More on carbon trading
August is a time to catch up on reading. A good place to start is “National Climate Policy: Choosing the Right Architecture” [PDF], by Yale’s Robert Repetto, one of the country’s leading experts on environmental and resource economics. He argues for an upstream cap-and-trade system, and against a safety valve. Other views can be found here, here, and here. This is Repetto’s conclusion:
It is extremely important that the U.S. adopt a good policy architecture for greenhouse gas control. The costs of not doing so will be very large and will persist for decades, adding up to many trillions of dollars, because any policy architecture put in place will be very hard to change later.
An upstream cap-and-trade system along the lines outlined above is a good policy architecture. It will be effective, ensuring comprehensive control of carbon emissions. It will be cost-effective, allowing maximum flexibility for market responses and providing continuing incentives for development of alternative energy and energy efficiency technologies. It will be relatively easy to administer and enforce. It will provide ample opportunities to ensure fairness. It is politically viable. It links readily to domestic and international offset programs. It deals effectively with the problem of energy subsidies.
The advantages of an upstream system have been recognized by public and private policy research groups, including the Congressional Budget Office, Resources for the Future, and the Climate Policy Center.
The National Commission on Energy Policy has also endorsed a comprehensive nation-wide cap-and-trade program, implying an upstream approach. However, all these envisage price caps and other features that would make the architecture less effective and less cost-effective.
Illustrating the policy risks, few of the legislative proposals that have been introduced so far into the Congress have been based on a comprehensive upstream approach. The exception is the bill proposed by Senator Bingaman, which is based on an upstream cap-and-trade system. Also, the proposal sponsored by Senators McCain and Lieberman embodies a mixed cap-and-trade, located partly upstream and partly midstream. Much would be gained if supporters of mandatory emission limits, whether in government, the private sector, or in policy research bodies, could coalesce around an upstream cap-and-trade system similar to that outlined in this paper.