Carbon accounting is tricky, and the wrong approach anyway

I just came from a talk by a guy affiliated with the CO2PE group about accounting for the carbon cost of manufacturing. The speaker presented a novel means of accounting for the carbon cost of manufacturing parts in terms of tonnes of CO2 equivalent emitted. It was very technical, and highlighted the enormous significance of location (and thus source of grid electricity, with coal burning places the worst and those with large hydroelectricity and nuclear power the best).

However, the discussion afterword quickly fell into "What about X?" questions in his accounting. After a couple "we will have to consider that", mostly related to water, the answer became "we have to start somewhere, and tweak the accounting later." The major difference between his formula and the 54 wildly divergent "carbon footprint" surveys is its transparency, which is good. However, I doubt anyone left the room satisfied that that this was a good method. That is was also the best most of us had seen (indeed, the only formula), highlights how difficult it will be to have carbon trading schemes that involve manufacturers directly.

He did, however, make a subtle point that there's an enormous amount of inefficient equipment in use today. Getting rid of this equipment will require two things: (1) a rise in energy prices due to something like a carbon tax and (2) functional credit markets. Given the state of finances in the Western world, we're looking at a combination of higher taxes, cut services and high inflation. A tax that encouraged investment, by say, covering the Social Security Deficit with a carbon tax (~$4.74/ton this year), could potentially shore up the fiscal situation and ease a lot of fears worldwide.

The trouble, of course, is that realizing that future savings requires investment in real things today. I think this is a big part of why so little progress has been made, especially in the US. Our economic policy since 1982 has heavily encouraged, through gov't guarantees, Federal reserve action, tax incentives and "degregulation" (aka regulatory capture) financial investments (housing, 401K's, IRA's, etc) at the expense of infrastructure and physical capital. Changing that requires a fundamental shift in how we view retirement, wealth and the role of government.

The concept of "too big to fail" and the S&L crisis heartily confirmed that our economy would be structured to favor financial instruments. Problems with unions and energy supply in the 1970s probably had a lot to do with that, but basically the federal government has been quietly moving downside risk away from private investors and into the public purse since Lockheed's debacle with the L-1011. This form of economic planning is largely invisible to the average citizen. They are invited to join in the benefits with tax-deferred savings, higher property values, and access to a society that "feels" wealthier. Now that the blush is off the rose, we've seen a few groups that would like less economic planning, but still plead for government action that will give them jobs.

However, the kinds of policies that will result in a clearer, more efficient economy will be visible. You can't ignore a wind turbine or a solar rooftop, and rising energy prices will hit everyone. Getting there will require credit markets that are actually healthy, not relying on clever debt-hiding schemes. Given where we are now, and how all major markets now rely on some kind of government guarantee or subsidy, an explicit move must be made. Using a carbon tax to cover entitlement shortfalls is my personal favorite, since it fixes a temporary shortfall with a temporary revenue stream. It also puts a very powerful lobby on the side of clean technology and physical-plant investment. However, actually getting the metal bashed will require successful financial reform.

Hopefully those of us in the metal-bashing world will bear in mind the lessons of Greece, Enron, Madof, Lehman Brothers and the failure of Sarbanes-Oxley to prevent the financial crisis. Accounting is good when there are no places to hide or fudge numbers, but "off balance sheet liabilities" are especially common when the rules are vague and incomplete. Open standards for carbon footprints are a huge step in the right direction, but at best they tell us how much trouble we're in. Getting out of it means creating incentives and allowing investment.

New feature! A blogroll

I haven't been able to post as often as I'd like, and when I do I'm often rehashing the arguments from one of the authors on the right.

Today I'd like to highlight Simon Johnson's (former head of the IMF's) Baseline Scenario and Arms Control Wonk. Dr. Johnson's recurring theme is that no institution is too big to fail, but in his experience (and with 2 exceptions all of human history) many are too big to succeed. There's a lot of nuclear security talk these days, and the team at Arms Control Wonk do a great job of boiling it down.

Best Beignets Yet

I once heard that there were no good beignets in South Bend. Chicory Cafe, a fine establishment that all you South Bend readers ought to patronize (they give away bags of coffee grounds to customers who garden), does a passable job. However, for a real Beignet with real depth of flavor, read on:

Ingredients:
1.5 Cup warm (100-120F) pasta or potato water
1Tbsp dry yeast
4 cups all purpose flour
1 cup evaporated milk
2 eggs
1/4 cup sugar
1/4 cup molasses

1/4 cup butter, melted
3 cups whole wheat flour
Oil for frying
Confectioner's sugar for dusting

Combine the first two ingredients in a large bowl and let the mix get frothy.

Stir in the a.p. flour, cover and place somewhere warm.

Take your time (~20min) mixing up the ingredients in italics

Combine the early dough with the sugar mix, then add the butter.

Stir in enough wheat flour to make a soft dough.

Now chose "Make Soon" or "Make later"

Make Soon: Place bowl in a warm place for about 1hr until it approximately doubles in size
Make Later: Cover bowl and place in a cool, dry place like a refrigerator until 30min before you plan to start frying

Punch down the dough and roll it out on a well floured baking mat (or counter top) to about 1/4" thickness

Cut into 2" squares with a pizza cutter and fry in hot (350F) oil. Fry 3-5 at a time and flip once, ~2min per side or until golden brown.

Sprinkle with powered sugar immediately, ~1/2t per beignet. More just causes a mess.

Drill, 'Bama Drill!

I make no secret of the fact that the policy goal of this blog is to find the set of incentives that will lead to a sustainable economy that provides a minimum level comfort to as many people as possible. As such, the opinions expressed here are generally opposed to activities that encourage greater use of fossil fuels. For the moment, however, I'm all for this: Recharging Debate, Obama Expands Offshore Drilling

I do not, however, believe that it will make a noticeable difference in US oil imports. I don't expect there to be any real impact on the price of oil, given the cost of extracting deep-water reserves and the years of work required to bring this stuff to market. This will do very little, if anything, for US employment. In other words, I doubt there will be any significant positive benefit from this decision, and it will likely be regarded by history as mistake.

That is precisely what I hope to see. History suggests that energy extraction is extremely bad for the local community, bringing environmental degradation (and loss of tourism dollars). It draws corruption like flies, the only thing worse is foreign aid or Federal pork-barrel spending. If the money doesn't get siphoned off, its effect on civil society is about what one would expect from people spending money they didn't earn and don't have to (or can't) maintain.

Nothing will defang the argument that "we're not exploiting our national resources" in the energy debate like actually exploiting them. Nothing will hurt oil's image in the public mind quite like a big spill, or even unsightly oil rigs, off formerly beautiful beaches. The political fight over issuing permits, arguments over subsidies will become political footballs that will increase uncertainty and make everyone involved look bad.

In short, this is likely to be a Pyrrhic victory for the extraction industry. Inshoring the problems of energy extraction over the objections of a large number stakeholders will highlight those problems. The only way this decision will impact energy security is if it is matched with enormous efficiency improvements and little regard is paid to environmental concerns. According to the CSIS, we're looking at a period of stagnating energy demand, meaning it may never be profitable to use a rig off the coast of Florida or Virginia.

If this move provides the political cover to pass a climate bill that creates a stable regulatory environment, it will be an unqualified success. If it changes the tone of the debate away from simply rehashing old arguments, it will be moderately successful. Alone it will do as much for energy security as Diet Coke has for obesity.