Finally, a real world example of how benefit-cost analysis should be used in practice. Alberta takes the revenues that represent a portion of the society wide benefits and distributes those to the losers from the policy change. Economists have almost always ignored the problem of how to compensate losers in changes in social policy, and of course those who keep losing increasingly oppose any more policies. Instead of dreaming up ways to invest carbon market revenues in whiz bang solutions, we first need to focus on who’s being left behind so they are not resentful, and become a key political impediment to doing the right thing.
I follow Matthew Kahn’s, USC economics chair, blog posts. He expresses a libertarian view. He also writes about climate adaptation. He makes an important point that civilization is not static and we will be able to adapt the human ecology to a range of climate change. But his latest post on how climate change might affect marathon performances raised an important issue for me.
Kahn fails to acknowledge that adaptation to small, incremental climate change is not the concern. It’s the large, catastrophic changes with unknown (and unknowable) probability–deep uncertainty–that is of concern–collapsing ice sheets or ecosystems. He is not addressing the problem of what happens if the climate passes a tipping point. These types of articles and blog posts produced by Kahn and his colleagues trivialize the real risks and consequences, as though we’re just trying to adapt to a change in the weather while ignoring the potential systemic changes.
Bjorn Lomborg, a Danish political scientist who has pushed for focusing spending on other pressing world needs over reducing climate change risk, has criticized the extension of California’s cap and trade program in the LA Times. I found two serious flaws in Lomborg’s analysis that undermine his conclusions.
The study that Lomberg cites about the electricity market impacts has not been reproduced since such extensive “contract reshuffling” can’t occur in the Western Electricity Coordinating Council (WECC) region or in the CAISO market. That’s just a simplistic modeling exercise not tied to reality. The fact is that thousands of megawatts of coal plants are retiring across the WECC at least in part in response to the cap & trade and renewables portfolio standards (RPS) adopted by California.
And then Lomberg writes “A smarter approach to climate policy — and one befitting California’s role as one of the most innovative states in the country — would be to focus on making green energy cheaper. ” Has Lomberg noticed that new solar and wind installations are now cheaper than new fossil-fueled plants? Contracts are being signed for less than 5 cents per kilowatt-hour–PG&E’s average cost for existing generation is close to 9 cents.
It’s as though Lomberg hasn’t updated his understanding of the energy industry since 2009 when the Copenhagen climate accord was signed.
I believe that California’s passage of the extended cap and trade program was a generally good compromise. Most importantly, it decoupled the cap and trade market from separate legislation to regulate local emission impacts. As I wrote earlier, earlier proposals failed on this aspect.
Here’s the two best analyses I’ve seen so far, one legal and the other economic (by a former Michigan classmate), of the legislation.
The California State Supreme Court refused to rehear a state appellate court decision that upheld the validity of the cap and trade program (CATP) established in Assembly Bill 32 (2006). Those challenging the program claimed that (1) the program required firms to acquire allowances to operate and (2) that the auction receipts were budgeted into state programs like other tax revenues. However, the Court’s decision was a victory for those who believe that stronger property rights can lead to an improved environment.
The AB 32 CATP defined the property rights for individual firms and for the public in allowed GHG emissions into the atmosphere. CARB also allocated allowances for free to these firms and set rates of declining annual emission totals (with some upward adjustments to accommodate interstate and international competitiveness). This is akin to delineating the acreage that a property owner has, and then setting out a rate at which the property owner must dedicate a portion to public use, while still allowing the owner to continue to use that land. The U.S. Supreme Court just upheld the ability of state governments to regulate land use in this manner. The CATP essentially allows an owner to continue to use the land in same manner by acquiring usage rates from other owners who may find it more lucrative to sell their allowances rather than use them. Under AB 32, the state auctions some of those allowances to make for a liquid market, while other allowances are traded bilaterally amongst firms. The bottom line is that CATP established property rights in GHG emissions, just as California established water property rights in 1914.
If the CATP had been declared to be another tax, then any disbursement of government property that generated revenues, e.g., sale of excess office space or forest land, could also be considered a “tax” subject to a two-thirds vote approval by the State Legislature under the state constitution. I doubt that the plaintiffs in this case (led by the Chamber of Commerce) intended that sale of state property would require a two-thirds supermajority vote.
Severin Borenstein’s post raises an important issue that economists have ignore for too long. I posted the following comment there:
We gave politicians the tool of benefit-cost analysis which they have used to justify their policy objectives, but we completely failed to drive home the requirement that those parties who are on the losing end need to be compensated as well. I looked in my edition of Ned Gramlich’s book on Benefit-Cost Analysis (who taught my course), and the word “compensation” is not even in the index! Working on environmental regulations, I regularly see agency staff derive large positive ratios for the “general public” and then completely dismiss the concerns of particular groups that will be carrying all the burdens of delivering those benefits. If we’re going to teach benefit-cost analysis, we need to emphasize the “cost” side as much as the “benefit” that politicians love to extol.
Source: Creative Pie Slicing To Address Climate Policy Opposition |
California’s SB 775 would prohibit interaction with other states’ cap and trade programs. The best alternative to a federal program is a network of state markets.
“A cap-and-trade program in Virginia would be the third in the U.S., and buck direction from the White House to pull back on carbon regulation.”
Source: Virginia to establish cap-and-trade program in push to regulate carbon emissions | Utility Dive