Obama and Global Warming – Cap & Trade or a Carbon Tax?

Taxes aren’t just too high, they’re too dumb. Whenever we put a tax on something, we get less of it. Yet, incomprehensibly, we continue to tax the things we want more of: income, jobs, and savings. Economists used to like that — they thought taxing good things was “neutral.” But it’s not. In a resource-constrained world, it’s much smarter to cut taxes on what we want — like jobs — and make up the difference by raising taxes on things we want less of: carbon, pollution, and waste. – Bill Shireman, President and CEO of the Future 500

The invisible hand of the market is blind to the effects of inputs and outputs that don’t provide any immediate price signals.  No where is that more true than in the fossil fuel derived energy markets, where the price signals for resource depletion, air and water pollution, and climate change are either non-existent, understated, or so delayed as to render any “natural” free market correction an economic and humanitarian crisis.

In the case of anthropogenic global warming [AGW], market forces may react to new shipping lanes in the Arctic or improved crop yields in certain parts of the world, but they will not react to species loss or rising sea levels until we are well past the tipping point of no return.  So the only way to drive the market to “decarbonize” our atmosphere is for the government to impose a price signal on fossil fuel generated carbon.

We can do this with either a system of Cap & Trade or with a Carbon Tax.  Either method would impose a cost on the release of carbon dioxide from the burning of fossil fuels and adjust the price upward to reflect the environmental costs that the “market” fails to “see”.

In a recent letter to president elect Obama, Jim Hansen, head of the NASA Goddard Institute for Space Studies proposes a carbon tax.  Here are some excerpts from the letter:

A rising carbon price is essential to “decarbonize” the economy, i.e., to move the nation toward the era beyond fossil fuels. The most effective way to achieve this is a carbon tax (on oil, gas, and coal) at the well-head or port of entry.  The tax will then appropriately affect all products and activities that use fossil fuels.

The public will support the tax if it is returned to them, equal shares on a per capita basis (half shares for children up to a maximum of two child-shares per family), deposited monthly in bank accounts.  No large bureaucracy is needed.  A person reducing his carbon footprint more than average makes money.   A person with large cars and a big house will pay a tax much higher than the dividend.  Not one cent goes to Washington.  No lobbyists will be supported.  Unlike cap-and-trade, no millionaires would be made at the expense of the public.

A carbon tax is honest, clear and effective.  It will increase energy prices, but low and middle income people, especially, will find ways to reduce carbon emissions so as to come out ahead.  The rate of infrastructure replacement, thus economic activity, can be modulated by how fast the carbon tax rate increases.  Effects will permeate society.  Food requiring lots of carbon emissions to produce and transport will become more expensive and vice versa, encouraging support of nearby farms as opposed to imports from half way around the world.

As a candidate, Obama supported a Cap & Trade policy that would require all pollution credits to be auctioned.  These credits would then be “traded” creating a new source of commission revenue for the financial markets.  A 100 percent auction policy would ensure that all industries pay for every ton of emissions they release, rather than politically giving emission rights  and credits away to companies on the basis of their past pollution.  Obama proposed that a small portion of the auction receipts (~$15 billion/year) be invested in the development of clean energy sources and that the balance be used for rebates to individuals, families, and communities to off-set the increased cost of fuel, natural gas, and electricity.

Personally, I like the administrative simplicity of Hansen’s plan and it’s relative immunity to political and financial gaming.   Obama has proven he is open to any good idea — let’s hope he is open to Hansen’s proposal.

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In a World of Nested Ponzi Schemes – Can we all Plead Insanity?

