Time to Change U.S. Climate Policy

Resident Scholar Robert W. Hahn
Resident Scholar
Robert W. Hahn
Washington is about to get serious about climate change. Global-warming deniers have been pushed to the political fringe. And through a combination of grass-roots organizing and savvy coalition-building, a veto-resistant majority has emerged in Congress that can push through market-friendly regulation to limit carbon emissions. Even the Bush Administration is on the defensive: to counter recent calls for a new Kyoto treaty at the United Nations, the State Department staged its own climate change conference to brainstorm ways to involve developing nations in carbon containment.

But there's still room for a slip between cup and lip. It's true that opponents of action on climate change have lost the battle for public opinion. It's also true that they've suffered major defections, as corporations ranging from Alcoa to Shell to Whirlpool maneuver for advantage in the regulatory regime they expect to come. But new opposition tactics have plenty of potential to distract Congress from the prize.

The Divide and Conquer Strategy

Most climate change proposals before Congress are patterned on the approach used successfully to reduce sulfur oxide and nitrogen oxide emissions from power plants. First, cap total emissions, initially assigning limited rights to dump carbon dioxide into the atmosphere by a formula based on past emissions. Then, encourage trading among the rights-holders.

The catch here is that the world will likely have to adjust to global warming even as we fight to slow it down.

This approach is good economics and better politics. "Cap-and-trade" programs create incentives to reduce emissions at minimum cost, as well as offering rewards to producers nimble enough to cut emissions below their quotas. The cap-and-trade approach also ensures political support from Wall Street, which is already salivating over the money to be made in trading rights. And, not to be forgotten, a cap-and-trade system can be designed to limit the potential costs by adding a "safety valve" allowing emitters to buy all the rights they need from the government at a price fixed in advance.

But conservatives are now touting another, equally efficient way to manage reductions: tax carbon emissions, and let markets adjust to the new costs by switching fuels and employing new carbon-sparing technologies. Indeed, some economists see it as the superior alternative because it may be less complicated to administer and would surely yield a lot of revenue that could be used for anything from subsidizing health insurance to rebuilding bridges.

There's a catch, however. A carbon tax is just that--a tax. And after years of equating taxes with the work of liberals and the devil, Congress would surely be reluctant to make an exception for one aimed at solving a problem that has yet to make any difference in Americans' lives.

Thus, if the carbon-tax alternative gains traction, it could fatally undermine the awkward coalition of businesses and environmental groups now supporting cap-and-trade. That explains why John Dingell of Michigan, the powerful chair of the House Energy and Commerce Committee and political enforcer for the automakers, is introducing a carbon tax. "I sincerely doubt that the American people will be willing to pay what this is really going to cost them," Dingell told C-SPAN.

The Wait and See Argument

Reducing global emissions fast enough to stabilize atmospheric carbon dioxide at an acceptable level, we are now told, could prove far more costly than the take-a-polar-bear-to-lunch bunch assumes. Dependence on electricity from coal, the premier source of carbon emissions, will be hard to break. Nuclear power is expensive, and bitterly opposed by many environmentalists, while alternative energy sources are equally expensive and--as the ethanol-from-corn boondoggle suggests--an invitation to economic dislocation and colossal waste.

Anyway, these skeptics say, even if rich nations do grasp the nettle, China and India can't be jawboned into joining the effort. Indeed, as the Nobel Prize-winning economist Thomas Schelling has pointed out, poor countries have little incentive to divert money to reducing carbon emissions when the cheaper way to save lives and property is to invest in economic growth. After all, the reason so many die when the monsoons flood West Bengal is that they have neither the roads nor the vehicles to get out of harm's way.

This pessimism offers cover to those who are urging us to abandon efforts to slow global warming and learn to cope with the consequences. Americans aren't truly obliged to live near hurricane-vulnerable beaches. And levees (presumably superior to the ones around New Orleans) could protect big coastal cities. There is even the possibility of a low-cost, high-tech fix for climate change, offsetting the greenhouse effect of carbon emissions by blocking sunlight with sulfur dust ejected at high altitudes.

The catch here is that the world will likely have to adjust to global warming even as we fight to slow it down. The high cost of curbing emissions in rich countries is thus no excuse for failing to create an efficient framework for managing the task. By the same token, the fact that poor countries are not likely to join the effort voluntarily doesn't mean that we could not or should not bribe them to cooperate with cash and technology.

Indeed, bringing Asia on board will be far easier if the United States joins Europe in regulating carbon emissions. A multi-country cap-and-trade system, with emissions rights assigned in a way that initially demanded little of China and India but created powerful financial incentives for businesses in rich countries to pay Asians to use clean technologies, could make everyone happy--and at far lower cost than goit-alone strategies. There are serious challenges in designing such a system--notably, verifying that emission reductions actually take place. But with the potential for reducing the overall cost of a successful climate change policy so high, the risks of learning by doing are surely worth it.

Fending off both sincere and sophistic opposition to cap-and-trade will no doubt require some uncomfortable compromises. Money will be wasted on unpromising R&D; grotesquely expensive renewable fuels may gain a permanent place at the subsidy trough. And, as noted above, there will always be a risk of cheating. But the first priority should be to seize the day, putting a domestic emissions regulation system in place. Without America's political leadership and economic muscle behind it, an effective global climate stabilization strategy isn't possible.

Robert W. Hahn is a resident scholar at AEI and executive director of the AEI-Brookings Joint Center for Regulatory Studies. Peter Passell is a senior fellow at the Milken Institute.

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