Emissions of greenhouse gases linked with global climate change are affected by diverse aspects of economic activity, including individual consumption, business investment, and government spending. An effective climate policy will have to modify the decision calculus for these activities in the direction of more efficient generation and use of energy, lower carbon-intensity of energy, and a more carbon-lean economy. The only technically feasible and cost-effective approach to achieving this goal on a meaningful scale is carbon pricing: that is, market-based climate policies that place a shadow-price on carbon dioxide emissions. We examine alternative designs of three such instruments: carbon taxes, cap and trade, and clean energy standards. We note that the U.S. political response to possible market-based approaches to climate policy has been, and will continue to be, largely a function of issues and structural factors that transcend the scope of environmental and climate policy.
Abstract An implication of the Coase theorem is that under certain conditions, the market equilibrium in a cap-and-trade system will be cost-effective and independent of the initial allocation of tradable rights. That is, the overall cost of achieving a given aggregate emission reduction will be minimized, and the final allocation of permits will be independent of the initial allocation. We call this the independence property. This property is important because it means that the government can establish the overall pollution reduction goal for a cap-and-trade system by setting the cap and leaving it up to the legislature to construct a constituency in support of the program by allocating the allowances to various interests without affecting either the environmental performance of the system or its aggregate social costs. We examine the conditions under which the independence property is likely to hold—both in theory and in practice.
Those who believe that renewable electricity standards would create a huge number of green jobs have forgotten the lesson of Detroit: a large domestic market does not guarantee a healthy domestic industry.
The climate change talks in Cancun, Mexico, didn’t solve all the world’s climate problems. But they were hugely successful. Through the Cancun Agreements, 194 countries reached landmark consensus (even the US and China) to set emissions targets and limit global temperature increases.
Are cap-and-trade schemes working? This column presents a summary of eight existing schemes arguing that half meet the independence property whereby the initial allocation of property rights does not affect the environmental or social outcome and the scheme is cost-effective. This success is a contrast with other policy proposals where political bargaining reduces the effectiveness and drives up cost.