by Robert Stavins, via An Economic View Of The Environment

The recent demise of serious political consideration of an economy-wide U.S. CO₂ cap-and-trade system and the even more recent resurgence in interest among policy wonks in a U.S. carbon tax should prompt reflection on where we’ve been, where we are, and where we may be going.

Lessons

Almost fifteen years ago, in an article that appeared in 1998 in the Journal of Economic Perspectives, “What Can We Learn from the Grand Policy Experiment?  Lessons from SO₂ Allowance Trading,” I examined the implications of what was then the very new emissions trading program set up by the Clean Air Act Amendments of 1990 to cut acid rain by half over the succeeding decade.  In that article, I attempted to offer some guidance regarding the conditions under which cap-and-trade (then known as “tradable permits”) was likely to work well, or not so well.  Here’s a brief summary of what I wrote at the time:

(1)  SO₂ trading was a case where the cost of abating pollution differed widely among sources, and where a market-based system was therefore likely to have greater gains, relative to conventional, command-and-control regulations (Newell and Stavins 2003). It was clear early on that SO₂ abatement cost heterogeneity was great, because of differences in ages of plants and their proximity to sources of low-sulfur coal. But where abatement costs are more uniform across sources, the political costs of enacting an allowance trading approach are less likely to be justifiable.

(2)  The greater the degree to which pollutants mix in the receiving airshed or watershed, the more attractive a cap-and-trade (or emission tax) system will be, relative to a conventional uniform standard. This is because taxes or cap-and-trade can – in principle – lead to localized “hot spots” with relatively high levels of ambient pollution. Some states (in particular, New York) tried unsuccessfully to erect barriers to trades they thought might increase deposition within their borders.  This is a significant distributional issue.  It can also be an efficiency issue if damages are nonlinearly related to pollutant concentrations.

(3)  The efficiency of a cap-and-trade system will depend on the pattern of costs and benefits. If uncertainty about marginal abatement costs is significant, and if marginal abatement costs are quite flat and marginal benefits of abatement fall relatively quickly, then a quantity instrument, such as cap-and-trade, will be more efficient than a price instrument, such as an emission tax (Weitzman 1974).  With a stock pollutant (such as CO₂), this argument favors a price instrument (Newell and Pizer 2003).  However, when there is also uncertainty about marginal benefits, and marginal benefits are positively correlated with marginal costs (which, it turns out, is a relatively common occurrence for a variety of pollution problems), then there is an additional argument in favor of the relative efficiency of quantity instruments (Stavins 1996).

(4)  Cap-and-trade will work best when transaction costs are low (Stavins 1995), and the S0₂ experiment showed that if properly designed, private markets will tend to render transaction costs minimal.

5)  Considerations of political feasibility point to the wisdom of proposing trading instruments when they can be used to facilitate emissions reductions, as was done with SO₂ allowances and lead rights trading, less so for the purpose of reallocating existing emissions abatement responsibility (Revesz and Stavins 2007).

(6)  National policy instruments that appear impeccable from the vantage point of Cambridge, Massachusetts, Berkeley, California, or Madison, Wisconsin, but consistently prove infeasible in Washington, D.C., can hardly be considered “optimal.”

Implications for CO₂ Policy

In the same article, I noted that many of these issues could be illuminated by considering a concrete example:  the “current interest” in applying cap-and-trade to the task of cutting CO₂ emissions to reduce the risk of global climate change.  Some of the points I made in this regard in my 1998 article were:

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by Michael Conathan

Hurricane Sandy’s terrible toll in lost lives and decimated communities is still being measured. But as we start to sort out the pieces, it’s also worth noting that the storm sent shockwaves through the mid-Atlantic region’s fishing industry. Harbors and infrastructure were pummeled and in some cases destroyed along the New York and New Jersey coastlines, and the Garden State Seafood Association has already asked Gov. Chris Christie (R-NJ) to formally request a federal fisheries disaster declaration.

In the aftermath of the storm, the link between our changing climate and increasingly extreme weather is coming into greater focus and being called out by an increasingly large caucus. (For more on the link between climate and extreme weather events in North America, see this new column by the Center for American Progress.) New York Gov. Andrew Cuomo was among the first to link Sandy’s fury to the “reality” of climate change. Bloomberg Businessweek ran a cover story under the banner headline, “It’s Global Warming, Stupid,” which called out the increasing spate of corporate voices accounting for climate change in their business models. And the magazine’s namesake, New York Mayor Michael Bloomberg, cited climate change as the tipping point that led to his much-ballyhooed endorsement of President Barack Obama for reelection.

Just as Sandy’s fury cannot be separated from the effects of global climate change, fishermen have already noticed the effects of global climate change on their work. As our last wild capture industry, fishing businesses are arguably more reliant on natural forces than any other profession. It’s a centuries-old vocation, inherently dependent on knowledge passed down from one generation to the next, so when species distribution patterns evolve, even subtle change becomes readily apparent.

As ocean waters have warmed, fishermen have been finding some species that their grandfathers and even their fathers never dreamed of seeing. A 2009 report by the National Oceanic and Atmospheric Administration’s Northeast Fisheries Science Center found that about half of the species it studied were shifting their range further north or into deeper water in search of colder water, including Atlantic cod, haddock, and hake species—the keystones of New England’s iconic groundfishery. The commercial lobster fishery has all but disappeared in the waters of southern New England. And on the Pacific northwest, oyster farming is threatened by ocean acidification, a phenomenon caused by higher carbon concentrations in seawater.

In the Businessweek story, Eric Pooley, senior VP of the Environmental Defense Fund, adapted an old analogy first articulated by National Center for Atmospheric Research scientist Jerry Meehl. “We can’t say that steroids caused any one home run by Barry Bonds, but steroids sure helped him hit more and hit them farther,” Pooley said. “Now we have weather on steroids.”

A similar theory can be applied to climate change’s impact on fisheries. Not that ocean warming and acidification has led to fisheries on steroids—the general decline in world fish populations certainly counters that interpretation, and we should be careful not to blame climate for the decline in populations. Overfishing, coastal pollution, and habitat degradation are far and away the greater factors there. Rather, climate change is increasing the degree of difficulty fishermen and regulators face in rebuilding depleted fish stocks now that the overfishing has, at least in the United States, largely been ended. We can’t say climate change has prevented any one species from rebuilding, but climate change sure made it harder and take a lot longer.

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