The conservative case for government intervention in energy markets is just as flimsy as the liberal case for government intervention in any other sector of the economy. Energy markets may not work as perfectly as in a textbook model, but they work — and government works even less perfectly.

Consider one of the premises underlying the present energy-policy debates: the fear that our reliance on foreign oil leaves us vulnerable to supply disruptions. Most conservatives seem to believe that a reduction in imports will insulate us from price shocks caused by developments overseas. That is nonsense. A supply disruption anywhere will increase the price of crude oil everywhere for the same reason that an early frost in Florida will increase the price of citrus produced in Florida and California by roughly the same amount. Energy independence provides no protection against supply disruptions abroad.

Others fear that reliance on imports requires us to undertake military commitments to ensure that oil continues to flow. But producers have even more reason to worry about the safety of their facilities than we do and, likewise, more reason to ensure the security of international oil-shipping lanes. Hence, they have every incentive to defend their oil infrastructure, whether we help foot the bill or not.

No less a conservative than Dick Cheney argues that producers and consumers make bad decisions in energy markets: They fail to appreciate the profit opportunities associated with certain investments, he says, be they renewable, nuclear, clean coal, ethanol — whatever. Consumers, the argument goes, are too risk-averse to make expensive bets on promising technology, while they discount the certainty of energy depletion and the dwindling of power supplies. And, Cheney says, producers' time horizons are too short to invest in energy technologies that offer long-term promise. But economists investigating the issue find little evidence for assertions like Cheney's, and little reason to believe that markets in energy are different from markets in other commodities.

Policy activists are on somewhat firmer ground, however, when they argue that energy prices do not fully reflect the environmental costs associated with energy consumption. But economists are wildly divergent in their estimates of the costs of these energy-consumption externalities. Some studies find that present prices for conventional fuels, such as natural gas, are too high rather than too low — owing to regulatory distortions in the market.

In the case of fuels for which the evidence about environmental externalities is clear, the solution is a tax that increases the price and allows producers and consumers complete freedom to adjust. But that would create visible costs and diffuse benefits, and politicians prefer the opposite: concentrated benefits for companies that collect subsidies and diffuse costs imposed on the taxpayers and the economy.

The strongest critique of a laissez-faire energy regime is that innovators in energy markets cannot capture the full benefits of their innovations. Hence, businessmen may underinvest in energy research and development. Notice that the complaint, however, is that industry will underinvest in R&D across the board — not that investors back the wrong technologies. If this is a serious problem, the solution is to make all R&D more attractive through preferences in the tax code. Targeted energy R&D subsidies and mandates simply substitute political judgments about investments for market judgments, even though politicians have no comparative advantage in sorting technological winners from losers.

Consider the current love affair of the Right with "clean coal" technology. Billions of federal tax dollars have been spent since the 1980s on various iterations of this concept — most recently via George W. Bush's "FutureGen" project and the "Clean Coal Power Initiative" — yet the marketplace has not been friendly to new coal plants. From 2001 through 2007, 179,382 megawatts of natural-gas-fired electric generators were added, but only 3,311 megawatts of coal-fired generation capacity came online.

It's not that we don't know how to make coal facilities cleaner — it's that we don't know how to make coal plants both cleaner and profitable. Throwing more tax money at this riddle will not necessarily produce an answer. Why are conservatives doubling down on the same ill-fated taxpayer adventure that Ronald Reagan labored so mightily to kill in the 1980s?

Nuclear power is another favored recipient of conservative largesse. Despite promises in the 1950s that nuclear power would soon become "too cheap to meter," 50 years of lavish federal subsidies and regulatory preferences have yet to produce an industry that can turn a profit without taxpayer help. That is an observation that even the nuclear-energy industry's trade association freely concedes, at least when it is time for politicians to reconsider the merits of existing subsidies such as the federal guarantee of private loans to the industry, federal protection against liabilities beyond a certain threshold, production tax credits, and the like. Tufts economist Gilbert Metcalf calculates that nuclear-power costs would increase by almost 50 percent if those subsidies were eliminated.

How is the conservative case for the above subsidies any different from the liberal case for subsidizing solar or wind energy, or high-mileage automobiles — or, for that matter, the case for government backing of financial institutions and automobile companies? It isn't, and conservatives should not check their skepticism about central planning and the bureaucratic ordering of markets at the door when they walk into the energy-policy funhouse. There is no BTU exception to The Wealth of Nations.

If the G-20 leaders really want to demonstrate commitment to action on climate change, they would do well to be more careful about sticking to their commitments when it comes to open international trade.

Many lofty sentiments were displayed at both events. UN Secretary General Ban Ki-Moon announced that the world is "one step closer" to a climate change deal. But he declined, of course, to point out that this particular journey of a thousand miles looks increasingly precarious and that one step is nowhere near enough progress for those hoping for a final deal in December.

The new Japanese Prime Minister made nice with his colleagues by reaffirming his vow to reduce his country's emissions to 25% below 1990 levels by 2020. China's President Hu Jintao only went so far as to promise his country would reduce emissions by a "notable" margin, but at least sounded receptive to emissions reduction efforts. President Obama gave yet another eloquent speech, which though short on specifics, conveyed that the United States accepted responsibility for past damage, while continuing to insist on efforts from "rapidly-growing developing nations."

On trade, the G-20 will no doubt pledge to work hard to complete the Doha round of multilateral trade negotiations by 2010, and to keep trade open in the meantime. Unfortunately,its record in this area is not great.

The governing body has consistently, if hypocritically in view of its subsequent actions, issued statements emphasizing the importance of avoiding protectionism amid a global financial crisis, only to have its members do the opposite. Too often the temptation among G-20 countries to subsidize and protect their own has proven too great to resist.

The political tension between protection-seeking domestic constituencies and those in favor of more open trade is beginning to appear in the climate change debate. Importantly, the free flow of goods and environmental soundness are not necessarily at odds.

Indeed, because trade leads to wealth, and wealth to an increased desire and ability to protect the environment, the two are complementary. Nonetheless, many G-20 leaders are doing their best to set them up as being inalterably opposed. President Sarkozy earlier this month became the latest politician to call for carbon tariffs to "level the playing field" for French products that will attract a carbon tax and yet compete with untaxed imports.

Similar sentiments are held among certain U.S. politicians too. Senators from manufacturing states crucial to securing passage of a climate bill have repeatedly insisted that their support depends on protection for vulnerable domestic industries. They continue to argue that Chinese imports are threatening U.S. jobs in energy intensive industries, even though more than two-thirds of those types of products come from other similarly rich (and, in some cases, greener) countries.

President Obama spoke out against punitive trade measures inserted into the House bill when it passed in June, but declined to say whether he would veto a final bill if it contained the same elements. He has demonstrated little willingness to resist the siren song of protectionism, judging from his actions on trade since assuming the presidency. He also displayed a lack of appreciation for the foreign policy implications of protectionism in announcing tariffs on Chinese tires just prior to a climate summit where the country's cooperation was considered crucial.

Alienating the Chinese by threatening them with trade barriers would be a big mistake. And considering that the U.S. accounts for less than one percent of the market for Chinese energy-intensive goods as is, tariffs would create even less of an incentive among producers to clean up their production techniques for what would be a shrinking market. What they will do is increase the costs of U.S. producers who use Chinese inputs, and ultimately, of U.S. consumers.

Protectionism in the name of climate change carries little upside and much risk, for the environment and for the global economy. Leaders who care about either or both goals should start fulfilling their own pledges on open trade.

From an outsider's perspective, religious displays of self-inflicted pain can seem pointlessly barbaric. But many anthropologists and evolutionary psychologists believe they have an important function: to facilitate collective action by requiring members to send a costly, hard-to-fake signal of commitment to the group's common creed.

The same impulse, in a rather less impassioned form, seems to animate the Democrats' climate change bill. Coordinating international political action to achieve significant reductions in carbon emissions is a collective action problem of grand, global scale. One way to achieve and maintain such coordinated effort is to detect and punish shirkers. (Governments keep money rolling into their treasuries by threatening tax dodgers with jail.) However, there is no world government with the power to bring wayward nations into line, no world-ranging whip to keep countries pulling in time.

