You can’t achieve the three goals of climate policy at once

I’ve been thinking about carbon policy lately (shocker, I know), prompted by recent interactions with Monica Prasad, Peter Barnes, and our own Sean Casten. The more I think about it, the more one of the central tensions becomes clear to me.

Here are three goals for good climate legislation:

1. Simplicity: The bill should not be hundreds of pages long, packed with addenda, loopholes, provisos, and over-specifications. Complexity boxes out ordinary citizens and insures gaming, rent-seeking, and inefficiency.
2. Political buy-in: Reducing emissions the amount science indicates will likely occupy us for the next century. It is critically important that whatever system is put in place has broad and enduring political support.
3. Efficiency in reductions: The system should achieve maximum emission reductions for minimum cost (or maximum profit).

Here’s the problem: As I see it, you need 1 to get either 2 or 3. I see how you can get 1 and 2. And I see how you can get 1 and 3. But I don’t see how you get all three at once.

Let me unpack that a little, saving No. 1 for last.

Political buy-in:

Politics is complex, but I think the formula for political support is fairly simple: low (visible) costs + high (visible) benefits = political buy-in.

"Visible" because most people do not assess legislation empirically or even rationally. They respond based on low-information heuristics, preexisting biases, and emotional signals. If you threaten them with tangible, immediate costs and promise diffuse, long-term benefits, you’re going to have a rough time of it. Conversely, if you promise tangible, immediate benefits and impose diffuse, long-term costs, your chances for success rise sharply. As long as benefits remain tangible and the costs diffuse, you’ve got a perpetual political motion machine.

Efficiency in reduction:

Maximum efficiency requires two things. First, in a given sector, you set up a system that transfers capital directly from those over-emitting to those reducing emissions, in an agnostic fashion — that is, preferencing no particular set of technologies or practices. A ton of CO2 ought to be worth the same no matter how it is emitted or prevented, and there should be no net loss of capital in the sector (as there would be if the feds took the revenue and spent it on other things). Second, you remove existing regulatory barriers to that capital flow. As long as capital continues flowing from emitters to savers, you’ve got a perpetual economic motion machine.

Simplicity:

Simplicity means the system can be explained in an elevator. The further you get from simplicity, the more citizens tune out, the more politicians have license to propagandize, and the more business interests have room to game the system to their benefit.

The difficulty is, when you try to balance political buy-in and efficiency, you lose simplicity. You get Frankenstein bills like Lieberman-Warner.

L-W tries to get political buy-in by allocating some of the permits for free to polluters, on the theory that it keeps costs lower for ratepayers in coal states and vouchsafes the support of coal legislators. It also uses auction revenue as a slush fund, specifying recipients in great detail, up to 38 years out.

It tries to achieve efficiency by collecting auction revenue and plowing some if it back into favored technologies and industries.

In the end, it fails on all three counts — it is complex, politically fragile, and inefficient.

Now here’s the problem: I know of a climate policy proposal that achieves sublime simplicity and stable political buy-in. I know of another that achieves comparable simplicity and exquisite efficiency. (In my next post I’ll compare the two.) But I know of no proposal that achieves all three.