Articles by Ken Johnson

A possible consensus perspective on the tax vs. cap debate

Last revised: 07/10/2008

In his recent Congressional testimony, James Hansen talked about a "perfect storm" of climatological tipping points that may soon converge to yield global cataclysm. But another kind of perfect storm is brewing: a technology storm that could rapidly displace fossil fuels and restore global climate sustainability.

Effective regulatory policy could provide the kind of incentives and stable investment climate that are needed to facilitate the clean-energy revolution. Unfortunately, the "caps and standards" approach that is currently in vogue cannot provide the economic backbone for a rapid and orderly transition to a sustainable global economy. Emission caps and performance standards are rarely if ever set at levels that represent true sustainability, and are generally biased toward extreme cost conservatism. Regulators try to second-guess markets in setting targets and schedules, while markets try to second-guess regulators; the instability and unpredictability of carbon prices deters long-term investment in clean energy.

A carbon tax like the one advocated by Dr. Hansen and many economists would provide price stability, and could theoretically be five times more cost-efficient than cap-and-trade, but taxes are politically verboten. Industry interests oppose taxes because of their alleged high regulatory costs and cap-and-traders won't let go of their hallowed "environmental certainty."

So the tax-versus-cap debate goes round and round, never resolving and never converging on a credible climate stabilization strategy. But the debate could be resolved if policy makers -- and the economics profession -- could put aside their dogmatisms and recognize several basic principles of climate policy:

Will California’s climate change regulations mandate maximum emission reductions?

[This post is follow-up to a David Roberts post from Jan. '08: "What does California's climate bill mandate?"]

Sometime later this month, the California Air Resources Board (CARB) will release its draft "Scoping Plan" on implementation of the state's Global Warming Solutions Act of 2006 (AB 32), which requires that statewide GHG emissions be reduced to or below 1990-level emissions by 2020.

AB 32 also requires that the regulations "achieve the maximum technologically feasible and cost-effective greenhouse gas emission reductions." Furthermore, the regulations must be designed "in a manner that is equitable, seeks to minimize costs and maximize the total benefits to California, and encourages early action to reduce greenhouse gas emissions".

The law authorizes a variety of regulatory measures, but CARB's Scoping Plan effort has focused primarily on cap-and-trade, following the precedent set by the U.S. Acid Rain program. Cap-and-trade can be effective at achieving a specific emission target at minimum cost -- but how does the requirement for maximum emission reductions fit in with this approach?