Exploring an effective, low-cost and fair U.S. climate policy
Stanford economics Professor Larry Goulder discusses the tradeoffs of federal climate policy options and finds ways to enhance both societal health and economic benefits.
New analysis by economist Larry Goulder finds a carbon tax is a more cost-effective option to achieve reduced emissions than conventional forms of regulation. (Image credit: pixabay)
As evidence of climate change’s damaging impacts continues to mount, the political debate over whether policies to mitigate carbon may be less costly than dealing with higher global temperatures is heating up. In his new book, Confronting the Climate Challenge: U.S. Policy Options, Larry Goulder, the Shuzo Nishihara Professor in Environmental and Resource Economics at Stanford, and co-author Marc Hafstead, director of the Carbon Pricing Initiative at Resources for the Future, examine a range of U.S. climate policy options with the goal of identifying options that are both low cost to the economy as a whole and fair, in that any economic sacrifices are distributed across industries and households.
Goulder discussed the book’s findings and potential impact.
Given the current political resistance to federal policy on climate change, what impact can a book have on U.S. climate policy?
The book can affect the politics by making clear the case for climate policy – providing good evidence that its benefits to the environment and human health significantly outweigh the sacrifices involved. The chances that the U.S. Congress will legislate any significant climate policy in the near term are quite low. But my collaborator, Marc Hafstead, and I hope that our book will have an impact down the road. Political balances do shift – and the situation might be different after the midterm election or after the 2020 presidential and congressional elections. We think that supporters of climate policy will have more influence in the future because of the information we present.
Many politicians have focused on a carbon tax – either recommending it or condemning it. What is your take?
The carbon tax emerges as a very attractive option, for two reasons. One is that a carbon tax is an exceptionally low-cost option compared with some other policies, provided that its revenues generated by the tax are returned to the private sector. A second is that the benefits – in terms of avoided climate damages – far outweigh any costs.
Could climate policies hurt U.S. energy industries?
This is a key issue we focus on in the book. It all depends on how you design the climate policy. Suppose the policy is a carbon tax. Under some designs, this policy would lower the profits of fossil fuel suppliers and other “carbon-intensive” industries. But we find that if the policy design involves using just a small fraction of the revenues to provide corporate income tax credits to firms in the most vulnerable industries, the potential adverse profit impacts are avoided.
What about the impact on low-income households?
There’s good news here as well. If just a small fraction of carbon tax revenues is used to provide rebates to disadvantaged households, the policy will avoid a negative impact on their standards of living. Indeed, some disadvantaged households would experience an increase in real income from a carbon tax – even before accounting for the environmental and health benefits. There’s real-world evidence that this works. British Columbia rebates about half of the revenues from a carbon tax to its residents, and the results are encouraging.
Some states are doing a lot to manage carbon, such as California’s cap-and-trade program. How would federal policy to regulate CO2 have impacts where state regulations might not?
The significant efforts at the state level are very encouraging – an antidote to the discouraging stalemate at the federal level. The states are addressing the climate change problem using a variety of policies, so the impact of federal policy can differ, depending on the state in question and which federal policy you choose. A nationwide clean energy standard – which requires electric utilities to purchase at least a certain fraction of their electricity from renewable sources such as wind-powered generators – would, in many ways, mirror existing standards already in 30 states. In states that don’t already have policies that promote low-carbon energy sources, a nationwide clean energy standard would boost renewables considerably.
How would a nationwide carbon tax affect industries in a way state policies couldn’t?
Our work and numerous other economic analyses suggest that a carbon tax would enable the economy to achieve emissions reductions at lower cost than conventional forms of regulation such as low-carbon fuel standards. These analyses suggest this tax is particularly good at exploiting the “low-hanging fruit,” that is, the lowest-cost opportunities for reducing emissions, including opportunities involving expansion of electricity generation from wind and solar. To the extent that a carbon tax replaces existing regulations, there can be considerable cost savings.
What was the most surprising thing you found after analyzing these different climate policies?
Based on earlier studies, we expected that for the economy as a whole, the benefits from several policies would exceed the costs. But we have been surprised to find that there are several ways that policies can be designed so that they not only have low overall costs but also avoid unfair distributions of these costs across industries and households. Under a range of policies, the United States can produce significant reductions of greenhouse gas emissions at low cost and at the same time avoid adverse impacts on profits in key industries as well as adverse impacts on real incomes of low-income households.
Goulder is also a faculty affiliate at the Stanford Woods Institute for the Environment, a senior fellow at the Precourt Institute for Energy and a senior fellow at the Stanford Institute for Economic Policy Research.