My good friend Scott, and frequent commenter, pointed out that it’s been a month since my last post. I have lots of excuses for that but will bear you the boring details. Probably as he was writing to tell me that frustrating piece of information I was reading a post from MR that responded to the question “Do all serious economists favor a carbon tax?“, here are Tyler Cowen’s reservations about such a policy:

1. Other countries won’t follow suit and then we are doing something with almost zero effectiveness.

2. It may push dirty industries to less well regulated countries and make the overall problem somewhat worse.

3. There is Jim Manzi’s point that Europe has stiff carbon taxes, and is a large market, but they have not seen a major burst of innovation, just a lot of conservation and some substitution, no game changers.  Denmark remains far more dependent on fossil fuels than most people realize and for all their efforts they’ve done no better than stop the growth of carbon emissions; see Robert Bryce’s Power Hungry, which is in any case a useful contrarian book for considering this topic.

4. Especially for large segments of the transportation sector, there simply aren’t plausible substitutes for carbon on the horizon.

5. A tax on energy is a sectoral tax on the relatively productive sector of the economy — making stuff — and it will shift more talent into finance and other less productive sectors.

6. Oil in particular will become so expensive in any case that a politically plausible tax won’t add much value (careful readers will note that this argument is in tension with some of those listed above).

7. A carbon tax won’t work its magic until significant parts of the energy and alternative energy sector are deregulated.  No more NIMBY!  But in the meantime perhaps we can’t proceed with the tax and expect to get anywhere.  Had we had today’s level of regulation and litigation from the get-go, we never could have built today’s energy infrastructure, which I find a deeply troubling point.

8. A somewhat non-economic argument is to point out the regressive nature of a carbon tax.

9. Jim Hamilton’s work suggests that oil price shocks have nastier economic consequences than many people realize.

9b. A more prosperous economy may, for political and budgetary reasons, lead to more subsidies for alternative energy, and those subsidies may do more good than would the tax.  Maybe we won’t adopt green energy until it’s really quite cheap, in which case let’s just focus on the subsidies.

10. The actual application of such a tax will involve lots of rent-seeking, privileges, exemptions, inefficiencies, and regulatory arbitrage.

One of the reasons I’ve been a bit absent is that I’ve been doing a lot of big picture thinking lately about policy, business and energy issues and, particularly, have been contemplating the opportunities from a business perspective. I’ve been stuck in a daydream of entrepreneurial thought about how one can make money in both new development projects and/or ventures that seek to improve the efficiency in the existing built environment. Real money. WRT to the existing homes market, I have become increasingly skeptical that there is a real, large-scale business model that can sustain itself. I don’t consider HOME STAR real money, it’s a giveaway for lack of real incentives. The residential Better Buildings program is starting to attract negative attention, and I wonder would a more direct subsidy work any better than a program that was supposed to, or is still trying to, find a market based ’solution’ to a market that currently doesn’t really exist? On the commercial side the market for upgrading existing buildings is more established and there are big, national players (which raises the barrier to entry). The ESCO business is arguably the most defined and successful existing building “industry” but it is not predominantly active among private property developers/owners: it has ~$4 billion in revenues but almost 70% is from MUSH (municipal/state governments, universities and colleges, K-12 schools, and hospitals). That is, organizations that can take a long-term planning view with their operational finances. Four billion is a  serious market, for sure, especially when the players tend to be bigger. But the private response to the real/perceived need to reduce energy use cost effectively, which I believe can be done to some extent in the built environment, is either non-existent or driven by policy and select market segments. For the majority of the economy, all $14 trillion of it, this issue/question is nonexistent. Of course there is plenty of other more near-term problems to be concerned about these days, but there just isn’t enough relative pain for an individual or an organization to act on the “need” to improve building/operational efficiency to reduce energy costs. “Utility Bill” isn’t a big enough line-item in the budget for most people/organizations to really matter.

Why post Prof. Cowen’s reservations on a carbon tax then go off on that rant? Well, I’ve always considered a carbon tax the best policy outcome that would initiate in a meaningful way the human response to the global, at least partially man-made, problem or anthropogenic climate change (I’m being conservative and politically correct here). It is also the mechanism that would, slowly over time, drive cost-effective systems-related solutions to making the built environment more efficient and marketable….it is potentially a market-making policy. But Cowen brings up many good points about the challenges such a policy would have to overcome, and they are significant. Any policy instrument designed to address a problem as widespread as carbon emissions is bound to be complicated and have, potentially large, unintended consequences. The outlook for any effort, be it a carbon tax or cap-and-trade type policy, is grim, and Cowen’s comments do little to inspire optimism. However, some maintain a positive view:

Mr Cowen doesn’t mention what I see as one of the most important roles of a carbon tax: as a check on other ill-advised programmes. A carbon tax would have quickly made the net dirtiness of corn-based ethanol obvious (by helping to offset subsidies and making corn-based ethanol more expensive). It would be more difficult to roll out and sustain such misguided programmes with a carbon tax, and the ones that went ahead anyway would do less damage. A carbon tax is also the easiest way to capture whatever low-hanging emission-reduction fruit is out there. Right now, consumers are generally indifferent between similarly-priced goods with wildly different carbon profiles. A carbon tax encourages consumers to realise the easy carbon gains available from switching to good low-carbon substitutes wherever they exist.

All interesting discussions but going nowhere fast. Maybe I should try my hand at health care administration, I hear there’s money to be made.