Economic Policies

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Economic Policies Global WarmingPOSC 370
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Cap Trade vs. the Carbon TaxBackground
FACT most economists predict a negative
hit from global warming of between 1 and 1.5
of U.S. GDP FACT global warming and oil
dependence issues are connected, and both are
geo-politically important! (1) U.S. economy
is vulnerable to shocks due to over-reliance
on oil, as we are now seeing!! (2)
Geopolitical issues military force, terrorism,
and MidEast political stability, are tied to
oil.
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Cap Trade vs. the Carbon TaxU.S. Voters are
conflicted
GOAL we want to reduce GHG emissions
by (a) lowering fossil fuel use example oil
responsible for 44 of CO2 in the
atmosphere (b) keeping emissions from entering
the atmosphere, relying on cleaner or carbon
capturing technology GOAL we want lower
energy prices!
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Cap Trade vs. the Carbon TaxThought
Experiment
What IF the U.S. had instituted cap trade
or the carbon tax before the latest oil price
surge?NOW what is happening
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Cap Trade vs. the Carbon TaxThought
Experiment
What IF the U.S. had instituted cap trade
or the carbon tax before the latest oil price
surge?what could have been
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The Big PictureA 3-point Strategy
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The Big Picture the first cog
Both cap and trade and carbon tax do
this STRATEGY make the PRICE of carbon equal
to not just its market value, but to real
social/envir. costs! deals w/ the common
problem of externalities
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The Big Picture the 2nd cog
CUT 14 billion now going to energy
subsidies! spend on basic research high
risk / high reward give prizes for
technology competition innovate! use
consumer/other tax credits to spur adoption
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The Big Picture the 3rd cog
engage the world in a new version of
Kyoto if needed, lead by unilateral GHG
U.S. reductions assist developing nations
with GHG technologies
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The Problem with Drilling
SUPPLY-side strategies like this will
discourage conservation and exacerbate climate
problems! U.S. still at mercy of intl oil
price shock as well as held hostage by
nations like IRAN VENEZUELA, who still would
be able to manipulate global oil price
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The Problem with Command/ControlGovernment
Policies
MANDATE-style strategies are inefficient ways
to change behavior require U.S. government to
pick winners and losers winners failed in
the past CAFE mandate on autos, light
trucks, etc renewable portfolio ( of total
energy) mandates specific energy industry
SUBSIDIES i.e. Ethanol!
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The Advantage of FreeMarket Strategies
CARBON TAX set the real social/envir. price
of carbon (20) and market decided how much to
emit CAP TRADE set the emissions goal to
hit a CO2 mitigation target, and let market set
the price Both strategies encourage
decentralized innovation (vs. command/control)
in way to best hit efficiency
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Cap Trade options
Give away permits FREE, or use an auction and
then use proceeds to fund progressive tax
rebates / research Carbon Tax options How high
do you set the price? Mankiw (fmr. Bush
advisor) 1 gas tax, phased in over
time Economists set a tax of 15-20 per ton of
CO2 emittedEffect electricity up 14, heating
up 10, gas up 9
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Cap Tradevs.a Carbon Tax...
ADVANTAGES and DISADVANTAGES Questions?
What do you think? Which is more politically
viable? Tie to reading on CAFE standard