Former API economist Michael Canes says cap and trade costly way to constrain emissions

As Congress continues to weigh several different options for addressing climate change, the effect that climate change legislation might have on the U.S. economy remains a prevalent issue for some lawmakers. During today's E&ETV Event Coverage, Michael Canes, senior research fellow at the Logistics Management Institute, discusses his recent study "A Cap and Trade System v. Alternative Policies to Curb U.S. Greenhouse Gases." Canes recommends a carbon tax in lieu of a cap and trade system for reducing emissions. He discusses and weighs the various climate change solutions.


Jeff Kueter: Good afternoon. I'm Jeff Kueter, the president of the George Marshall Institute and it's my pleasure to welcome you to this installation of our Washington Roundtable on Science and Public Policy. This is a continuing series of the Marshall Institute designed to bring together the scientific and public policy communities to discuss issues of importance.

Given the considerable interest in climate change topics in the early part of this year we thought it was particularly important to bring Dr. Canes in to describe to you and discuss the broader issues of cap and trade based on a study that he did for us last fall, which we released in December of 2006. Copies of this report are available out at the front desk.

Cap and trade programs, of course, have come to the forefront of the policy debate over how best to respond to climate change by contrasting proposed cap and trade programs with the empirical outcomes of ongoing technology deployment efforts. Dr. Canes' report offers a basis for policymakers and the public to compare potentially competitive options and to make informed judgments about the utility of one approach versus the other, or some combination thereof.

Dr. Canes is a senior research fellow at the Logistics Management Institute. He previously was vice president and chief economist of the American Petroleum Institute where he sponsored the early development of the Charles River Associates multi-sector, multi-regional trade model for climate change policy analysis. He's been a member of the faculty at the graduate school of Management at the University of Rochester. He has a Ph.D. in economics from UCLA and a masters of science and economics from the London School of Economics. Please join me in welcoming Dr. Michael Canes.

Michael Canes: Well, thanks very much Jeff. Can everybody hear me pretty well?

It's a pleasure to be here today. I appreciate very much the opportunity to spend a few minutes with you discussing some of the issues surrounding climate change policy. I should say I am a senior research fellow at the Logistics Management Institute, but I am speaking here entirely on my own. The views I represent here are not theirs necessarily or anybody that's connected with LMI.

Why don't we go to the next slide? I'm going to try to make a series of points with you today and I will give a series of arguments in each case for why I think those points are important and valid. First, that constraints on fossil energy use will have an impact on U.S. GDP if we impose them. And by that I mean compulsory constraints on fossil energy use.

Second, that a cap and trade system, which is currently being discussed in a number of quarters, particularly up here on Capitol Hill, that a cap and trade system is a particularly costly means of constraining greenhouse gases, relative to other options that I will talk about. Then I will talk a little about what has actually been happening, what the record looks like with respect to U.S. greenhouse gas emissions and curbing those emissions. And if you are not familiar with that record there may be one or two surprises for you in how those numbers look. That curbs on greenhouse gases, while an important objective, are not our sole social objective and that has implications for how, I think, we should view the problem and how we should view policy options.

And finally, that well-funded research on means to deal with climate change, coupled with strong capital recovery incentives, provide powerful mechanisms to curb U.S. GHGs. And I'll talk about that as one of the options. So I'll spend just a few minutes on this point that energy and output are related and that, therefore, curbs on energy consumption will have some impacts on output. Output is produced by a combination of labor, capital, and energy. Energy is both a substitute for and a complement to labor and capital. By that I mean labor or capital can be substituted for energy to perform work and produce output. That's the sense in which they are substitutes, but more energy makes labor and capital more productive and, hence, increases their per-unit output. That's the sense in which they're complementary. That is, if more of one resource makes other resources more productive they are complements. And as much cost-effective energy efficiency as possible, but ongoing U.S. economic growth would require more energy use. Just a moment or two on each of those points.

Next slide. I tried to dress it up a little here so that it wouldn't be just strictly boring looking words, output produced by a combination of labor, capital and energy. What you see here is a drilling rig with some roustabouts working on it and that's a way in which labor and capital combined with energy, which is used to drive the drilling rig or produce output, which, in this case, would be oil and gas. Just a sort of pictorial representation of the point that all three resources go into the production of output.