This is the glaring flaw in plans for carbon taxes and cap-and-trade regimes: The world's wealthy nations may now be willing to paddle their boat upstream, but if the developing world won't row along with them, if they insist on a free ride, the boat is going nowhere.

Yet there are other tricks for encouraging cooperation and weeding out "free-riders." Consider the self-flagellating Shiites and face-piercing Thai vegans. These are extreme examples of a cooperation-enabling strategy that game theorists call "costly signaling." Those who display an unflinching devotion to even the most burdensome rules of common life are more likely to pull their weight, to uphold their end of a deal. Talk is cheap, but the willingness to pay a price signals to others the commitment of a real team player.

President Obama would like to walk into the climate-change talks in Copenhagen this December flashing a clear signal that America is willing to pay a price in the fight against carbon and its depredations. Indeed, the best one can hope from the climate legislation languishing in Congress is that, if passed, it will put the world on notice that the United States, the Earth's greatest per-capita carbon font, can be trusted to pull its weight in a global climate deal.

The signal would certainly be costly. According to the Congressional Budget Office, the Waxman-Markey cap-and-trade scheme passed by the House would reduce GDP growth between .03 percent and .09 percent per year for the next 40 years. That may not sound like much, but annual growth rates, like annual interest rates, are compounding, which means that the cost grows considerably over time. At the conservative .03 percent annual penalty, the CBO estimates the U.S. economy in midcentury will be short more than $300 billion a year compared with a future without Waxman-Markey.

What would Americans get in return? Nothing, nada, zip, zilch—unless most of the world plays along. As the CBO put it: "As long as a significant fraction of the world did not adopt similar policies, some of the reductions in the United States would probably be offset by increases in emissions elsewhere." That is to say, if countries like India and China won't agree to (and, more important, stick with) painful cuts that will slow their steady rise from poverty, American sacrifice will do next to nothing to combat the threat of melting ice caps and a more livable Canada.

Costly signals can make sense if they deliver the benefits of cooperation. Won't proof of our faith help skeptical governments in the developing world see that international cooperation is possible after all? It's unlikely.

The Democrats' cap-and-trade bill is stalled in legislative limbo because Americans are far from united about its merits. It would be reasonable for international players to suspect that an American electorate unhappy with the costs of a future carbon cap might have a change of heart. And then there's the bill itself: a patchwork of exemptions, subsidies, and special favors. If political horse-trading produced something so convoluted from the start, it is fair to assume that it will become even more compromised as time goes on, leaving the U.S. unable to actually meet the legislation's aims. Most important, a costly signal clinches trust only among those on the same wavelength. Overheated ultra-orthodox Jews and lacerated Shiite Muslims probably don't much impress each other. Likewise, the signal broadcast by the willingness of wealthy nations to cut their carbon emissions may fail to impress poorer counties with fundamentally different priorities. They are not free-riding if they never asked to be in the boat.

It is hard to see the point of legislation that promises certain costs and improbable benefits. Still, there could be a point. Many Americans would find profound meaning in passing legislation like Waxman-Markey and gladly bear its costs—even if it does little to secure international cooperation, and even if it does nothing to slow global warming. The law would nevertheless speak to what Americans value, what we aspire to, who we are, what we're about. It would say that we're not so bad, that we repent our industrial sins, that over here we know full well that green is the new black.

Alas, this is not a statement of faith most Americans are prepared to make, or a cost they are prepared to pay. They should not be asked to don a green hair shirt just to show the world that some of us care.

Ethanol is sustainable by definition. The CO₂ sequestered by growing corn is exactly offset by the CO₂ emissions that follow from burning the fuel in a car. The same observation applies to, say, consuming bourbon made from corn, but ethanol can replace energy — bourbon cannot. Hence, any sustainability standard should be applied to all corn and other crop products, and not just ethanol.

Sustainability standards are based on "lifecycle accounting," in which ethanol is assumed to replace gasoline; but in fact, it may be replacing coal or other energy sources. Life-cycle accounting also fails to recognize that if incentives are given for ethanol producers to use relatively "clean" inputs (e.g., natural gas), the "dirtier" inputs (e.g., coal) that might otherwise have been used for the ethanol production will simply be used by other producers to make products that are not covered by the sustainability standard. Sustainability standards reshuffle who is using what inputs — with no net reduction in national emissions.

Finally, sustainability standards are discriminatory under World Trade Organization law and are unlikely to survive a legal challenge from ethanol producers abroad. The United States will not be able to rely on the World Trade Organization's exception for trade laws protecting the environment because of lax U.S. policies dealing with greenhouse gas emissions relative to its trading partners. Moreover, the imposition of U.S. tariffs on more climate-friendly ethanol produced abroad weakens any U.S. defense of ethanol sustainability standards under the WTO.

But even though it's now clear the bill is not getting out of Congress, look for the Obama Administration to saddle our economy with this huge new energy tax through other means.

First, a brief flashback: The blowback against Obamunism began over global warming, not health care. By a squeaky 219-212 vote, the House rushed the 1,300-page cap-and-trade opus out the door so the members could get back to the hustings for the Fourth of July. When many freshman Democrats got home, those who voted for it experienced the first angry town halls of their careers. In our minds, it is easy to remember that the rancorous public meetings that continued in the August recess were always about health care, but they weren't.

So, given that health care is now effectively bottled up in both chambers of Congress, why isn't Obama pushing cap-and-trade in the Senate? Simple: the votes aren't there for it. Blanche Lincoln, the new head of the Agriculture Committee, calls cap-and-trade a "complete non starter" and said that it is not her "preference to move on cap and trade this year." Majority Leader Harry Reid recently signaled his agreement by stating that cap-and-trade "may" not be considered until next year.

For cap-and-trade, "next year" translates as "never." Senators know what touched off the town halls, and they know what fate awaits many of their Democratic colleagues come November 2010. Passing an unpopular health care "public option" along with cap-and-trade will easily realign the Senate into its old filibustering self. That kills cap-and-trade in the next Congress.

But do not despair, fans of economy-killing regulation.

Thanks to the Supreme Court's landmark decision in Massachusetts v. Environmental Protection Agency (2007), the EPA has authority to issue its own regulations on carbon dioxide. So while asking legislators to swallow hard on the bitter gristle of cap-and-trade, the president has really had the power to enact its core components on his own all along. Small wonder lawmakers of his own party are more than willing to toss the issue back onto his plate.

Now that cap-and-trade has so spectacularly failed in the legislature, it is a sure bet that Obama will direct (or has directed) EPA Administrator Lisa Jackson to issue her own cap-and-trade protocols. Look for something concrete out of EPA before the U.N.'s climate change confab in Copenhagen in early December. (That "something" may even include a new fuel economy standard of 35.5 miles-per-gallon—though it would be lower, of course, for the inefficient cars produced by government-owned General Motors.)

The timing of the Copenhagen conference is really what has been driving Obama's support for cap-and-trade all along. It would be an embarrassment for a left-hewing "green" president to show up empty-handed at such an event—and it will greatly diminish Obama's ability to wag his finger at other industrialized countries. For sure, the world's largest emitter of CO2—China—isn't going to agree to any mandatory emissions reductions unless the U.S. has something very serious in hand. And if China does nothing, there's simply not going to be a major slowdown in the growth of atmospheric greenhouse gases.

Not that it really matters. The rather large elephants crowding cap-and-trade out of the Senate is the earth's reluctance to warm in the last decade along with new projections saying that we could go another ten years without much warming.

The current hiatus in warming portends a reduction in potential heating for the entire century. Most computer models produce significant warming as a result of an increase in atmospheric water vapor (a "greenhouse" gas), which comes from an ocean initially warmed by carbon dioxide. When the ocean doesn't warm much, this "feedback" effect is delayed. Or so goes the myth.

The lack of warming is an embarrassment to any elected official who has been hiding behind "the science is settled" fig leaf in order to promote cap-and-trade. While every scientist will tell you that indeed the surface temperature of the planet is warmer than it was a century ago (that's the "settled" part of global warming science), very few scientists anticipated as long a period without warming as we are in. In other words, the real science of future warming is completely unsettled.

