The quest to reduce carbon emissions is plagued by a near-pathological case of economic illiteracy.

This illiteracy has caused us to focus on the wrong problems, and the wrong solutions … and it’s stalled the realization of any politically tenable carbon reductions.

Ironically, while the goal of reducing carbon emissions has political allies and adversaries, the economic illiteracy is found on both sides. It has become self-reinforcing. The only solace is that the economists are just as guilty.

Let me first make a few points clear. We must reduce carbon emissions. The comment above in no way suggests that the costs of continued carbon release are even remotely comparable to the (comparatively minor) costs being floated for carbon reduction.

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The problem is that the entire debate starts from the presupposition that carbon reduction will cost money. So long as this presupposition exists, we will talk about the wrong issue. The presupposition is not only wrong, but dangerous.

We didn’t sign Kyoto because we determined that we couldn’t politically afford the reduction. Mr. Dingell is now floating the idea of a carbon tax, seemingly to test out whether the public is willing to pay for carbon reduction. (One wishes we had a giant Mastermind board with black & white pegs to at least give a few hints: “right answer, wrong question.”)

Meanwhile, carbon keeps getting emitted, with no politically acceptable solution, because we keep getting sidetracked by economically dubious assumptions. But we in the environmental community must realize that we are part of the problem. Consistently saying that we have to pay to reduce carbon (or the inverse, that we can’t afford not to reduce carbon) may be morally appealing, but it is politically — and environmentally — toxic, because it reinforces precisely those beliefs that are preventing us from implementing laws that would actually start to reduce carbon emissions.

Allow me to explain in more detail:

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The universe of economic modeling that shapes policy is based on the flawed assumption of “full employment.” Skip Laitner of EPA (a man worth Googling) is a lone voice crying out against this problem, but let me try to briefly explain. Economic modeling has always been a guess masquerading as science. I can’t tell you what I’m going to spend money on tomorrow, and certainly can’t be relied on to tell you what the whole nation is going to buy next year. The rub, which causes all economic forecasts to be dubious, is that the models are valid only so long as you can use can assume so-called “full employment.” This is not a measure of people at work, but rather the collective use of all resources (capital equipment, people, dollars, etc.), and it can be summed up as “we have a market economy and markets are efficient. Ergo, all present expenses and investments are optimally deployed.” With this assumption made, one must conclude that any deviation from our present ideal state is an economic negative, and we need not do anything more than figure out how much any given change will cost (there can’t be a benefit associated with said change, because we’re already perfect). A half-second’s thought points out the fallacy of this logic (and indeed, many Nobel prizes have been given out to people like Solow, Kahneman, and Tversky, who put that half-second’s thought in). But the underlying assumption still shapes economic policy making.

To see how this plays out, consider a recent effort to create an investment tax credit for various energy efficiency investment. Congress goes through a process of “scoring” to determine the fiscal impact of the policy and comes up with various costs to the taxpayer of said change — but never makes any assumption about economic gains from greater efficiency — because, per full-employment assumptions, such opportunities do not exist. When it comes time for Congress to decide whether to implement the bill, they look at this (incorrect) fiscal score, compare it to other incorrect fiscal scores, and make policy. Grossly incorrect, but it starts from the presumption of full employment.

While we cannot change these assumptions, we can at least adjust our positions to play into the weaknesses of the approach.

Let’s look at how we might do so for carbon. When we frame the debate as a carbon tax, cap-and-trade system, or other such mechanism, we frame the political options in an economics vs. environment construct, and we are bound to lose politically. Thus, the only real debate we’ve had about carbon reduction is of the “can we afford it” type, which is both interesting and irrelevant. As long as that’s all we talk about, the one certainty is that we won’t get carbon reduction (at least not by politicians who want to get reelected).

It doesn’t have to be this way. It is quite consistent to put a charge on carbon while simultaneously driving down total economic costs. Think about what happens when you go to buy something (say, a TV). Once you’ve figured out the features you want, you buy the cheapest one that meets your criteria; no one argues that the other manufacturers’ lost sale is worthy of government intervention. Similarly, we could structure a carbon market such that there is a transfer of revenue from those who generate carbon to those who do not, without net societal cost.

For example, one could say to all power plants that given our average release of about 1,300 lbs of CO2 with every MWh we produce, there will be a new tax charged to everyone who exceeds that number. The revenue will be transferred proportionately to everyone who comes in below it. Thus, the guy emitting 1,500 lbs/MWh pays a couple bucks to the guy emitting 1,100. This could be reset every year based on revised averages, thus slowly raising the bar of expectation, but in all cases ensuring that there is no net fiscal cost.

I mention this only as an illustrative example, and clearly you could put a lot of variants into the mix. To see another person’s idea on the same subject, see here.

So how much carbon could you actually reduce without increasing costs? At the risk of being overly quantitative — gajillions. Let me cite some personal experience. The managers of our company have deployed over 250 cogeneration and energy-recycling projects over the last 30 years, amounting to over $2 billion worth of capital. Every one of them reduced carbon (the least efficient was two times as efficient as the central grid, and the most efficient was cleaner than a solar panel, by generating fuel-free power and reducing on-site fossil-fuel use). These projects have also generated handsome returns (over 15 percent, unleveraged) to our investors and customers, largely without any government subsidy.

I don’t mention this to plug our company, but to point out a larger truth. We have identified $350 billion worth of opportunities like these in the country — in this context, our efforts are peanuts. We haven’t scratched the surface, in spite of deploying those billions. But the opportunities are out there.

And that’s just in the U.S.! (Indeed, because the opportunities are coincident with manufacturing plants, there are arguably many more in the developing world, creating a neat inversion of the conventional wisdom that the developing world shouldn’t have to act on carbon until us first-worlders get our act together. The reality is that it is in all of our economic interests to save fuel.) These are just energy-recycling projects. Add in opportunities for energy efficiency, opportunity fuel use, and conventional renewables, plus the societal costs that you save when you stop subsidizing the dirtier stuff, and you have massive opportunities to profitably lower carbon emissions.

So let’s stop talking about costs. Let’s offer up solutions like the ones above, that are guaranteed to be fiscally neutral. Let’s challenge our legislators to do the same. Call their bluff! If you can’t vote on something that might have costs, then structure it to ensure that there are no costs. But let’s not put off carbon reduction just because of some goofy economic theories.

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