29 june 2013

Climate-change policy in America, Europe and China

Tepid, timid

The world will one day adopt a carbon tax—but only after exhausting all the alternatives

The Economist, June 29th 2013

THIS is an unusually busy moment in the unhappy history of efforts to curb climate change. In two weeks at the end of June the world’s three biggest polluters unveiled carbon-reducing measures. In China and America these are more ambitious than previous policies. But they fall far short of what is needed to rein in the relentless rise in global carbon emissions.

The centrepiece of the changes was the announcement, on June 25th, of new controls on American greenhouse-gas emissions, “one of the most important decisions we make as a nation”, Barack Obama boasted (see article). A week before that China, the largest greenhouse-gas producer, unveiled its most far-reaching attempt so far to control toxic air pollution; it also started a pilot carbon-trading scheme in the southern city of Shenzhen, loosely based on the troubled European scheme. Not to be outdone, the European Union confirmed limits on car emissions for 2020.

Let us give credit where it is due. After years of fruitless wrangling to negotiate a global treaty for all, the big polluters have decided to go it alone. This is better than nothing. But the measures they propose are not those needed most; and they may even diminish further the chances of a treaty, since big polluters can now claim that such a thing is unnecessary.

Many of the American and Chinese moves are of the command-and-control variety—a ceiling on emissions here, a regulation of polluting activities there. In China there is a public-health justification for this sort of approach. Beijing suffered an “airpocalypse” in January, with smog 40 times above safe levels: too high at any price. America has no such justification. Mr Obama is using measures associated with Soviet central planning out of desperation: he cannot get climate laws through Congress, so executive orders are his only weapons.

The trouble is, such measures are not very accurate. Bans or quantitative limits restrict emissions without considering the policy’s full costs. Some may provide net benefits (like controls on vehicle exhausts). Many do not. Retrofitting carbon capture and storage, for example, costs a fortune. America’s plans look worryingly like an energy-policy grab-bag in which the president has been rummaging, rather than an efficient carbon-cutting plan.

Environmental policies are no different from any others: you want the biggest bang for your buck. The way to get that is to use market mechanisms to discover, say, the most efficient way of cutting carbon. America does not have such a mechanism at the federal level and is struggling to set one up.

Europe can claim to be ahead here: since 2005 it has had a cap-and-trade scheme which sets a limit on emissions and allows companies to trade pollution permits up to that level, thus putting a price on carbon. But the scheme is complex and has been undermined by vast exemptions—flaws which apply to China’s new scheme, too. The European Parliament will vote on an emergency fix on July 2nd. Even if a compromise is passed though, it will merely stave off collapse for a year or so.

A Churchillian approach to global warming

Winston Churchill famously said America would always do the right thing after exhausting the alternatives. The right thing in climate policy for all the big countries is a carbon tax, which is simpler and less vulnerable to fluctuations in emissions than cap-and-trade schemes. For years, such a tax has been a non-starter politically. But as the alternatives are tested to destruction, it deserves to be looked at again. Current environmental policies will not keep the rise in global temperatures to below 2°C—the maximum that most climate scientists think safe. A carbon tax, if stiff enough, could. Big polluters should assume that such a tax will one day arrive, and start planning for it now.

Economists Have A One-Page Solution To Climate Change

by David Kestenbaum, Planet Money, June 28, 2013

Climate change seems like this complicated problem with a million pieces. But Henry Jacoby, an economist at MIT's business school, says there's really just one thing you need to do to solve the problem: Tax carbon emissions.

"If you let the economists write the legislation," Jacoby says, "it could be quite simple." He says he could fit the whole bill on one page.

Basically, Jacoby would tax fossil fuels in proportion to the amount of carbon they release. That would make coal, oil and natural gas more expensive. That's it; that's the whole plan.

Jacoby's colleague John Reilly told me the price of gasoline might rise by 25 cents a gallon in the first year. Over time, that would increase. By 2050, Reilly figures the carbon tax would add about $1 to the price of every gallon. Across the economy, prices of energy-intensive goods and services would rise. This would encourage people and businesses to be more efficient.

This is why economists love a carbon tax: One change to the tax code and the entire economy shifts to reduce carbon emissions. No complicated regulations. No rules for what kind of gas mileage cars have to get or what specific fraction of electricity has to come from wind or solar or renewables. That's by and large the way we do it now.

Reilly says the current web of rules is a more complicated and more expensive way of getting the same outcome as a carbon tax. The current system "pretty much is one of the worst ways we could do it," he says.

As with any fix for climate change, a carbon tax would hit some people harder than others. People with long commutes would pay more. People who work in coal mines could lose their jobs.

But here is where Reilly brings up what is perhaps the most surprising thing about a carbon tax: If you do it right, he says, carbon tax can be nearly painless for the economy as a whole.

Besides reducing carbon emissions, a carbon tax brings in a bunch of money – it's a tax after all. So, Reilly says, you can reduce, say, income tax to balance out the new taxes people are paying for carbon emissions. People pay more for gas, but they get to keep more of their income.

I called around and talked to a bunch of economists about this, and they said the basic idea was sound: If you give the carbon-tax money back by cutting income taxes, you can probably offset a lot of the pain.

President Obama has indicated he would support a market-based solution to climate change. But a carbon tax would of course require an act of Congress. And right now, that seems unlikely.

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