Yesterday, the Environmental Protection Agency (EPA) announced that it was going to pass a series of carbon-reducing initiatives, the most notable one being a regulatory cap on already-existing coal plants. The Chamber of Commerce recently published a report (2014) estimating that it would lower the GDP by $50B per annum to implement these regulations. That doesn't count the 224,000 jobs per annum lost or the lower disposable income due to the higher energy costs. After these regulations, carbon emissions would only decrease by 1.8 percentage points. I don't know about you, but paying so much to acquire so little, and doing so in the name of fighting the "War on Climate Change," puts me a bit on edge, especially when decreasing carbon emissions needs to be a global effort in which China particularly needs to make commitments to decrease carbon output.
Although the EPA's plan consists a smorgasbord of policy alternatives that will be implemented on a state-by-state basis, the one that will be most probably be implemented is the cap-and-trade scheme, partially because certain states already have the schemes in place and partially because the first half of "cap-and-trade" is now law. Proponents of cap-and-trade think such a scheme would be wonderful because it would be successful in decreasing carbon emissions. Cap-and-trade has the ability to adjust It also avoids higher rates of taxation, something that is very aversive for Americans. The truth is that cap-and-trade is not good policy, especially when compared to alternatives. For one, the the Congressional Budget Office (CBO) shows that such carbon reductions would translate into less jobs and higher energy costs. Second, although it is presented as a "free market" idea, it really is nothing more than an arbitrary scarcity created by government regulation.
Typically, the dichotomy set up in this debate is "cap-and trade vs. carbon tax" (see CBO study here). Personally, if I had to pick between the two, I would go with the carbon tax hands down. Aside from higher levels of transparency, being simpler, and less corruptible, the carbon tax also prevents adverse interactions with other climate change policies, reduces price volatility, and reduces the wealth transfers to oil-exporting countries (Goulder and Schein, 2013). Even if I prefer the carbon tax over cap-and-trade, this still presents a false dichotomy because there is at least a third option. Neither cap-and-trade nor the carbon tax really address the technology-based price gap that exists between fossil fuels and alternative energy, which gets at the heart of the problem when looking at the long-run. Also, demand for energy consumption is going to increase greatly over time, so it would make more sense to find smarter, more efficient ways to consume energy so that it neither damages the environment nor the economy. I would also argue that the sizable increase production and consumption of natural gas have already been reducing carbon emissions much more than a carbon tax or cap-and-trade scheme could do.
Assuming that the social cost for carbon has not been overstated, the best solution is in research and development. The American Enterprise Institute, Brookings Institution, and Breakthrough Institute jointly published a report saying that investments in science and education, as well as energy subsidies, would do the trick. Even if a carbon tax were a part of the portfolio, it should be minimal, and those revenues should fund research in non-fossil fuel energy (Acemoglu et al., 2012). If the government has to get involved, I would say that subsidies towards the energy sector is the best way to go. That way, we are dealing with the root of the problem instead of putting a band-aid on it.
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