Common Tragedies

Thoughts on Environmental Economics

Climate change legislation in the last Congress

Posted by Daniel Hall on December 18, 2008

There is a new feature up at the RFF website that sums up the activity on climate change legislation in the 110th Congress:

It provides an overview of some of the key issues under discussion.  It also includes a table and chart that sum up 15 or so of the major proposals for cap-and-trade (or carbon tax) programs.  The chart depicts the proposed emissions targets in the various bills; the table sums up the major provisions for key issues.

In my opinion most people who follow the climate change issue spend far to much time worrying about the chart and not enough about the table — in other words, people are much too focused on the emission target and underestimate the importance of well-designed policy.  (A very current analogy might be observers who were more focused on how big TARP should be — $400 billion?  $700 billion?  $1 trillion? — than they were on how funds would actually be spent.)

The reality is that any target we pick now — particularly for far-off times like 2030 or 2050 — is going to get revised based on evolving knowledge.  But given the intrinsic path dependency involved in setting up new political institutions such as cap-and-trade programs, I think it is important to get a well-designed and robust framework in place from the beginning.

For starters, a well-designed policy would:

1) cover as many emissions sources as possible;

2) auction all allowances;

3) give away (to politically powerful entities) as little of the auction revenue as is politically feasible;

4) use some revenues to provide per-capita lump-sum rebates;

5) use other revenues to support basic and applied energy R&D (and NOT technology deployment);

6) allow entities to bank and borrow allowances (to increase intertemporal flexibility and efficiency);

7) and use price floors and price ceilings to ensure (on one side) that there will be at least some revenues raised and emissions reduced, and (on the other side) that price increases do not become politically unsustainable.

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