The United States is now the only developed country that has neither a cap and trade program for carbon emissions nor a carbon price. Some, such as John Gage, believe that carbon pricing is inevitable, especially given the European Union’s recent implementation of a carbon border adjustment program.
In this posting, I argue that not all such carbon pricing programs are equivalent; thus, it matters how the program is designed. I find cap and trade programs less attractive than direct carbon pricing for three primary reasons. Of course, exemptions from either type of program are likely to inhibit efforts to reach either equity or efficiency objectives.
- Cap and trade programs typically provide an initial allocation of carbon emission permits at a zero price. Those entities that receive such permits can then trade them in the marketplace for cash. Such trades will take place if the value of the permit to the purchaser exceeds that of the seller. At the margin, the result is efficient in the sense that the market price for carbon matches the supply of with the demand for permits. There is no reason to believe, however, that society’s goals for equity – a fair distribution of permits – will be served. In short, the initial allocation of permits – often based on existent emission of carbon into the atmosphere – does little to improve the quality of life for those who suffer the consequences of dispersed carbon in the atmosphere.
- The environmental justice movement is concerned about the distributional effects of climate change policy on particular locations – such as those where low-income people reside. Cap and trade does little to address such concerns. The Fall 2023 issue of Resources suggests that this problem can be addressed by including specific emission limits for each carbon dispersal location. Such a process would require a great deal of knowledge and judgment; furthermore, such judgments and the resultant decisions would be imbedded within existent administrative and political institutions and the organizations that influence them. In my view, such a program would be both expensive to implement and biased towards those stakeholders that have the most political influence. Consistency with social equity and efficiency goals would be serendipitous.
- Cap and trade provides little revenue to deal with income distribution effects, industrial transition ease, or encouragement of investments for alternative energy use. A well-designed carbon pricing system (wishful thinking on my part and assuming that equity objectives can be well defined) doesn’t have the problems generated by cap and trade and provides some revenue that can address a variety of needs. For example, the Citizen Climate Lobby’s Energy Innovation and Carbon Dividend Plan and the Climate Leadership Council’s Climate Dividends Plan both feature carbon pricing with the resulting revenues distributed back to the domestic population. Such plans provide a price incentive to switch from carbon inducing activities to non-carbon activities as well as provide income support such that low-income households would be net recipients of funds while high income, high carbon-user households would be net contributors. Furthermore, no one would receive a free permit to emit carbon; thus, both efficiency and equity objectives could be addressed. Of course, introduction of a carbon pricing system at levels such as exist in Europe (roughly 100 euros per metric ton) would impose sizeable costs on those who would have to change their economic activities; thus, such policies should be implemented over a period of time such as 5 to 10 years.
I am under no illusion that the introduction of serious carbon pricing in the United States will take place in the near future. Europe’s carbon border adjustment mechanism and business investment in decarbonization, however, should improve the chances for passage of pricing policies that along with the subsidies imbedded in The Inflation Reduction Act of 2022 would help put the US on a decarbonization path.
In a future posting, I intend to address how decarbonization need not require a sacrifice of economic growth.
No Con Economics 