political polarization Archives - An Economic View of the Environment

Political polarization has reached alarming levels in the United States, with few moderates remaining in either the Republican or Democratic party who are capable of bridging the partisan divide on many, indeed most issues. Climate change – and more broadly, environment – is one such issue. I’m pleased to say that in the most recent webinar in our series, Conversations on Climate Change and Energy Policy, sponsored by the Harvard Project on Climate Agreements (HPCA), we featured a conversation with Congressman Garret Graves, a Republican from Louisiana’s 6^th Congressional district, who serves as the Ranking Member of the House Select Committee on the Climate Crisis. A video recording (and transcript) of the entire webinar is available here.

As many readers of this blog know, in this webinar series I feature leading authorities on climate change policy, whether from academia, the private sector, NGOs, or government. In this most recent Conversation, I was fortunate to engage with someone who has had solid and important experience in government.

While stating that climate change is a “huge problem” in need of innovative solutions, Congressman Graves makes the case for bridging political divides by aligning environmental sustainability with economic sustainability.

It is significant that Graves represents a district that has been and will be seriously affected by climate change. The region has lost more than 2,000 square miles of coastline to subsidence and rising sea levels, an area larger than the state of Rhode Island. “This is a huge personal issue for us…South Louisiana is a state that doesn’t have a large margin of error in regard to sea level rise.” he says.

Yet Congressman Graves also acknowledges that the political divides in Washington make it very difficult to agree on climate policies, noting that politics has become “a blood sport, with party first, and the country after that.” And he remarks that things don’t seem to be getting any better at the moment.

“I don’t see a trend in the right direction,” he says. “I think people are taking things that people used to be able to rally around, like kittens and dogs and apple pies, and found ways to make them partisan.”

Climate change is certainly one of those issues, the Congressman states, because the discussion has become more emotional than science- and data-driven. But he also notes that if politicians begin speaking about the issue with an eye toward the economic benefits of creating a more diverse energy portfolio, the issue may begin to gain traction among people in both political parties.

“If you bring up climate change and global warming, you’re going to have pretty different views among Democrats and Republicans. However, we have found that if you begin slicing it up into different components [you can achieve some consensus],” he says. “I can be in a room with some liberal folks and talk about the protection of communities and the resilience of ecosystems; it resonates, absolutely. And I can be in rooms with conservative folks talking about how we’ve funded these [climate-related] disasters over and over…and there are all sorts of studies…that have clearly shown how making investments in the front end in resilience or hazard mitigation more than pays for itself in the longer term.”

While Graves expresses his ambivalence toward instituting a national carbon pricing system, he speaks passionately in favor of investing in technological solutions that balance environmental with economic sustainability, including investments in wind, solar, and geothermal. The challenge, he says, is in understanding where the best returns-on-investments will be.

“We’ve got to do a better job now helping decision makers know where and how to most effectively use the tools available to where you get affordable energy, where you get resilience performance, and where you get lower emissions over the long run.”

Congressman Garret Graves also argues that small innovative businesses could play a significant role in helping mitigate the climate crisis in the coming years.

“That is exactly where the problem is going to be solved,” he remarks. “We are going to innovate our way out of this…[because] innovators have the opportunity to come in and disrupt.”

All of this and much more can be seen and heard in our full Conversation here. I hope you will check it out.

Previous episodes in this series – Conversations on Climate Change and Energy Policy – have featured Meghan O’Sullivan’s thoughts on Geopolitics and Upheaval in Oil Markets, Jake Werksman’s assessment of the European Union’s Green New Deal, Rachel Kyte’s examination of “Using the Pandemic Recovery to Spur the Clean Transition,” Joseph Stiglitz’s reflections on “Carbon Pricing, the COVID-19 Pandemic, and Green Economic Recovery,” Joe Aldy describing “Lessons from Experience for Greening an Economic Stimulus,” Jason Bordoff commenting on “Prospects for Energy and Climate Change Policy under the New U.S. Administration,” Ottmar Edenhofer talking about “The Future of European Climate Change Policy,” Nathaniel Keohane reflecting on “The Path Ahead for Climate Change Policy,” Valerie Karplus talking about “The Future of China’s National Carbon Market,” and Laurence Tubiana reflecting on “A European Perspective on COP26.”

