Tag Archives: cap and trade

Using tariffs to achieve valid goals

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President-elect Trump has called for imposing significant tariffs to “bring back jobs to America.” Unfortunately, this will be a fool’s errand. The Smoot-Hawley Tariffs in 1930 were imposed to “save” farming jobs, but instead exacerbated the Great Depression as shown in the chart above. There’s no valid reason to think tariffs will work any better this time around.

Yet, there are a set of valid reasons to impose tariffs, that in a roundabout way could lead to job growth in the U.S. These tariffs could be useful tools to pursue other policy goals by forcing other nations to play on a level field with U.S. industries. The tariffs could be adjusted downward as those countries adopt policies in line with those in the U.S. The World Trade Organization (WTO) allows these types of tariffs if properly designed. Just trying to save jobs doesn’t count, but achieving valid policy goals does.

The policy areas where using flexible tariffs could be fruitful include:

  • environmental and climate change
  • labor and employment
  • product standards

Tariffs to encourage nations to comply with global greenhouse gas reduction goals is one type of environmentally oriented use. Since U.S. companies comply with a wide range of environmental regulations, many of which are intended to preserve natural habitat that has worldwide value, asking other countries to do the same seems to be a valid request. Those nations can ignore those standards if they choose, but U.S. businesses should be allowed to compete as though imported products have incurred similar compliance costs.

Similarly, the U.S. has a wide range of labor employment, workplace and safety standards. Ensuring the well being of those outside of the U.S. if we’re going to buy those products is similarly valid.

Product standards is a third area. Many U.S. products last longer and perform better because they meet stricter standards. The increased longevity of automobiles is largely a byproduct of the increased stringency of emission standards that require engine performance meet those standards for at least 100,000 miles. Improved standards also can lead to reduced waste and increased productivity.

But to justify these tariffs will require that American corporations fully support the application of these standards within the U.S. Whether they can be persuaded to the advantages remains to be seen.

Ideas on adopting world carbon prices

Two news items showed up today on the idea of adopting a worldwide carbon price to reduce GHG emissions. The general idea is to use one of three approaches: 1) world cap & trade allocations (which has been the underlying notion in negotiations so far); 2) setting a specific carbon price or tax through treaty; or 3) using trade tariffs by a coalition of participating nations to incent non-participating ones to control their emissions. There is evidence that pricing carbon is effective in reducing emissions.

The U.S. Secretary of Energy called for a world carbon price implemented through one of the first two methods listed here.

The new American Economics Review has an article that shows that a trade tariff regime imposed by a coalition can induce other nations to control their emissions.

The Strategic Value of Carbon Tariffs
Christoph Böhringer, Jared C. Carbone and Thomas F. Rutherford
We ask whether the threat of carbon tariffs might lower the cost of reductions in world carbon emissions by inducing unregulated regions to adopt emission controls. We use a numerical model to generate payoffs of a game in which a coalition regulates emissions and chooses whether to employ carbon tariffs against unregulated regions. Unregulated regions respond by abating, retaliating, or ignoring the tariffs. In the Nash equilibrium, the use of tariffs is a credible and effective threat. It induces cooperation from noncoalition regions that lowers the cost of global abatement substantially relative to the case where the coalition acts alone. (JEL D58, F13, F18, H23, Q54, Q58)
Full-Text Access | Supplementary Materials

Cap & trade and market design

Bob Sussman at Brookings writes favorably about the resurrection of cap and trade for GHG regulation as a viable policy option with the Chinese planning to implement a program and the US EPA Clean Power Plan encouraging market trading mechanisms in two forms of compliance. Yet as I read this (and also think about proposals to increase water trading to solve California’s ongoing drought), I can see an important missing element in these discussions–how can these markets be designed to gain success?

In 1996, I wrote “Environmental Commodities Markets: ‘Messy’ Versus ‘Ideal’ Worlds” that explored the issues of market design and political realities. As I’ve written recently, we are not always good at fully compensating the losers in environmental policy making, and these groups tend to oppose policies that are beneficial for society as a result. And market incentive proponents seem to always propose some variation on one of two market designs: 1) everyone for themselves in searching for and settling transactions or 2) a giant periodic auction.