The bottom line is that Senate Democrats are perfectly happy to kick cap-and-trade under the bus. They're going to have a hard enough time recovering from the upcoming health care wreck. But the economy, meanwhile, will have an equally hard time recovering from what President Obama is going to do instead.

First, before Congress approved the Interstate Highway System, it had a good idea how much it would cost. In contrast, Congress approved $8 billion for high-speed rail without knowing the total cost, which is likely to be at least $90 billion.

Second, highway users paid for interstate highways, whereas high-speed rail will be almost entirely subsidized by general taxpayers who will rarely use it.

Third, interstate highways connect all 48 contiguous states and major metropolitan areas. The FRA's high-speed rail plan consists of six unconnected networks that reach only 33 states and less than two-thirds of the nation's 100 largest urban areas.

Fourth, the average American traveled 4,000 miles on interstates in 2007. High-speed rail proponents optimistically estimate that the average American would ride the FRA's high-speed rail system less than 60 miles per year.

Finally, interstate highways improved social welfare by increasing highway safety. In contrast, far from saving energy and reducing pollution, high-speed rail would actually increase energy consumption and greenhouse gas emissions.

For all these reasons, the United States government should not fund high-speed rail. The $8 billion in high-speed rail stimulus funds should be invested in safety improvements, not in new trains and new routes that will add to future taxpayer obligations.

But now some in the auto industry are worried about the inevitable drop in sales, since the cash giveaway caused most everyone — at least, anyone interested in free money — to accelerate their purchase plans. Jeremy Anwyl, CEO of the automotive research group Edmunds.com, observes: "Nice party, but the hangover is awful."

There's also an impending downturn in the auto repair industry. Fewer used cars to sell and service. Fewer parts to trade. Moreover, there have been and will continue to be fewer other goods and services sold. After all, if you rushed to buy a new car, there's a good chance you had to put off some other purchases.

The green eyeshade folks among us say the government shouldn't waste money like this in the future. But in the new ultra-Keynesian, post-budget deficit age, we need to think outside of the box. We need to expand the ambit of "Cash-for-Clunkers."

Let's start big. The housing market remains in the doldrums. There's a huge inventory of new and used homes pressing down prices, an excess capacity that threatens to flood the market at the faintest price uptick, and a lot of old, energy inefficient — and sometimes ugly — older dwellings. So why not a housing "Cash-for-Clunkers" program? Trade in your old, environmentally poor house for a brand new, energy efficient home and get a voucher for the value of your current property, plus $50,000. The developer would be responsible for putting the wrecking ball to your old residence; the government would keep the land for subsequent resale.

Then there should be "Cash-for-Clunkers" for home furnishings. Uncle Sam should pass out checks to anyone who trades in his wasteful furnace, heat pump, air conditioner, fan, washer, dryer, fridge, oven, dish washer, microwave, toaster, can opener, coffee maker, television, DVD player, radio, CD player, light, vacuum cleaner, computer, or other home appliance. (There's currently a modest rebate program, with no trade-in requirement, for some major new appliances. We need to think more creatively.) Sellers would render the goods inoperative while the federal government, in another job-creating program, would collect and dispose of the trade-ins.

With the rise of the Kindle, online books are now a reality. So we need a "Cash-for-Clunkers" program for wasteful old books, which have occasioned the death of so many trees. Buy a Kindle and get a $20 check for every book you turn in while purchasing the new online version. Amazon.com would be responsible for creating central collection points, where you would dump your book, after tearing it in half to render it unusable. A similar program should be undertaken for newspapers — buy the Kindle and cancel your New York Times/Washington Post/Local Mullet Wrapper subscription, and get a check.

"Cash-for-Clunkers" also could be adapted for the antique and collectibles markets. A great deal of money, time, and resources are wasted as people visit antique shops and troll online for goods produced long ago and therefore the production of which creates no jobs today. Turn in your antique painting, chess set, silver service, china cabinet, stein, armoire, jewelry, and more, and the government will pay you the value of your item plus provide a voucher for ten percent of the purchase price of a modern replacement. Uncle Sam would take title of the goods, for possible display at the Smithsonian. Constructing several new buildings to house the government's new acquisitions would generate additional jobs.

There also should be "Cash-for-Clunkers" for old clothes and shoes. Who knows how many leisure suits still clutter up old closets? Think of all the out-of-style dresses that women hang onto, hoping that the clothes will come back into fashion. Turn in those tattered Bermuda shorts and sadly aged pumps and get a check to buy replacements. Not only will jobs be created, but Americans will leap ahead of Europeans to lead the fashion parade.

The "Cash-for-Clunkers" concept could be used for airplanes. With the downturn in air travel there is a surplus of older, less fuel-efficient aircraft. Orders for new planes have been reduced as a result. The government should provide a (large) check whenever an airline trades in an old aircraft for a new (preferably Boeing) plane. The discards could be used by the Pentagon for target practice. We'd have a stronger national defense as well as less pollution, reduced fuel consumption, and more jobs.

Finally, "Cash-for-Clunkers" could be used to eliminate the build-up of old, fatty, and calorie-filled snack products in cabinets and refrigerators across America. Bring in your potato chips or M&Ms and get a check for their value, plus a coupon for use towards the purchase of apples, carrots, or Brussels sprouts. Surrendered foods would be given to the Surgeon General for use as part of a broad-ranging educational campaign against obesity.

The end of the "Cash-for-Clunkers" program bespeaks a lack of vision. Paying people to destroy their old cars was a stroke of genius. Let's expand it to the rest of the economy.

And why stop with economics? Let's also apply the concept to Capitol Hill. Toss out your clunker of a congressman and then — and only then — get some federal pork for your district. Talk about a "Cash-for-Clunkers" program that would benefit America!

"Well, me and few of your other neighbors are tired of looking at Ted's Toyota Tundra and thinking about all of the environmental damage that he is doing with that truck. So here's our plan. We're going to take up a collection. Once we get $4,500 or so together, we're going to offer it to Ted on the condition that he use it to buy something a little less gas-guzzly. And since it is Ted we're talking about, we know he won't go for this deal unless we let him buy something short of an econo-box. Of course, he has to sell the Tundra as part of the deal, but we'll see to it that the Tundra is scrapped so nobody else can inflict that truck upon this neighborhood again. So . . . can we sign you up for a contribution?"

While there's nothing obvious in this for you, it does bug you to see that Toyota Tundra on the road. And if you don't pay Ted to buy a more fuel efficient car or truck, you fear that he's simply not going to no matter how often you surreptitiously leave those Earth in the Balance DVDs in his mail box.

Still, there's a few nagging concerns that keep you from reaching for your checkbook. For instance, it occurs to you that nobody gave you $4,500 to go out and buy your Prius (OK, you got a pretty chunky tax credit, but if Ted wants to avail himself of it, it's still there). Aren't we simply rewarding Ted for saying no to fuel efficiency for all of these years?

"Well, maybe," we say, "but it sure doesn't look like Ted is going to give up that Tundra any time soon." But on second thought, you're not so sure. Ted may like Sarah Palin and all, but he was none too happy when gasoline prices hit $4 a gallon last summer. He even mentioned to you last year that he was thinking of trading the Tundra in as soon as he got the next big repair or maintenance bill. Maybe if you wait long enough, Ted will buy a more fuel-efficient car on his own volition, especially if gasoline prices go up . . . as your Greenpeace friends keep telling you they inevitably will, given that we're running out of oil (at least, that's how they tell it).

Moreover, you worry that this scheme of ours might encourage all kinds of undesirable behavior from Ted. He's strikes you as just the kind of guy to start letting his lawn go in the hopes that, once again, a neighborhood collection is made to get him to break-out the lawn mower or buy one that can do the job quicker and easier. Or the sort who would buy an Honda Civic, drive it for a few months, and then sell the thing and buy a new Tundra! After all, as long as he can turn around and sell the Civic for more than he paid for it (whatever he can negotiate from the dealer minus the $4,500 we propose to give him), he will actually make a profit... and he's just the sort of weasel who would use that profit to get back in a Tundra on our dime.

