The 6 types of climate policies

People who have little knowledge of economics, politics, or climate science often try to lump climate policies into two buckets, “market solutions” and “non-market solutions”. This is a weird way to look at the issue in my opinion. First of all, we have to understand, what is a market? A market is where two or more people meet to exchange goods or services. Any time where two or more people choose to exchange items, a market has been made. If two children are trading Pokemon cards and they trade a Pikachu for a Charizard, they have just formed a market, and they have determined that the Pikachu card is equally valuable as the Charizard card.

That’s it. There’s nothing else to it. Every economics textbook regardless of its political bias will say this. It’s a really simply concept.

Market based solutions versus non-market based solutions is analogous to physics based engineering and non-physics based engineering. One of them works, one of them is stupid.

From this, we can quickly interpret what the term “carbon market” means. It is a very simple concept, it is the global market where people buy and sell fuel which emits CO2. Pretty simple.

So when we are looking at climate change solutions, at some point that person had to decide to purchase gasoline to fill their car, pay the bill for their natural gas, or pay the electric bill for the electricity which was generated with coal. Unless if that person was going to drill for the oil themselves and process it themselves, and use that oil to fill their car (a process which is going to be burdensome no matter what) they are going to participate in a market in order to get the gasoline to fill their car. At this point, we now know that EVERY effective policy to fight global warming is inherently a “market based” policy because EVERY policy to fight global warming is going to have to engage with how people are buying and selling (always and, never or) fossil fuels. This means the term market based is always accurate, and everyone who claims a policy is not market based is either lying, or the policy is snake oil.

There are only a few questions left when evaluating a policy:

  • Breadth (how much of the carbon market is covered)
  • Depth (how much will carbon emissions decline)
  • Equity (how will this policy impact inequality)

For me, depth is the most important part of the equation, since global warming is inherently inequitable. A policy which has more depth will be inherently more equitable than a policy which does less, no exception. Breadth and depth are deeply intertwined, if you exempt the major polluters in your area, your policy will not work, so you cannot have depth without breadth. Equity is of course going to naturally stem from policies with the most depth and breadth, and by doing this you will maximize equity in the long run. If you have a policy with a double dividend you can choose to use that money to improve equity in the short run as well.

There are really only a few policies we need to look at now, namely:

  • Carbon tax
  • Cap and Trade
  • Deadlines
  • Carbon offsets
  • Regulations
  • Subsidies

Carbon taxes are the best policy of them all, they have the most breadth, and depth. In terms of equity you can choose to use the double dividend from the carbon tax in any way you like, and one possible use is to improve equity through either government spending or slashing regressive taxes. A properly designed carbon tax will have few or no deductions, taxing every ton of carbon dioxide emitted equally. This is the most important feature of a carbon tax, since exemptions to proposed carbon taxes historically have gone to the biggest polluters, which reduces equity,  destroys breadth, and eliminates most if not all depth. A properly designed carbon tax however will have the widest possible breadth in a jurisdiction, ensuring depth is proportional to the tax rate, and the expenditure can be used to improve equity if that is what the people in a region choose to use the proceeds for. The experiences of Canada and Australia have proven that carbon taxes successfully reduce emissions, and create large double dividends which have helped governments cover necessary programs. They work in theory and they work in practice.

Cap and trade has some major problems. The rate plummets during recession, destroying depth, and this is why cap and trade historically has failed to create real reductions in carbon emissions. California has a cap and trade program, as does the European Union. These jurisdictions have not seen any significant difference in their emissions compared to places which don’t have cap and trade at the same, particularly after recessions. Cap and trade has been tried, and everywhere it has been attempted it has failed to reduce emissions. This policy has a major flaw with how the rate can drop suddenly, and because of this it usually does not reduce carbon emissions in the long run. It has nothing in common with carbon taxes, it does not generate a double dividend, and it is not a solution.

I love deadlines, I like the whooshing sound they make as they fly by.

Carbon offsets do not reduce carbon emissions. NPR Planet Money

Regulations can be effective at removing or eliminating specific sources of pollution, and have been in the past. The breadth tends to be very narrow and the depth in the target can be large. This is such a large topic that entire books can barely scratch the surface! In short, regulations typically work by reducing the supply of activities which generate carbon emissions, which makes them a supply side policy. There is nothing inherently wrong with supply side policies, and there are some very useful tools for environmental economics in this category which have been extremely successful, such as the Clean Water Act.

Subsidies can be effective at fighting climate change. Not all subsidies are created equal, since the cost effectiveness of subsidies regarding how much they impact climate change is highly varied. Reducing the price of electric vehicles (for example) does reduce demand on gasoline powered vehicles, and that does make an impact on global warming. Whether it is as cost effective as a carbon tax is something which is studied intensely. One good example of a subsidy which works is to subsidizing carbon sequestration technology which takes carbon out of the air which is a good technique to fight climate change.

All of these are ultimately market based solutions. Regulations are supply side economics, carbon taxes are using tax wedges, subsidies are using subsidy wedges, and cap and trade and carbon offsets generally do nothing in the long run. Deadlines are a joke.

It’s really just that simple.

Pretty much every policy you can name fits easily into one of these 6 categories. They all are either market based solutions, or they are not solutions. The policies I have lobbied for have been carbon taxes and subsidies, which are essentially the same type of policy, since tax wedges and subsidy wedges are essentially the same thing, just mirror images of each other.

Those are all 6 policies which are frequently talked about to fight climate change, how each of them work, and why I choose to fight for the policies which I work on.

Leave a Reply

Your email address will not be published. Required fields are marked *