Climate Policy Blog

This post identifies real and perceived risks of climate policy and explores ways to minimize those risks. I’ll focus on four risks:

1) Damage to the economy as a whole
2) Damage to some sectors within the economy
3) Lost opportunities from the investment of limited resources on climate change
4) Potential political costs of supporting climate policy

Most risks, perceived & real, can be managed well but not all can be eliminated entirely.

OVERAL DAMAGE TO THE US ECONOMY: Economic damage can occur if policies to curb greenhouse gas (GHG) emissions are either too weak or too strong. Steep emissions cuts create economic risks because they may trigger price increases for electricity and transportation. Weak policies create economic risks by increasing climate damage itself and by potentially requiring steep emission cuts in the future. An additional risk comes from unilateral action, which could reduce a nation’s competitiveness.

One solution is to begin with policies that modestly curb GHG emissions, that build our capacity for longer-term reductions, and that include powerful incentives for international cooperation. Most of the existing legislative proposals in the US seek relatively modest near-term curbs on emissions and use market-based approaches to keep compliance costs to a minimum. These approaches, combined with incentives for international cooperation, would greatly reduce the potential for large economy-wide damages. Indeed, including the cost of climate damage into the price of activities that lead to GHG emissions is an overall economic benefit because it reduces the damaging subsidy that comes from being able to use the atmosphere like a free sewer.

DAMAGE TO SOME BUSINESSES OR ECONOMIC SECTORS: This risk is very real. In general, policies that internalize the societal costs of pollution will benefit the population as a whole by protecting the climate system, promoting greater efficiency among existing businesses, and creating new business opportunities (discussed here). However, some existing individuals, corporations, and economic sectors will be hurt by climate policies. Those most likely to be hurt are the fossil fuel producers (especially coal), coal-fired electricity generators, heavy energy consumers (e.g., manufacturers), and, if we aren’t careful, low-income families.

One solution is to distribute some of the economy-wide gains we can expect to those who get hurt. For a CAP-and-TRADE approach, this is accomplished by giving permits freely to disaffected groups. Economic analysis suggests that far less than half of the permits are needed to compensate those who are badly impacted. There will still be winners and losers, however, so it is not possible to completely eliminate this problem.

LOST OPPORTUNITY FROM THE INVESTMENT OF LIMITED RESOURCES ON CLIMATE CHANGE: This is a legitimate concern for climate spending but not for market based climate policies that put a price on pollution (i.e., CAP-and-TRADE or EMISSION FEE approaches). Federal dollars invested to reduce GHG emissions could be used in other ways that advance the public interest (e.g., child health and welfare, education and job training, health care, basic research, decreasing the deficit, etc.). In some cases, the return on federal investment may be larger if spent elsewhere.

One solution is to enact only legislation that internalizes the societal costs of GHG emissions (from climate damage), without including new spending. This can be accomplished with economic efficiency using either a CAP-and-TRADE or a POLLUTION-FEE approach (which we’ve discussed here, here, here, and here). Societal costs are not well quantified, however, so it is necessary to pick a cap level or pollution fee that may be too strong or too weak. Most of the existing legislative proposals seek relatively modest near-term curbs and are therefore not likely to be too strong. As long as the internalized cost is equal to or less than the actual social cost of polluting, there would be an overall economic improvement from climate policy.

POTENTIAL POLITICAL COSTS OF SUPPORTING CLIMATE POLICY: Those who may be hurt by climate legislation generally know it, are powerful, and are well organized. Those who will benefit from climate legislation often do not realize it, are interested in a wide-range of other issues, are not very organized, and are generally less powerful. As a result, there are substantial political risks in supporting climate policy. Furthermore, some voters view climate change as a bogus ploy to push a liberal, or anti-US agenda. This sentiment appears to be waning as many businesses, conservatives, and conservative religious leaders support climate protection. Nevertheless, the real risks posed by climate change do little to reduce the political damages that could result from that perception.

One solution is to ensure that legislation eases the burden on disaffected constituencies, clearly benefits other constituencies, and promotes ancillary outcomes that are broadly favored. In a mandatory CAP-and-TRADE system, the allocation of emissions permits is one powerful approach for this as the permits created will have a substantial value. Economic analysis suggests that a substantial fraction will be available even if we first protect the profits of existing emitters. The remainder could be allocated to states based on their historical emissions and used for related purposes (e.g., improved energy efficiency, or the development of new technology) or otherwise broadly beneficial policy like education and job training.

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