The only reasonable response is “yes, of course.” Climate proposals such as Kerry-Lieberman, Cantwell-Collins, or Waxman-Markey will have limited effects on oil consumption for two reasons: first, they are market mechanisms; second, they are weak market mechanisms.

To start with the good news, reducing carbon emissions from electric utilities is cheaper than reducing oil use. Any market mechanism is supposed to prompt us to do the cheapest things first; that’s the whole point. There are many ways to make electricity with lower carbon emissions than a coal plant; putting a price on carbon makes those alternatives cheaper relative to coal. There are also many ways to promote energy efficiency, incrementally reducing electricity use.

For most Americans, on the other hand, there is only one way to make transportation, and it runs on oil. In the short run, with all of us driving the cars we now own, there is very little chance to change our gasoline use. In the closing words of one of the best satirical videos about the oil spill, “BP: You’re not mad enough to not drive your car.”

Carbon prices could have a greater effect in the long run, as everyone gradually replaces their cars, taking the new prices into account. This leads to the not-so-good news: the leading legislative proposals all have low ceilings on carbon prices, and release many more emission permits when the price hits the ceiling. The price ceilings vary between bills, generally falling around $30 – $40 per ton of CO2 by 2020.

Every $1 per ton of CO2 released is equivalent to $0.01 per gallon of gasoline. How much more would you think about fuel efficiency when you buy your next car if climate policy makes gasoline cost $0.30 – $0.40 per gallon more than it does today? The low price ceilings simply prevent the climate bills from doing much about oil consumption.

This problem is not unique to the current climate proposals. As Lesley McAllister has shown, many existing cap-and-trade programs have been set up with caps so high that they accomplished little or no emission reduction. In this case, limiting the price of carbon to no more than $30 – $40 per ton of CO2 allows a modest effect on electricity generation, but very little on oil and transportation.

What carbon price would be needed to change our transportation system, and our use of oil? Western European countries, with a quality of life similar to ours, pay as much as $4 per gallon more than we do for gasoline, and have much lower transportation emissions per capita. To get to their level, we could adopt a carbon price of $400 per ton of CO2 – for instance, by setting a very low cap on carbon emissions – and return most of the revenues to households on a per capita basis, as is done in Cantwell-Collins.

In a forthcoming research report (available in July), Elizabeth Stanton and I demonstrate that, even at very high tax rates, an appropriately designed rebate system can lead to net economic gains for every state, and for almost everyone except the richest 10 percent of the population. Moreover, at a high tax level, even when most of the revenues are returned to households, the undistributed remainder is a sizable amount of money which can be used to finance mass transit, new vehicle technologies, and the transition from coal to clean energy technologies. Price incentives will work better and faster if supported by targeted programs to develop and deploy new, low-carbon technologies.

Yes, the current proposals for climate legislation will have little effect on oil dependence. That’s a reason to do more, not less, than Congress is contemplating.

This post was originally published on CPRBlog.

Nuclear power was never quite free of fears; it was too clearly a spin-off of nuclear weapons to ignore the risk of a very big bang. Yet as its advocates point out, we have had hundreds of reactor-years of experience, with only a few accidents. (And someday when Nevada’s politicians aren’t looking, maybe we can slip all of our nuclear waste into a cave in the desert.) Again, the risks are so low that you’d be happy to learn about a law limiting industry’s liability for accidents, wouldn’t you?

Environmentalists have long warned that the world could run out of energy and resources, from the “limits to growth” theories of the 1970s to the more recently popular notion of “peak oil.” The response from economists has been that prices for energy and raw materials are still moderate, and declined over the course of the 20th century; if we are running out of something, why doesn’t its price skyrocket?

The problem is that what we’re running out of is low-risk conventional energy supplies. Because our economy conceals and socializes energy risks, prices remain deceptively low for an increasingly risky energy supply.

The market wasn’t supposed to work this way. In the mythology of perfect competition, each individual business bears the entire risks of failure as well as reaping the rewards of success. Almost all small businesses quickly fail, a point which is glossed over in the cheerleading for competition – but the damage is normally limited to the loss of savings and derailing of careers for the unlucky proprietors.

This model of competition and individual risk-bearing may be a great way to decide which restaurants should stay in business. For offshore oil rigs and nuclear reactors, it’s not so good. The risks are enormous, potentially affecting large numbers of innocent bystanders. The costs of these energy technologies are high enough that large companies are the only candidates for using them. And large companies don’t like to bet the existence of the company on uncertain risks from dangerous technologies. Most large companies don’t fail, ever; they do everything they can to avoid bet-the-company risks.