Next slide please. But labor and capital can be substituted for energy to perform work and produce output. So if you want to do it with less energy you can substitute people to do work. The idea is to get work accomplished to produce output. And there are ways to substitute labor for energy. And there are ways to substitute capital for energy, sometimes productively, sometimes maybe not so productively, but it can be done.

Next slide. But more energy makes labor and capital more productive and increases their per-unit output. Well, this is a picture from a steel mill and it shows that workers working with capital and a lot of energy can produce a lot of output. And if you add energy to the mix you can accomplish more work with the same labor and capital which means that the capital output ratio, or the labor output ratio is enhanced with the addition of more energy.

And next slide. Much cost-effective energy efficiency is possible, but ongoing U.S. economic growth will require more energy use. While this is a topic of some controversy among people who are conversant with energy technology, and particularly energy efficiency technology, there's a belief that there's a great deal that can be done cost effectively to reduce energy use and to provide energy services with less, provide the same level of services but with less actual energy input. And I think there's something to those arguments. I kind of agree with that. I think there are a number of transactions costs associated with knowledge about energy efficiency and so on that make it sometimes somewhat difficult to employ methods that would be cost effective if people had perfect information about what can be done.

Nevertheless, nevertheless, when all is said and done and you think in terms of a lot more cost-effective energy efficiency being employed in vehicles and being employed in structures and in processes. When you think in terms of the longer-term and income growth and income growth generated by population growth and by productivity growth and by demand, you come to the conclusion that there's no way to avoid the fact that we are going to want to demand, we are going to demand more energy in the future than we are using today. It is simply inevitable. It could be that for years we could conserve our way out of that, but eventually we will find that we will want to use more energy and we have to plan for that.

So what are the implications of that, in terms of trying to curb fossil energy use, which is of course what we have in mind when we talk about curbing greenhouse gases? Well, fossil fuels make up about 85 percent of total U.S. energy use. And it breaks down, approximately, oil takes up about 40 percent of our energy use, coal about 23 percent, natural gas about 23 percent. So that's 85, 86 percent, and nuclear accounts for about 8 percent, and renewables for about 6 percent.

So when we think of we have to curb energy use and we have to curb fossil energy use we are thinking in terms of curbing the vast majority of the energy that we use. Constraints on fossil use will force substitution of higher costs, less productive inputs, and hence reduce the growth of U.S. GDP. Sort of an implication of what I was saying before, that if you curb the use of one of the efficiently used inputs and use other inputs, which are higher cost or less productive, you are going to have some impact on GDP or the growth of GDP. And the magnitude of these costs will depend, in part, on how the constraints are imposed.

Next slide. Just some pictures just to kind of illustrate the point, fossil fuels make up 85 percent of total U.S. energy use. There's an old farm with, a tank farm. And as I said, oil is the single largest, about 40 percent of total energy use, almost half of fossil energy use.

Next slide. The constraints will be forced substitution of higher cost, less productive inputs. This was supposed to represent moving from, let's say oil fueled vehicles to a lesser form, but it's just meant to illustrate that this is a point that you have to keep in mind.

And next slide. So, the magnitude of these costs, this is important in understanding what, in fact, are maybe the ways to go in this. So I'm going to look at a cap and trade system, in particular, and compare it to a carbon tax, which is the kind of thing that economists tend to think about a lot and believe may be a superior alternative. And then, as a third alternative, research and development with enhanced capital recovery and incentives and private/public partnerships. And I'll talk about all of those, but for now I'm going to focus on a cap and trade system.

Next slide. As those of you who are familiar with cap and trade know it is a constraint. It was meant to be a constraint on carbon and it would be a constraint of fossil energy use if we imposed it. Returnable emission rights would be created under such a system and they could be either given away or they could be auctioned. And there are all kinds of schemes afoot, but I point out, as others have pointed out, that no tradable emission rights in the United States have ever been auctioned. So when you think in terms of what is actually, likely to happen, maybe because of the political imperatives, if you wish to install such a system. The more you try to add auctioning as a feature to the system the more resistance you're likely to get in attempting to impose such a system. And, therefore, they have not been auctioned and you have to question whether there will be auctioning in the future.