Watch for an announcement about our next webinar. You will be able to register in advance for the event on the website of the Harvard Project on Climate Agreements.

Friday, October 21^st was a significant day for climate change policy worldwide and for the use of market-based approaches to environmental protection, but it went largely unnoticed across the country and around the world, outside, that is, of the State of California. On that day, the California Air Resources Board voted unanimously to adopt formally the nation’s most comprehensive cap-and-trade system, intended to provide financial incentives to firms to reduce the state’s greenhouse gas (GHG) emissions, notably carbon dioxide (CO₂) emissions, to their 1990 level by the year 2020, as part of the implementation of California’s Assembly Bill 32, the Global Warming Solutions Act of 2006. Compliance will begin in 2013, eventually covering 85% of the state’s emissions.

This policy for the world’s eighth-largest economy is more ambitious than the much heralded (and much derided) Federal policy proposal – H.R. 2454, the Waxman-Markey bill – that was passed by the U.S. House of Representatives in June of 2009, and then died in the U.S. Senate the following year. With a likely multi-year hiatus on significant climate policy action in Washington now in place, California’s system – which will probably link with similar cap-and-trade systems being developed in Ontario, Quebec, and possibly British Columbia – will itself become the focal point of what may evolve to be the “North American Climate Initiative.”

The Time is Ripe for Reflection

California’s formal adoption of its CO₂ cap-and-trade system is an important milestone on the multinational path to carbon pricing policies, and signals that the time is ripe to reflect on the promise and problems of pricing carbon, which is the title of a new paper that Joe Aldy and I have written for a special issue of the Journal of Environment and Development edited by Thomas Sterner and Maria Damon on “Experience with Environmental Taxation” (“The Promise and Problems of Pricing Carbon: Theory and Experience,” October 27, 2011). [For anyone who is not familiar with my co-author, let me state for the record that Joseph Aldy is an Assistant Professor of Public Policy at the Harvard Kennedy School, having come to Cambridge, Massachusetts, from Washington, D.C., where he served, most recently, during 2009 and 2010, as Special Assistant to the President for Energy and Environment. Before that, he was a Fellow at Resources for the Future, the Washington think tank.]

Why Price Carbon?

In a modern economy, nearly all aspects of economic activity affect greenhouse gas – in particular, CO₂ – emissions. Hence, for a climate change policy to be effective, it must affect decisions regarding these diverse activities. This can be done in one of three ways: mandating that businesses and individuals change their behavior; subsidizing businesses and individuals; or pricing the greenhouse gas externality.

As economists and virtually all other policy analysts now recognize, by internalizing the externalities associated with CO₂ emissions, carbon pricing can promote cost-effective abatement, deliver powerful innovation incentives, and – for that matter – ameliorate rather than exacerbate government fiscal problems. [See the concise and compelling argument made by Yale Professor William Nordhaus in his essay, “Energy: Friend or Enemy?” in The New York Review of Books, October 27, 2011.]

By pricing CO₂ emissions (or, more likely, by pricing the carbon content of the three fossil fuels – coal, petroleum, and natural gas), governments wisely defer to private firms and individuals to find and exploit the lowest cost ways to reduce emissions and invest in the development of new technologies, processes, and ideas that could further mitigate emissions.

Can Market-Based Instruments Really Work?

Market-based instruments have been used with considerable success in other environmental domains, as well as for pricing CO₂ emissions. The U.S. sulfur dioxide (SO₂) cap-and-trade program cut U.S. power plant SO₂ emissions more than 50 percent after 1990, and resulted in compliance costs one half of what they would have been under conventional regulatory mandates.

The success of the SO₂ allowance trading program motivated the design and implementation of the European Union’s Emission Trading Scheme (EU ETS), the world’s largest cap-and-trade program, focused on cutting CO₂ emissions from power plants and large manufacturing facilities throughout Europe. The U.S. lead phase-down of gasoline in the 1980s, by reducing the lead content per gallon of fuel, served as an early, effective example of a tradable performance standard. These and other positive experiences provide motivation for considering market-based instruments as potential approaches to mitigating GHG emissions.

What Policy Instruments Can be Used for Carbon Pricing?

