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The U.S. Senate is girding for battle over greenhouse gas control bills, and legions of diplomats are preparing to assemble in Copenhagen to debate a new accord on climate change to replace the Kyoto Protocol. In the United States, the Environmental Protection Agency grinds relentlessly forward in its plans to
Download Audio as MP3 regulate greenhouse gases under the Clean Air Act. None of the options being considered resembles the simple carbon tax proposals deemed by economists to be the least expensive method of controlling greenhouse gas emissions. Why? What is causing reformers to tackle the most expensive environmental task ever attempted with policies known to cost far more than necessary? Will the result do much to help the environment?
Answering these and other questions and discussing their paper "Political Institutions and Greenhouse Gas Controls" will be Lee Lane, AEI resident fellow and codirector of AEI’s Geoengineering Project, and former Intergovernmental Panel on Climate Change reviewer W. David Montgomery, vice president of Charles River Associates. John Joseph Wallis, professor of economics at the University of Maryland, and international economics professor Peter S. Heller, a former deputy director of the Fiscal Affairs Department at the International Monetary Fund, will respond. Kevin A. Hassett, director of economic policy studies at AEI, will moderate.
|9:30||Presenters:||Lee Lane, AEI|
|W. David Montgomery, Charles River Associates|
|Discussants:||John Joseph Wallis, University of Maryland|
|Peter S. Heller, Johns Hopkins University|
|Moderator:||Kevin A. Hassett, AEI|
1150 Seventeenth Street, N.W.
Washington, DC 20036
American Enterprise Institute
1150 Seventeenth Street, N.W.
Washington, DC 20036
WASHINGTON, NOVEMBER 20, 2009--In the United States, Congress and the Environmental Protection Agency are currently moving forward with plans to regulate greenhouse gas (GHG) emissions. These plans appear likely to achieve less and cost more than could other policy options. Further, at the upcoming United Nations meetings in Copenhagen, governments will attempt to draft a new global climate policy regime. The U.N. proposals on the table also seem needlessly costly. At a November 20 event sponsored by the AEI Geoengineering Project, a group of economists and climate experts probed why such seemingly inferior approaches gain favor.
Kevin A. Hassett, director of economic policy studies at AEI, moderated the discussion. He observed that many economists favor carbon taxes because they can achieve more emission reductions per dollar of cost than can command-and-control options. Yet climate policy design has largely rejected carbon taxes. "Why is it, then," he asked the panel, "that we find ourselves in this situation?"
W. David Montgomery of Charles River Associates and AEI resident fellow Lee Lane addressed this issue in their paper "Political Institutions and Greenhouse Gas Controls." Montgomery noted the benefits of combining a stable, broad-based carbon tax with a long-term commitment to basic and applied energy research. Such a system could slow climate change at far lower costs than would current proposals which, he argued, add costs because they feature redundant measures, designed-in carbon price volatility, and unnecessary haste in setting emission reduction targets."Addressing the problem of climate change," Montgomery continued, "entails long-term gains and near-term costs." Enacting legislation with these costly features will require Congress to include many favors to special interests that will raise the legislation's costs and lower its net benefits.
Montgomery also noted that, globally, low emissions per dollar of GDP are strongly linked to market institutions. In China and other developing countries, distorted markets and a weak rule of law have boosted emission intensity. It is unclear that these structural problems can be surmounted without a more sweeping regime change. Hence, in both developed and developing nations, measures to control greenhouse gas emissions will accomplish less and cost more than the taxes modeled by the Intergovernmental Panel on Climate Change (IPCC).
Lee Lane, codirector of the AEI Geoengineering Project, said at the international level many barriers impede meaningful cooperation on climate issues. Transaction costs, for example the costs of making, monitoring, and enforcing an agreement, are a central problem. Climate accords entail high transaction costs for several reasons. For instance, to produce effective treaties, many parties must agree, and nations have differing priorities and preferences on climate. "Furthermore," he added, "no third party exists to enforce participation or compliance." Then too, the economies of countries like China are very opaque to outsiders; therefore, other nations cannot be sure China will fulfill its commitments. This uncertainty raises the costs of monitoring and enforcing an agreement. The relatively modest net benefits of GHG controls, he observed, have not been large enough to exceed the sum of the costs of climate change and the transaction costs of making and enforcing a global accord.
Lane also focused upon how the United States might fare from global climate agreements like those that will be considered at the upcoming Copenhagen meetings. He argued that the United States would be among the least likely countries to benefit because of its capacity to adapt to climate change, its weakened bargaining position due to domestic politics, and the barrage of demands for wealth transfers to developing nations. Lane then offered some predictions as to what a future GHG control regime will entail. The main features of such a regime will be patchy and ineffective global controls, an exchange of First World controls for Third World no-regrets measures, and tight controls only where environmental activism is strong and governments are responsive. U.S. controls will be needlessly costly. Lane called for a new agenda for climate policy analysis. Such an agenda, he said, should feature a greater focus on institutions and transaction costs. He went on to propose that climate policy should shift towards adaptation and research on geoengineering as possible responses to ineffective GHG control policies.
