First, the idea that a price on carbon would be transformative, and that we should do that first and then come in with other complementary policies later, is dangerously wrong. Transportation and building heating/electricity are the two largest contributors to carbon emissions, accounting for well over half the total. The price elasticity on transportation fuels is very low, as we’ve seen. With gas prices up $2 per gallon in the last three years, we’re now finally seeing small reductions in driving, somewhere in the neighborhood of 4%. $2 per gallon of gas is roughly the equivalent of $200 per ton of carbon, a price impact that the failed Lieberman Warner bill wouldn’t have brought until beyond 2040, if then.

Home energy use is not only terribly price inelastic (people light and heat their homes out of habit and necessity, not on the basis of price), so that we’d need very high prices to induce behavior changes, but is also characterized by a terrible market failure in information, where people have no idea what appliance costs them what in terms of electricity. As everyone should now be aware, rental units are subject to other serious energy market failures due to renter/owner split incentives and the liquidity constraints of many renters.

Second, and equally important, are the macroeconomic impacts of rising energy prices. Even with efficiency investments, the price per unit of energy will go up, and as will the price per unit of energy services for many applications. This will reduce the economic viability of some industries currently on the economic edge and make the bust part of the boom-and-bust cycle unbearable for others. Bad as it is that households might see their disposable income go down by 1 or 2% as a result of higher energy prices ($50 per ton of CO2 translates to about $1000 per year on average household income of $63,000), it will be far worse when a sizable minority of households lose 100% of their disposable income when plants start laying off. Unless we use the bulk of carbon revenues to reduce the costs of employment, we’ll be driving a wedge between the blue collar left and the green left, destabilizing first the support for climate legislation, and then the climate itself.

Giving permits away to corporations is a lump-sum transfer of wealth that creates no incentives to do anything new. Giving permits away for free to individuals (or, equivalently, a cash payment of a share of carbon revenues) is another form of lump-sum transfer that only creates an incentive to remain alive, for which there is already ample incentive. The slightly higher marginal propensity to consume of the average individual as compared to the upper income owners of polluting corporations is not enough of a difference to stimulate sufficiently higher demand to offset the impacts of higher energy prices.

To make climate policy work economically, the money must be invested in energy efficiency and renewables (deployment of existing technologies should be the priority). It should also be used to keep low income households already living on the economic edge from falling into a hole they can’t climb out of, for job retention and retraining for workers and industries with high energy intensity. The rest (65% or so) should be used to reduce existing taxes that currently create disincentives for job creation. I prefer cutting the payroll tax because it is the most regressive tax we have, though I’m not sure I want to wade into the social security debate.

One big potential advantage of cap and dividend (I think it needs a much better name, by the way) is that it could raise some support among a certain class of Republican who believes that the government can do no good and should be shrunk wherever possible. But I am virtually certain that, despite the fact that it is easily understandable and very good in terms of income distribution, it won’t attract massive public support from people who would not support other forms of cap and trade. Telling people that climate policy won’t be as bad as they think is not a message that will drive people to get on board with enthusiasm.

Cynicism aside, I think this is a good thing. People are suffering, and if the government can do something about it, why shouldn’t they? It sometimes seems like heresy these days, but I tend to think it’s what we pay them to do.

The problem is that some of the stimulus proposals floating around, including ones by our green friends (see Josh Dorner’s post for example), are not very good stimulus policies. It’s not that any of these ideas are bad. Most of them are downright good. Excellent, even. The problem is that almost none of them can be remotely classified as stimulus.

Here’s the problem, or at least one of them: Since World War II, the average recession has lasted just 11 months. Add the fact that it takes a fair bit of time (anywhere from 3 to 6 months) before we even recognize that we’re in a recession. Add still more time to decide what to do about it, and more time on top of that for whatever we decide to do to actually have an effect, and you see the problem. Even for the quickest policy approach, we could be solidly 7 months into an 11 month recession before we can have any impact.

There is a very short window for policy to stimulate the economy. If we don’t act fast enough, the policy won’t take effect soon enough to help anyone. If we’re late enough, the policy ends up hitting the economy when it’s on the upswing, and instead of smoothing out the business cycle, we end up contributing to it.

