Too much of the debate on carbon-control policy starts from flawed assumptions. Take those assumptions away, and one quickly realizes that we have a lot of pretty good options.

Let’s parse the carbon policy argument, and think for a moment about how to best engender the most economically beneficial carbon reduction policy.

First, let’s strike any false assumptions from our logic:

  1. Let’s not assume that it costs money to reduce carbon emissions until proven otherwise.
  2. Let’s not presume that any of us know what the answer is.

Take these away, and you can pretty quickly get a good model. Picture, if you will, a 2×2 matrix of all the world’s policy options. On one axis we list things that reduce or increase carbon emissions. On the other, we list things that cause GDP to grow or shrink. The middle of the plot (0,0) is the status quo. No change in emissions, no change in the economy.

Clearly, we ought to preferentially deploy resources towards those options that win on both metrics. Equally clearly, we ought not to spend any time on options that lose on both metrics. And once we’ve picked up all the low-hanging fruit in that win/win box, we can start getting into really hard political debates about whether win/lose beats lose/win.

And yet … and yet.

We spend massive amounts of energy and money subsidizing a cost-plus regulatory model that encourages electric utilities to overproduce CO2 (lose/lose). More troubling, we start the debate where we ought to end it, quibbling over who should lose and who is more moral. “Environmentalists are too dumb to understand how the economy works!” “The business community is too short-sighted to consider the environmental consequences of their actions!” Stop it.

Let’s set up a carbon price (be it by tax or auction — this is simply a matter of politics, and while a tax may be more theoretically efficient, an auction is less prone to arbitrary changes in the face of shifting political winds). We currently emit about 1,300 lbs of CO2 for every kWh of power we generate. Calculate this average every year such that those on the wrong side of the line pay those on the good side. Do the same for heat and transportation fuel. Recalibrate every year so that you always get credit for beating the average. Don’t pick winners. Don’t pay solar more than wind just because it’s less cost effective. Don’t pay coal plants to do carbon sequestration because you think coal is the key to the future. Just set the price, get out of the way and let markets work.

They will.

What is troubling is that this isn’t even close to what we’re doing. Cap-and-trade models in RGGI and elsewhere are nice, but are bedeviled by the fact that the cap may well be too high (witness Kyoto — it is always politically tempting to set caps at easily obtainable goals that make for good PR but lousy policy). Cap-and-trade regimes also suffer by limiting participation only to a small sector of the economy (in the case of RGGI, generators over 25 MW). Having gotten the cap wrong and not allowed the right people to trade, there’s not much left. I will grant you that RGGI allows other avenues of participation through offsets, but why not let all good carbon reduction approaches in the front door?

More on this here (PDF).