Even if Ted doesn't play some game like that, is this really the best way to save the planet? You make a mental note to do a little math tonight to see how this proposition pencils out. The calculation you have in mind is fairly straightforward. Total up all the greenhouse-gas emissions that are avoided by replacing Ted's Tundra with an econo-box, divide by the neighborhood bribe, and the result is the cost of reducing a ton of Ted's automotive greenhouse emissions. You suspect that it costs a lot more to take greenhouse gases out of the atmosphere this way than it would to, say, plant some trees throughout the neighborhood. And doesn't making a new car for Ted put its own basket of greenhouse gases into the atmosphere?

You relate these concerns to us, but we are unmoved. "Well, think of all the autoworkers you'll help out," we say. "Even if you don't like Ted, think of them. And think of their children!" Now, no one ever accused you of being a stone-hearted Republican, but you are even less moved now. This isn't the first time, after all, that someone came to your door to save some autoworkers, most of whom make more money than you do. When are these people going to stop asking for handouts? And what about helping people who don't hold membership cards with the UAW? After all, there are people in your neighborhood who work in retail sales and residential services who recently lost their jobs. Why not pay Ted to paint his ugly house and landscape his dying front yard? Don't painters and landscapers deserve as much help as these wealthy autoworkers you've never met?

"Perhaps they do," we say. "But regardless, you'll help us stimulate the economy and thus get the country back on its feet." That's sounds reasonable at first, but you can't help but wonder how destroying a bunch of perfectly good cars and trucks is going to help the country grow rich. If destroying private property created wealth, Cuba would be fabulously wealthy by now.

We're getting annoyed at your intransigence. "We've seen this done before in other neighborhoods," we say tartly. "And by gosh, people love it!" Sure, you think, it's obvious why people like Ted love it when you give them money.And it's obvious why autoworkers love it when you pay people to buy the cars that they make. But you're not sure why anyone else should love this idea.

You mutter something about being in the middle of dinner and will get back to us tomorrow. And you shut the door. Nicely.

Under this policy, consumers who own a car with low fuel efficiency can receive $3,500 to $4,500 from the federal government if they buy a new car with higher fuel efficiency.

The goals of the program are to help the environment and to stimulate the auto industry.

The program has been popular with consumers and car dealers. Congress initially allocated $1 billion to the program, and this funding was expected to last through November 2009. Yet the program apparently committed the entire $1 billion after only four days in operation, and many interested consumers have not yet been able to consummate a deal.

Because the program is such a hit, President Obama and members of Congress have vowed to add funding. The House voted an additional $2 billion last week; the Senate may vote Tuesday.

Despite the program's popularity, cash for clunkers is bad medicine for the U.S. economy.

The first problem is that under the terms of the program, any used car that is traded in must be scrapped, and key parts like the engine and drive train destroyed. Thus the program pays people to junk cars that still have economic value. A good friend, for example, is planning to trade in a car that is in good working order. Before the program, he had planned to use the car for another couple of years.

How can it make any sense for policy to encourage the destruction of working cars? Proponents of the program offer two rationales: that the higher fuel efficiency of new cars will reduce the use of fossil fuel, and that the increased demand for new cars will rescue the failing auto industry. Neither of these defenses passes muster.

Cash for clunkers will have a minor impact, at best, on the use of fossil fuel. Many people who trade in clunkers would have upgraded to more fuel-efficient vehicles within a year or two anyway. Thus the program might hasten the adoption of more fuel-efficient cars and trucks, but this is a modest, one-off effect.

Worse, cash for clunkers might cause more driving, since new cars are more fun to drive, and more fuel-efficient cars are less costly to operate. Plus, it takes energy to scrap old vehicles and produce new ones, so the net effect of the program might even increase the use of fossil fuel.

Attempts to reduce the use of fossil fuel should focus on two different policies: higher gasoline taxes and increased rush-hour tolls on highways. If gasoline costs more, everyone faces an incentive to drive less.

If highways cost more at rush hour, some people would commute earlier or later, which means less congestion and reduced gasoline use by all commuters. These two approaches are easy to implement given existing policies, in contrast to cash for clunkers, which requires complicated new rules and enforcement procedures.

The environmental defense of the program is therefore not persuasive. The question is then whether cash for clunkers makes sense because it helps resuscitate the auto industry.

The answer is a resounding no. Government policy should not favor some industries at the expense of others, but that is exactly what cash for clunkers does. The program helps consumers who can take advantage, and it increases profit and employment in the auto industry. But funding for the program comes from all other taxpayers, so it harms the consumers and industries not supported by the program.

Thus cash for clunkers creates winners and losers based on political considerations, not economic values. Whether or not government spending is a good way to stimulate the economy, the specific kind embodied in this program is misguided because it distorts the economy's allocation of resources across consumers and industries.

Any spending stimulus, of course, tends to favor some sectors over others, which is one reason stimulus is better accomplished via reductions in tax rates, not increased spending. Tax cuts improve the incentives to work, save and invest, thereby making the economy more productive going forward. Reductions in tax rates are neutral across sectors and therefore let private valuations of costs and benefits -- not political connections -- determine winners and losers.

Cash for clunkers is therefore just redistribution to certain consumers and to the auto industry; it is more bailout dressed up as environmental policy. Congress should end the program, not expand it.

The actual Corporate Average Fuel Economy (CAFE) results will depend on the mixture of fuel-thrifty and fuel-thirsty vehicles consumers choose to buy from each manufacturer — not on what producers hope to sell. That means only those companies most successful in selling the smallest cars with the smallest engines will, in the future, be allowed to sell the more profitable larger pickups and SUVs and more powerful luxury and sports cars.

Sales of Toyota's Prius, Yaris, Corolla and Scion, for example, allow and encourage Toyota to market more Lexus 460s, Sequoia SUVs and Tundra pickups in the U.S. without incurring fines. Hyundai's success selling Accent and Elantra compacts allows it to sell 368-horsepower Genesis sedans.

Similarly, Ford has the Toyota-licensed hybrid Fusion and will soon produce the European Ford Fiesta in Mexico. Chrysler will soon have Fiats. But what does GM have?

No independent reviewer suggests that the Chevy Aveo and Cobalt are credible contenders in the small car field. Even the president's auto task force finds the electric Chevy Volt "unviable," since it will lose money unless priced above a Cadillac CTS. The Opel-engineered 2011 Chevy Cruze will face tough competition from Asian cars whose reliability is better established. Launching such new models will be even tougher in the future, now that GM has lost control of Opel.

GM accounted for about 19% of vehicle sales so far this year, but the company had a much smaller share of the market for small cars and SUVs (which accounted for 20% of total sales through May). To continue offering a Toyota-like array of larger cars and trucks under ever-tighter CAFE rules, GM would have to capture a much larger share of the market for small and/or diesel-powered vehicles. Unfortunately, European and Asian car makers have decades more experience building reliable subcompact cars and diesel engines for their local markets — where consumers face steep taxes on gasoline and large engines.

General Motors does produce competitive cars and trucks, but not one of them is small. Consumer Reports recommends three GM cars and three GM trucks. The recommended cars are the Chevy Malibu (the unrecommended hybrid has been dropped), the large Buick Lucerne and the Cadillac DTS. Consumer Reports recommends the Chevy Avalanche and Silverado and the GMC Sierra trucks. Car enthusiast magazines insist on adding Camaro, Corvette and the 556-horsepower Cadillac CTS-V to that list.

Among those nine best GM vehicles, only the four-cylinder Malibu achieved as much as 25 mpg in Consumer Reports testing. The others get 12-17 mpg, yet they are no less fuel-efficient than comparable foreign brands. The Environmental Protection Agency rates the mileage of the Toyota Sienna van and Nissan Titan pickup as worst in their class, and comparable Chevys as best. Unlike GM, however, Japanese car companies sell enough small cars to offset the large and thus hold down the average figures.

