Climate Policy Blog

Last week I wrote about a new fee and dividend climate policy put forward by a group of conservative policy makers (which you can download here or read about here and here). It’s a fee starting at $40 per ton of carbon dioxide that increases over time. All revenue would be returned on a per-capita basis to the American people with checks coming every three months.

The approach would provide serious climate protection, as much or more than anything anyone has tried so far. Yet past policy debates (like the Washington State initiative I wrote about here) suggest there will be criticisms of the approach that have at most a thin basis in reality. These criticisms will be important to avoid (or refute) if this new approach is to receive a fair look. So my next few posts will look at some of the most common misunderstandings likely to arise with this new approach. (more…)

Science and the Carbon Market

With the change of U.S. administrations, there is renewed discussion of climate change policy. Ideas at the forefront are environmental pollutant markets and tax-based controls. The market-based approach, called cap and trade, is posed in opposition with the tax-based approaches. This polarization is not a useful or correct way to advance policy.

The advocacy of a cap and trade market follows from the success of the sulfur market, which controls acid rain. The amount of pollutant that can be tolerated is informed by scientific investigation. This leads to a “cap” on the amount. (more…)

Herman Daly delivered a fantastic keynote address to AMS’s workshop on Federal Climate Policy. The text is reproduced here in full.

Climate Policy: from “know how” to “do now”

Herman E. Daly

The recent increase in attention to global warming is very welcome. Most of the attention seems to be given to complex climate models and their predictions. That too is welcome. However, it is useful to back up a bit and remember an observation by physicist John Wheeler, “We make the world by the questions we ask”. What are the questions asked by the climate models, and what kind of world are they making, and what other questions might we ask that would make other worlds? Could we ask other questions that would make a more tractable world for policy? (more…)

The cost and environmental efficacy of either a cap-and-trade program or an emission tax will depend on several important design issues: the point of regulation; the coverage of emission sources; “complementary” programs; and possible hybrid policies that integrate elements of both approaches.

Point of regulation. It would be infeasible to regulate all greenhouse gas emissions at the very point where they enter the atmosphere – monitors will not be placed on every car and truck tailpipe, every home that heats with natural gas or heating oil, as well as every smokestack in the industrial and electricity sectors. One approach – often referred to as upstream regulation – would impose the emission tax or the requirement to hold permits on energy suppliers, such as at coal mines, natural gas wellheads, petroleum product refineries and importers. The carbon content of all fossil fuels that enter the U.S. energy system would be covered by this approach. This approach would be administratively simple and straightforward because it accounts for almost all U.S. CO2 emissions (more than 98 percent) by focusing on a relatively small number of firms; incorporates existing monitoring and measurement of fuel supplies; and takes advantage of the fundamental molecular properties of fossil fuels that allow for precise measurement of emissions based on the physical amounts of these fuels. (more…)

Building on my previous posts in this series providing an overview of cap-and-trade and emission taxes and a discussion of their similarities, this post illustrates some of the differences between cap-and-trade and an emission tax: the trade-off between cost certainty and emissions certainty, incentives for R&D, and revenue generation.

Cost certainty versus emissions certainty. In an uncertain world, it is impossible to design a policy that simultaneously guarantees an emissions outcome at a certain cost. An emission tax provides cost certainty – the incremental increase in energy prices is transparent and fixed under a tax – while cap-and-trade provides emissions certainty by capping aggregate emissions. Under a tax, emissions in aggregate can vary depending on the realized costs of abatement (that cannot be predicted ex ante with certainty), economic growth, relative changes in energy prices unrelated to a carbon policy, etc. These factors can likewise drive the variation in costs under a cap-and-trade program. (more…)

Cap-and-trade programs and emission taxes share several important similarities, including incentives for cost-effective mitigation, increasing energy prices, and raising revenues (assuming an auction in the cap-and-trade program).

Cost-Effective Mitigation. Cap-and-trade programs and emission taxes promote cost-effective emission mitigation by ensuring that every source of emissions faces the same marginal cost of abatement. Under an emission tax, firms should abate emissions until the last ton of abatement is equal to the tax. If they abate less than this amount, then they would make tax payments on some tons of emissions in excess of what it would have cost to abate those tons. If they abate more than this amount, then it would have cost more to abate some of those tons than it would by paying taxes on them. In a similar fashion under cap-and-trade, covered firms would make abatement decisions based on the clearing price of allowances in the market. If they can abate more tons for less than the current market price, then they would do so and sell any excess allowances. If they cannot, then they would buy additional allowances from the market at a lower cost than the emissions abatement would have cost. (more…)

As interest mounts for a federal policy to mitigate greenhouse gas emissions, two policy options have received substantial attention: a cap-and-trade system and an emission tax.

A cap-and-trade system would limit greenhouse gas emissions by setting an aggregate quantitative cap (e.g., over the entire economy or a specific sector, such as electric utilities). This cap is then allocated to regulated firms – either through an auction or for free – in the form of emission allowances. An allowance would give a firm the right to emit a given amount of greenhouse gases (e.g., one metric ton). Firms are allowed to buy and sell allowances among themselves, in effect creating an allowance market. Firms with high costs of abating their emissions may prefer to buy allowances from firms with low abatement costs. At the end of every regulatory period, firms would submit allowances the government to cover their greenhouse emissions during that period. (more…)

In any discussion about climate change, you will almost certainly hear the claim that reducing our greenhouse gas emissions will harm the economy. Even proponents of climate policy seem to take this as a given when they argue that environmental protection justifies the economic costs that could result.

The view seems to make intuitive sense: greenhouse gas emissions result from energy use, efforts to reduce emissions will make energy more expensive, higher energy prices will hinder economic activity and thereby harm the overall economy. For all its intuitive certainty, however, the view that increasing energy prices must necessarily harm the economy is patently false. Basic economic principles instead suggest that including a price on pollution would lead to an overall economic improvement. In this post, I’ll explain why. (more…)

The Intergovernmental Panel on Climate Change released Working Group III’s (WG-III) contribution to the Fourth Assessment Report, “Mitigation of Climate Change,” earlier this month with the Summary for Policymakers and the pre-copy edit chapters. The House Committee on Science and Technology held a hearing last week with four WG-III lead authors. Let me address some questions policymakers may have about climate change policy and how the IPCC WG-III report addresses them.

How should we choose a goal? (more…)

Climate change may or may not be the world’s most important challenge, but it is certainly the most complex. Indeed, it may be the most complex challenge the world has ever faced.

That is why the conclusions reached by the Stern Review stand out. Sir Nicholas Stern and his colleagues looked carefully at this complex problem and concluded, simply, that “the benefits of strong, early action considerably outweigh the costs.” Previously, the “mainstream” economics literature had concluded that emissions should be reduced now but that “strong” action should be delayed. (more…)