In reality, carefully designing market institutions that work for participants is key to the success of those markets. Daniel Bromley wrote about how just “declaring markets” in Russia and Eastern Europe did not instantly transform those economies, much to our chagrin. The RECLAIM emissions market has woefully underperformed because SCAQMD didn’t think through how transactions could be facilitated (and that failure prompted my article.) Frank Wolak and Jonathan Kolstad confirmed my own FERC testimony that the disfunction of the RECLAIM market led to higher electricity prices in the California crisis of 2000-01.

For a presentation a few years ago, I prepared this typology of market structure that looks at the search and match mechanisms and the price revelation and settlement mechanisms. This presentation focused on water transfer markets in California, but it’s also applicable to emission markets. Markets range from brokered/negotiated real estate to dealer/posted-price groceries. Even the New York Stock Exchange, which is a dealer/auction probably works differently than how most people think. There are differences in efficiency and ease of use, often trading off. As we move forward, we need more discussion about these nuts and bolts issues if we want truly successful outcomes.

Market Typologies

Reblog: Leaking Coal to Asia

Maximillian Auffhammer at UC’s Energy Institute @ Haas focuses on the issue of exporting coal from the Port of Oakland, but he turns to the issue I highlighted recently–the path to accomplishing environmental objectives should travel through compensating those who are worse off from such policies.

Source: Leaking Coal to Asia

Differing views of the future? High speed rail vs electric vehicles

As I was driving back from Los Angeles to Davis, I thought about how convenient it would be to turn on an auto pilot that allowed us to lock into the train of cars up Highway 99. The only reason I really had to pay attention was due to the varying speeds of the traffic. But that future may be nearer than we might think. Google’s self-driving car is getting most of the press, but in fact there are many similar technologies already on the road. In fact, there’s been some concern that drivers are already pushing the limits on current controls, but collision avoidance devices may soon be standard equipment.

Which brings us to the question: How will high speed rail fare in a world with driverless electric cars? The high speed rail travel forecast appears to assume a similar mix of gasoline-fueled automobiles; in fact, the word “electric” isn’t even in the report. On the other hand, studies show that EV market share probably needs to reach 45% by 2030 to achieve an 80% reduction in GHG emissions by 2050. And the Air Resources Board is considering regulations to implement “fast refueling / battery exchange” that would make the LA-SF trip even easier in an EV. Given the shorter life of automobiles, we might expect that almost all of the highway trips are with EVs by 2045.

We’re left with the question of what are the true emission reductions from HSR in such a world? Are we building a project that’s truly useful life is less than a decade?

Focus on uncertainty and risk in climate change

Unfortunately Alex Epstein, a blogger at Forbes, takes the wrong perspective–an underlying premise that we need absolute certainty that climate change is occurring before we should act. (And equally unfortunately, environmentalist argue that catastrophic climate change is occurring with absolute certainty to defend policy initiatives.)

The correct perspective is to ask “what are the relative risks and consequences posed by potential climate change?” Can we say with absolute certainty that GCC is not and will not occur? No, we have strong evidence that warming has occurred (although the rate can be disputed) and that various local climates have measurably changed (e.g., glaciers receding). As an analogy, would anyone argue that we shouldn’t take measures to reduce forest fire risks to communities even if fires aren’t burning nearby? We know that such fires are a strong risk, and we ask what actions are sufficient to reduce the risks while still achieving other objectives. We should be asking the same questions regarding responses to potential climate change.

Steve Moss and I wrote about this perspective in 1999 in Chapter 2 of this report. (Note that we did not coauthor the other chapters. Chapter 3 about the economic consequences of using carbon taxes to replace other tax revenues in particular is simply wrong.) Economists have evolved methodologies beyond the simple approach we presented there, such as robust decision making (RDM)real options analysis and “fat-tailed” uncertainty benefit-cost analysis. We face a great deal of uncertainty in many dimensions. We need to conduct more complete analyses that assess the potential costs and benefits under uncertainty–i.e., measure the risk of relative actions and non actions.

Simply having a battle over which scientists are correct is fruitless and distracts us from the real question at hand. Let’s agree that a large plurality of scientists have posed a plausible case for human-induced climate change, even if there are doubts about the potential magnitude and consequences. Then we can move on to what are the range of potential consequences and the justification for various responses.