General Motors is likely to become profitable only if it is allowed to specialize in what it does best — namely, midsize and large sedans, sports cars, pickup trucks and SUVs. The company can't possibly afford to scrap billions of dollars of equipment used to produce its best vehicles simply to please politicians who would rather see GM start from scratch, wasting more taxpayer money on "retooling" to produce unwanted and unprofitable subcompacts and electric cars. The average mileage of GM's future cars won't matter if nobody buys them.

Politicians are addicted to CAFE standards because they create an illusion of doing something sometime in the future without voters experiencing the slightest inconvenience in the present. Tighter future CAFE rules will have no effect at all on the type of vehicles we choose to buy. Their only effect will be to compel us to buy larger and more powerful vehicles from foreign manufacturers. Americans will still buy Jaguars, but from an Indian firm, Tata, rather than Ford. They'll buy Hummers, but from a Chinese firm, Tengzhong, rather than GM. The whole game is a charade; symbolism without substance.

As a matter of practical politics, rescuing GM from strangulation by CAFE will require offering economically literate environmentalists a greener alternative, i.e., one that works. Luckily, the government has two policy tools that, with minor modifications, really could discourage people from buying the least fuel-efficient vehicles.

One is the federal excise tax on "gas guzzlers," which could take some fun out of the horsepower race except that it applies only to cars, not to SUVS, vans and trucks. Why not apply this tax to all types of gas guzzling vehicles? Owners of trucks used for business could deduct the tax in proportion to miles used for business, as they do with other vehicular expenses. Phase it in after 2011 to encourage buyers to snap up the unsold inventory of gas guzzling trucks quickly — a timely "stimulus plan."

Second, the federal fuel tax is highest on the most efficient fuel (diesel) and below zero on the least efficient fuel (ethanol). Cars get about 30% better mileage on diesel than on gasoline, and cars running mainly on gasoline get about 30% better mileage than they would using 85% ethanol.

To stop distorting consumer choices, simply apply the same 24-cent-a-gallon federal tax to gasoline and ethanol as we do to diesel. This would add funds to the depleted federal highway trust. More importantly, it would remove an irrational tax penalty on buying diesel-powered cars — arguably the most cost-effective way to improve mileage without reducing car size or performance.

These two proposals are a greener alternative to CAFE, because they'll work. But they'll only work if Congress totally and permanently abandons the charade of CAFE. It is arguably worthwhile to accept a modest tax increase in exchange for an end to harmful regulations, but that exchange is effective precisely because it is not painless.

Unifying fuel taxes and broadening the excise tax on gas guzzlers makes sense as an alternative to CAFE. Otherwise it's just more pain with no gain.

If politicians insist on tightening fleet average mileage standards for bankrupt auto companies, how could those rules be enforced? The only penalty for violating CAFE rules is a big fine. If consumers keep refusing to buy enough small cars from GM and Chrysler to allow them to meet the CAFE rules, how are those companies expected to pay the fines?

The government is already planning to spend about $50 billion bailing out General Motors plus $7 billion for Chrysler. Will President Barack Obama provide Detroit auto makers with even more subsidies to pay CAFE fines?

Maybe so. That would be only slightly more bizarre than current plans to bribe folks with $4,500 to sell their "clunkers," or to offer huge tax credits to those rich enough to buy a $73,000 hybrid Cadillac Escalade or an $88,000 Fisker Karma.

The bottom line is that CAFE standards are totally unenforceable and ineffective. Regardless of how much damage the rules do to GM and Chrysler, Americans can and will continue to buy big and fast vehicles from German, Japanese, Korean, Chinese and Indian car companies. CAFE standards might just be another foolhardy regulatory nuisance — were it not for the fact that they could easily prove fatally dangerous for any auto maker overly dependent on the uniquely overregulated U.S. market.

Ethanol is sustainable by definition. The CO2 sequestered by growing corn is exactly offset by the CO2 emissions that follow from burning the fuel in a car. The same observation applies to, say, drinking bourbon made from corn.

Are CO2 emissions due to operating an automobile any worse than emissions due to digestion? The only difference is that ethanol can replace gasoline—bourbon cannot. Hence, a logical sustainability standard would be tougher on bourbon and all other products made from corn —products that can negatively impact health, like beef, bacon, butter, Buffalo wings etc. – and a lot easier on ethanol which is more greenhouse-friendly than other corn-based products and saves lives by powering ambulances to hospitals.

The EPA's sustainability standard is based on "life-cycle accounting" (LCA), a "well to wheel" measure of greenhouse gas emissions in the production of gasoline and a "field to fuel tank" measure for ethanol production. While attractive in theory, LCA fails to recognize that if incentives are given for ethanol producers to use relatively "clean" inputs (e.g., natural gas and land previously used for soybean cultivation), the "dirtier" inputs (e.g., coal and land previously dedicated to rainforests) that might otherwise have been used will simply be used by other producers to make products not covered by the sustainability standard.

In short, sustainability standards reshuffle who is using what inputs with no net reduction in national emissions. LCA measures are therefore misleading and may not measure the actual greenhouse gas emissions saved by ethanol production.

Rather than try to get LCA right, the entire exercise should be scuttled altogether. The difficulties associated with a sensible calculation are simply too great.

LCA assumes, for instance, that ethanol will replace gasoline, but it may actually replace coal or other energy sources, especially since oil supply is generally thought of as "finite" while coal is considered "unlimited in supply." This is not simply a matter of theory. In developing countries like Brazil, electricity is generated by harnessing leftover sugar cane, thereby potentially replacing coal-based electricity. It is also possible for biofuels to replace wood currently used for home cooking and heating, both of which impose huge health and environmental costs in developing countries. The upshot is that LCA will almost certainly undercount the greenhouse gas emissions that are "saved" by ethanol as well as other problematic air emissions.

Nor is LCA any easier when we apply it to the oil sector. The direct and indirect effects of oil pollution in the Ecuadorian jungle, for instance, would have to be measured, as would the environmental impacts of site specific drilling everywhere else on the globe.

To make matters worse, the argument over sustainability standards diverts attention from the contradictory and wasteful stew of federal ethanol policies – import tariffs, tax credits, mandates and production subsidies – which exist whether ethanol is sustainable or not. Our research shows that these policies generate tens of billions of dollars per annum of economic inefficiencies. Ensuring that ethanol is "sustainable" does not make those costs disappear. To just take one example, combining a tax credit for ethanol with a binding mandate requiring a minimum level of consumption will subsidize gasoline consumption instead of ethanol consumption, resulting in an increase in CO2 emissions, traffic congestion, and dependence on foreign oil.

Sustainability standards for ethanol make no sense. If we want to tackle greenhouse gas emissions, the most efficient means of doing so it to impose a carbon tax (explicitly through the tax code or implicitly with a cap & trade emissions program) on oil and natural gas at the refinery, coal at the plant using the coal, and land at time of conversion into the production of biofuels, bourbon, shopping malls, etc. That covers all of the relevant sectors of the economy in a fair and efficient manner. "Fair" and "efficient," however, are not words one would use to describe sustainability standards for ethanol.

Already California, Florida, Illinois and other states are applying for funds under the president's plan. But, except for rail contractors, Americans should find little reason to like this proposal.

Although every taxpayer would share the cost of these trains, high-speed rails are not about serving the common people. Instead, they are aimed at the elite. Japanese and French high-speed trains are attractive to tourists, but they're not heavily used by local residents. Residents of Japan and France on average ride their bullet trains less than 400 miles a year.

Pricey option

Amtrak charges a minimum of $99 for its high-speed Acela from New York to Washington, but only $72 for its conventional train. Fares for unsubsidized buses on this route start as low as $20 (including free Wi-Fi), while airfares start at $99. Only the wealthy and those whose employers cover the cost will pay the $99 rail fare.

Obama's 9,000-mile high-speed rail plan reaches just 33 states, yet the $13 billion he proposes to spend would cover about 2.5% to 25% of the cost, depending on how the system is built. In contrast with the interstate highway system, which paid for itself out of user fees, high-speed rail fares would not cover the capital costs and only part of the operating costs.

