The Only Politically Feasible Approach

A call for “a comprehensive, upstream cap-and-trade system” to combat climate change:

Inspiration for climate change, by Robert N. Stavins, Commentary, Boston Globe: …Will the environment and energy team of President-elect Obama respond effectively to the serious challenges that lie ahead? … Ultimately, will Obama work with Congress to develop climate strategies that are scientifically sound, economically sensible, and thereby politically pragmatic? Will he take on the difficult task of crafting meaningful climate legislation?

The only politically feasible approach that can make a real dent in the problem is a comprehensive, upstream cap-and-trade system to reduce carbon dioxide emissions 50 to 80 percent below 1990 levels by 2050. The declining cap will increase the cost of polluting, thereby discouraging the use of the most carbon-intensive fossil fuels and providing powerful incentives for energy conservation and technology innovation.

The system could start with a 50-50 split of auctioned and free allowances, gradually moving to 100 percent auction over 25 years. To establish political support in the short term, free allowances should be targeted to sectors that are most burdened by the policy. And the auction revenue which will increase over time can be used to compensate low-income consumers…

The best option may be to make the program revenue-neutral by returning all auction revenue to citizens through direct cash dividends or annual tax credits. This can go a long way toward making the legislation palatable to Republicans and Democrats alike who are reticent to take any actions that even resemble a tax increase.

By making the overall emissions cap gradually become more stringent over time, costs can be greatly reduced by avoiding premature retirement of existing capital stock, reducing vulnerability to siting bottlenecks, and ensuring that long-lived capital investments incorporate appropriate advanced technology.

Still, the costs of meaningful action will be significant, with impacts on gross domestic product eventually reaching up to 1 percent per year. …

The bottom line is that getting serious about global climate change will not be cheap or easy. Beware of claims to the contrary. But if the current state-of-the-science predictions about the consequences of another few decades of inaction are correct, this defining moment provides an important opportunity for serious and sensible action.

Is a carbon tax out of the question?

Originally published on November 12, 2008 at Economist’s View and reproduced here with the author’s permission.