Cheat Sheet for Climate Policy: Part I – What’s Essential for a Good Climate Bill

By and / 4.22.2010

How to tell a good climate bill from a bad one? This series will guide you through the main issues that are likely to arise in the coming weeks as the Senate takes on climate change. In this post, we identify the essential ideas that need to be enshrined in any climate bill. These are the provisions that no good climate policy can do without. (To read the other posts in the series, click here.)

With Sens. John Kerry (D-MA), Lindsey Graham (R-S.C.), and Joe Lieberman (I-CT) set to release their climate legislation next week, climate change seems poised to return to the top of the agenda in Washington. One lesson learned from the last big fight on the Hill — health care — is that things can get confusing and ugly quickly for non-expert observers when media attention shines a light on the congressional sausage factory. It becomes hard to keep issues and ideas straight, harder still to understand which are important, and the avalanche of political rhetoric can make it tempting to just tune out.

Our goal for this short series is to help you cut through the noise. These posts are intended to be a climate policy cheat sheet that will help you decode the discussions. The issues we’ll cover are not equally important — some, like a price on carbon, are integral to the success of any climate and energy policy. Others, like expanding oil drilling, are substantially less significant from a climate/emissions perspective, though perhaps more relevant from other angles (energy security, politics, etc.).

To make the relative importance of these issues clear, we’ve divided them into four categories of decreasing significance — the crucial, the merely important, the relatively minor and the distractions. We’ll summarize the issues in each of the four categories in different posts, starting today with the absolutely vital issues. These categories, we hope, will help you figure out whether something is relatively trivial, or if the farm is being given away in the course of the legislative debate.

We want to make it clear that these categories are based only on the policies’ impact on the key issue: reducing emissions as much as possible for the lowest cost. Other policy goals like economic equity, increased domestic energy production, energy security, etc. might all be important, but (at least in the context of climate policy debates) they’re subordinate to the primary aim of emissions reduction. We’ll mention these goals when one of the policies we discuss affects them, but they are not our focus. We also won’t spend much time discussing the relative levels of political support for different policies – we’ll leave the political commentary to others.

We’re sure that not all of you will agree with our judgment of the relative importance of these issues. That’s fine — encouraging and enabling quality debate on climate policy (look elsewhere for a science debate) is the entire point of the list.

Category I Issues: The Sine Qua Non of Climate Policy

#1: A price on carbon

As Nathan’s written here before, a climate policy without a price on carbon isn’t a serious one. Fossil fuels have deep roots in our economy, and only a carbon price can effectively reach all sources of greenhouse gas emissions. Just as important, no other policy can achieve reductions as efficiently as a carbon price can. The price mechanism forces firms to identify inefficiencies that generate excess greenhouse gas emissions, resulting in the cheapest emissions cuts.

A carbon price can come in one of two forms: either tax carbon emissions directly, or cap them and distribute a limited number of emissions allowances. While a carbon price is not the only policy that matters, it is the one that matters most by far. Anyone who tells you a carbon price is not the most important aspect of climate legislation, no matter how well-intentioned, is wrong.

No climate proposal from the Hill, and few media reports, however, will mention a carbon price. Instead, you’ll hear about cap-and-trade or, since that term has become politically unpalatable, any one of a number of rebrandings: “cap and dividend,” “creating a green economy,” “incentives-based mechanisms,” or something altogether new. If there’s one point worth making here, it’s this — none of these names matter very much, at least substantively. They serve a political purpose, not a policy purpose.

By far the most important question to ask is whether a rebranded proposal puts a price on carbon or not. Is there a cap on emissions and allowances or permits that emitters can trade? Is there a single price (whether it’s called a tax or not) on carbon emissions? If there is, the rest of the proposal is secondary (the details of which may or may not be important). If not, it’s not an honest climate policy.

#2: Breadth of coverage—how much carbon gets priced?