Most of Obama's plan should really be called "moderate-speed rail," as it would upgrade existing freight lines to run passenger trains at top speeds of 110 mph. At around $5 million per mile, the total cost would come close to $50 billion.

Not satisfied with moderate-speed trains, California says it wants half of all federal funds so it can build brand-new 220-mph rail lines. But it's unlikely other states will settle for the slower trains if California gets the faster ones. Building fast trains nationwide would cost at least $500 billion. (By comparison, and adjusting for inflation, the 47,000-mile interstate highway system cost about $425 billion.)

Little congestion relief

Besides the high costs, these trains do little to relieve congestion. "Not a single high-speed track built to date has had any perceptible impact on the road traffic" in Europe, says Ari Vatanen, a European Parliament member. California predicts its 220-mph trains would take just 3.5% of cars off of roads. California highway traffic grows that much every two years.

Moderate-speed trains would do even less. Nor would such trains be good for the environment. Amtrak diesel trains are only a little more energy efficient than flying or driving, and pumping those trains up to 110 mph would reduce their efficiency. Because planes and cars are growing 2% more energy-efficient per year, rail would fare poorly by such measures over the next 15 to 20 years.

Moreover, high-speed rail consumes enormous amounts of energy and emits enormous volumes of greenhouse gases. These would cancel out any operational savings over cars and planes.

Interstates paid for themselves out of gas taxes, and most Americans use them almost every day. Rail requires huge tax subsidies and would regularly serve only a small elite. Which is the better symbol for the America President Obama wants to build?

If the proposed fuel efficiency standards were in place today, Edmunds.com reports that only two cars — the 2010 Toyota Prius (50 mpg) and the 2009 Honda Civic Hybrid (42 mpg) — would meet the standard. Angry environmentalists might thus find themselves key-scratching "gas guzzlers" such as the 2009 Honda Fit (31 mpg), the 2009 Mini Cooper (32 mpg) and the 2009 Smart ForTwo (36 mpg).

There is little dispute that, as a consequence, cars would become more expensive and industry profits more scarce. Even the Obama administration concedes that automotive costs would increase by $600 per car on average and that industry revenues would decline by $13 billion to $20 billion a year. Others offer larger figures, but it's difficult to peg costs with any certainty.

What do we gain by this? Very little.

We wouldn't reduce our reliance on foreign oil: If we reduced global demand for crude oil, the most expensive-to-produce oil would go away first, and that oil is not in the Middle East. It's in North America.

Consumers would not be better off: If gasoline prices remained in today's neighborhood (that is, near their historical average, adjusted for inflation), the fuel savings from these new hybrids would not offset the higher sticker prices.

Moreover, many consumers would be forced to buy cars they don't want.

Greenhouse gas emissions might not decline much, if at all. U.S. emissions would likely decline, but reduced U.S. demand for crude would mean reduced global crude prices, which in turn would increase demand for — and consumption of — oil outside the USA. Eventually, most if not all our reductions might be offset by increases elsewhere.

Finally, drivers and passengers would be less safe. Plenty of hard evidence suggests that smaller, lighter cars equal more highway injuries and fatalities.

Reduced fuel consumption is not an end unto itself. It is a means to an end. These means wouldn't achieve the advertised ends.

Not surprisingly, the United Nations has just jumped on President Obama's hybrid bandwagon, demanding yet another trillion dollars (coming mostly from you-know-who) to fund "A Global Green New Deal for Sustainable Development." Translation: The U.S. will provide funds to poorer nations so that they, too, can tell their private companies what to make, whom to employ, and how much to pay them. The U.N. wants your money pronto, by the end of next year.

The U.N.'s "deal" really amounts to drastic interference in the development of other nations that are neither recipients of nor contributors to the cool Trillion. India's Tata Motors has just unveiled a $2,000 mini-car, which could be a hit in a lot of poor countries. China's Cherry is poised for a global pounce as soon as liquidity reappears. But the U.N. proposes to spend our money fighting "automobiles, which are environmentally harmful," promoting instead a "shift to clean public transport" which they then call "clean fuel buses."

Huh? So the UN is hoping to close developing markets in poor countries to developing producers in countries a tier or two up the economic ladder, and then substitute a nonexistent technology?

Our researchers are still busy at work trying to figure out what a "clean fuel bus" is. It can't be one run on ethanol, because that takes more energy to produce than we currently get out of it. If it's run on electricity produced by solar panels, the physics become daunting. An array required to run just one bus for 100 miles per day would stretch over ten miles. And where would the energy come from at night?

Like Obama's initiatives, the U.N.'s purpose is to provide "green jobs." Nothing new here. Germany put in a similar program a few years ago, sending out an army of people otherwise employed or not employed to install solar panels. German taxpayers subsidized each of these 35,000 jobs at $170,000 apiece. Now the UN wants to do the same with your money — all over the world.

Worse still, the "Green New Deal" wants energy subsidies from you — called global "feed-in tariffs" — to boost inefficient energy sources. This reverse tariff would "overcome" the "difficulty" of noncompetitive energy, providing guaranteed purchase prices to producers in developing countries for a period of 20 years. The electricity would then be sold to final consumers at a lower price.

What's the difference between a "feed-in" tariff and a real one? There isn't one. It basically says that anyone who has cheaper electricity for sale across national borders need not apply. As is the case with Obama's cap-and-trade energy taxes here in the States, the U.N. says their tax on us is "desirable on climate-related grounds."

Nothing is new here. The U.N. is hoping for more green stimulus from an already overstimulating and intrusive president, and returning more of the same: higher taxes, and technologies that won't work and that will cost a fortune.

In addition, with the U.S. Federal Reserve System greatly expanding the money supply - which will continue because of the explosion in government spending - the dollar is falling against other currencies; and given that global oil is priced in dollars, the price of oil will rise in dollar terms, just as it did two years ago.

About 65 percent of the demand for global oil can be supplied at a price of $35 per barrel. Another 20 percent of demand can be supplied at a price of $35 to $60 per barrel, but the remaining 15 percent will only be supplied over the long run at prices of $60 to perhaps $130 per barrel. Oil, like all commodities, is priced at the margin, which means the price of all oil demanded by the market is equal to the price that producers can get for the last barrel of oil they sell.

It takes considerable time to greatly increase oil production, and it also takes time to reduce production. Despite the global recession, oil production capacity is only slightly above demand, so that any significant supply disruption - a war in an oil-producing area, pipelines being blown up or tankers sunk, etc. - will almost immediately create a supply shock, causing the oil price to soar again.

Because of the drop in oil prices during the last eight months, high-cost production facilities are being shut down, including low-output wells, some offshore production, Canadian oil sands, etc. When the oil price shoots back up, it will take time to get these production facilities back on line.

Oil prices will almost certainly be much higher in real terms (inflation adjusted) during the next 15 years because world energy demand is expected to increase at an average annual rate of 1.6 percent between now and 2030. More than 80 percent of the increase in energy demand during the next two decades is expected to come from China, India and the Middle East.

Low-cost oil production is declining sharply, as the old easy-to-produce fields are being rapidly depleted. There are still huge potential oil supplies, but most of it will be in very expensive, deep-sea areas, or in oil sands (Canada) or oil shale (Colorado, Wyoming, Utah), all of which are much more costly to produce. Biofuels are also expensive and compete with food for land on which to produce them.

If suddenly it were announced that a miracle electric battery - one that could power a full-sized automobile at high speed for more than 300 miles and could be quickly recharged - had been developed, what impact do you think it would have on the price of gasoline next week? The answer is probably none because it would take several years for the manufacturers of automobiles to switch over completely to battery-powered ones, and then another decade or so before most of the existing stock of automobiles would be battery powered.

In the long run, improved battery technology will probably reduce the demand for liquid fossil fuels, but even under the most optimistic scenario, the dependence on oil will last a couple or more decades.

