My fantasy climate change policy

2010-01-26

in Economics, Geek stuff, Law, Politics, Science, The environment

Even once you have reached agreement that there must be a cost associated with dumping greenhouse gases in the atmosphere, there are countless ways in which you can choose to do so. Many different instruments could be combined in many different ways.

Some argue that the simplest policy that corrects for the market failure is the best. I think there are multiple interlinked market failures, which require multiple policies to correct them.

If I had the power to dictate a climate policy for a developed state, it would look something like this:

1) Ban coal

Coal has no place in our energy future, given the terrible climatic effects that would result from burning the world’s massive reserves of the stuff. As such, no new coal-fired facilities should be allowed. Existing facilities should be subjected to the same carbon pricing mechanism as the rest of the economy, with no refunds, exemptions, or special treatment.

If someone wants to build a coal-fired facility that captures and stores its greenhouse gas emissions, they can be free to do so, provided:

  1. The firm pays the full cost for the equipment;
  2. They demonstrate that the technology is safe and environmentally effective;
  3. They continue to pay the market price for any greenhouse gas emissions not captured.

In practical terms, the demand for subsidies may be impossible to resist. At the very least, they should be directed towards research and demonstration projects, not towards commercial ventures.

2) Set a hard cap

This could be done in either of two ways. You could calculate the quantity of emissions likely to be produced by burning a unit of any particular fuel, then cap how much can be extracted or imported. Alternatively, you could require permits for the emission of greenhouse gases and only sell a set number.

Some intermediate system could also be possible: with fuels capped upstream and certain emission-generating activities capped at the point of emission (such as cement production). The important thing is that the cap should include all activities that occur within a country, and which lead to greenhouse gas emissions. This would also include things like land use changes, as well as the emissions embedded in imports. The latter should be addressed with a carbon tariff applied at the border. This could be waived in the case of imports from states that have robust carbon pricing systems of their own.

To get the level for the cap, you would start by choosing an overall temperature target (such as keeping the increase to less than 2°C), then work out a fair way to distribute the global cap that generates between nations. Some kind of contraction and convergence approach would likely be the most fair, with emissions in rich states falling soonest and fastest, but with everyone eventually reaching carbon neutrality.

3) Auction all permits

The revenue from the production/import/emission permits should be used in several ways. Firstly, some should be recycled back to taxpayers. In the event that refunds are granted for children, the level of the benefit should be capped at two per family, as an incentive to constrain population growth in emissions-intensive societies.

Some of the income should be used for basic research into low-carbon technologies, including renewable forms of energy, air capture of greenhouse gases, etc. Some could also be used for feed-in tariffs, to encourage the deployment of zero-carbon forms of energy.

4) Establish rising floor prices for transportation fuels

Fossil fuels were never going to last forever, and volatility in their prices leads to inefficiency and other problems.

As such, the government should set minimum prices for transportation fuels including diesel and gasoline. These should rise predictably over time. In the event that market prices are above the minimum, market prices would prevail. If those fall below the mandated minimum, the government would collect the difference.

The funds that accumulated would go into a fund from which payments would be made to all citizens, without ever drawing down the principle. That way, future generations will benefit from the bounty of fossil fuels, even if they live long after we’ve stopped using them.

5) Coordinate with other policies

Even all together, these approaches might not be sufficient to drive society aggressively in the direction of carbon neutrality. They could be supplemented with additional policies, as the effect of those already enacted becomes clearer. Also, the rate at which the overall cap is tightened could be increased or decreased, as necessitated by improved understanding of climate science or economics. Other policies and incentive schemes may well be necessary to ensure that the costs of complying with the declining cap do not become excessive. These would include support for research and international cooperation on zero-carbon energy projects.

Other existing policies that promote high emissions should be scrapped, such as subsidies to fossil fuel producers or emissions-intensive industries. Climate change must also be taken into account when making policy in areas like urban and transportation planning.

It would also be appropriate to participate in international efforts in areas like climate change adaptation and preventing deforestation.

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{ 18 comments… read them below or add one }

Tristan January 26, 2010 at 9:50 am

This looks pretty good. I would disagree with some of your priorities in 3. I think that the current energy-intensive economy was built largely through state subsidy, (command), i.e. roads, computers, shipping containers, etc…

So I’d say we need not only research into new technologies – we already have lots of great technologies – but we also should have state investment in infrastructure which is friendly to carbon-neutral markets.

For starters, it just seems like a no-brainer to spend 10 billion to electrify Canadian mainline rail. Also, the market isn’t going to build site C or fusion power. My point is state investment should be a combination of research and construction.

R.K. January 26, 2010 at 9:54 am

Nothing on biofuels or agriculture? Do you expect carbon pricing to take care of all the problems there?

Also, what about domestic adaptation?

richard pauli January 26, 2010 at 11:08 am

Fine list…. I can agree with much. Especially banning coal – something that will be easier to deploy when the drama and violence of climate change hits home. We are so reactive. And delayed reactive.

Again Hansen points out cap and permit is a defacto tax… and will work only if it is ineffectual.

http://www.youtube.com/watch?v=jarAWIGML5k&feature=related
10 mins in…

Milan January 26, 2010 at 11:31 am

I have no problem with a tax. I just prefer a hard cap because that is what we really need to be targeting – the level of our emissions – not the price per tonne that people have to pay to avoid cutting them.