Theoretically, they could be traded internationally. That is the idea. The Europeans have a scheme and we have a scheme and there are some, if we had a scheme they could be traded between us and others could be included. And there are already some institutions in place for joint development projects. So it all could be done on an international scale. And they could have a safety valve feature, where the government sells extra allowances at a preset price, which is meant to be a kind of a safety device so that if there was too much volatility in the prices of these allowances that there would be a way of kind of smoothing that.

However, when you look at the actual proposals, at least the ones that I have looked at, while there are some that have been safety valve feature in them a lot do not and there's a reason for that. And the reason is that many in the environmental community are very uncomfortable with a safety valve because it means that you may not achieve the particular goal at the cap and trade system was put in place to achieve, quantitatively, may not achieve the goal that it was set in place to achieve. So if one of them would really be a safety valve feature is open to serious question I would say.

Next. So what are the costs and what are the magnitudes of the costs of a cap and trade system if that were the way that policy were to go? Well, you begin with the GDP losses, this is the point that I was making earlier. That when you constrain energy use and you're forced to substitute labor and capital for it, then you will have some impact on GDP.

So EIA has done a series of estimates of different cap and trade type proposals, and they all end up concluding that after a period of time the losses begin to accumulate. They start to reach percentage, small percentages of GDP, the GDP is very large and, therefore, the numbers run in the tens of billions annually after some years. And that's even the most benign of the proposals, meaning they have safety valves and they're very slow to develop and so on. Those are the numbers that one sees after a period of time, it takes time. And when you cumulatively look at them they're in the hundreds of billions and when you try to estimate this on a per family basis you're talking several hundred dollars per year per family after these things have been in effect for some time.

DOI and re-fed, DOI did a resource assist to it at one time, WEFA, which once was Wharton Econometric Forecasting Associates, which now are all one firm, Charles River Associates, they've all made estimates. The estimates and the bottom returns of the estimates depend among the features, the particular features of the program, whether there was trading in the program, whether there was a safety valve, whether there's international trading and so on.

But they all find that the costs are significant, run in the tens of billions at least, in some cases hundreds of billions of you constrain the program more tightly. And so inevitably the economics people, the people who have done work in this area, conclude that you are going to have costs in terms of GDP and they will be fairly substantial. However, while those costs are always estimated by these models, there are two forms of costs, which to my knowledge are never estimated in the models.

And the first is the cost of actually distributing the allowances, because if you distribute allowances for free, then they have, they are forms of wealth. And people understand that they are forms of wealth and therefore they want to have more of these allowances as opposed to less and that involves, there's a regulatory process of some kind in which the allowances are distributed initially to people, after which they may be traded, but initially distributed. And so it induces a kind of competitive what I called rent seeking, which means trying to get something at the behest or by sanction of regulators through lobbying, essentially.

And so resources are put into that and there's a lot of money at stake. The U.S., I think the rough estimate is somewhere on the order of 7 billion tons per year of carbon, so if you thought the price is going to be $20 or $30 a ton, or somewhere in that range, you're talking $100 to $200 billion at stake if you had allowances handed out for all of that carbon.

It could be smaller to start, but nevertheless, you're talking about very significant monies and therefore very significant inducement to put resources into attaining more of those allowances as opposed to less. And all kinds of cases can be made about how an area of the country is particularly disadvantaged or we have a lot of poorer people here or some other argument as to why historically we are in a more deserving position than others and should get more of these allowances.

Of course, if you optioned them all, this problem wouldn't exist, but as I say, that's highly unlikely. The likelihood is that many, if not all the allowances are going to be handed out roughly based on historic use, and that will induce this kind of behavior. And those estimates, how high might those costs be? Well, hard to say.

People have to understand and have to see what may be possible. But in theory, I mean there's 100 to 200 billion at stake here and all of that could be absorbed in the lobbying game, probably wouldn't be. However, whatever resources are incurred on an ongoing basis in this activity are never estimated in these model estimates, or at least I have never seen them estimated. And then there are the costs of monitoring a trading program.

