Carbon pricing vs. regulation: An economist weighs in

Gernot Wagner

Ask any economist about the most efficient way to tackle climate change, and the response will be clear: put a price on carbon. Cap or tax carbon pollution, and then get out of the way. It’s the most effective policy. It’s cheap. It works.

Except for when politics gets in the way.

A price on carbon may be the obvious choice for policymakers in Beijing, Brussels and Sacramento. Yet, Washington is playing a different game.

It’s where more than three years of work on a common-sense, bipartisan energy-efficiency bill dies the Senate filibuster death because of election-year politics. And where a senator and likely presidential candidate denies climate science in the same news cycle that gave us two independent studies showing that the melting of the West Antarctic ice sheet is likely irreversible – and expected to flood large parts of his own state of Florida over the coming centuries.

When a price on carbon isn’t an option

All this political craziness limits the White House to pursue climate policy through executive action, largely via the Clean Air Act of 1970. One incarnation comes in form of long-overdue carbon pollution standards for new and existing power plants.

Are they any economist’s first choice for limiting carbon? No, but given that pricing carbon via a federal cap or tax isn’t on the table at the moment, the only relevant question now is whether carbon pollution standards are good in and of themselves. Yes, they clearly are.

Do benefits of environmental rules outweigh costs?

The Clean Air Act of 1970 and its 1990 Amendments consistently pass benefit-cost tests with flying colors.

Overall, average benefits exceed costs to the tune of 30 to 1. We can’t wish costs away, but investing $1 to get $30 makes sense in any book. (Amazingly, the latest study points to how the small costs themselves turn into direct economic benefits of well over $4,000 added to each affected child’s lifetime income due to cleaner air: less pollution; fewer sick days; more education; more income.)

These benefit-cost calculations don’t yet include carbon pollution standards, though we can already say one thing: The number crunchers at the Office of Management and Budget will make sure that benefits of any rule do, in fact, outweigh the costs.

Over the past decade, the average environmental rule enacted by two Administrations – George W. Bush and Barack Obama – has passed the benefit-cost test by more than 10 to 1. That ratio for the U.S. Environmental Protection Agency, by the way, is higher than any other government agency, including, for example, Homeland Security.

Of course, costs would be lower with a direct price on carbon. But the benefits of regulating carbon will be all the same. Each ton of carbon dioxide pollution causes at least about $40 of damages to health, ecosystems, and the economy. Overall, there are billions of tons of carbon pollution that can be removed at low, no, or even negative costs – well below the $40 or more in benefits.

Who pays? And with what consequences?

Pollution comes with a price. The only question is who pays, and with what consequences. Instead of pushing the costs onto all 300 million of us – all 7 billion, really – it’s clear that polluters can and should pay for the full costs they cause. Whether the policy of choice is carbon caps, taxes, or power plant carbon pollution standards, that principle is all the same.

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