John Joseph Wallis, professor of economics at the University of Maryland, responded with thoughts about applying to climate policy insights derived from new institutional economics. He noted that the assumptions of neoclassical economics can produce distorted results. Thus, in many markets, transaction costs are both positive and substantial. When they are, institutions will affect outcomes. "Institutions," Wallis stated, "are the rules that govern both economic and political behavior." Such rules, he continued, do not automatically produce the best policy outcomes; governments have their own interests as well. These interests may clash with those of the governed. "In any time frame, governments must find it in their interests to implement policies," he observed, "and most governments do not feature democracies. One shared element will be whether the implementation of a policy generates fiscal returns or fiscal benefits to the government."
Dr. Peter S. Heller of the Paul H. Nitze School of Advanced International Studies at Johns Hopkins University offered additional comments. Heller pointed out that in Europe some integrated assessment models of climate have become more sophisticated. These models can more closely replicate institutional impacts on climate policies than do some of the models discussed in the Lane/Montgomery paper. Even so, these models still embody a somewhat narrow view of costs and benefits. They are also pessimistic about the chances of a "grand coalition" forming to produce an effective climate agreement. "Such a coalition," Heller said, "would not be stable, as there are too many incentives for free riders." Heller went on to suggest that resource-rich countries may well attempt to prevent a coalition from forming, as it would harm their interests by limiting the demand for fossil fuels. Heller continued by noting that greater emphasis on the political economy of adaptation will be crucial; it will give us a better understanding of the ways in which we might cope with climate change. In this and other regards, he suggested that application of institutional economics to climate policy should extend well beyond the Lane/Montgomery paper's focus on emission controls.
Kevin A. Hassett is a senior fellow and the director of economic policy studies at AEI. His research areas include the U.S. economy, tax policy, and the stock market. Previously, Mr. Hassett was a senior economist at the Board of Governors of the Federal Reserve System, a professor at Columbia University, and a policy consultant to the Treasury Department during the George H. W. Bush and Clinton administrations. He also served as a top economic adviser to the George W. Bush and John McCain presidential campaigns.
Peter S. Heller is senior adjunct professor of international economics at the Paul H. Nitze School of Advanced International Studies at the Johns Hopkins University, teaching courses on public finance, long-term fiscal challenges, international monetary theory, and international financial institutions. He also teaches regularly at the Graduate School of Governance of Maastricht University and the University of the Auvergne. Mr. Heller was a staff member of the International Monetary Fund from 1977 to 2006, serving as deputy director of the Fiscal Affairs Department from 1995 until he left in 2006. Previously, he was an assistant professor of economics at the University of Michigan, Ann Arbor (1971-77). He is the author of Who Will Pay? Coping with Aging Societies, Climate Change, and Other Long-Term Fiscal Challenges (International Monetary Fund, 2003) and has published in journals and lectured extensively on issues relating to fiscal policy, long-term fiscal budgetary challenges, aging populations, pension reform, public expenditure policy, adaptation to climate change, economic development and poverty reduction, health care in developing countries, privatization, and globalization. He has participated in the World Economic Forum at Davos (2004-2007) and the Global Economic Symposium (2008-2009).
Lee Lane, codirector of the AEI Geoengineering Project, is a resident fellow at AEI and a consultant to Charles River Associates. He formerly served as executive director of the Climate Policy Center, a Washington, D.C.-based policy research organization that analyzes climate policy and promotes economically efficient policy responses to the challenge of climate change. Mr. Lane is the author of Strategic Options for Bush Administration Climate Policy (AEI Press, 2006) and has contributed chapters to several books on climate change and energy policy. He was also the lead author of the 2006 National Aeronautic and Space Administration Ames workshop report on geoengineering. Mr. Lane has consulted with the American and Japanese governments on technology and energy policy and with private sector clients both in the United States and in Australia.
W. David Montgomery is vice president of Charles River Associates. He advises clients on how future climate policies and other environmental regulations could affect their asset value, investment decisions, and strategic direction. He was a principal lead author of the Intergovernmental Panel on Climate Change Second Assessment: Climate Change 1995 report and other publications on climate policy and has been a frequent witness at hearings on climate policy in the U.S. Congress. His current research deals with the economic impacts of climate policies, design of research and development policy, and how economic and political institutions affect the effectiveness of climate policies. Prior to his current position, Mr. Montgomery was assistant director of the U.S. Congressional Budget Office and deputy assistant secretary for policy in the U.S. Department of Energy. He received the Association of Environmental and Resource Economists' 2005 award for a "Publication of Enduring Quality" for his pioneering work on emission trading.
John Joseph Wallis is a professor of economics at the University of Maryland. His research focuses on the interaction of economic and political development, particularly in the case of the United States, and understanding why governments behave the way they do, with emphasis on the kinds of government policies that promote or retard economic development. Specific interests include state and local government finances, the New Deal, the 1830s, and state constitutions. He is coauthor of Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History (Cambridge University Press, 2009).