The latest twist in Bernard Madoff’s $50-billion dollar ponzi scheme sideshow is the rumor that Bernie’s legal team will have him plead insanity, claiming that he had some kind of mental break or suffers from a serious psychological disorder.  Given the age of  Madoff’s operation, my guess is that he started out with good intentions and slowly drifted into ponzi mode to maintain his self image as a respected and admired investment advisor – the guy you could only get to via invitation.  Only in the perfect redemption storm of 2008 would Bernie’s grand self delusion finally come to an end.
As Warren Buffet is fond of saying, “when the tide goes out we see who is swimming naked”.  In 2008, much was revealed and it seems that Bernard Madoff was just one of the smaller dolls in a world of nested ponzi schemes.  I sometimes feel as if we are collectively working our way out of the center of a Russian matryoshka or set nesting dolls.

At the core we have Madoff and probably a score of other financial wizards that the lowered tides have yet to reveal.  Next we have Wall Street itself, a casino of questionable securitized debt and 100’s of trillions of dollars of derivative side bets hypothetically backstopped by over-leveraged counter parties.  Then we have the U.S. economy — a debtor nation house of cards inhabited by consumers at the end of their credit line.
Coming to the rescue is the U.S. Government teetering on the edge of default.  Our massive debt funded by foreign purchasers of U.S. Treasuries is a ponzi scheme on its last legs.  In 2007, public debt in the U.S. was $10.6 trillion dollars or 77% of GDP.  In 2008, the percentage of debt to GDP has grown to over 100% and that excludes the liabilities of Medicaid, Medicare, and Social Security.  Given our current debt to GDP ratio the U.S. would not even qualify for admission to the EU.
However the final doll in our matryoshka of ponzi schemes is the belief that our world population and economy can grow forever in the closed ecological system of planet earth, and yet central banks and governments around the world are desperately trying to “jump start” the economy and get us back into growth mode.
So I wonder — will we all end up pleading insanity — and to whom?

Only after the last tree has been cut down.
Only after the last river has been poisoned.
Only after the last fish has been caught.
Only then will you find that money cannot be eaten.
Cree Indian Prophecy

From Nouriel Roubini of the RGE Monitor on March 11, 2009:

A reporter contacted  today with the following question:

“I am a reporter and I am doing a story on Bernard Madoff’s life after pleading guilty. As part of this I was wondering if you could comment on what significance he will have in the history of this period. Will he represent more than a scamster who stole a lot of money from a lot of people? As Bernie Ebbers and Ken Lay came to embody corporate greed and deceit, what will Madoff symbolize? I would really appreciate your insights on this”.

Here is my answer fleshed out in full:

Americans lived in a Made-off and Ponzi bubble economy for a decade or even longer. Madoff is the mirror of the American economy and of its overleveraged agents: a house of cards of leverage over leverage by households, financial firms and corporations that has now gone bust.

When you put zero down on your home and you thus have no equity in your home your leverage is literally infinite and you are playing a Ponzi game.

And the bank that lent you with zero down, a NINJA (no income, no jobs and assets) liar loan that was interest only for a while with negative amortization and an initial teaser rate was also playing a Ponzi game.

And private equity firms that did over a $1 trillion of LBOs in the last few years with debt to earnings ratio of 10 or above were also Ponzi firms playing a Ponzi game.

A government that will issue trillions of dollars of new debt to pay for this severe recession and to socialize private losses may risk to become a Ponzi government if – in the medium term – does not return to fiscal discipline and debt sustainability.

A country that has – for over 25 years – spent more than income and thus run an endless string of current account deficit and has thus become the largest net foreign debtor in the world (with net foreign liabilities that are likely to be over $3 trillion by the end of this year) is also a Ponzi country that may eventually default on its foreign debt if it does not – over time – tighten its belt and start running smaller current account deficits and actual trade surpluses.

Whenever you persistently consume more than your income year after year (a household with negative savings, a government with budget deficit, a firm or financial institution with persistent losses, a country with a current account deficit) you are playing a Ponzi game; in the jargon of formal economics you are not satisfying your long run intertemporal budget constraint as you borrow to finance the interest rate on your previous debt and you are thus following an unsustainable debt dynamics (discounted value of your debt growing without limit in NPV terms as the debt grows faster than the interest rate on it) that eventually leads to outright insolvency.