So if it's a domestic program, it's the cost of sort of measuring what is each emitter annually doing? If an emitter is saying that they're reducing their carbon emissions and so will have rights to sell, that has to be monitored. That has to be shown in some way. There has to be a process for that to happen. There are the possibilities of black-markets in allowances, since allowances will have value. There are also insurance, fuels not attached to allowances, simply making fuels available for free, at cost, but without the allowances. All of that will have to be monitored in a cap and trade type system, just domestically.

And we're talking here about thousands of emitters. I mean even in the best-case circumstance you're talking about thousands of emitters if this is going to be a comprehensive type program. If we go to an international trading program the problems become much worse. It's very difficult, I think, to monitor government behavior all over the world. If governments are involved then they can be often under an international allowance trading systems, allowances through projects in their countries and so on. All of that has to be monitored and the costs rise even more. And, again, to my knowledge, these kinds of costs, the monitoring and administrative costs are not generally included in the econometric estimates.

Next slide. So when I look at a carbon tax relative to, when I look at cap and trade relative to a carbon tax, if just those two options are on the table, I believe a carbon tax would be the more efficient way to go. And a number of economists have looked at this question. I cite here are four of them, like Bill Moore has, who's been working on this problem for many, many years, at Yale, put out a paper, again in 2005, on this issue pointing out how volatile the price of carbon would be under a cap and trade system. And the price of energy would be volatile as a consequence and that would have impacts on the economy. He estimated substantial deadweight losses from such a system and recommended against it.

Richard Cooper at Harvard went over a lot of the same ground, basically hard data that an international trading system is unworkable. That the monitoring problems are so great and the chances of corrupt entities being involved in it are so great that it probably would not work.

William Poser, who's at Resources for the Future, back around 1999, wrote a paper in which he compared the carbon tax approach to the cap and trade approach. And said, well, depending on, it all depends on the particulars of the cap and trade system, but I find that the carbon tax is up to five times more cost-effective than is the cap and trade system, let's say, at its worst.

And finally, Bob Shapiro, who used to be with the Progressive Policy Institute, was active in the Clinton administration, but now is with a company called Semicon, has just written a paper, it came out in February actually, this month, and, again, argued against a cap and trade system on many of the same grounds as the other economists. Talked at some length about the dangers of manipulation of the international allowance market by entities with some incentive to do that, but concluded, as the other economists did, that if you go in this direction a carbon tax is the way to go.

Next slide. So having now talked a little bit about what I believe are the weaknesses of a cap and trade system and wide, if you're going to, if the government is going to step in and constrain carbon, then the way to go would be a carbon tax as opposed to a cap and trade system, I want to talk now little bit about what the U.S. has actually been doing and what its record looks like.

So we start with while our greenhouse gases have been rising since 1990, the GDP of this country has been rising more rapidly than most major Western nations and we will take a look at those data in just a second so you can get a sense of what I am talking about. The U.S. has reduced the carbon intensity of its GDP faster than most large industrial countries. And this is a very important point, in my opinion, because it measures how rapidly carbon is being reduced relative to GDP growth.

And we'll come back to this point, but GDP growth is crucial because constraining carbon is not our only social objective. We have other social objectives. And the way to pay for those is to generate as much GDP as we are capable of generating, these include, well, I will get into that later. But these include a lot of different things as we will see, including other environmental objectives. So carbon intensity then becomes a crucial thing because it we're trying to grow GDP as rapidly as we can and want to try to not constrain the growth of GDP if we can avoid it, but we've still got to deal with the carbon problem, then carbon intensity is the way to measure that.

Are we cutting our carbon intensity at a sufficiently high rate? Integration and population growth often are ignored in assessing U.S. greenhouse gas emissions. And these account for about a third of the growth in U.S. emissions between 1990 and 2004. I'll come back to that and I'll show you the data that supports that statement.

Next. So here are some numbers on carbon dioxide and GDP growth between 1990 and 2004. These are taken from EIA tables. I've just sort of condensed it all into a kind of a convenient form and I really show here a comparison with some of the other leading OECD nations. There's a lot of other countries, Austria and Belgium and so on, and our record is pretty impressive compared to just about all of them.

