cepr: A Green New Deal is Fiscally Responsible. Climate Inaction is Not [feedly]

A Green New Deal is Fiscally Responsible. Climate Inaction is Not
http://cepr.net/publications/op-eds-columns/a-green-new-deal-is-fiscally-responsible-climate-inaction-is-not

In the coming days, the Senate majority leader, Mitch McConnell, plans to hold a vote on the Green New Deal resolution recently introduced by congresswoman Alexandria Ocasio-Cortez (D-NY) and Senator Edward Markey (D-MA). Despite polls showing broad bipartisan support for a Green New Deal, McConnell hopes his ploy will divide Democrats and boost the GOP talking point that the plan is fiscally irresponsible.

While McConnell and other critics seem to think that they can defeat the Green New Deal by repeating a tired mantra – "we can't afford to do it" – the real question is: how can we afford not to? Without bold action to tackle climate change, toxic pollution and economic and racial inequity, our society will only see rising fiscal burdens. A Green New Deal would not only help us avoid mounting costs – it also would stimulate broad-based demand in the economy by investing in real drivers of economic prosperity: workers and communities. That's in stark contrast to the GOP's expensive recent policy priority – the nearly $2tn tax cuts of 2018 – which did little more than enrich stateless mega-corporations and the wealthiest investors.

A Green New Deal is first and foremost about justice – prioritizing working people, communities of color and others who bear the brunt of stagnant wages, polluted air and water, and climate impacts. It's about acting at the speed and scale that equity and science demand. But if opponents want to debate the plan's straight economic merits, Green New Deal backers should welcome the opportunity. The plan is also about fiscal foresight.

While some people talk about the costs of climate change as far-off hypotheticals, there's growing evidence that costs are already here. On 6 February, the National Oceanic and Atmospheric Administration and NASA released findings that climate change impacts in 2018 directly resulted in 247 deaths and $91bn in damages. The longer-term fiscal implications are also becoming clearer. In November, 13 US federal agencies reported that, under current emissions trajectories, the US economy would bear more than $500bn per year in costs due to labor and agricultural losses, sea level rise and extreme weather impacts by the end of the century. This annual half-trillion-dollar burden didn't account for many unpredictable second-order costs of climate change, like the implications of mass forced migrations driven by water scarcity and flooding. These are risks that the Pentagon has been highlighting for a decade.

A Green New Deal would help to seriously reduce climate pollution and cut these long-term liabilities, whether by supporting a transition to 100% clean energy, expanding access to clean public transportation, or spurring innovation in clean manufacturing. While some impacts of climate change are now inevitable, a Green New Deal also would help communities mitigate costly damage by investing in urban green spaces to prevent flooding, restoring wetlands to buffer hurricanes, protecting houses from forest fires, and shielding coastlines from sea level rise. In addition to supporting community resilience, this would reduce long-run costs for the federal government and for the states and municipalities that tend to shoulder the biggest burdens in emergencies.

Of course, a Green New Deal isn't just about managing risks – it's also about creating economic opportunities. The plan would create millions of jobs with family-sustaining wages for workers whose inflation-adjusted pay hasn't budged since the 1970s. Whether replacing lead pipes, weatherizing homes, manufacturing components for light rail, or rehabilitating damaged ecosystems, a Green New Deal would put money in the pockets of the workers who are most impacted by rising economic inequality. Given that low-income workers tend to spend more of their available money than the wealthy, this targeted effort to boost working class wages would strengthen growth, reduce the income gap, and ultimately improve the nation's economic fundamentals.

Even people who deny the evidence that inequality is slowing economic growth must admit that a Green New Deal would address other long-term liabilities. The plan would invest in the kinds of infrastructure upgrades that nearly everyone agrees are needed – not only to create good jobs, slash pollution and build community resilience, but also to support economic growth. Renewal of our energy, water and transportation infrastructure is long overdue – and today's low borrowing costs make the investment all the more prudent. Looking to the long-term, a Green New Deal also would spur innovation and growth in advanced manufacturing through policies like "Buy Clean" that direct tax dollars for public projects to the most efficient, least polluting forms of production.

