired power plants) of polluters against non-polluters (such as wind-power farms). Secondly, it is easier to set up a carbon tax. Any given activity (emitting methane, cutting down a tree of a given size, tilling an acre of silage) can be taxed at a rate equivalent to emission of a given amount of CO₂. It would be much more complicated to set up a comprehensive exchange. It would require farmers, brewers, power plants and many, many other businesses predict their expected carbon output and trade permits with each other. A carbon tax also has the advantage that it allows polluters to pollute above the level that they predict. Put another way, in a cap and trade scheme, there are a fixed number of permits, so the power plant that exceeds its demand late in the year is screwed. There may be no permits left. In a carbon tax system, that power plant simply pays the tax. Of course, the government directly control the amount of pollution under cap and trade, but I feel that it is better to provide economic flexibility (you wouldn't want your mom's pacemaker to shut off because all the permits were used). The tax can always be raised next year if industry exceeds a given level of pollution.

Quantity of CO₂ to Remove

The Earth's atmosphere is 5.15×10¹⁸ kg of gas. Presently 0.04% of the atmosphere is CO₂. In 1850, the atmosphere was 0.0285% CO₂. Thus we need to remove 5.9225×10¹⁵≈592 trillion kg CO₂ to return to pre-industrial levels.