…environmental economics and the implications of environmental policy

Archive for the ‘Congressional budget office’ tag

Why Design Matters: Flexibility in Cap and Trade and Carbon Taxes

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Ok, so in taking a look at the CBO document a couple of points are worth mentioning.

First the report’s main conclusion that a carbon tax is five times more efficient than cap and trade is based on a policy comparison that is unreal. Essentially the inflexible option compared is unlike any cap and trade system that would be seriously contemplated. The poorly performing “inflexible” cap and trade policy has no design features for price certainty, like a safety valve, banking or borrowing. Most designs allow for intertemporal shifting of abatement effort to allow for efficiency in time. When these are added, the efficiency approaches that of a tax in the CBO document (see Figure 1-2). This assumed policy inflexibility seems excessive and is not therefore a real option. Yet the report makes the inefficiency argument strongly based on this comparison. This is not quit right.

Next, the report does make some good points on why a cap and trade program is less desirable. The case about administrative complexity is a good one, where cap and trade requires a number of design features that need to be tweaked in time to enable price certainty. This seems like a heavy administrative burden and thus the tax seems to be more desirable.

I think the authors of the report could have done us all a better service if they had highlighted one single point – design matters. In designing these programs effort is required to get things right – balancing price certainty through containing costs is important, but so is getting emission reductions. The report argues that reductions later are ok, and thus price certainty is more important (based on Weitzman’s argument that marginal costs are rising but damages are flat and somewhat uncertain and thus price certainty is preferred). But this does not mean that a tax is preferred, but rather that price certainty is important and can be achieved in cap and trade and a carbon tax.

While this report is worth the read, a critical eye seems warranted.

Written by Dave Sawyer

February 19th, 2008 at 8:39 pm

“Depressing facts about climate change: The best policy is the one that’s going nowhere”

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The CBO report (see my last post) has a number of folks talking. But I like this reaction, (here)

Good Climate Policy, Bad Politics.

A new report from the Congressional Budget Office confirms one of the most depressing facts about climate change: The best policy is the one that’s going nowhere in Washington.

The CBO report concludes that a tax on carbon emissions “would be the most efficient incentive-based option for reducing emissions and could be relatively easy to implement. If it was coordinated among major emitting countries, it would help minimize the cost of achieving a global target for emissions by providing consistent incentives for reducing emissions around the world.” But the major presidential candidates aren’t supporting such a tax, and the few proposals on Capitol Hill to impose a tax are not expected to go anywhere anytime soon.

I still plan to take a closer look at the report, and don’t totally support the whole sale adoption of the report’s conclusion without a closer read. But still, even if cap and trade is as efficient given similar design, the post’s inference holds…carbon tax is a four letter word in politics.

Written by Dave Sawyer

February 15th, 2008 at 10:03 pm

I am confused….a carbon tax is five times more efficient than cap and trade?

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The US Congressional Budget Office has just released a report that argues that a cap and trade system is much less efficient than a tax. Download the report here (02-12-carbon.pdf) and see coverage by the Wall Street journal (Here).

At first glance it seems we have an apples and oranges issues where the reductions are not similar for the two scenarios. Or the design elements diverge significantly. So, one would expect lower costs if one is comparing lower targets or a less flexible policy. But these folks at the CBO are not dumb, and they consulted some big brains on this (Billy Pizer of RFF and Weitzman from Harvard) so the report needs a closer look. More to come…

Written by Dave Sawyer

February 14th, 2008 at 11:06 pm