Contrast these forward-looking investments with a spending deal that many opponents of a Green New Deal so ardently championed: the Republican tax cuts of 2018. While backers of the GOP tax package billed it as a vision of fiscal responsibility – a program that would "pay for itself" according to the treasury secretary, Steve Mnuchin – the nonpartisan Congressional Budget Office estimates the deal will now add $1.9tn to the national debt over a decade.

And it's not as if this money has gone toward solving real challenges. Much of the large sum has gone to share buybacks that serve one purpose: lining the pockets of the richest investors. Recent economic analysis show that the short-term stimulus effect of the tax cuts has now been mostly exhausted.

Some in the GOP seem to think that fiscal responsibility means spending billions to prop up the financial interests of billionaires and corporate polluters. A Green New Deal offers a better definition: laying the groundwork for a more vibrant and equitable economy that sustains the communities and physical resources on which our society is built.

Mitch McConnell and fossil fuel lobbyists are hiding behind flimsy talking points to justify the costly path of continued inaction on climate and inequality. Backers of a Green New Deal should stand up to this hypocrisy and reclaim the mantle of real social and economic responsibility.

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Justin Talbot-Zorn is the senior advisor for policy and strategy at the Center for Economic and Policy Research. Ben Beachy is the director of the Sierra Club's Living Economy Program. Rhiana Gunn-Wright is the policy director for New Consensus.

 -- via my feedly newsfeed

Jobs and Medicare for All [feedly]

A VERY important point, here, by Jack Metzgar  He highlights the precise issue in Medicare for All that Haunts the Green New Deal Resolution. What about the losers in the transitions and big reforms contemplated, and deemed "necessary". Who will pay the insurance industry workers the $58, 000 THEY need to make a manageable, not traumatic transition. Same with the GND resolution. Put the JOBS and INCOME protections and enhancements UP FRONT. Otherwise, as Brother Metzgar notes, the doors to backlash are opened. The losers costs are gonna be paid, paid, paid in one form or another. Pay them up front! That way you get more support, not division. Same with approaches to Amazon, IMO, btwl 

. Accept, that with change, there will be losers. Pay them. Make them winners.

Jobs and Medicare for All
https://workingclassstudies.wordpress.com/2019/02/25/jobs-medicare-for-all/

You can tell that Medicare for All is becoming a real possibility when it gets a rigorous cost-benefit analysis and when its advocates start seriously raising and addressing the inevitable downsides of the policy.  There is no greater downside to Medicare for All than the 1.8 million clerical and administrative jobs it will eliminate in the insurance industry and in health providers' offices.

In their nearly 200-page Economic Analysis of Medicare for All, researchers at the Political Economy Research Institute (PERI) at the University of Massachusetts provide a thorough cost-benefit analysis of Senator Bernie Sanders' proposal (Senate Bill 1804). And for the first time they've estimated the likely magnitude and character of jobs that will be lost and have taken a first crack at suggesting what to do about that job loss.  I want to critique their "just transition" program for these workers, but before I get to that, let me first marvel at the level of detail in their analysis.

It's an important moment.  Medicare for All is no longer just a fine sentiment, but a real policy with all the nuts and bolts and messiness of things that are real.  The PERI analysis is rightly focused on how much the new system will cost and how to pay for it.  They figure it will cost the government about $1 trillion a year above current costs, with nearly 60% of that being paid by employer contributions that will be lower than they are currently paying.  The rest is paid for with a sales tax on non-necessities, a small wealth tax, and taxing capital gains as ordinary income.  In the long-run, though more expensive for the government, Medicare for All will reduce the country's overall health expenditures by about $500 billion a year. Most of the savings will go to workers and households in lower premiums and out-of-pocket costs.  Plus, of course, everybody will be assured of access to the health care they need – a huge direct benefit to the more than one-third of us who are uninsured or underinsured while providing everyday peace of mind and life-planning stability, as well as more take-home pay, for all of us.

As the study is at pains to point out, however, the transition from the current system, which is both wasteful and of mediocre quality, to Medicare for All will be tricky.  The bulk of the savings comes from the dramatic reduction in paperwork and administration that will result from eliminating private health insurance. But this also means a huge job loss over a 2- to 4-year period – about 800,000 jobs in the insurance industry and a little more than 1 million in doctors' offices, clinics, hospitals, and other health providers.