According to Minsky and according to economic theory Ponzi agents (households, firms, banks) are those who need to borrow more to repay both principal and interest on their previous debt; i.e. Minsky’s “Ponzi borrowers” cannot service neither interest or principal payments on their debts. They are called “Ponzi borrowers” as they need persistently increasing prices of the assets they invested in to keep on refinancing their debt obligations.

By this standard media US households whose debt relative to income went from 65 percent 15 years ago to 100 percent in 2000 to 135 percent today were playing a Ponzi game.

And an economy where the total debt to GDP ratio (of households, financial firms and corporations) is now 350 percent was a Made-Off Ponzi economy. And now that home values have fallen 20% and they will fall another 20% before they bottom out and now that equity prices have fallen over 50% (and may fall further) using homes as an ATM machine and borrowing against it to finance Ponzi consumption is not feasible any more. The party is over for households, banks and non-bank highly leveraged corporations.

The bursting of the housing bubble and of the equity bubble and hedge funds bubble and private equity bubble showed that most of the “wealth” that supported the massive leverage and overspending of agents in the economy was a fake bubble-driven wealth; now that these bubble have burst it is clear that the emperor had no clothes and that we are the naked emperor. A rising bubble tide was hiding the fact that most Americans and their banks were swimming naked; and the bursting of the bubble is the low tide that shows who was naked.

Madoff may now spend the rest of his life in prison. The US household and financial and non financial firms and government may spend the next generation in debtor’s prison having to tighten their belts to pay for the losses inflicted by a decade or more of reckless leverage, over consumption and risk taking.
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The End of Petroleum for Personal Transportation

Every great company in the history of the [silicone] valley started in a technology down cycle. — Shai Agassi

Stories about electric cars usually don’t get me very excited.  They may not generate any emissions on the road, but their batteries must recharged from a national electric grid, which in America is 50% dependent on coal and 20% dependent on natural gas.  Essentially, electric cars always looked like a game of fossil fuel whack-a-mole – trading the limitations and pollution of oil for the limitations and pollution of coal and natural gas.  You could argue that we could power the grid with renewables, but the grid is a 7/24 dance of precisely matching up demand with supply and it can only tolerate a limited amount of intermittent power like wind and PV before the music stops.  Add to that the limited range of electric cars and the whole concept falls apart when you consider that potential buyers must be confined to a tight radius around the umbilical cord of their home’s electric meter.

All of that is about to change as our model of personal transportation built around cheap oil and the internal combustion engine goes the way of the buggy whip.  Imagine a future work day that looks like this:

1. You enter your garage and pull out your electronic key. The logo on the key is blinking blue, indicating your car is fully charged.
2. You unplug your car from the wall, open the garage door, and head for work. Your electric system software analyzes the first few minutes of driving and determines your likely destination based on past history: “Work?” it asks to confirm. You answer the question in the affirmative and the system determines how much energy is needed for the day.
3. During your commute, the GPS enabled system finds and displays three open parking spaces near your office that are equipped with charging pods linked with your electric car’s subscription plan.
4. You pull into one of spaces and an automatic arm extends to plug into the car. The charging pod then communicates with the control center, and based on the your driving history,  picks the lowest rate time slot to recharge your vehicle.
5. Before your recharge is complete an unexpected cross town meeting comes up.  You climb into your car and enter the new destination, and the system software notifies you that there is insufficient charge to make the trip, return to the office, and commute back to your home.    To extend your range you order a battery swap.
6. The system software finds the most convenient battery-exchange location and books a bay. The old battery gets lowered onto a hydraulic plate, and the car moves forward on a car-wash-style track. In no more time than it takes to fill up your old tank with gasoline, a fully charged battery pack is in place, and you are on your way with another 100 miles of driving range.

If all this sounds like an episode from the Jetsons, think again.  Within 15 years, automobile transportation in Israel and Denmark will be carbon neutral, with electric cars powered by wind and solar energy, and the rest of the world may not be that far behind.  This all starts with a business model for the automobile that takes its cues from the mobile phone.