Tom January 26, 2010 at 11:38 am

How would you tweak this for use in Canada, particularly given the constraints of federalism?

Milan January 26, 2010 at 11:44 am

Well, that’s where the ‘fantasy’ part of this comes in.

Your question is like asking someone who came up with a fantasy baseball team: “How would you actually make these trades, and pay for it all with the salary of one team’s general manager?”

Obviously, the split between provincial and federal jurisdiction (as well as differing political cultures) means that the above would be very hard to implement in a Canadian circumstance. You would need to take into account regional realities (provinces that use coal, and others with big oil and gas sectors) as well as all sorts of legal issues.

That being said, if both the federal and provincial governments really understood the seriousness of the climate change threat, perhaps they could work together to enact something similar to the above.

Tristan January 26, 2010 at 1:49 pm

“Your question is like asking someone who came up with a fantasy baseball team: “How would you actually make these trades, and pay for it all with the salary of one team’s general manager?”

But, that’s what fantasy baseball is all about – you actually deal with all those problems – how to make the best team with the resources you have, and how to increase your resources – and the games are just played out at random (not completely random of course, otherwise there would be no point in trying to trade for stronger players). Fantasy sports is all about doing the best job managing your team.

So, if correspondingly invent “fantasy climate change mitigation”, in the style of fantasy sports, it would be all about politics-as-art-of-the-possible.

Anon January 26, 2010 at 1:50 pm

I don’t get it. How will this lead to socialism?

Milan January 26, 2010 at 1:50 pm

Let the record show that I know nothing about fantasy sports.

Matt January 26, 2010 at 2:45 pm

I don’t get it. How will this lead to socialism?

Who said anything about socialism?

Milan January 26, 2010 at 2:54 pm

A joke, I think. Recall that some people argue that climate change isn’t really a problem, but provides an excuse to secretly create a socialist state.

richard pauli January 26, 2010 at 3:58 pm

Oh I just heard the term “distributed capitalism”

The term sounds much better than national socialism or totalitarian capitalism.

. January 27, 2010 at 12:19 pm

“Coal burning at power plants is the greatest source of increasing atmospheric carbon dioxide. It is also the source most susceptible to control.”

Hansen, James. Storms of My Grandchildren. p.2 (hardcover)

Ryan Nassichuk January 28, 2010 at 10:38 pm

How about a two-child policy?
A one-child policy?
A several-cats-but-no-more-children-please policy?

People who don’t exist have very low carbon footprints.

I know it currently falls very much into the ‘fantasy’ category, at least here in Canada, but it seems to me that population control could be a very effective, albeit longterm, part of the solution to climate change.

Milan February 1, 2010 at 9:48 am

I would support policies that encouraged people – especially in rich states with high per-capita emissions – to have fewer children.

Such policies would have to be carefully designed, however, so as not to have a harmful effect on children who, after all, didn’t choose to be born. As discussed before, cutting subsidies for child raising does risk harming innocent kids.

One option that could work is cutting pension benefits for people who have more than two children.

. March 5, 2010 at 2:03 pm

“So far, governments have proven themselves unable to impose prices on carbon high enough to meet the recommendations of the ramp-up supporters, to say nothing of those urging drastic action. The idea that those same governments might somehow be able to adopt far more painful measures in order to forestall catastrophe is absurd. The public won’t stand for it. And that’s part of the political challenge of climate change—by the time the public is able to observe the catastrophic effects of warming in ways that might steel them to accept painful emissions reduction measures, it’s too late to do anything about the problem.

What this suggests, then, is that while pursuit of a carbon price is a worthwhile goal, it can’t be the end of the policy response. A carbon price, even one insufficiently small, would create some incentive to change behaviour and innovate. But what’s also needed is a set of technological leaps sufficient to quickly and drastically increase the elasticity of demand for carbon. And that militates in favour of large-scale investment in green infrastructure and a broad push to encourage research into alternatives to carbon-intense activities. These activities wouldn’t be cheap, but they’d be easier to bear than an immediate price of $200 per tonne of carbon. And politically, such measures should go down easier, given that they entail the doling out of government resources rather than the imposition of a tax on a negative externality.

Of course, there will be costs to moving away from a purely market-driven approach to climate policy. Non-Pigouvian taxes to fund the above measures will generate bigger economic distortions, and targeted government spending is likely to breed some inefficiencies and opportunities for rent-seeking. Politics being politics, it’s also possible that some counter-productive steps are taken—the example of ethanol subsidies looms large in these discussions. But for some expected cost and likelihood of tail climate impacts, these downsides become acceptable.”

. April 13, 2010 at 3:15 pm

“A market-based system would create decentralized incentives to do the right thing, and that’s the only way it can be done.

That said, some specific rules may be required. James Hansen, the renowned climate scientist who deserves much of the credit for making global warming an issue in the first place, has argued forcefully that most of the climate-change problem comes down to just one thing, burning coal, and that whatever else we do, we have to shut down coal burning over the next couple decades. My economist’s reaction is that a stiff license fee would strongly discourage coal use anyway. But a market-based system might turn out to have loopholes — and their consequences could be dire. So I would advocate supplementing market-based disincentives with direct controls on coal burning.

Milan July 29, 2010 at 1:21 pm

Al Gore’s five point climate plan would also be a good way to get started in North America, though it doesn’t put quite enough emphasis on phasing out coal.

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