Assessing U.S. Climate Policy Options

Nov 15, 2007 | Raymond J. Kopp, William A. Pizer, Daniel Hall, Richard D. Morgenstern, Juha Siikamäki, Joseph E. Aldy, Ian W.H. Parry, Karen L. Palmer, Dallas Burtraw, Mun Ho, Evan M Herrnstadt, Joseph Maher

Executive Summary

Climate change is a century-scale, global challenge that will require a global response. A global response, however, emerges from national policies in leading countries. In the United States, there is a growing debate about federal legislation that would begin to tackle the problem without doing serious harm to the economy or unfairly burdening particular regions, industries, and consumers. Crafting such legislation requires thoughtful, objective input on critical design issues. To meet this need, RFF organized the U.S. Climate Policy Forum in May 2006. The Forum’s objective is to provide legislators with well-vetted, detailed policy options; important criteria for policy assessment; and well-articulated concerns (specifying the strengths and weaknesses of different approaches). The 15 issue briefs collected in this report were written by RFF researchers and informed by frank discussions with 23 companies drawn from across the broad spectrum of the U.S. economy. Collectively, they attempt to provide a foundation of common understanding from which effective federal policy might be crafted. The Forum has not sought to reach consensus or advocate a particular course of action.

Throughout the analyses and discussions that follow, a key theme has been the need for policies that combine a long-term strategy for managing environmental risk with the ability to adjust, over time, to new information and developments. Addressing climate change will also require significant resources, with perhaps 1 percent or more of annual global output devoted to stabilizing atmospheric concentrations of greenhouse gases (GHGs).

These two observations motivate current interest in policies that—by placing a rising price on GHG emissions—attach a tangible market value to avoiding or reducing those emissions. Reliance on a pricing mechanism as the core element of domestic climate policy promises lower overall costs to the economy because it creates incentives to exploit the cheapest emissions-reduction options wherever they exist. Given that considerable resources will be required to address climate risks even with efficient policies, the arguments for avoiding strategies that add to cost by unnecessarily restricting flexibility are compelling. Reliance on a pricing mechanism also provides flexibility over time because the aggressiveness of the policy can be adjusted relatively easily in the future by changing a primary parameter: the emissions price.

In some areas—particularly in the electricity and transportation sectors—additional policies are likely to be implemented to promote lower-carbon technologies. Broader energy policy decisions—particularly those that affect natural gas supply, nuclear waste, the siting of renewable energy projects, electricity grid infrastructure, and energy efficiency— will also have important consequences for efforts to reduce GHG emissions. These policies can act as complements to a pricing policy, possibly reducing the cost of achieving a particular emissions goal. However, they can also work against an otherwise efficient pricing policy—raising costs at best and creating conflicting incentives at worst.

The 15 issue briefs that comprise this report aim to elucidate the important questions that confront legislators and regulators as they seek to develop effective policy responses to address climate change. Their key themes can be framed as a series of questions, which are summarized below. Of these questions, the first five concern the core design of an emissions pricing mechanism, while the last three explore the rationale for additional policies to address specific technology opportunities (and often unique features) in key sectors:

  • What is an appropriate, overall GHG emissions objective for the United States at this time? While a logical starting point for answering this question involves weighing the executive summary 5 Assessing U.S. Climate Policy options global cost and benefit of stabilizing atmospheric GHG concentrations at different levels, efforts to define a goal for domestic policy must also confront capital, technological, and institutional constraints, along with the United States’ ability to engage, coordinate with, and motivate other major economies and emitting nations.
  • What sectors of the economy should be covered by a single emissions pricing policy and where in the supply chain should energy-related carbon emissions be regulated?
  • How much emphasis should be placed on providing certainty about future GHG emissions versus providing certainty about the trajectory of future GHG prices?
  • Given that the impacts of a federal GHG pricing policy are likely to vary considerably across regions, industries, and consumers, how should the distributional consequences of such a policy be addressed? Specifically, how should revenues (in a tax system) or the asset value represented by emissions allowances (in a cap-and-trade program) be distributed back to society?
  • How will the policy address international competitiveness concerns?
  • To what extent should a domestic climate policy create additional requirements and/or incentives (beyond the GHG price signal) for accelerated technology development and deployment?
  • What role do additional policies in the electricity sector—including performance standards, renewable energy portfolio standards, energy efficiency programs, and incentives for carbon dioxide (CO2) capture and storage—play alongside a CO2 pricing policy? How can emissions allowances or tax revenues be allocated in an equitable fashion given the varied forms of regulation and patterns of fuel use that characterize the electricity sector in different regions of the country?
  • Given that significantly reducing the GHG contribution from the transportation sector will require much higher emissions prices and longer lead times than achieving similar reductions from other sectors, what is the role for vehicle fuel-economy standards, renewable or low-carbon fuel requirements, and other technology-forcing policies—either alongside or in place of a single GHG-price policy? How might these policies be designed in more or less cost-effective ways?

These questions can provide a framework for devising a climate policy from scratch, or they can help to unpack and illuminate the core elements of existing proposals. Specifically, they can help policymakers and stakeholders understand how and whether a given proposal covers key bases, how it might be improved, and whether its various elements fit together in a sensible way. As efforts to reach consensus on a federal climate policy intensify, this kind of critical thinking by all parties to the debate, including the broader public, is increasingly important.