As vehicles eventually move from liquid fossil fuels to electricity, the demand for liquid petroleum will drop, but the demand for electricity will greatly increase. The environmentalists and many in the political class like to talk about "renewables" meeting the demand. A nice notion, but at best it is not going to happen for decades. As the chart shows, wind, solar and geothermal are less than 3 percent of total energy supply. They all still need to be heavily subsidized because they are not economical and probably will not be for many years.

Hence, even at high-growth rates, they will only supply a small percentage of total energy needs in the next two decades.

When oil prices soared a couple of years ago, the Bush administration moved to open up government lands and certain offshore areas for more oil exploration and production. Officials in the new Obama administration are now in the process of again locking up these areas to prevent oil production.

If the Obama administration is right in its forecast that the economy will be growing again by the end of this year - which is probably even more true for the world economy - the demand for oil will be rising rapidly again. Yet much production has been shut down because of the recession, and potential future supply inside the U.S. is being restricted by government action.

The result should be obvious - gasoline at the pump will be at least $3, if not $4 or more. Americans will still be hurting as a result of the recession, so many of them will be most unhappy to see the prices soar again.

Given that many in the political class seem to think the long run is the next five minutes, they do not see or want to see this tsunami coming. Many politicos will try to blame the high prices on "greedy oil companies" or laggard automobile executives rather than to look in the mirror and see the shortsighted demagogues whose policies led to the mess.

Trade restrictions tend to leave all involved poor, making trade war a frightening prospect during an already immiserating recession. So how did we come to have the Energy Secretary provoking threats of mutually destructive trade sanctions?

Here's how. Either all the big, carbon-intensive economies reduce their emissions, or there's little chance of reducing warming. If the climate modelers are right, we'll all be better off if everyone pitches in. But each has an incentive to hold out, since countries that don't pitch in will enjoy lower energy costs and a competitive advantage in international markets.

Chu rightly points out that Obama's proposed cap and-trade scheme will put American manufacturers at a relative disadvantage. So how do we avoid this, and make sure countries like China don't get a leg up?

In short, we can't. There is no mechanism, no global government, to compel compliance. And it is dangerously naive to think that China, who is the world's largest owner of dollar-denominated assets, is in a weaker bargaining position than the U.S. We poke the dragon at our peril.

Cap-and-trade is sure to raise costs for struggling American consumers. But it won't much reduce warming unless countries like China and India fall in line. Yet neither the U.S. nor Europe can just force this to happen. If we try by imposing carbon duties, we'll hurt consumers even more by raising the cost of imports, and possibly start a trade war no one will win.

Chu's remarks highlight the fact that cap-and-trade is a costly, risky gambit. But now's not the time. Suffering workers and consumers can't afford to lose again.

Will Wilkinson says we can't fight other countries to enforce our will regarding carbon regulation on Marketplace (March 25, 2009) [MP3]

But when I looked at the details, I discovered that — while high-speed rail may be good for tourists — it isn't working very well in Europe or Japan.

Japan and France have each spent as much per capita on high-speed rail as we spent on our Interstate Highway System. The average American travels 4,000 miles and ships 2,000 ton-miles per year on the interstates. Yet the average resident of Japan travels only 400 miles per year on bullet trains, while the average resident of France goes less than 300 miles per year on the TGV — and these rail lines carry virtually no freight.

Throughout the world and throughout history, passenger trains have been used mainly by a wealthy elite and have never given the average people of any nation as much mobility as our interstate highways.

Moreover, the interstates paid for themselves out of gas taxes and other user fees, while high-speed rail requires huge subsidies from general taxpayers.

Personally, I would much rather ride a train than drive anywhere. But I have to admit that automobiles are the most egalitarian form of travel ever invented. Throughout the developed world, people of all income levels regularly travel by car, while only a small number of people regularly ride trains. For example, the average American drives for 85 percent of their travel; the average European 79 percent — not much difference.

The environmental benefits of high-speed rail are also questionable.

President Obama's plan actually calls for moderate-speed rail: 110-mph passenger trains sharing tracks with freight trains. These moderate-speed trains will mostly be diesel-powered, and for safety purposes they will be heavy. By the time these trains start operating, both cars and airplanes will use less energy and emit far less greenhouse gases per passenger mile than the moderate-speed trains.

True high-speed rail — trains moving at 200 mph or faster — requires costly dedicated tracks: a national network would easily cost more than a half-trillion dollars. Considering that both airplanes and cars are getting more fuel-efficient all the time, the environmental costs of constructing these lines will never be recovered in any operational savings.

True high-speed trains are electrically powered, but if that electricity comes from fossil fuels, it will produce as much greenhouse gas, per passenger mile, as autos or planes. As we develop more renewable electricity, we would do better to dedicate that power to plug-in hybrids than to build expensive but little-used train lines.

We have a choice between a transportation system that everyone uses and that pays for itself, or one that requires everyone to pay through their taxes but that is used by only a small elite. Which is the better symbol for the America that President Obama wants to rebuild?

Because the 103 estimates come from only 28 studies and are therefore not really 103 independent estimates, Tol produces weighted estimates of the mean, mode, and median that proportionately reduce the weight given to multiple estimates from a given study. If a study produces one estimate of the mean, it gets a weight of one. If a study has seven estimates of the mean, they each get a weight of one seventh. Calculated this way, the median estimate for the cost of emitting a ton of carbon in those studies is $14. The mean estimate is $93 per ton. And the modal estimate is $2 per ton (all numbers rounded to the nearest dollar).

Tol then calculates estimates that vary the weight of each study along several subjective dimensions. Was the study peer reviewed? Was the study based on an independent impact assessment of climate change? Did the study rely on dynamic climate change scenarios? Was the study based on explicit economic scenarios? Did the study estimate marginal damage costs rather than average costs? Each "yes" to the above questions earned the study one point (meaning a 5-point study was given proportionally more weight than a 1-point study). He then gave each study an additional 0.1 point for each year in which the study was published since 1990, thus giving more weight to newer rather than older studies.

The median cost estimate for carbon emissions in Tol's quality-weighted data set is $16 per ton ($2 more than without quality weights). The mean estimate is $129 per ton ($36 more than without quality weights). The modal estimate remains at $2 per ton.

When Tol eliminated the studies that weren't peer reviewed, the median quality-weighted cost estimate fell to $14 per ton, the mean to $50 per ton, and the mode increased to $5 per ton.

The large difference between the mean and median estimates as well as the low modal estimate highlight the large variation in the carbon-cost estimates as well as a large "right-tail" in the distribution. That variation is explained for the most part by (1) the discount rate applied to future costs and benefits, and (2) the manner in which monetarized costs were aggregated across countries. That is, it's not so much that study x found high costs because the authors of study x concluded that sea level rise would be more economically devastating than, say, study z. It's that study x used a 1% discount rate for those future sea-level-rise costs while study z used, say, a 3% discount rate. And study x weighted damages in poorer countries more than in wealthier countries.

Tol reports that, if he removes those studies engaged in "equity weighting" from the dataset, median carbon emissions costs are $10 per ton. Mean costs are $90 per ton. Modal costs are $2 per ton. And when he removes studies from the dataset using a 1% or lower discount rate, he found that median carbon emissions costs were $7 per ton, mean $16 per ton, and mode $2 per ton.

"If we take all studies without discriminating between them, the best guess for the marginal damage costs of carbon dioxide emissions is $5 per ton," writes Tol, but "there are good reasons to discriminate between studies ... it appears that studies with better methods yield lower estimates with smaller uncertainties than do studies with worse methods. If one excludes the studies in the gray literature, the combined marginal damage cost estimate falls further, and so does its uncertainty. It seems as if the most pessimistic estimates of climate change impacts do not withstand a quality test."

Given that, what's the "best" guess available from the literature published through 2004? When asked that question by Danish statistician Bjorn Lomborg, the answer he gave was $2 a ton (an answer reported in Lomborg's book Cool It). $2 a ton is the most frequent value in the data, or mode. Because environmentalists worship at the alter of "consensus" when discussing the science of climate change, a similar emphasis on a show of hands in the economics professions suggests a modal — not a mean or median — calculation. Hence, we have been comfortable using Tol's $2 per ton figure when discussing what the economics literature has to say about the cost of carbon emissions.

