The Next Step for US Climate Change Policy

Peter J. Wilcoxen and Warwick J. McKibbin
Warwick McKibbin
Warwick J. McKibbin Former expert - Economic Studies, Center on Regulation and Markets, Distinguished Professor of Economics & Public Policy - Crawford School of Public Policy, The Australian National University

June 26, 2001

During the recent European Summit, President Bush faced criticism from his European counterparts, from protestors and from much of the world media for his stance on rejecting the Kyoto Protocol. Why is there almost universal criticism despite the fact that the Bush Administration has done the world a favor by abandoning the Kyoto Protocol? The approach of fixed targets and timetables for emissions reduction at an unknown economic cost is an infeasible and undesirable approach to climate change. The Protocol never had any chance of ratification. The reason for the outcry is that rather than put in place a better alternative to Kyoto, the Bush Administration has so far left a vacuum in place of a climate change response. If the Administration moves quickly to put a more realistic policy on the table then the focus of the global reaction can be shifted from outrage to reasoned debate. Abandoning the Kyoto Protocol could be the most important and positive environmental legacy of the Bush Administration. The European Summit was the first opportunity to act, but it was lost. The next opportunity is at the COP6(II) negotiations to be held in Bonn in July.

Being realistic means discarding a couple of notions cherished by the ideologically pure at either end of the political spectrum. The first thing to go should be the claim that climate change is not a problem. It is quite clear that human activity is raising global concentrations of carbon dioxide. While climatologists disagree about how much warming will occur and when it will happen, virtually no one seriously suggests that we can emit as much carbon dioxide as we want into the atmosphere without any adverse consequences.

The second notion to go should be the one at the other end of the spectrum: the idea that climate change is such an overwhelming problem that it must be stopped no matter what the cost. Frankly, too little is known about the damages caused by climate change and the costs of reducing emissions to draw this conclusion. To pretend that climate policy doesn’t need to take costs into consideration is to guarantee that any climate change treaty will be rejected by the Senate as well as by many other governments.

A good way to think about the climate change problem is by analogy to driving in the rain. Both involve risk: rain increases the chance of being involved in a serious accident and carbon dioxide emissions increase the chance of a serious climate problem. The right response to risks like these is prudence: when it is raining, people drive more carefully and avoid unnecessary trips. Likewise, in the face of a potential climate problem, a sensible thing to do would be to slow the growth of carbon dioxide emissions. In neither case is it practical to escape the risk entirely. Few people would be in favor of a law prohibiting driving in the rain under any circumstances. Similarly, few people would be willing to accept sharp reductions in fossil fuel use today simply because it might cause a problem sometime in the future.

After tossing the ideological baggage overboard, what might prudent and realistic governments do about climate change? The answer is to look for a global warming policy with three key features. First, the policy should slow down carbon dioxide emissions where it is cost-effective to do so. Second, the policy should involve some mechanism for compensating those who will be hurt economically. Third, since climate change is a global problem, any solution will require a high degree of consensus both domestically and internationally. However, consensus is the operative word: it is not realistic to think that a rigid global regulatory regime for greenhouse policy can ever be implemented. Few countries want to relinquish sovereignty over setting their own polices especially when the policies in question can have large economic effects.

We have set out such a policy in a recent Brookings Policy Brief. Our proposed permit trading system is much like the one now used to control sulphur emissions. The main difference would be that the market would include a mechanism that would prevent the price of a permit from exceeding a specified threshold. The threshold price would be set for 10 years at a time. Thus emissions would be allowed to vary over time and not be fixed as under the Kyoto Protocol. There are mechanisms in the detailed proposal that allow medium term targets and a market to price these. The permits would be given freely to each citizen and to existing emitters to grandfather emissions. These would be tradable in an open market. Any additional permits that would be required to keep the price from exceeding the threshold would be sold by the government in that year. By raising the price of carbon, the net effect of the policy would be to discourage increases in emissions, and to encourage reductions where they are cost-effective, but without levying a sudden multi-billion dollar burden on fuel users. This would be a significant, realistic step toward controlling climate change.

A key feature of the policy is that it is flexible. The permit price could be adjusted as needed when better information becomes available on the seriousness of climate change and the cost of reducing emissions.

As a unilateral policy this is feasible. Success would encourage other countries to join a more coordinated system. A country could join a multilateral system by adopting the policy domestically and no international negotiations would be required. If the same permit price were chosen in all countries, the system would reach a very efficient and low cost outcome — very similar to that from global permit trading system but without the problems associated with international permit trading. Flexibility is crucial because it is clear from current negotiations that only a small subset of countries would agree to be initial participants in a climate change treaty.

It is time for the Bush Administration to offer realistic alternatives to the Kyoto Protocol. The debate must move away from ideological battles over impractical goals and un-implementable policies to a discussion of policies that could be concrete but cost-effective steps to slow the growth of carbon dioxide emissions.