That’s where Congress has stepped in, to socialize the risks of energy supply. The Oil Pollution Act of 1990, adopted in the wake of the Exxon Valdez accident, imposes a tiny tax on the oil industry, currently 8 cents per barrel, to finance the Oil Spill Liability Trust Fund, which now contains $1.6 billion. In exchange for the tax, the Oil Pollution Act limits industry liability for spills to actual clean-up costs plus $75 million. That amount is a pittance for a giant oil company, and is far below the economic losses to the communities affected by BP’s recent spill in the Gulf of Mexico. While BP has said it will voluntarily pay more, U.S. law does not require it, and BP shareholders might not tolerate it.

No utility would ever invest in any reactor without the Price-Anderson Act, which puts a strict upper limit on industry’s liability for a nuclear accident. The limit is now up to about $10 billion (to be shared by the industry as a whole), higher than for oil spills but still far below the damages that could be caused by an accident at a reactor, especially one close to a major city. The federal government has, in addition, guaranteed that it will find a final resting place for nuclear waste from reactors around the country, although Yucca Mountain, the only site seriously debated in the first few decades of discussion, has apparently been rejected.

That’s why risky energy technologies look cheap: Congress has decided that we, the taxpayers, are the industry’s insurance policy. Unlike insurance companies that know what they’re doing, though, Congress doesn’t bother to calculate the real risks and set premiums on that basis. Instead, they pretend that the worst will never happen; happy days and low prices are here again, and again.

We are in danger of applying the same short-sighted approach to the biggest energy risk of all, namely climate change. Pretending that the worst case couldn’t possibly happen is all-important to those who want to go slow on climate policy; the most likely climate outcomes for this century are unpleasant and expensive, while the worst cases are truly catastrophic – and too large and irreversible for anyone to pay for the damages. But not to worry: Those catastrophes are at least as unlikely as an oil rig capsizing and filling the Gulf of Mexico with petroleum.

This post originally appeared on the TripleCrisis blog.

What the model shows is that the most cost-effective way to reduce global emissions and maximize the yield of “green” investment is to target developing countries: Because the impact of every dollar is bigger in a lower-income economy, shifting capital from rich to poor regions has the best payoff.

Developing nations have advocated this approach for years, but industrialized nations have resisted, not wanting climate mitigation to become a vehicle for the redistribution of wealth. In fact, widely used economic models specifically correct for this “problem,” and focus on climate solutions that leave global inequality untouched by design.

Read our working paper to learn more.

As we outlined in our recent white paper, “The Social Cost of Carbon” (available on the E3 Network website), the $21-per-ton figure being used by the government as a “central estimate” of the damages caused by carbon dioxide emissions is based on flawed economics and questionable value judgments.

Frank’s article describes how the government came up with that number, and why the SCC is so important: It’s like a “volume dial” that determines how strict environmental standards should be. Even worse, as Congress considers a climate bill, the $21 SCC could be taken as the recommended level for a carbon tax or permit price:

If that happens, there is no way the United States could reach the widely discussed, science-based goal of cutting emissions by 80 percent by 2050, which would require a much higher price on carbon. Given how cost-benefit analyses dominate U.S. policymaking, a $21 SCC could have a devastating impact on environmental legislation.

It’s easy to think of the fuel-efficiency standards as yesterday’s news, and not discuss the SCC again until it comes up in Congress. But in fact, now is the time to do our homework and figure out what the true price of carbon should be – before that, too, is a done deal.

Krugman has done a nice job of describing some of the major points of disagreement within the field of climate economics. Here’s his view:

[T]he policy-ramp prescriptions seem far too much like conducting a very risky experiment with the whole planet. Nordhaus’s preferred policy, for example, would stabilize the concentration of carbon dioxide in the atmosphere at a level about twice its preindustrial average. In his model, this would have only modest effects on global welfare; but how confident can we be of that? How sure are we that this kind of change in the environment would not lead to catastrophe? Not sure enough, I’d say, particularly because, as noted above, climate modelers have sharply raised their estimates of future warming in just the last couple of years.

Krugman concludes that the “nonnegligible probability of utter disaster” should guide our climate policy, and that this “argues for aggressive moves to curb emissions, soon.”

Anyone who has been reading this blog will know already that I feel that the evidence of both the climate science and climate economics literatures overwhelmingly supports a big-bang climate-policy approach. It’s nice to know that Paul Krugman is a supporter of these views, and it’s even nicer to have his clear and influential thoughts on this reach such a wide audience.