A related issue is how much of U.S. carbon emissions a price mechanism covers. A tax or cap-and-trade system could cover the entire economy, or just one or more sectors. Generally speaking, the broader the coverage of a single emissions market, the greater the possible emissions reductions and the lower the cost per unit of emissions reduction. In other words, broader markets are better. There is some indication that the Kerry-Graham-Lieberman proposal will have an energy-sector only cap, with other measures used to reduce emissions elsewhere. This is useful, but not as good as an economy-wide cap.

A useful rough rule of thumb is that electricity-sector emissions are a third of total U.S. emissions, transportation-sector emissions are another third, and everything else (industry, agriculture, etc.) comprises the remaining third. Since it’s hard to measure emissions from some sectors (like agriculture), a program that includes all U.S. emissions isn’t practical. But including electricity, transportation and industry is feasible and can cover approximately 85 percent of all U.S. greenhouse gas emissions. Policies that cover these sectors are better than those that don’t, and policies that have the same price mechanisms for all three are best of all.

#3: Emissions reduction targets — setting the cap

Setting a price on carbon is critical, but it’s only a means to an end. The goal, of course, is to reduce greenhouse gas (primarily CO2) emissions and limit environmental damages. Once you know that a proposal is a serious one (because it includes a price on carbon), your next question should be how much that policy will reduce emissions. In short, what’s the target?

For a cap-and-trade system, knowing the target is easy: it’s the cap. The concept is pretty simple: set a finite number of emissions allowances and distribute them to actors in the economy in the first year of the program. In each succeeding year, lower the number of allowances available until you reach a desired level of emissions.

For a carbon tax, figuring out emissions reductions is a little more complicated. A rising tax produces similar results as a tightening cap, but you trade emissions certainty (you don’t know exactly how much reduction you’ll get, unlike with cap-and-trade) for price certainty (emitters know exactly how much it will cost for them to emit greenhouse gases). With a cap, it’s the opposite – we know exactly how much we’ll get in reductions, but the market for allowances will determine the price.

More often than not, the first thing highlighted about a new climate proposal are the reduction targets, especially the near-term targets. From an environmental perspective, however, the more important issue is cumulative emissions, not emissions at any point in time. That’s because CO2 and other greenhouse gases are stock pollutants — they accumulate over time. It doesn’t necessarily matter if high or low volumes are released at certain times, just what those volumes add up to over the course of the regulation.

The current global benchmark, to which U.S. action will contribute, is to reach an emissions path that keeps average temperature rises to 2 degrees Celsius. For climate legislation, what matters is the general path of emissions, not necessarily the specific reductions in 2020 or 2040. As we’ll explain in our next post, specific market regulations will determine the exact emissions in any given year, but the market needs a path to follow, which is determined by the lowering cap (or increasing tax). There’s no way to guarantee some set percentage reductions in any year without a direct mandate, which would be extremely costly and restrictive. When you hear lawmakers railing about how 20 percent reductions from 2005 levels in 2020 are unreasonable but 14 percent cuts are attainable, know that they are having a political discussion, not a policy one.

In short, the exact percent emissions targets don’t matter too much year to year. Instead of worrying about whether the goal is to reduce greenhouse gas output by 17 percent or 20 percent in 2020, worry about the trajectory of emissions reduction over the lifetime of the regulation. The long-term outlook is much more important than the short-term benchmarks. Unfortunately, finding out what this long-term outlook is can be hard. It’s a failure of policy leaders and the media that short-term single-year targets are widely publicized while the effect of a given policy on the future stock of greenhouse gases in the atmosphere is rarely discussed.

The Bottom Line

These issues — a carbon price, its reach and the emissions target — are by far the most important parts of a climate proposal. The first questions you should ask of any such proposal are:

  1. Does it create a price on carbon?
  2. How much of U.S. emissions are covered by that price?
  3. What is the path of emissions reduction set by the cap?

The answers to these questions are the most critical to designing effective climate policy. Other things are important, too, as we’ll describe in our next post, but don’t let them distract you. If you care about climate change, keep your eyes on these three ideas.

Photo credit: / CC BY-NC-ND 2.0

Update: This item has been corrected.