There is widespread agreement among most economists that economy-wide carbon pricing will be a necessary (although not necessarily sufficient) component of any policy that can achieve meaningful and cost-effective CO2 reductions in large, complex economies. But there is less agreement about which of two carbon pricing instruments will be better. Some support carbon taxes, while others favor cap-and-trade. How do these two pricing approaches compare? In this survey and synthesis of theory and experience, I show that when carbon taxes and carbon cap-and-trade systems are designed in ways that make them truly comparable, their characteristics and outcomes are similar and, in some respects, fully equivalent. But the two approaches can perform quite differently along some specific dimensions, sometimes favoring taxes and sometimes cap-and-trade. The key differences in performance depend on details of program design. Indeed, what appears at first glance to be a dichotomous choice between two distinct instruments can turn out to be a choice of specific design elements along a policy continuum.
The seminal contributions of William Nordhaus to scholarship on the long-run macroeconomics of global climate change are clear. Much more challenging to identify are the impacts of Nordhaus and his research on public policy in this domain. We examine three conceptually distinct pathways for that influence: his personal participation in the policy world; his research’s direct contribution to the formulation and evaluation of public policy; and his research’s indirect role informing public policy. Many of the themes that emerge in this assessment of the contributions of one of the most important economists to have worked in the domain of climate change analysis apply more broadly to the roles played by other leading economists in this and other policy domains.
The Paris Agreement to the United Nations Framework Convention on Climate Change has achieved one of two key necessary conditions for ultimate success—a broad base of participation among the countries of the world. But another key necessary condition has yet to be achieved—adequate collective ambition of the individual nationally determined contributions. How can the climate negotiators provide a structure that will include incentives to increase ambition over time? An important part of the answer can be international linkage of regional, national, and sub-national policies, that is, formal recognition of emission reductions undertaken in another jurisdiction for the purpose of meeting a Party’s own mitigation objectives. A central challenge is how to facilitate such linkage in the context of the very great heterogeneity that characterizes climate policies along five dimensions: type of policy instrument, level of government jurisdiction, status of that jurisdiction under the Paris Agreement, nature of the policy instrument’s target, and the nature along several dimensions of each Party’s Nationally Determined Contribution. We consider such heterogeneity among policies, and identify which linkages of various combinations of characteristics are feasible; of these, which are most promising; and what accounting mechanisms would make the operation of respective linkages consistent with the Paris Agreement.
This article reviews the design of environmental markets for pollution control over the past 30 years, and identifies key market-design lessons for future applications. The focus is on a subset of the cap-and-trade systems that have been implemented, planned, or proposed around the world. Three criteria led us to the selection of systems for review. First, among the broader class of tradable permit systems, our focus is exclusively on cap-and-trade mechanisms, thereby excluding emission-reduction-credit or offset programmes. Second, among cap-and-trade mechanisms, we examine only those that target pollution abatement, and so we do not include applications to natural resource management, such as individual transferable quota systems used to regulate fisheries. Third, we focus on the most prominent applications—those that are particularly important environmentally, economically, or both.
Trump’s decision to withdraw the nation from the Paris climate agreement was not based on science or sound economics, but on a confused, misguided, and simply dishonest desire to score some short-term political points with his voters. What he sacrifices in the long term will be immensely more difficult for the country to win back at the ballot box: authority, credibility, and influence.
This essay provides one economist’s perspective on the two-decade evolution of the field of environmental economics, by tracing it through personal reflections on the professional path that has led to my research and writing. Also, the article summarizes the highlights of some of my research and writing during this period.