Finale on climate change policy

2. Finale on climate change policy This week: Policy: • US policy • Implementing policy Alternative perspectives • Environmentalist perspective • Tipping points and policy • Conservative perspectives Final problem set on Wednesday Discuss final on Wednesday

3. From Science to Implementation • Understand the basic science • Weigh costs and benefits to determine a “reasonable policy ” for emissions, economic, and climate trajectory • US policy • How to translate economics into policy (taxes, regulations, subsidies, …) But don’t underestimate the chasm between good analysis and good implementation….

4. Implementation of Policies • Move from science to policy • Three level decisions: • Global • National • Individual • Virtually unique set of policy issues in historical context because of global public good, long-time lags, asymmetric impacts and costs, uncertainties, catastrophic potential

5. U.S. Climate Policy 1994: Framework Convention on Climate Change entered into force. 1997: US signed Kyoto Protocol but never ratified. 2001: G.W. Bush withdrew U.S. from Protocol. 2007: Supreme Court ruled that Clean Air Act covered greenhouse gases. 2009: Obama proposed strong cuts, House passed strong bill, but it died. 2009: EPA: “The Administrator is proposing to find that the current and projected concentrations of the mix of six key greenhouse gases—carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), …—in the atmosphere threaten the public health and welfare of current and future generations. This is referred to as the endangerment finding.” December 2009: Failure to agree on successor to Kyoto Protocol. 2010: Republicans win House. All Republican Senate candidates oppose cap and trade. No serious climate legislation. Jan 2011: Climate change disappears from the State of the Union. March 2011: Congress attempts to roll back EPA’s authority to regulate.

6. The Copenhagen Meeting Successor to Kyoto Protocol took place in December 2009 in Copenhagen. There was an agreement on a goal (2 °C temperature limit). There was no binding agreementon emissions. Countries agreed to aspirational targets. Unresolved problems: - What are targets of rich countries? - Will the US participate? - Will middle income countries take on commitments? - What mechanism will be in place to encourage reductions in poor countries? - Who will pay for efforts in poor countries, and through what mechanism? 6

7. Major Policy Approaches for Global Warming • Internationally harmonized carbon tax • Universal cap and trade – Kyoto Protocol plus … • Regulatory substitutes (CAFE standards, ban coal plants, …) • Voluntary measures (carbon offsets) • No intervention

8. What is “cap and trade”? Begin by capping emissions (for firms or countries). Allocate allowances (or perhaps auction them). Then allow firms/countries to trade (buy/sell) allowances. This ideally ensures that marginal abatement costs are equalized across entities.

9. What are “harmonized carbon taxes”? Basic approach • Raise prices of GHGs proportional to carbon content • All countries would levy a comparable tax • Level of tax set to meet environmental target • Countries would retain all revenues (this is not an international transfer program) • Carbon tax can be used to replace existing taxes or reduce fiscal deficits

10. First order: C&T and CT are identical [Just show the MSC and MSB curves and that can give the same emissions reductions and costs.] [We did the MC and MSB of abatement in class, and I won’t repeat that here. Make sure you know this!]

11. Pros and Cons* Pros of cap and trade: - Familiar to most participants, negotiators, legislators. - Imbedded in Kyoto Protocol - May have higher acceptability than taxes in some countries. - Allows using the valuable permits to buy political support - Allows transfer of resources to developing countries - Reduce uncertainty about emissions Pros of carbon taxes: - Reduce uncertainty about abatement costs. - Can capture revenues (public finance “double dividend”) to reduce fiscal stress (large potential green revenues) - More efficient for stock pollutants (Weitzman extension) - Lower volatility - Less prone to corruption in weak political systems - Friendlier for small countries to join (a theorem here?) - A proven regime in all countries. *The NRC report, Limiting, has a rundown of the pros and cons but it is (to my taste) slanted.

12. Quantity-type regulations show extremely volatile prices for the trading prices of carbon emissions

13. It is important for governments to capture the revenues (either through 100% auctions or taxes): • raise revenues for distributional policies • reduce the efficiency losses from taxation Latter is the “double dividend theory” of green taxes: • First dividend is to reduce the environmental harms (taxes on “bads”) • Second dividend is to use the revenues to reduce other inefficient taxes (on goods).

14. Kyoto Protocol has suffered from extreme attrition … Source: Nordhaus, “Economics of Copenhagen Accord,” PNAS (US), 2010.

15. Corruption and alternative mechanisms A final question concerns the administration of programs in a world of where governments vary in terms of honesty, transparency, and effective administration. Quantity-type systems are much more susceptible to corruption than are price-type regimes. Why? An emissions-trading system creates valuable tradable assets in the form of tradable emissions permits and allocates these to different countries. Limiting emissions creates a scarcity where none previously existed and in essence prints money for those in control of the permits. Such wealth creation is dangerous because the value of the permits can be used by the country's leaders for non-environmental purposes rather than to reduce emissions. If oil ministers in corrupt countries pocket oil export revenues, why would permit ministers not pocket permit revenues? A price approach gives less room for corruption because it does not create artificial scarcities. There are no permits handed over, so they cannot be sold abroad for wine or guns. Any revenues would need to be raised by taxation on domestic consumption of fuels. In fact, a carbon tax would add absolutely nothing to the instruments that countries have today. The dangers of quantity as compared to price approaches have been shown frequently when quotas are compared to tariffs in international trade interventions.