by Robert Stavins
In just a few days, Sens. John Kerry, Lindsey Graham, and Joe Lieberman will release their much-anticipated proposal for comprehensive climate
and energy legislation—the best remaining shot at forging a
bipartisan consensus on this issue in 2010. Their proposal has many
strengths, but there’s an issue brewing that could undermine its
effectiveness and drive up its costs. I wrote about this in a Boston Globe op-ed on Earth Day, April 22.
Government officials from California, New England, New York, and
other northeastern states are vociferously lobbying in Washington to
retain their existing state and regional systems for reducing
greenhouse gas emissions, even after a new federal system comes into
force. That would be a mistake—and a potentially expensive one for
residents of those states, who could wind up subsidizing the rest of
the country. The Senate should do as the House did in its climate legislation: preempt state and regional climate policies. There’s no risk, because
if federal legislation is not enacted, preemption will not take effect.
The regional systems—including the Regional Greenhouse Gas Initiative (RGGI) in the Northeast and Assembly Bill 32 in
California—seek to limit carbon dioxide emissions from power plants
and other sources, mainly by making emissions more costly for firms and
individuals. These systems were explicitly developed because the
federal government was not moving fast enough.
But times have changed. Like the House climate legislation passed last June, the new Senate bill will feature at its heart an
economy-wide carbon-pricing scheme to reduce carbon dioxide emissions,
including a cap-and-trade system (under a different name) for the electricity and industrial sectors.
(In a departure from the House version, it may have a carbon fee for
transportation fuels.)
Though the Congress has a history of allowing states to act more
aggressively on environmental protection, this tradition makes no sense
when it comes to climate change policy. For other, localized
environmental problems, California or Massachusetts may wish to incur
the costs of achieving cleaner air or water within their borders than
required by a national threshold. But with climate change, it is
impossible for regions, states, or localities to achieve greater
protection for their jurisdictions through more ambitious actions.
This is because of the nature of the climate change problem.
Greenhouse gases, including carbon dioxide, uniformly mix in the
atmosphere—a unit of carbon dioxide emitted in California contributes
just as much to the problem as carbon dioxide emitted in Tennessee. The overall magnitude of damages—and their location—are
completely unaffected by the location of emissions. This means that
for any individual jurisdiction, the benefits of action will inevitably
be less than the costs. (This is the same reason why U.S. federal
action on climate change should occur at the same time as other countries take actions to reduce their emissions).
If federal climate policy comes into force, the more stringent
California policy will accomplish no additional reductions in
greenhouse gases, but simply increase the state’s costs and subsidize
other parts of the country. This is because under a nationwide
cap-and-trade system, any additional emission reductions achieved in
California will be offset by fewer reductions in other states.
A national cap-and-trade system—which is needed to address emissions meaningfully and
cost-effectively—will undo the effects of a more stringent cap within
any state or group of states. RGGI, which covers only electricity
generation and which will be less stringent than the federal policy,
will be irrelevant once the federal system comes into force.
In principle, a new federal policy could allow states to opt out if
they implement a program at least as stringent. But why should states
want to opt out? High-cost states will be better off joining the
national system to lower their costs. And states that can reduce
emissions more cheaply will be net sellers of federal allowances.
Is there any possible role for state and local policies? Yes.
Price signals provided by a national cap-and-trade system are necessary
to meaningfully address climate change at sensible cost, but such price
signals are not sufficient. Other market failures call for supplementary policies. Take, for example, the principal-agent problem through which despite higher energy prices, both landlords and tenants
lack incentives to make economically-efficient energy-conservation
investments, such as installing thermal insulation. This problem can
be handled by state and local authorities through
regionally-differentiated building codes and zoning.
But for the core of climate policy—which is carbon pricing—the
simplest, cleanest, and best way to avoid unnecessary costs and
unnecessary actions is for existing state systems to become part of the
federal system. Political leaders from across the country—including
the Northeast and California—would do well to follow the progressive
lead of Massachusetts Governor Deval Patrick and Secretary of Energy and Environmental Affairs Ian Bowles,
who have played key roles in the design and implementation of RGGI, and
yet have also publicly supported its preemption by a meaningful
national program.
California’s leaders and those in the Northeast may take great pride
in their state and regional climate policies, but if they accomplish
their frequently-stated goal—helping to bring about the enactment of
a meaningful national climate policy—they will better serve their
states and the country by declaring victory and getting out of the way.
Related Links:
What is the social cost of carbon?
Astute climate bill analysis from DJ Biz Markie
What to look for in the bipartisan climate and clean energy jobs bill