Thursday, February 28, 2013

Ignoring Path Dependency and Practical Politics Is No Way to Promote a Better Climate Policy

Over at Project Syndicate (here), the very smart economist Jeffrey Sachs lauds Europe for displaying seriousness about climate change (e.g., by creating the world's largest carbon trading market in the form of the EU Emissions Trading Scheme), but then recommends that they would be better off scrapping that system entirely and moving to a carbon tax, as should ever other country in the world.

As someone who generally believes that carbon taxes are preferable to cap-and-trade for at least some combinations of greenhouse gases and sources, I am appalled by Sachs' lack of serious analysis of the situation in Europe that makes adoption of a Union-wide carbon tax nearly impossible. Specifically, under EU constitutional rules, such a tax would have to be separately enacted by each member state; unlike the EU ETS, it could not imposed from above by Directive. How likely does Sachs believe it is that EU member states would unanimously embrace a unified carbon tax scheme? Does he know that the EU tried going down that road before, and switched to emissions-trading after realizing that a carbon tax would go nowhere? Moreover, does he have any idea how many vested interests have been created by the ETS, and how those interests would now strongly oppose scrapping that scheme in favor of a completely new tax-based system?

Sachs also ignores two modest adjustments to the existing EU ETS that would add to it the best qualities of a tax-based scheme, one of which the EU is already implementing: (1) the EU is ramping up  mandatory auctioning of emissions allowances (to 100% by 2020), and the auction price functions just like a tax; and (2) what the EU has not yet done, but should, is set a price floor for emissions allowances, so that the entire system becomes more robust to economic recession. Just recently, the EC had to intervene in the market (with parliamentary approval) and withdraw allowances to keep the price from falling to zero (see, e.g., here and here). A fixed (or adjustable) price floor would have obviated the need for such an emergency intervention.

Economists and policy analysts really should try to avoid sweeping and simplistic policy recommendations that ignore real-world politics and path-dependencies. If they want their ideas to be taken seriously, they themselves must take seriously practical problems of policy design and implementation. Frankly, we suffer from a glut of facile policy recommendations for climate policy with too little serious analysis.

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