So our increment in CO2, between 1990 and 2004, was almost 18 percent, which, for example, would compare with about what Italy did, but would be less than some other countries, but would be more than a few others. But if you look at the increment in GDP between 1990 and 2004, in real terms, ours was about 52 percent, greater than any other of these Western nations.

So if you compare us to Italy, because the growth of carbon emissions, CO2 emissions was about the same, that you can see that our GDP grew about 150 percent more than did theirs. There are countries like France who constrained their GDPs more than we did, but their growth in GDP was just about half of ours. The Germans and the UK look pretty good, but many of you will know that both of those countries had kind of special circumstances over this time period.

The Germans absorbed the East and were able to shut down a number of inefficient factories and coal mines and so on and that made a lot of difference in their data. And the UK, back in the Thatcher era, around 1990, moved away from subsidization of the coal industry and towards the use of gas from the North Sea and that made some difference in theirs.

I don't say that accounts for all the differences, but those were important factors for those two countries. And only the U.K. had growth, or of the countries that constrained their GDP as well, only the UK had growth that was anywhere near the United States.

Next. So what about this carbon intensity? What have we been doing actually over the period of 1990 to 2004? And there's the record. This is measured in terms of millions of metric tons per thousand dollars of GDP, U.S. GDP. The comparisons are made on a purchasing power parity basis I believe, and this is all in 2000 dollars to keep it in real terms.

And so the U.S. has cut its carbon intensity over that time period by about 21 percent, which compares pretty well with most of the other large countries, the two competitors are Germany and the UK. Again, somewhat because of special circumstances, maybe partly because they were active in other ways as well, but it does show that we have been doing pretty well compared to most other Western countries.

Next slide, please. What about an update for 2005 and 2006? We have some data. It's partial. It's not complete. And the tables aren't complete at EIA, so I couldn't update those tables. But I do know that in 2005, according to the EIA and EPA, U.S. carbon dioxide emissions increased 0.3 of 1 percent and the GDP increased 3.2 percent, so the differential there is about 3 percent. In 2006 we only have 10 months data so far on fossil fuel use in the United States.

The latest Monthly Energy Review has this data, shows coal consumption down approximately 1 percent, oil consumption down 1.3, and natural gas down 0.8 of 1 percent. So roughly speaking fossil fuel consumption was down about 1 percent over the 10 months through October, whereas we made for the year 2006, U.S. GDP increased about 3.4 percent in real terms. So the differential there will run maybe around 4 percent for the year. That is the intensity will drop by about 4 percent for the year.

And so, I conclude from these data, U.S. carbon intensity dropped about by 7 percent over the years 2005 and 2006.

Would you go back one? No, go back one.

Yes, so what that means in terms of this number is, I think, that we are now at about 0.14. Seven percent would be, roughly, a drop of 0.01 there, and so we are at about 0.14 and moving in the right direction. Other countries may be moving too, I don't know. I don't have the data for them. But we continue to reduce carbon intensity at a pretty good rate in the United States.

OK, let's go forward two. Thank you.

Population growth. When you consider the record of the United States and you say, well, when all is said and done, our carbon dioxide emissions did rise over the time period. We have to take a look at population among other factors and we will see one reason why. So the population in the United States went up about 16 percent, a little over 16 percent over this time period. Now as any one of the other large OECD countries, population increase was in the single-digit category, usually sort of on the order of 2 or 3 percent, maybe 5 percent in the case of France.

So there's a big difference between what's happened in the United States and elsewhere and that accounts in part for why our emissions rose over that time period.

Next slide. And where was the population growth coming from? Now some of it was generated just by people having more kids here, but a good part of it, actually about 54 percent of the population growth over the period 1990 to 2002. Here my data has to switch by a year because this is what I've got data for, immigrants and their offspring accounted for greater than 50 percent, it's actually 54 percent, of U.S. population growth, 21 million of 39 million total increase in population over that time period.

