Resident Fellow Lee Lane

Ideas drawn from the works of Douglass North and those of other political economists suggest that institutions limit the extent to which efficient policies to reduce greenhouse gas (GHG) emissions are likely to be adopted. Most analyses of the costs of making steep GHG emission cuts conflict with these realities. Problems arise at both the international level and within nations.
 
Internationally, no third party institutions exist to enforce agreements, and nations differ widely in their interest in restricting GHG emissions. Therefore, high transaction costs will attend efforts to reach and maintain broad GHG controls. So far, those transaction costs have blocked agreement, and there seems little reason to expect that these constraints will soon vanish. 
 
Institutional constraints also exist within key nations. In the United States, widespread voter xenophobia and distrust of markets contribute to adoption of cost-ineffective policy tools, and legislators' incentives to serve constituency interests further supports adoption of regulatory and subsidy programs that greatly increase costs of mitigation. China's legal and economic institutions could not currently apply an effective GHG cap-and-trade or carbon tax. These kinds of GHG controls require the full rule of law, market prices for energy, and market discipline for major industries. In China, the prospects for such a transformation remain highly uncertain.
 
The most likely course for future climate policy is drift and fragmentation. Some countries, including the US, may adopt GHG limits. One key question is whether this country will be able to make policy changes to limit the economic harm from adopting poorly designed policies. A second is whether it will be able to develop options for adapting to climate change or finding means that prevent warming despite continuing GHG emissions.
 
Exploring these options will require a new, broader focus for climate policy analysis. To achieve this wider view, the lessons of political economy must become central to the study of climate policy. An initial step toward this goal would be to encourage a systematic exchange of views between the climate modeling community and leading scholars in the traditions of political economy and institutional economics. . . .

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Lee Lane is resident fellow and codirector of the AEI Geoengineering Project. David Montgomery is vice president of Charles River Associates.