The PERI analysis profiles these workforces by occupations, average wages, ages, educational credentials, and racial and gender composition. That analysis shows the median wage in health insurance is $54,400 but only about $39,400 in health care administration, where 92% of workers are women compared with only 55% in insurance.  The level of statistical detail PERI produces on these workers is itself refreshing, and is fairly rare in not treating dislocated workers as after-thoughts at best and chaff at worst – as so many industrial and extractive workers have been treated in public policy in the past.

It is also refreshing that the PERI authors insist on a "just transition" and open up that discussion.  Their program would use ERISA, the federal government regulatory agency for private pensions, to ensure that health insurance companies and providers cannot raid their currently solvent pension funds, thereby guaranteeing all workers their current pension benefits.  In addition, of the 1.8 million displaced workers, nearly 300,000 are 60 years or older and that part of the workforce is treated very generously – they will be paid 100% of their current salaries until age 65 if they choose to retire.

But the rest of the plan, though probably the most generous ever proposed for dislocated workers, is not just enough, and it leaves Medicare for All subject to political backlashes that could be offset by a more thorough program. It leaves about 1.5 million displaced workers, who would be guaranteed one-year's salary and would receive $10,000 each to pay for education or training and $10,000 each to cover relocation expenses.  This is historically generous, but it is not enough primarily because the American system of training is an ill-coordinated mess about which workers are highly, and rightly, cynical.  In the Rust Belt, for example, so-called Trade Adjustment Assistance training programs have been notoriously poorly funded and have often led not to jobs but to flooded labor markets for specific occupations, thereby pulling down wages in those occupations.  Likewise, the relocation assistance is very generous money-wise, but the U.S. does not have a nationally coordinated employment system that helps workers find out where they might be needed elsewhere in the country.  So, though very generous, the PERI proposal pretty much throws money at displaced workers and tells them to figure out what to do on their own.  Without a nationally coordinated training and employment system, I fear this "just transition" will be rightly seen as merely "buying off while selling out" these workers.  What's more, helping workers relocate does nothing for the communities those workers are leaving – an issue especially important in places where insurance or health care is concentrated, like Connecticut for insurance and Pittsburgh for health care.

What is needed is a jobs program for these (and other) workers – that is, a systematic effort to create and stimulate job creation.  Here's where Medicare for All could meet with a now widely discussed Green New Deal, which would create more than a million jobs.  However, these jobs, primarily in construction and manufacturing, are likely to disproportionately benefit men, while the dislocated workers in health and insurance administration are 75% women.

For administrative workers displaced by Medicare for All, we need a plan that matches existing skills with the training needed for jobs that can be productively created.  Maybe House Democrats could commission an audit of the number and kind of government jobs that are needed to greatly improve our government's functioning at all levels – beginning perhaps with the jobs that would support a competent national system of training and employment.  Or maybe create more positions like those 50,000 Internal Revenue Service auditors who would produce six times their own salaries by tracking down some of the $400 billion in tax fraud and avoidance that occurs each year.  Likewise, most federal and state government agencies are understaffed to adequately perform their jobs, often purposely so because of decades of Republican budget cuts.  And rare is the teachers' strike today that doesn't document the crying need for more librarians, social workers, and nurses, as well as for smaller class sizes that would require more teachers.  A 10% increase in government workers at all levels, phased in over a four-year period, would produce more than 2 million jobs.

I have no idea whether an increase of that magnitude would be realistic or desirable, but that's what an audit of employment needs would provide.  What I am sure of, however, is that even the generous amounts of money provided in the PERI proposal are political liabilities – not only among workers directly affected and their friends and neighbors, but also for all those who are sick to death of hearing about "retraining and relocation" that is almost always nothing but a tragically ineffective sop, something politicians say to make us think they care.  We need plans that provide training for specific jobs that we know are being created, with at least some jobs that can be located in places that need them most.

