Aug 7, 2009.   There's a lot of crazy talk about the cost of cap and trade. But you don't need a big government model to check it. You can do it yourself. First, let's do the math; then I'll explain why it works. This is the formula:

Pretty simple. Now in 2020, EPA says the permits will cost $16, and the Dept. of Energy estimates $32. So to be cautious, say $32. Next, the law makes emitters cut 17% off capped emissions in that year. That's 17% of 6092 tons, or 1036 million tons of "carbon" emissions saved. Let's call that 1000 million.

So the cost is $32 × 1000 / 2 million or $16,000 million dollars a year. Now there will be about 320 million people by then, so each person pays $16,000/320, or $50/year. That's 14 cents per person per day. It's not free, but I think we can manage.

Now why is that formula right? Say you're going to have to pay $20 on a ton of emissions. But some guy comes by and says, "I can help you save that ton and not emit it -- it'll just cost you $25." You'll say, "Forget it; the permits are cheaper." So no one pays more than the permit price to save carbon. That's why this is so much better than if the government says, "You must insulate to save a ton, or buy a solar panel to save a ton." Then who knows what it might cost. But this way, the cost will be somewhere between zero (or less if you save more on the energy than on your insulation) and the price of carbon permits.

Since the cost of saving a ton can be anywhere from zero to the price emissions, on average it's about one half the price. That's why the formula divides by 2. (This is a standard economic approximation, and it's used by EPA. In fact, it tends to over estimate cost quite a bit at the start.)

But not so fast. We just calculated the cost of a nice cap and trade bill like Obama proposed. Waxman has added a lot of bells and whistles, and those are not free. First there are the foreign offsets. There can be up to 1,500 million of those. Most predictions are for a third less or so, so lets assume 1,000. That would be a cost of $32×1,000 or twice as much as what we spend reducing our own emissions. So that's another $28 cents per person per day.

Next there's the question of what Waxman does with all the revenues and free permits, which can be given away or spent like revenues. Most of these are give back to someone -- 35% go to utilities, maybe 10% to poor people. All told about 80% are returned. No more than 20% of the revenues from 5056 permits in 2020 are spent on green projects. So thats about another $32 times 1000 million permits. Or about 28¢/person-day on green projects. (This may be quite a bit high.)

So the total cost is at most five times what a clean cap-and-trade bill would cost, but still only 70¢/person-day. And that's not until 2020. It's cheaper at the start.

Aug 7, 2009.  The unpredictability of carbon prices under a cap is worrisome to politicians and investors. As a result cap laws include many provisions to limit carbon prices. This weakens the cap, and in the case of the Waxman bill, causes it to allow 1.5 billion tons of foreign offsets per year.

According to the EPA, offsets will mean that in 2050, capped emissions will be at 71% of their 2005 level instead of 17% as claimed by the bill. But a worse consequence follows from the huge flow of funds to developing countries. It's not bad that they get financial help, but the way this help is given makes them resit cooperating on climate change. Their plan is now to cooperated only to the extent we pay them to, and those payments will be half profit and half will pay for rather inefficient ways to reduce emissions. In the end, this will be politically disastrous for the Kyoto process.