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Towards A Comprehensive Climate and Energy Policy

Reviewing the policy landscape at the beginning of 2009, as the Obama Administration was taking office,  I wrote this series (links accessible below as well as to the right),

Part 1. Carbon Pricing is Just One Piece of the Puzzle: Two Economic Worldviews
Part 2. Theory and Practice of Carbon Pricing
Part 3. A Survey of Energy and Infrastructure Related Market Failures
Part 4. Scope of a Comprehensive Climate and Energy Policy
Part 5. Instruments and Outline of a Comprehensive Climate and Energy Policy

as a means of bringing together my view of the energy policy instruments and their expectable effectiveness in reducing emissions.

In general, the effort in writing this series was to contextualize carbon pricing policies, which in my view had become overvalued as a singular solution to our climate and energy needs. I still hold this view but subsequent to writing this piece, the US Congress has been attempting to create a bill that all in one attempts to be a comprehensive climate and energy policy.  This bill, variously called “Waxman-Markey”, “ACES”, and now with a number of Senate versions, has so far been a disappointment with far too many compromises struck with polluting industries.

Furthermore, my fear that carbon pricing would be taken as a substitute for or interfere with a more comprehensive suite of measures is still very much alive.  In this case, the choice of the cap and trade instrument is at least suboptimal and potentially catastrophic.  A fixation on cap and trade has so far evaded an engagement with critical thinking and the observations of many economists that suggests that carbon taxation is the more appropriate way to disincentivize the use of fossil fuels.

The political preference for cap and trade consists primarily in evading the use of the word “tax” which has been, more than usual, considered to be politically “toxic”.  It is my opinion as well as that of a number of noted economists in the informal “Club Wagner” that a substantial level of taxation, greater than the current US norm, is required to supply the services and infrastructure that citizens of developed societies demand and expect.  Given this reality, overcoming irrational tax avoidance by politicians is one of the first political orders of business.  Designing climate policy in an environment without a sober realization of the need for taxation is an extreme liability for designers of what is often a first-ever Comprehensive Climate and Energy Policy.

The five-part series did not take a position on the tax vs. cap and trade controversy but since then I have come to fear the distortions of priority and the formidable new cap and trade bureaucracy which will focus more on the complexity of the trading system rather than cutting emissions, so see myself as largely opposed to cap and trade.   If politicians must “save face” after having jumped on the cap and trade bandwagon, I would recommend a virtual tax with a narrow permit pricing band within permit prices would be contained.   These price controls on permit pricing will enable actual carbon-reducing investments to be faced by polluters without fear of the gyrations of permit pricing.

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