The Sanders bill and the PERI analysis, pushed by nurses' and other unions who have built a social movement for health care as a right, are making Medicare for All a real possibility.  But there is still time for them to design a much more just transition for the workers who will be dislocated so that all of us can enjoy better, cheaper, and more secure health care.

Jack Metzgar

Editor's Note:  An excellent summary of the PERI analysis is available in a video interview with chief author Robert Pollin at Common Dreams.

Jack Metzgar is a retired professor of Humanities from Roosevelt University in Chicago, where he is a core member of the Chicago Center for Working-Class Studies. His research interests include labor politics, working-class voting patterns, working-class culture, and popular and political discourse about class.  He is a former President of the Working-Class Studies Association.

 -- via my feedly newsfeed

Bernstein: The economic reasoning behind the Democrats’ bold agenda [feedly]

The economic reasoning behind the Democrats' bold agenda
https://www.washingtonpost.com/outlook/2019/02/25/economic-reasoning-behind-democrats-bold-agenda/

Jared Bernstein

Just because Congress is anchored in a toxic combination of partisan gridlock and Trumpian chaos doesn't mean policy debates are dead. Democrats are working overtime to craft an alternative to the status quo, including progressive tax reform, jobs programs, pushback on climate change, universal health care, expanded Social Security and more.

As it happens, economic conditions right now make this an excellent time for a bolder-the-better agenda.

First, the Federal Reserve recently announced that its previously planned interest-rate increases were on pause. After holding the benchmark rate they control at zero for an unprecedented six years, in late 2015, the Fed began raising rates. A few years later, even as interest rates and unemployment remained historically low, enough economic head winds developed that the bank realized it had better stop tapping the growth brakes.

There were lots of reasons for those head winds, including President Trump's trade war, global growth problems, stock market volatility and more. But there's always a lot of other stuff going on in global markets. The key fact is that the U.S. economy started to wobble with the Fed funds rate at 2.5 percent, a level that's but one-half of its long-term average.

Low inflation even at low unemployment means the Fed is correct to pause, and that the terms of the traditional trade-off of equally balanced inflation and employment risks have changed. In today's economy, the risks of weak demand, left-behind people and places, and stagnant low- and mid-level wages and incomes are greater than those of higher inflation. This is a symptom of structurally weak underlying demand and a rationale for stimulative policies.

Second, the U.S. economy is probably significantly slowing as we speak because of fading fiscal stimulus. The tax cuts and a big uptick in government spending, both of which were deficit-financed, added close to an extra point to gross domestic product growth in 2018 and most of this year. But as they leave the system, the Atlanta Fed is predicting that GDP growth fell to 1.4 percent last quarter (half the average growth rate this year), and forecasts for the next few years are well below 2018's pace.

These dynamics imply that a fiscal policy twofer is on offer. Increased investment in public goods, including education, infrastructure and the Green New Deal can help push back both on structural inequality and slower growth. At the same time, progressive tax policy, such as Sen. Elizabeth Warren's wealth tax or Sen. Bernie Sanders's estate tax expansion, can help support that fiscal agenda while also chipping away at wealth concentration.

But the broader point is that without the push of stimulative monetary or fiscal policy — or both — the U.S. economy will probably slow and the unemployment rate will rise. We're a bit like a bicycle that cruises along at a decent clip until it hits the slightest hill, and then, without a push, starts to shake.

Third, even as the heretofore stimulated U.S. economy was closing in on full employment, interest rates and inflation stayed very low and lots of people were/are still struggling to make ends meet.

Low interest and inflation at low unemployment imply that a supposedly high-pressure economy isn't showing up in traditional pressure gauges. Economist Larry Summers discusses this phenomenon under the rubric of "secular stagnation," meaning that even late in an expansion, economies underperform without an extra push. Such sluggishness is occurring not just here, but in Europe as well, as Euro area growth rates, inflation and interest rates all remain historically low.

The result is that both here and abroad, weak underlying growth alongside high levels of inequality means many households and communities remain left behind.

In other words, the Democrats' progressive agenda is not only a response to the upward redistribution that Republicans have successfully pushed since President Ronald Reagan. It is also a coherent and essential response to underlying stagnation that has grown to plague advanced economies.

