Which plan on climate change?
By Gilbert E. Metcalf  |  January 28, 2007

IN HIS STATE of the Union address, President George Bush announced changes to federal fuel-efficiency standards for vehicles and called for a boost in ethanol production. Then again, he has opposed mandatory limits on carbon emissions in the past, and he said nothing in his speech to change that position. But like Canute trying to hold back the tide, this president's stance seems increasingly irrelevant given the wave of congressional climate plans under discussion.

Senators Joseph Lieberman and John McCain, for example, would sharply cut carbon emissions by 2050. Senators Barbara Boxer and Bernard Sanders have a competing plan that cuts carbon even more. Over in the House, Speaker Nancy Pelosi has announced a new Select Committee on Energy Independence and Global Warming headed by Representative Edward Markey. Undoubtedly this committee will offer its own plans for reducing carbon emissions. Policymakers are also beginning to look more closely at a carbon tax.

The action doesn't stop at the federal level. Governor Arnold Schwarzenegger has an ambitious initiative to roll back carbon emissions in California. And Governor Deval Patrick signed up Massachusetts to join the Regional Greenhouse Gas Initiative, or RGGI , a multistate compact to reduce carbon emissions from power plants.

How should we sort through all these initiatives? These are the factors we should consider in evaluating these and other plans to combat climate change.

Administrative complexity. Is the plan in question easy to administer, or will it require heroic oversight efforts? At the national level, the first place to look is to see if the plan is an upstream or a downstream plan. An upstream plan would focus on producers of carbon; coal mines, refineries, natural gas wells, and the firms that import fuel into our ports would have to submit permits for their carbon . A downstream plan would focus on the companies that use fossil fuels.

At the national level, an upstream plan is better. Production of carbon-based energy is concentrated, and relatively few producers would have to be part of the system -- especially if we exempt small producers. For example, a plan with an exemption for mines with annual production levels below 225,000 short tons would capture 95 percent of domestically produced coal but require less than 30 percent of mines to be part of the system. Downstream implementation in contrast would require thousands of firms to participate. When a system is too complex, policymakers are likely to throw up their hands and leave crucial sectors out.

Coverage. Does the plan cover a large fraction of carbon emissions? If not, it unfairly burdens covered sectors while reducing the program's effectiveness. Consider the regional initiative, which covers only power plants. This means we cover one-third of the carbon emissions in Massachusetts and exclude carbon emissions from home heating oil, transportation fuels, and natural gas used in homes and businesses.

Give aways. Governor Patrick has broken the mold by deciding to auction RGGI carbon permits. In contrast, the European Union's carbon trading program gave them away. Not only did electric utilities in Europe receive permits worth millions of euros, but they also raised electric rates, arguing that it was now more costly to produce electricity since doing so required them to use their carbon permits!

Watch the debate over carbon cap-and-trade systems carefully. The number of carbon permits that are issued could well be based on the existing emissions levels. This could help explain why Texas utility TXU plans to build 11 coal-fired plants adding 78 million tons of carbon dioxide to the atmosphere annually. Better to build the plants before a carbon cap is put in place, the thinking goes, so you can argue for grandfathering them under the new rules.

Revenue use. If governments impose a carbon tax or auction off permits under a cap-and-trade system, what will they do with the money? Patrick promises to auction the RGGI permits and use the $25 million in revenue for energy efficiency and renewable programs. I'm a big fan of renewables and energy efficiency, but is this the best use of these funds? Spending programs should compete with other revenue needs. Should carbon revenues go for new efficiency programs or, say, to provide property tax relief?

The public has long understood the need to reduce carbon emissions, and it is exciting to see politicians catching up. But the details matter, and it's vital to figure out which bills are worth supporting and which ones are just more hot air.

Gilbert E. Metcalf is a professor of economics at Tufts University.

This story ran on The Boston Globe on January 28, 2007.

© 2012 Department of Economics, Tufts University. All rights reserved.
Site designed and maintained by ITS.