In a recent on-line debate with Joe Romm, however, Tol's 2005 review of the literature was dismissed by Joe because it was old and has been superseded by more recent work; in particular, the IPCC's 4th assessment on climate change (published last year) and the Stern Review on the economics of climate change (released in 2006). More importantly, Tol updated his literature review last August — of which we were unaware — and, according to one blogger, "Taylor's quoting of old numbers that Tol has himself moved away from looks like cherry-picking and in any case will not convince anyone who has moved on from 2004."

So what does Tol report now?

Well, it's certainly true that the literature has expanded a bit. Nineteen studies have been published since Tol's 2005 paper and, as a consequence, there are now 108 new marginal cost estimates to consider. Yet this explosion of published work is somewhat misleading given that all of those studies are based upon only 12 underlying papers estimating the total costs of climate change, and only two of those studies were published since Tol's 2005 survey of the literature. The (raw unweighted) median estimate for the cost of emitting a ton of carbon from the 211 estimates in those studies is $29. The mean is $105 per ton. And the mode is $6 per ton (all numbers rounded to the nearest dollar). Those numbers are remarkably similar to the raw 2005 estimates of $26, $97, and $6 respectively.

If one thinks of the 211 estimates as a sample of data drawn from an unobserved population, what type of population is it? Is it normally distributed or something else? In his 2005 paper, Tol assumed normality. In his 2008 paper, Tol now considers three possible distributions: the normal distribution; the normal distribution with normalized standard deviations (standard deviation divided by the mean, which is also called coefficient of variation), and Fisher-Tippett (which, unlike the normal distribution, is skewed right). Given the right skew to the 2005 data (mean>median>mode), this would seem to be an obvious addition.

Table 1 summarizes the median, mean, mode, and standard deviation findings for each of these three probability density functions after Tol's 2005 quality-weights are applied to the 2008 data set. Standard deviations are also offered. Findings are then further subdivided based on discount rate, peer review, and publication date.

Some observations about Table 1.

First, the widely-held belief that recent studies argue that the costs of climate change will be higher than previously thought — an argument presented in the most recent IPCC report and by Joe Romm in our recent on-line exchange — is incorrect with one exception. That is the mode, median, and mean estimates of costs are highest in the oldest studies and lowest in the most recent studies. The one exception is the median estimate in the normal distribution using the coefficient of variation, which increases with time from $14 a ton to $16 and $17, but that change is very small.

Second, some of Tol's 2008 estimates are larger than his 2005 cost estimates and some are not. Recall that Tol's quality-weighted 2005 median, mean, and mode findings were $16, $129, and $2 per ton respectively. His 2008 cost estimate using the normal distribution (coefficient of variation) is lower: $15, $102, and $0 per ton respectively. The 2008 estimates using normal distribution (standard deviation) and Fisher-Tippett have higher medians, lower means, and higher modes: $47, $88, and $33 and $74, $127 and $35, respectively.

Third, just as in 2005, the "better" (peer reviewed) studies in the literature produce lower cost estimates relative to non peer reviewed studies with the exception of the mode in the normal (coefficient of variation), which rises from $0 to $3.

Fourth, just as in 2005, large cost estimates flow from low discount rates (pure rate of time preference) and low cost estimates flow from higher rates of pure time preference.

The contention that Tol has "moved away" from his 2005 numbers is literally true. The most important difference between Tol 2008 and Tol 2005 is that Tol 2008 considers three probability density functions rather than the one employed in Tol 2005. Two of those three probability density functions report more varied (higher and lower) cost estimates than those reported in Tol 2005.

Tol argues in his 2008 paper that the social cost of carbon emissions is positive, that there is so much uncertainty regarding costs that "a considerable risk premium is warranted," and that, consequently, "greenhouse gas emission reduction today is justified." Those declarations did not appear in his 2005 paper, but they are not inconsistent with the findings of that paper. There is a difference, of course, between a discussion about the social cost of carbon emissions and a discussion about appropriate carbon taxes. The former informs but does not dictate the latter. Tol 2005 discussed only the former. Tol 2008 discusses primarily the former but briefly touches on the latter as well.

Regardless, one can embrace the findings of Tol's meta-analysis without embracing Tol's interpretation of how best to translate that meta-analysis into public policy. The literature suggests that the social cost of carbon emissions is likely positive, but that alone does not justify a carbon tax. If the social cost is only a few dollars a ton, the political and economic transaction costs associated with imposing a carbon tax would likely exceed the benefits. Moreover, there may be less expensive ways of reducing harm than imposing carbon taxes or emission trading regimes. Uncertainties there may be, but if we discount the future by 3 percent annually (a discount rate that seems appropriate given opportunity costs), the high-cost scenarios that so heavily weight these analyses vanish into thin air. That's because most of the damages associated with climate change will occur many decades in the future and even small differences regarding the economic impact of those damages produces highly variant estimates. Discount the future, however, and the (economic) importance of those disagreements all but disappears.

So what does Tol 2008 tell us about the social cost of carbon emissions (assuming that the underlying science from the IPCC is correct)? Given our skepticism about the underlying logic of discount rates of 1% or less, any number between $3 per ton and $24 per ton seems defensible. The lower end of that distribution would seem to be more reasonable, however, keeping in mind that the better and more recent studies produce lower cost estimates than do others.

This Policy Analysis reviews the academic literature relevant to these matters and argues that the prevailing policy proposals are premised on a misunderstanding of energy economics and market realities. The interventionists do not distinguish between problems that government can remedy and those that it cannot. They ignore lessons that should have been learned from past experience. They embrace at best second- and third-best remedies rather than first-best remedies for the alleged problems. Moreover, they ignore the extreme difficulty associated with ensuring efficient policy response even when it seems to be theoretically warranted.

Fear of oil imports is premised on pernicious myths that have long distorted energy policy. The U.S. defense posture probably would not be altered by reducing the extent to which oil is imported from troublesome regions. Fears about a near-term peak in global oil production are unwarranted, and government cannot help markets to respond properly even if the alarm proved correct. Market actors will produce the capital necessary for needed investments; no "Marshall Plans" are necessary. Price signals will efficiently order consumer behavior; energy-consumption mandates are therefore both unwise and unnecessary. Finally, more caution is needed regarding the case for public action to address global warming.

The omnipresent calls for more aggressive energy diplomacy are misguided. Economic theory validated by historical experience implies that the diplomatic initiatives are exercises in futility because they seek to divert countries from the wealth maximization that is their goal. Similarly, the search for favorable access to crude oil is futile. Despite their popularity, rules to force reductions in energy use lack economic justification. Attacks on American oil companies and speculators seek to shift blame to those subject to U.S. government control from the uncontrollable foreign oil-producing governments that are truly to blame.

Before trying one more time, legislators should ask why they favor a policy so politically correct and so economically suspect. Support for a national program largely stems from misleading claims about state-level successes, misunderstandings about how renewables interact with other environmental regulation, and misinformation about the actual benefits renewables create.

State RPS programs are largely in disarray, and even the apparently successful ones have had little impact. California's supposedly aggressive program has left it with the same percentage of renewable power as in 1998, and Texas's seemingly impressive wind turbine investments produce only two percent of its electricity. The public may envision solar collectors but wind accounts for almost all of the growth in renewable power, and it largely survives on favorable tax treatment. Wind's intermittency reduces its efficacy in carbon control because it requires extra conventional generation reserves. Computer-generated predictions about a national RPS are generally unreliable, but they show that with or without one the great majority of generation investments for the next several decades will be fossil-fueled.

Even without the technological and environmental shortcomings of renewables, the case for a national RPS is economically flawed. Emissions policies are moving toward efficient market-based trading systems and more rational setting of standards. A national RPS clashes with principles of efficient environmental policy because it is a technological requirement that applies to a single industry. Arguments that a national RPS will create jobs, mitigate energy price risks, improve national security and make the United Sates more competitive internationally are in the main restatements of elementary economic fallacies. It is hard to imagine a program that delivers as little in theory as a national RPS, and the experiences of the states indicate that it delivers equally little in practice.