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Economic Scene

U.S. Leaves the Markets Out in the Fight Against Carbon Emissions

A coal-fired power plant in Newburg, Md.Credit...Mark Wilson/Getty Images

In 1990, by an overwhelming majority, Congress amended the Clean Air Act to establish a market for electric utilities to trade the right to emit sulfur dioxide, one of the main contributors to acid rain.

The law was based on a simple economic insight. If utilities facing high costs to cut emissions could, instead, buy allowances to pollute from those who could cut emissions for less, reducing overall pollution would be much cheaper. The idea had been successfully used before, during the Reagan administration, to reduce lead in gasoline.

It worked again. By 1996, sulfur dioxide emissions had declined by a fifth. A study published a few years later concluded that trading of pollution permits cut the cost almost by half, saving utilities and their customers billions of dollars.

Here’s the not-so-funny punch line: A decade and a half later, when President Obama proposed using “cap and trade” to cut emissions of greenhouse gases — the biggest environmental threat of our time — lawmakers looked back upon this unquestionable success and said “no.”

Members of Congress have changed, of course. Many Republicans who say that climate change is a myth or believe that the Obama administration is engaged in an unnecessary “war on coal” may have been hoping to block any environmental program. What they achieved, however, was to direct the nation’s efforts to combat climate change in a much more expensive direction.

“It is a mystery,” said Gilbert E. Metcalf, an economist at Tufts University specializing in energy and the environment, “why the Republican Party drives environmental policy away from using Adam Smith’s invisible hand.”

There is plenty of evidence of the high cost of regulation. Sebastian Rausch, from the Center for Economic Research at ETH University in Zurich, and Valerie J. Karplus from the Massachusetts Institute of Technology have modeled how a cap-and-trade policy would look compared to a variety of regulatory options — including a federal renewable portfolio standard, a clean energy standard, fuel economy standards and the like.

A standards-based policy, which is what we have now, is generally much more inefficient, delivering only one-fourth the emissions reductions of cap and trade for the same cost.

“The politics are making the administration do things in a much more expensive way,” said Michael J. Graetz of Columbia Law School, “than if the Congress had acted to do something about climate change.”

Other research points in the same direction. My column last week highlighted an assessment of the federal weatherization program by three top environmental economists. The findings, though heavily criticized by the Energy Department, were nonetheless discouraging. Residential weatherization reduced carbon emissions at a cost of $329 per ton, about 10 times as much as the Obama administration’s estimate of the damage that carbon in the atmosphere imposes on society.

By contrast, price-based tools — emissions permits traded on open markets or taxes that provide polluters an incentive to cut emissions — are efficient because they spread the cost of abatement throughout the entire economy.

As Robert N. Stavins, who heads the Harvard Environmental Economics Program, points out, using regulatory standards to limit greenhouse gas emissions from many millions of households, factories, farms, cars, trucks — all of which face very different costs of abatement — would be an implausibly complex task.

“The only way to do this is to send information through markets,” Professor Stavins said. An economywide carbon price, he argues — as does much of the economics profession, including many Republicans — would give everybody the incentive to reduce emissions at the lowest possible cost.

But little progress has been made. While carbon is often implicitly priced via excise taxes and other taxes on energy, the price tag is almost always too low to encourage substantial reductions in CO2 emissions.

Economists at the Organization for Economic Cooperation and Development estimated that the effective tax on carbon among the world’s 41 biggest polluting nations, which account for some 84 percent of global carbon emissions from energy, amounted to about $16.60 per metric ton of CO2, on average. That’s about $20 less than the estimate of carbon’s social costs.

China, the United States, Russia and India, which generate more than half of the world’s greenhouse gas emissions, price CO2 at less than $5.50 a metric ton. In Russia, the world’s third-largest emitter, the implicit tax on carbon from energy use is roughly zero.

What’s worse, subsidies to fossil fuels around the world reach into the hundreds of billions of dollars a year, putting a thumb on the scale in the wrong direction. Taxes on coal — the most polluting fuel — are often zero. Across the 41 countries evaluated by the organization it was taxed, on average, at $1.75 per metric ton of CO2.

“The overall landscape of energy taxation in most countries does not correspond well with the features commonly associated with effective environmental taxation,” the organization’s report concluded.

Can devastating climate change be averted without properly pricing carbon? Probably not.

To be sure, prices cannot do the job alone. The world also needs an intense, concerted investment effort to develop new energy technologies. But it also needs to put in place a powerful incentive to move away from fossil fuels that avoids being so expensive that it is politically untenable.

Unfortunately, some influential people are pushing the wrong way. Two weeks ago, Pope Francis made a case for aggressive action against climate change, but then rejected the use of markets to help do the job.

Trading carbon permits “can lead to a new form of speculation, which would not help reduce the emission of polluting gases worldwide,” he wrote. “It may simply become a ploy, which permits maintaining the excessive consumption of some countries and sectors.”

Mr. Metcalf of Tufts worries that the pope’s views could complicate the effort to forge a worldwide climate agreement in Paris in December. “What we don’t want is the Paris agreement to try to shut down markets,” he told me. “There’s a lot of pressure to inject some of the language about their negative aspects.”

Still, for all the skepticism from many quarters, the evidence that prices can do the job better than anything else is starting to sink in. The World Bank tallied eight new carbon markets that opened their doors in 2013. China is experimenting with seven carbon market pilot programs and is expected to start a nationwide trading program next year. Mexico and France introduced new carbon taxes last year. Mexico cut its oil subsidies.

President Obama’s clean power plan might lead to more carbon pricing, encouraging states to reduce their emissions by joining regional carbon exchanges.

Even Republicans might be brought on board. Professor Graetz at Columbia argues there is a good case for a carbon tax as part of a broad fiscal overhaul, using the revenue to offset cuts in payroll taxes.

Taxing carbon, a “bad,” to reduce taxes on wages, a “good,” could improve economic efficiency. And it could disentangle the debate over climate change from the perennial ideological battle over the size of government.

In the end, opposition to effective climate change policies will not stop the fight against climate change. But it can, unfortunately, prevent the fight from being done in the smartest possible way.

A correction was made on 
July 2, 2015

A chart on Wednesday with the Economic Scene column, about carbon emissions, was published in error in some editions. The chart was about Puerto Rico’s debt, the subject of another article in Business Day. A chart about carbon emissions that should have appeared with the Economic Scene column was omitted; it can be found at nytimes.com/business.

How we handle corrections

Email: eporter@nytimes.com; Twitter: @portereduardo

A version of this article appears in print on  , Section B, Page 1 of the New York edition with the headline: Invisible Hand Is Kept Off Carbon. Order Reprints | Today’s Paper | Subscribe

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