On the complexity level of climate policies

2009-03-20

in Economics, Law, Politics, Rants, The environment

Knot in wood

When it comes to policies for regulating greenhouse gas emissions, complexity can conceivably serve three purposes. Two of them have some justification, while the third is largely reprehensible but entirely obvious and largely unavoidable. Unfortunately, it is the two dodgier options that are overwhelmingly more likely to emerge.

The first purpose is environmental effectiveness. For instance, we might add complexity to a pure carbon tax by also banning the construction of new coal-fired power plants. Doing so is likely to reduce emissions somewhat further, especially given that once a coal power plant is built, it takes a brave politician to refuse to grant an exception that will stop a carbon tax from bankrupting it, tossing out those who work there, and nullifying the investments of the financial backers.

The second purpose is economic efficiency. In some cases, it may be that a more complicated policy can achieve the same level of emissions reduction at a lower cost than a simpler one. It may also be that other economic objectives need to be sought in concert with greenhouse gas mitigation. For instance, we might want to increase the total portion of our energy use that comes from domestic sources.

The third purpose is being able to grant hidden favours to friends and contributors. As soon as you start giving away ‘grandfathered’ permits, creating tax exemptions, and the like you, open the door to both soft and hard forms of corruption. The more complex the set of regulations, the easier it is to conceal this. Once you start stacking on special rules for new facilities, different modes of compliance, and complex interactions between carbon policies and other forms of taxation and subsidy, you gain a dense canopy of rules, under which all sorts of shady business can be undertaken.

A government that realized the scope of the threat we face could put a simple policy in place in a matter of weeks or months. They could say:

“If we continue to emit at the level we are now doing, we will probably destroy the ability of the planet to sustain human civilization. This may well happen by the end of this century, especially if our emissions remain on an upward trajectory. To respond to this risk, we are implementing an economy-wide carbon tax. Every time fuel that generates greenhouse gasses is produced or imported, the producer or importer will pay the tax. The cost will then spread through the rest of the economy. This year, the tax will be $20 per tonne of CO2 equivalent. It will rise by $5 per year until at least 2030. We will use the revenues to provide financing for efficiency improvements in all sectors.”

Instead, we are likely to see governments that fail to appreciate the magnitude of the danger, but fully appreciate the opportunities new regulations provide for them to strengthen their electoral positions. As a consequence, there is a very strong possibility that we will fail to respond effectively to the threat of climate change before it becomes impossible to avoid catastrophic harm.

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{ 3 comments… read them below or add one }

. March 20, 2009 at 11:59 am

America and climate change
Cap and binge

Mar 12th 2009
From The Economist print edition
America’s politicians are at last getting to grips with global warming, but in a dangerously expensive way

Mr Obama’s preferred device for cutting emissions, a cap-and-trade scheme, is designed to do just that. It involves placing a limit on the volume of emissions that can be produced around the country each year, and then auctioning tradable permits to pollute. The intention is to encourage firms that find it cheap to cut emissions to do so, while allowing those with no easy means to pollute less to buy permits instead. Politicians and bureaucrats, meanwhile, do not need to identify where emissions cuts should be made; the market takes care of that for them.

Much of the money doled out by the government would inevitably be wasted, adding to the overall bill for fighting climate change. Worse, such measures would risk distorting the carbon market, steering private capital as well as public money away from the cheapest technologies and towards those that have caught the eye of the politicians.

. March 20, 2009 at 12:32 pm

America and climate change
Sins of emission

Mar 12th 2009
From The Economist print edition
Barack Obama is keen to curb greenhouse-gas emissions with a cap-and-trade scheme. Can Congress come round to his way of thinking?

. April 15, 2009 at 10:45 am

Myth: Climate policy must be simple

Among the weird memes that has grown up around the cap-and-trade debate, one of the most puzzling to me is that C&T is fatally flawed because it is complex. Americans don’t “get it.” They’ll only support a climate policy that is so “simple and transparent” that you can explain it on a napkin. (Like a carbon tax, which Americans “get,” and thus support. Supposedly. All evidence to the contrary.)

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