Wednesday, January 13, 2010

Peter Grossman on Climate Policy

Peter Grossman is one of the very smartest people I know and also my best friend, which is why I work with him as often as possible (we have published a couple of books and several articles together over the last decade or so). In today's Christian Science Monitor, he has this op-ed calling for a US climate policy that would meet President Obama's stated goal of a 17% reduction in greenhouse gas (GHG) emissions by 2020, with just two simple mechanisms: (1) a carbon tax-and-rebate scheme that create incentives to conserve on carbon-based fuels but at no (aggregate) cost to consumers, plus (2) government incentives to replace coal-burning power plants with new gas-burning or nuclear plants.

As Peter notes, Obama's 17% promised cut in GHG emissions is not particularly ambitious, and should not be difficult to meet. Simply cutting carbon emissions from existing coal-fired power plants by 50% could do the trick. However, I'm not optimistic about the prospects for Peter's policy preferences, at least in the near term, and I'm sure Peter himself has no illusions about their prospects. Perhaps they would stand a chance of being enacted if Waxman-Markey fails to be enacted this term (or fails as policy after being enacted). But that doesn't mean I would wish for Waxman-Markey to fail.

Even though I agree with Peter that a carbon tax is, in theory, preferable to a cap-and-trade approach to reducing GHG emissions, and that climate policy should not be conflated with farm policy, I do hope Waxman-Markey passes. No, it is not a wonderful solution to the climate problem; nor do I like its ridiculous energy-policy provisions. But it would at least move the ball in the right direction on climate policy, which has not happened in the US for more than a decade.

Peter would also be the first to acknowledge that the devil would reside in the details of his proposals. The tax-and-rebate provisions, for instance, would have to be carefully designed to overcome the generic political opposition to taxes. In the first place, the government would have to credibly commit not just to collecting the tax but to paying the rebate, and not just temporarily. This could be accomplished by language in the legislation that would automatically kill the tax if Congress ever terminated the rebate. In the opposite direction, history suggests that Congress would be more likely, in time, to kill the tax than the rebate (remember Clinton's gas tax?) which could lead to even greater carbon emissions.

An even more difficult problem, it seems to me, is the predictable opposition from the energy lobby. One could hypothesize that the very provisions that make Waxman-Markey so unpalatable to Peter were written to appease lobbying groups including energy companies and farmers. Wouldn't those same lobbies likely ruin his proposed simple solution of a carbon tax-and-rebate?

Finally, with respect to the incentives for replacing old coal-fired power plants with new gas-fired or nuclear units, Peter's article is short on details. What kinds of incentives? How high the cost? I suspect that we could reduce carbon emissions from existing plants by 50% pretty easily, and at reasonable cost, by use of regulatory quotas (marketable or not).

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