Over that time period, it's a little different than a couple of the other tables, our greenhouse gases grew 12.4 percent. OK, well, let's say, just to kind of get a sense of this, how much difference did it make that we had this immigration over this time period? Suppose the immigrants only produced two thirds the greenhouse gases per capita of others in the US, on the theory that they're a not as wealthy as the average American and so they don't consume as much and don't travel as much and so on. So I used that number as just a rough estimate. That may account for about a third, when you take that they're 50 percent of the population growth and two thirds of the greenhouse gases, they may account for about a third of that 12.4 percent.

In other words, counting factually, had there been no immigration over this period, so no immigrants, nor kids of the immigrants, U.S. greenhouse gases would have grown about 8 percent, a little over 8 percent perhaps, as opposed to 12 percent. And other countries greenhouse gases, wherever the immigrants were coming from, would have grown more on the idea that those people would've been in those countries. They would've consumed something and there would've been some greenhouse gases. So when international comparisons are made I just remind you that the U.S. is a country that imports people as well as goods and services and that it has some impact on the greenhouse gases here.

OK, next slide. So what's actually going on? And what impact have some of the programs had that we have in place? Is all this, these intensity reductions and all this stuff sort of accidental or are we actually doing some things that perhaps is making some difference in the record in this country? Now we know that they're spending about 3 billion a year at the federal level in research and development on climate. And it takes a lot of different forms admittedly, but some of those forms are to look into technologies, particularly at DOE, technologies that can help reduce energy use, maybe we become more energy efficient. And I will show some examples of that in just a few minutes.

So some of that is paying off in terms of more productive, capital equipment, and capital equipment that uses less energy per unit and, thus, run in an efficient fashion. The Asia-Pacific Partnership, that doesn't get a whole lot of note, but we have started to see that the Chinese are rapidly catching up with the United States in terms of total greenhouse gases. And India is growing rapidly too and they're producing a lot and that in many years time India will be one of the very large-scale emitters.

So this entity, this Asia-Pacific Partnership, U.S., China, India, but also South Korea, Australia and Japan, is intended to begin to address that problem as I understand it. And it does so through encouraging technology transfer among the countries that are involved and also technology transfer to others to help them to use more energy-efficient technologies. And it is a start on a way to try to bring the Chinese and the Indians and here, with a few others, into the game. It's voluntary. Whatever targets or goals are set are voluntary, but nevertheless it is the first mechanism I know of to try to begin to deal with this question of what are we going to do about Chinese emissions or Indian emissions in a world in which we are going to try to deal with this problem.

There are a lot of public/private partnerships. These don't get a whole lot of publicity, but you may have heard of some of the names like in DOE's case, Climate Challenge, Climate Wise is actually jointly done with EPA, Clean Cities, carbon sequestration, the biofuels program. There's a lot of these in which they work with the private sector, sometimes they subsidize, but sometimes it's just asking the private sector to set goals. And then to give kind of favorable publicity to private sector entities that reach their goals and publicize the fact that they're cooperating with the federal government in this. And a lot of companies are willing to go along.

There's multiple reasons for that I think. Sometimes it's that they like what we might call the public relations benefits and in other cases it may be that the people in the companies feel, the CEOs and so on, that, hey, there's a problem here and I'm willing to be part of the solution. I'm willing to commit my company to try to help. And so you get these partnerships. EPA has some, Energy Star, Natural Gas Star, Waste Wise, coal bed methane and so on, a series of programs where they're working with private sector entities to curb emissions on a voluntary basis, but using the targets and some kind of commitments on the parts of the companies. Environmental groups also have these kinds of partnership programs with businesses. This is not what I would call a U.S. program, but it is somewhat important in that the entities, like Environmental Defense, World Wildlife Fund, and the PEW Center and World Resources Institute, work hard to try to get companies to commit to voluntary goals, which they then publicize positively if they make them and not so positively they don't adhere to what they have promised to do.

And, finally, there are some programs at the state and city levels. Some of those are getting more publicity now with what's going on in California, but I'm talking here about some voluntary programs. Minnesota Relief has to do with tree planting in that state. Seattle City Light had to do with putting more efficient lighting in, in the city, and encouraging businesses in that city to do so.

