Carbon policy is close to getting the macro right, but plenty of smaller decisions remain
My recent exchange with Gar has made it clear that there is a wide gulf between those details of carbon policy that are theoretically optimal and those which actually impact carbon reductions. Or, to be blunt, those that come up in our weekly staff meetings as actually affecting our decision to consider potential carbon reduction projects and those which simply elicit groans around the conference room of the “great intent, why did they screw up the execution?” variety.*
From our perspective, the good news is that our policy does finally appear to be moving not only toward putting a price on CO2 emissions, but getting the really important details (like auction vs. allocation) right. The bad news is that most of the other details are still wrong.
But those details are, well, complicated. And I don’t know how to describe them succinctly. So consider this post just a teaser, with more to follow. All of the political candidates are now making the right noises about auctioning (instead of allocating) pollution allowances. And while that’s far from settled, I’m not going to add anything to that discussion that hasn’t already been Gristed. However, there is still a wide gap between the other details of what is conventionally believed to be good GHG policy and those that will quickly and cheaply lower GHG emissions. Specifically:
- If “additionality” matters
- Whether we let markets or government set the price of GHG emissions
- Whether carbon contracts are denominated as single point “spot” or long term “strip” contracts
I will follow up with posts on each of these, but in the meantime suggest that there is a very simple way to evaluate any issue related to carbon policy, including the three noted above: Will they encourage investment in capital projects to reduce carbon emissions? I’ll close with a suggested approach that is way simpler and more effective than any of the options currently being considered.
More to come …
*Background detail: Our company has raised $1.5 billion to invest in projects that will satisfy our mission of profitable greenhouse gas reduction. Needless to say, this gives us a pretty strong incentive to think about how potential carbon reductions will impact our ability to invest that money. Thus the reference to the cheer/groan ratio around our staff meeting tables as an indicator of carbon policy effectiveness.