In our paper, Joe Aldy and I critically examine the five generic policy instruments that could conceivably be employed by regional, national, or even sub-national governments for carbon pricing: carbon taxes, cap-and-trade, emission reduction credits, clean energy standards, and fossil fuel subsidy reduction. Having written about these approaches many times in previous essays at this blog, today I will simply direct the reader to those previous posts or, better yet, to the paper we’ve written for the Journal of Environment and Development.

Although it is natural to think and talk about carbon pricing using the future tense, a few carbon pricing regimes are already in place.

Regional, National, and Sub-National Experiences with Carbon Pricing

Explicit carbon pricing policy regimes currently in place include the European Union’s Emissions Trading Scheme (EU ETS); the Regional Greenhouse Gas Initiative in the northeast United States; New Zealand’s cap-and-trade system; the Kyoto Protocol’s Clean Development Mechanism; a number of northern European carbon tax policies; British Columbia’s carbon tax; and Alberta’s tradable carbon performance standard (similar to a clean energy standard). We describe and assess all of these in our paper.

Also, the Japanese Voluntary Emissions Trading System has operated since 2006 (Japan is considering a compulsory emissions trading system), and Norway operated its own emissions trading system for several years before joining the EU ETS in 2008. Legislation to establish cap-and-trade systems is under debate in Australia (combined with a carbon tax for an initial three-year period) and in the Canadian provinces of Ontario and Quebec. And, of course, California is now committed to launching its own GHG cap-and-trade system.

International Coordination Will Be Needed

Of course, climate change is truly a global commons problem: the location of greenhouse gas emissions has no effect on the global distribution of damages. Hence, free-riding problems plague unilateral and multilateral approaches, because mitigation costs are likely to exceed direct benefits for virtually all countries. Cost-effective international policies – insuring that countries get the most environmental benefit out of their mitigation investments – will help promote participation in an international climate policy regime.

In principle, internationally-employed market-based instruments can achieve overall cost effectiveness. Three basic routes stand out. First, countries could agree to apply the same tax on carbon (harmonized domestic taxes) or adopt a uniform international tax. Second, the international policy community could establish a system of international tradable permits, – effectively a nation-state level cap-and-trade program. In its simplest form, this represents the Kyoto Protocol’s Annex B emission targets and the Article 17 trading mechanism. Third and most likely, a more decentralized system of internationally-linked domestic cap-and-trade programs could ensure internationally cost-effective emission mitigation. We examine the merits and the problems associated with each of these means of international coordination in the paper.

What Lies in the Future?

In reality, political responses in most countries to proposals for market-based approaches to climate policy have been and will continue to be largely a function of issues and factors that transcend the scope of environmental and climate policy. Because a truly meaningful climate policy – whether market-based or conventional in design – will have significant impacts on economic activity in a wide variety of sectors and in every region of a country, proposals for these policies inevitably bring forth significant opposition, particularly during difficult economic times.

In the United States, political polarization – which began some four decades ago, and accelerated during the economic downturn – has decimated what had long been the key political constituency in the Congress for environmental action, namely, the middle, including both moderate Republicans and moderate Democrats. Whereas Congressional debates about environmental and energy policy had long featured regional politics, they are now fully and simply partisan. In this political maelstrom, the failure of cap-and-trade climate policy in the U.S. Senate in 2010 was essentially collateral damage in a much larger political war.

It is possible that better economic times will reduce the pace – if not the direction – of political polarization. It is also possible that the ongoing challenge of large budgetary deficits in many countries will increase the political feasibility of new sources of revenue. When and if this happens, consumption taxes (as opposed to traditional taxes on income and investment) could receive heightened attention, and primary among these might be energy taxes, which can be significant climate policy instruments, depending upon their design.

That said, it is probably too soon to predict what the future will hold for the use of market-based policy instruments for climate change. Perhaps the two decades we have experienced of relatively high receptivity in the United States, Europe, and other parts of the world to cap-and-trade and offset mechanisms will turn out to be no more than a relatively brief departure from a long-term trend of reliance on conventional means of regulation. It is also possible, however, that the recent tarnishing of cap-and-trade in U.S. political dialogue will itself turn out to be a temporary departure from a long-term trend of increasing reliance on market-based environmental policy instruments. It is much too soon to say.