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What would be an effective and fair U.S. climate change policy?

Feb 27 2018
Larry's portrait

As evidence of human-caused climate change and the associated environmental damages continues to mount, the political debate continues about whether the problem can be addressed in way that’s economically sensible and fair.  In their new book, “Confronting the Climate Challenge,” Larry Goulder and co-author Marc Hafstead examine a range of U.S. climate policy options with the goal of identifying policies  that are low cost to the economy as a whole as well as fair in the way that any economic sacrifices are distributed across industries and  households.  Goulder is the Shuzo Nishihara Professor in Environmental and Resource Economics at Stanford and a SIEPR Senior Fellow; Hafstead is Director of the Carbon Pricing Initiative at Resources for the Future and a former SIEPR postdoctoral scholar.

Here are Goulder’s responses to some questions about the book’s findings and its potential impact.  

Given the current political resistance to federal policy on climate change, what impact can a book on U.S. climate policy have?

The chances that the U.S. Congress will legislate a significant climate policy in the near term are quite low.  But my collaborator Marc Hafstead and I hope that our book will have an impact down the road by making clear the case for climate policy — providing good evidence that its benefits to the environment and human health significantly outweigh the sacrifices involved. Political balances do shift – and the situation might be different after the midterm election or after the 2020 presidential and Congressional elections.  We think that supporters of climate policy will have more influence in the future because of the information we present.

Many politicians have focused on a carbon tax – either recommending it or condemning it. What is your take?

The carbon tax emerges as a very attractive option, for two reasons. One is that a carbon tax is an exceptionally low-cost option compared with some other policy approaches, provided that the revenues it brings in are returned to the private sector. A second is that the benefits — in terms of avoided climate damages — far outweigh any costs.

Could climate policies hurt U.S. energy industries?

This is a key issue we focus on in the book. It all depends on how you design the climate policy.  Suppose the policy is a carbon tax. Under some designs this policy would lower the profits of fossil fuel suppliers and other “carbon-intensive” industries. But we find that if the policy design involves using just a small fraction of the revenues to provide corporate income tax credits to firms in the most vulnerable industries, the potential adverse profit impacts are avoided.

What about the impact on low-income households?

There’s good news here as well. If just a small fraction of carbon tax revenues is used to provide rebates to disadvantaged households, the policy will avoid a negative impact on their standards of living.  Indeed, some disadvantaged households would experience an increase in real income from a carbon tax — even before accounting for the environmental and health benefits. There’s real-world evidence that this works. British Columbia rebates about half of the revenues from a carbon tax to its residents, and the results are encouraging.

Some states are doing a lot to manage carbon, such as California’s cap-and-trade program. How would federal policy to regulate CO2 have impacts where state regulations might not?

The significant efforts at the state level are very encouraging – an antidote to the discouraging stalemate at the federal level. The states are addressing the climate change problem using a variety of policies, so the impact of federal policy can differ, depending on the state in question and which federal policy you choose. A nationwide clean energy standard – which requires electric utilities to purchase at least a certain fraction of their electricity from renewable sources such as wind-powered generators – would in many ways mirror existing standards already in 29 states. In states that don’t already have policies that promote low-carbon energy sources, a nationwide clean energy standard would boost renewables considerably. 

How would a nationwide carbon tax affect industries in a way state policies couldn’t?

Our work and numerous other economic analyses suggest that a carbon tax would enable the economy to achieve emissions reductions at lower cost than conventional forms of regulation such as low-carbon fuel standards. These analyses suggest this tax is particularly good at exploiting the “low-hanging fruit,” that is, the lowest-cost opportunities for reducing emissions, including opportunities involving expansion of electricity generation from wind and solar. States often rely on conventional forms of regulation that in several cases are more costly.  To the extent that a nationwide carbon tax replaces such state-level regulations, there can be considerable cost savings. 

What was the most surprising thing you found after analyzing these different climate policies?

Based on earlier studies, we expected that for the economy as a whole, the benefits from several of the options we consider would exceed the costs. But we have been surprised to find a number of specific policy designs that not only have low overall costs but also avoid unfair distributions of these costs across industries and households. Under these policy designs, the United States can produce significant reductions of greenhouse gas emissions at low cost and at the same time avoid adverse impacts on profits in key industries as well as adverse impacts on real incomes of low-income households.