By Billy Pizer
June 28, 2007
President Bush now supports goals for reducing greenhouse gas emissions. A proliferation of state laws is putting increasing pressure on Congress to enact a nationwide program to address climate change. The question is no longer whether to cut the amounts of carbon dioxide that Americans throw into the atmosphere, but how.
Unfortunately for Congress, the most efficient policies – those that eliminate the largest amounts of carbon emissions for every dollar of cost to society – are turning out to the most difficult to work out and potentially the least popular. And vice versa – many appealing policies can be economically inefficient.
Efficiency is deeply important. Most atmospheric carbon dioxide comes from burning the fossil fuels that give us some 85 percent of the energy that runs our supremely productive economy and supports our standard of living. Following an inefficient path to change the way we make energy and to reduce these emissions could easily put a climate change solution out of our price range. We can’t afford to make mistakes.
At present it costs nothing to throw carbon dioxide into the sky. The efficient way to discourage it is to put a price on carbon – to make people and businesses pay for every pound of carbon that goes out the tailpipe or up the flue when they use fossil fuels, the same way they pay for water and electricity. When you have to pay for something, you learn to value it and use less. One way to do that is to put a tax on carbon emissions (can you hear the boos?). Another is a cap-and-trade program that would require everyone to obtain permits in proportion to their carbon dioxide emissions, typically sold along with the fuel (so individuals need not deal with the permit market). It puts a steadily declining legal cap on emissions, allowing those businesses and individuals who can reduce their fuel use and emissions most inexpensively to do so and allowing those who cannot to purchase more permits and support those who can. The political advantage of the cap-and-trade program is that permits can be given away freely to those individuals and businesses who are least able to afford the permit costs. However, both of these programs become even more efficient if revenue (from auctioning permits or paying the tax) is used to cut other taxes.
A number of bills now before Congress follow the cap-and-trade model, and one or two are suggesting a tax. But a number of other bills look to cut emissions without directly affecting the price of fuel and energy, either through performance mandates or subsidies. That makes them more popular – but less efficient and in some cases much, much less efficient.
For example, there’s wide political support behind the idea of requiring power plants to generate a certain proportion of their electricity from renewable sources. More than a third of the states have enacted one form or another of a renewable energy rule. It’s an appealing concept, but it has two problems.
At present the United States generates about half of its electricity by burning coal, which is dirty but cheap, and about a fifth with natural gas, which is much cleaner but also much more expensive. Faced with a requirement to use renewables, the power industry tends to hold down costs in part by substituting renewable energy for natural gas, not coal. Carbon emissions drop, but not in proportion to the reduction in fossil fuel as fossil fuel use becomes more coal – and carbon – intensive. A second problem is that a renewable energy rule leaves nuclear power out of the picture. With no carbon dioxide emissions and comprising one-fifth of our electricity generation, balancing nuclear and renewable use is left to chance rather than the market. While there may be other reasons for encouraging renewables through such a rule – to encourage new technologies or to promote energy security – it is not a cheap way to reduce carbon dioxide emissions.
Another example is CAFE – the corporate average fuel efficiency law, which sets the gasoline mileage standard that automobiles and light trucks must attain. First enacted in 1975, CAFE is now a familiar and widely accepted tool of energy and environmental policy, one of the first that many politicians reach for when they want to reduce oil consumption or carbon dioxide emissions. Congress is now considering a significant rise in the mileage requirement.
But again there’s a flaw. Ratcheting up the CAFE standard means a driver will get more miles to the gallon, which actually makes it cheaper to drive – which encourages people to do more of it. Raising the CAFE standard will save some oil and avoid emissions, but not in proportion to the rise in the standard.
Given fuel economy has not improved in 20 years, there is an arguable opportunity to fix what appears to be a failure of car buyers and car manufacturers to value fuel economy. But a higher the CAFE standard – coupled with a national renewable fuel requirement – would cost about 10 times as much, per ton of carbon emissions prevented, as a well-run cap-and-trade program that auctions off all the emissions permits and recycles the proceeds into tax cuts. That estimate, like the other observations here, comes from research done by economists at Resources for the Future.
The United States is going to need many different policies to control carbon emissions effectively. Renewable fuel requirements and CAFE can play a valuable part, depending on the details. But it would be a serious mistake to try to use them as substitutes for a broad, efficient approach like a cap-and-trade program or a carbon tax. It is tempting, however – these policies reduce emissions indirectly, giving the impression of laying much of the cost on big corporations like power companies and automobile manufacturers. In reality, much of the cost eventually falls on the consumer, but by that time it’s been mixed in with other costs and savings and isn’t nearly so visible as, say, a tax.
The bottom line is that society gets more for its money – bigger reductions of emissions, per dollar of cost – when it goes after emissions directly with a carbon tax or a cap-and-trade program.
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