In the 2001 recession, we sent out checks to taxpayers as part of a stimulus package. This is about as fast as the government can move money through a new program, and it took two full months for the checks to arrive in the mail. Anything much slower than that, and the game will be all but over.

The other problem is that there’s a limited number of things we can do to get people to spend more money quickly. People and businesses tend to spend based their long-term expected income. They borrow and save to smooth out the bumps. Giving people a short burst of income doesn’t change their long-term picture much, and it doesn’t create new spending in the short run, when we need it.

The exception is people who can’t borrow. People with no savings to draw on and limited access to credit can’t spend more in the short-run, even if they think they’ll make lots more in the future. Targeting stimulus at low-income households that fall into this category can create new spending in the short-run.  Of course, such “liquidity constrained” people tend to be the ones hurt most by recessions in the first place, so targeting them for stimulus makes even more sense.

For stimulus to work, we need to get cash as fast as we can into the hands of people and businesses that would spend it right away if they had it, and who would spend less otherwise. We’re looking for additions to or extensions of existing programs that have all the pieces in place to get money out the door quickly to low income households. Any new program that needs new administrative infrastructure, no mater how good a program it might be, will almost certainly come too late.

It’s a pretty high threshold to meet, and we shouldn’t be surprised that most green proposals fall short. Most other proposals do too.

Things like tax credits for more efficient homes and appliances fail the test for a couple of related reasons. The biggest problem is that they shift consumption, from buying inefficient equipment to more efficient equipment. They tend not to generate new consumption, which is what we need. Anyone in the market for a high end home or appliance is not liquidity constrained, almost by definition.

Otherwise good ideas, like the Green Jobs Bill or Clean Renewable Energy Bonds (CREBs), take too long to ramp up. Any program like these that requires the government to issue grant guidelines, receive applications and to approve those that qualify take too long from the time the bill can get passed until the money hits the ground.

The Production Tax Credit (PTC) for renewable energy should be extended as soon as possible. We’ve all heard how the renewable energy sector is lurching from boom to bust, and is on it’s way to bust again. The wind industry is facing 75,000 layoffs if the PTC is not extended. It’s patently absurd that while mature technologies like nuclear and oil continue to receive massive subsidies year in and year out, that newer, cleaner, and smarter technologies like wind and solar live hand to mouth.

But even renewing the PTC is suspect as stimulus policy. The problem, of course, is that if we stop using renewable electricity, we’ll start using more of other types of electricity, so we may end up replacing all those lost renewable jobs with other ones in the traditional energy sector, and it might just be a wash from an economic perspective.

The Investment Tax Credit for building new renewable generation is another great idea that’s going by the wayside. There is no question but that it should be renewed, just not under the rouse of calling it stimulus. There’s actually a perverse incentive to let the ITC expire for stimulative reasons: If builders knew that the tax credit for building in new renewable energy facilities was going to expire at the end of the year as planned, they would have the incentive to rush to get new projects underway sooner rather than later, with more short run stimulative impact then if we extend it.

I’m a green economist, but an economist nonetheless. It’s not called the dismal science for nothing. And while almost all of the “green stimulus” ideas I’ve seen are good ideas on their own, they stretch credibility when they’re thrown into the mix as stimulus policy.

Economists are obsessed with allocating limited resources. There are two here that worry me. First is how much money we can throw at this recession to help pull out of it. The more money we spend on good ideas that don’t help, the less we’ll have to spend on legitimate stimulus, and the longer people will be out of work.

The other is simple credibility and political capital. We have some momentum now, but there are still plenty of people and politicians out there who would like to dismiss us as treehuggers: all heart and no head. I worry that we (as a movement) run the risk of sounding rather silly. There’s a heated debate going on about how to avoid people losing their jobs and homes, choosing between food and heat, and renewing prescriptions or cutting pills in half. If we jump out from behind a tree and yell “windmills!” as the solution for every problem, we strain our credibility.

I see this a lot with the Bush administration calling for tax cuts for the rich as the solution to budget deficits and surpluses, to a sagging economy and one in danger of overheating. We should and do call them on it every time it happens, but if we want to be right, we have to be better than them, or we loose our right to moral outrage. And what’s a green without moral outrage?