President Bush and other leaders of the Group of Eight pledged yesterday to try to reduce greenhouse gas emissions 50 percent by 2050. A key consideration in evaluating climate policies is the economic cost of cutting emissions. That cost could be reduced, perhaps by a lot, depending on two key questions about domestic climate policies: whether flexibility is provided when emissions are reduced and whether allowances to emit carbon are sold or given away.
The most common proposal for reducing carbon emissions involves a cap-and-trade program. Such programs provide flexibility regarding where and how firms reduce emissions. That's a good start, but research suggests that businesses also need flexibility about when they reduce emissions if they are to minimize economic costs. Changes in climate reflect the accumulation of greenhouse gases in the atmosphere over long periods; the impact depends little on year-to-year fluctuations in emissions. By contrast, the economic cost of reducing emissions can vary a lot from year to year -- because of factors such as weather, economic activity or the state of technology....MORE
HT: Professor Mankiw who says:
"In today's Washington Post, CBO director Peter Orszag says that if a cap-and-trade system for carbon is to be maximimally effective, the allowances should be sold rather than handed out, and fluctuations in the price of an allowance over time should be limited. In other words, the cap-and-trade system should be designed to resemble a carbon tax.
Makes sense, but it seems like lawmakers are going through a lot of needless work just to avoid the word "tax."'
