Green Economics: Confronting the Ecological Crisis by Hahnel Robin

Author:Hahnel, Robin
Language: eng
Format: epub
ISBN: 9781317469360
Publisher: Taylor & Francis (CAM)

A Policy Primer

We begin by exploring the logic and implications of three different ways to reduce carbon dioxide emissions in a market economy. Suppose the U.S. government decides it wants to reduce national emissions by 10 percent next year. This could be done in three ways: (1) a regulation approach mandating a 10 percent reduction in emissions from every source; (2) a carbon tax set at a level that achieves a 10 percent overall reduction in emissions; (3) or a cap-and-trade program where the number of permits printed allows for only 90 percent of last year’s total emissions. Since all three policies reduce emissions by the same amount they are called equivalent, but as we will discover this does not mean their consequences are the same in other regards.1

Regulation: The regulatory approach would be to order every source inside the United States emitting carbon dioxide to reduce its own emissions by 10 percent. Many economists object to this approach for two sensible reasons: (1) This policy fails to minimize the cost to society of achieving a 10 percent reduction in overall emissions if there are differences in abatement costs among sources.2 For example, suppose one source emitting carbon dioxide can reduce emissions for half what it costs another source to reduce its emissions. It is inefficient to require the second source, for whom abatement costs are higher, to reduce emissions by the same percentage as the first source, for whom abatement costs are lower. Because there are significant differences in abatement costs among different sources, this criticism of the regulatory approach to reducing carbon dioxide emissions is well taken. (2) Ordering all sources to reduce emissions by 10 percent provides no incentive for any source to search for new technologies that could reduce its emissions by more than 10 percent—no matter how cheap it might be.

There is an additional problem with the regulatory approach that mainstream economists seldom point out, but that should be of concern to anyone concerned with equity. The regulatory approach does not require sources who, in our example, continue to emit 90 percent of the carbon dioxide they emitted the previous year to pay for the costs their emissions continue to impose on the rest of us. In other words, the regulatory approach does not implement the “polluter pays” principle, which many environmentalists and progressives champion with good reason. In effect, the regulatory approach draws an arbitrary line. It says that the last 10 percent of emissions from each source is so damaging that it must be outlawed completely, whereas the first 90 percent of emissions costs society nothing, and therefore sources should be free to emit 90 percent of their previous levels without payment or apology. But this is not consistent with the facts. The fact is that as long as sources wish to emit more carbon dioxide in the aggregate than is consistent with climate stability, whenever anyone emits any carbon dioxide it imposes a cost on society. In effect, the regulatory policy excuses 90 percent of socially costly emissions.

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