The idea, according to Shai Agassi, the software entrepreneur responsible for this new vision, is to sell electric car transportation on the model of the cellphone. Purchasers get subsidized hardware — the car — and pay a monthly fee for expected mileage, like minutes on a cellphone plan, eliminating concerns about the fluctuating price of gasoline.
As with cellphones the car will become secondary in importance to the network, “You’ll be able to get a nice, high-end car at a price roughly half that of the gasoline model today,”

Agassi’s vision is well on its way to reality.  His company, Project Better Place, has already attracted $200-million in venture capital, a commitment from Renault-Nissan to develop and build the software enabled electric cars, and commitments from Israel and Denmark to be the “beta sites” to prove the concept.  If any of this required some new technical breakthrough, I would find it all interesting in a wait-and-see kind of way.  However, what makes this real is that it all rests on a proven foundation of off-the-shelf technology.  The breakthrough lies in the vision – in the paradigm shifting business model.  The initial selling is done, what comes next is flushing out the partnerships, building he supplier base, creating the system software, and engineering the infrastructure.

The collection of park and charge spots across a country or city, together with software that controls the timing for charging the cars, creates a smart grid—synchronized and extending the country’s existing electric grid, matching excess electricity on the grid with the need to charge batteries flattening the demand curve in the process. When we put together the charge points, the batteries, exchange stations, and the software that controls timing and routing we get a new class of infrastructure—the Electric Recharge Grid (ERG). A new category of companies will emerge in the next few years which will install, operate and service customers across this grid—called Electric Recharge Grid Operators (ERGOs).—Project Better Place white paper distributed at EVS-23

The ifs and the maybes are past tense.  Renault-Nissan has promised to have the cars ready by 2011 and prototype testing has already begun in Israel.  These cars will not be glorified golf carts, but snappy full size sedans and small SUV’s.

The consumer’s contract for the EV must be the same – or better – than the consumer’s current contract for gas-powered cars.  We need to change the way consumers buy an EV so that it fits the current social contract we have with our cars, providing a normal car ownership experience even if the car has an electric drive train. -  Shai Agassi

Israel and Denmark provide ideal consumer markets to test the business model.  Each country enjoys low average miles driven per day that fall within the proposed battery pack range and a high likelihood that the electricity used for transportation will be renewable.  Denmark already generates enough excess wind power to supply all of it’s personal transportation needs and Israel has an obvious strategic need to be independent of Middle East oil.

With any infrastructure project of this magnitude, there will be unforeseen problems.  However, none are likely to be more than temporary engineering challenges.  The end result will be a new electric personal transportation paradigm that is equal to or better than the freedom and convenience provided by the internal combustion engine.  It is a business model that has the potential to greatly mitigate the impact of peak oil, positively impact climate change, and by providing a large storage sink in the form of batteries enable much greater use of  solar and wind power on utility grids.

It also extends the age of the automobile, along with the legacy of traffic jambs, suburban sprawl, and mind numbing commutes.  Better Place estimates the the cost to develop the necessary infrastructure in the U.S. is about $500 per car or about a year’s worth of oil imports.  Over $400 of that number is for investments in renewable energy to avoid the shell game of trading oil off against coal and natural gas, so the actual cost for the charging and battery swap infrastructure is only about $85 per car.  Since the U.S. electrical grid suffers from 30 years of under-investment and is a balkanized maze of 500 owners, the implementation of the Better Place model will mimic the cellphone industry and role out by metro region based on local politics and beliefs that favor an early adopter mindset.  It’s no surprise that the California cities of San Francisco, Oakland, and San Jose will combine to be the first U.S. adopters of the model.

A Utopian Future?

Once you have a system of electric cars – a system that knows where every car is and where they are going – it is not much of leap to imagine the end of traffic jams or even the end of actually having to operate the vehicle.  Phase II?

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