Yeah, next slide. So what are some of the results of this? I said that I would just quickly describe some of the technologies coming out of DOE's program, particularly if they're aimed at trying to develop more efficient uses of energy and thus curb emissions. Thin fan solar, improved wind turbines, superconductivity, lithium battery advances, industrial process catalysts, and more efficient biofuel production are just some of the technologies which, it is argued at least by the Department of Energy, have not just been developed there but are actually being employed in the private sector and so are making some advances.

And then the public/private partnerships, EPA and DOE in the Climate Action report to the United Nations Framework convention estimated, this is several years ago, estimated that the voluntary programs, taken as a whole, and they were mainly government programs, but knowledgeable about the private programs as well, that is the environmental group programs and so on, estimated that all of this combined, all these voluntary programs combined would yield a result of about a 9 percent reduction in greenhouse gases in 2010. I went back and checked with somebody from EPA who had worked on that about a year ago or so.

Just asking, is this still a valid estimate? Is this still, is it too high? Is it too low? And he said, look, you know, DOE kind of dropped out of that and so we didn't do that on our own. But we have tracked it and I would say I, this was somebody who was there, that that is a pretty good estimate still. That we still think we're on track. That the private/public partnership programs are going to get us to about that point. Did you want ...

Questioner: You didn't put nuclear on the list, is that a time horizon issue or ...

Michael Canes: You mean as a technology being developed by DOE? I guess, yeah, I was really focusing on some of the energy efficiency programs at the time and not really looking at what they're doing on nuclear. But maybe that ...

Questioner: In the power sector.

Michael Canes: Yeah, I would say it is too, and so maybe that's something we can discuss.

Yeah, let's move on. So climate change is an important social issue. Steps should be taken to deal with it. That's not -- I certainly am not questioning that premise. But I do question whether we should focus on that to the exclusion of all else. And that's what kind of drives my way of thinking about what we perhaps should be doing.

So here I'll identify a few of our other social goals and there are many others, infrastructure maintenance and expansion, education, health and welfare, other environmental objectives, poverty reduction, global wear and tear, which maybe should be at the top the list, and help for others abroad, foreign aid of various sorts. These are all really social objectives and we have to have the wherewithal to pay for that.

And so I become nervous about constraining the growth of GDP when I think in terms of, hey, you know, we've got lots and lots of different things we want to do. Let's be careful about how we go about dealing with the one problem that is important, but not the only problem we have to face. So, as I say here, GDP growth enables all U.S. social objectives. And what I mean by that is it provides the resources whereby we can deal with some of our other social issues.

Next slide. So, the policy choices. I mean here I've moved on beyond cap and trade and carbon taxes, for the moment, to strong research development and deployment programs. So that's the kind of thing that I was describing. Energy-efficient technologies, low carbon fuel alternatives, and my friend here on the nuclear, I'm sure, will finally see something there, strong capital recovery incentives, recapitalization and replacement of the capital stock. And then, in the end, when you say how are we going to curb carbon emissions? How are we going to cut the GDP intensity of carbon?

It's going to be through replacement of less efficient capital stock with more efficient capital stock. And that means structures and equipment, buildings, well, eight track systems and vehicles. And the way, one way, in which to induce people to do that is to promote strong capital recovery. That is to say accelerated appreciation or more expensing or whatever it might be that would give people, an investment tax credit maybe, that would give people inducement to replace capital equipment with more energy-efficient capital equipment. And then, in turn, strengthen the voluntary greenhouse gas reduction programs. What I mean by that is some of them work better than others. And so by focusing on and rewarding, these are the programs that are getting us better results and these programs are not getting us as good results and then we won't put as much resource into this, you can strengthen. You can strengthen the voluntary programs even beyond where they are today.

And, finally, so I conclude, curbs on fossil fuel use will reduce GDP growth. Cap and trade is a particularly costly means to do it. If we are going to constrain greenhouse gases through compulsory means a carbon tax would be the better way to go, in my opinion. But curbing GHGs is important and not the sole objective of our country. We have been reducing the carbon intensity of GDP at a rapid rate and I think we are continuing to do that, likely will continue. Strong R&D program to keep promoting energy efficiency and low carbon fuels, coupled with aggressive capital recover incentives can provide effective tools and will provide effective tools to curb our greenhouse gases.

Thank you very much.

[End of Audio]



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