Why that stagnation exists is not well answered. It may have to do with aging demographics, inequality, persistent U.S. trade deficits, the rise of unproductive finance, monopolistic concentration in key industries (retail, tech, health care), suboptimal public and private investment, and more.

But we needn't wait for a thorough diagnosis of causes if we know what will reverse them. -- via my feedly newsfeed

The very smart Simon Johnson believes that something like codetermination is essential if modern capitalism is going to... [feedly]

The very smart Simon Johnson believes that something like codetermination is essential if modern capitalism is going to...
https://www.bradford-delong.com/2019/02/simon-johnson-_saving-capitalism-from-economics-101-by-simon-johnson-project-syndicatehttpswwwproject-syndicate.html

The very smart Simon Johnson believes that something like codetermination is essential if modern capitalism is going to work: Simon Johnson: Saving Capitalism from Economics 101: "Warren is proposing a much broader rethink. Large corporations can still do well, but they need to be held accountable in a much more transparent way. Incentives for executives would be adjusted, and running these companies would no longer be so much about lining their own pockets.... The legitimacy of capitalism–private ownership and reliance on market mechanisms–would be greatly strengthened under the Accountable Capitalism Act. So, yes, like it or not, this will be on the final exam...  

 -- via my feedly newsfeed

Tim Taylor: Universal Basic Income: Preliminary Results from the Finnish Experiment [feedly]

I tend to favor the UBI approach, although the results are ambiguous in this first year study. However, I believe politically all guaranteed income has to be linked to work or service for able-bodied or able minded recipients.

Universal Basic Income: Preliminary Results from the Finnish Experiment
http://conversableeconomist.blogspot.com/2019/02/universal-basic-income-preliminary.html

The big selling points for a universal basic income are simplicity and work incentives. The simplicity arises because with a universal basic income, there are no qualifications to satisfy or forms to fill out. People just receive it, regardless of factors like income levels or whether they have a job. There are not bureaucratic costs of determining eligibility, and no stigma of applying for such benefits or in receiving them.

The gains for work incentives arise because many programs aimed at helping the poor have a built-in feature that as you earn more on the job, you receive less in government assistance. From one standpoint, this seems logical and fair. But economists have been quick to point out that if someone loses a dollar of government benefits every time they gain a dollar from working, the implicit tax rate is 100%. When there are a number of different programs aimed at the working poor, all phasing out on their own individual schedules as income rises, the result can be that low-income people face very high implicit tax rates--even in some situations close to 100%. But a universal basic income does not decline or phase out as someone earns more income. 

There are plenty of assertions about how a universal basic income would affect work incentives, but actual hard evidence is still accumulating. The province of Ontario announced that it would run a three- year experiment, but then cancelled it after one year. An organization called GiveDirectly is running a universal basic income experiment in Kenya, although results aren't available yet, but there is reason to be skeptical as to whether the cost and effects of such a program in a low-income country will offer natural lessons for high-income countries. A firm called YCombinator is planning to run a universal basic income experiment in two US cities starting in 2019, but details still seem sketchy. The city of Stockton in California has just started an experiment where 130 people will get monthly payments of $500 for the next 18 months.  The program in Alaska in which residents get a payment from the state based on oil royalties, typically $1000-$2000 per year, can be viewed as a form of a universal basic income, although it's clearly not enough to live on by itself.

Finland has been running an experiment with a university basic income for the last couple of years, and preliminary results on work behavior are now available. The report is  "The basic income experiment 2017–2018in Finland," edited by Olli Kangas, Signe Jauhiainen, Miska Simanainen, Minna Ylikännöand published by Finland's Ministry of Social Affairs and Health (February 2019). They write:

"[T]he amount of basic income was 560 euros per month. This corresponded to the monthly net amount of the basic unemployment allowance and the labour market subsidy provided by Kela (the Social Insurance Institution of Finland). Two thousand persons aged 25–58 years who received an unemployment benefit from Kela in November 2016 were selected for the actual experiment. They were selected through random sampling without any regional or other emphasis. ... Despite its deficiencies, the Finnish experiment is exceptional from an international perspective in that participation in the experiment was compulsory and it was designed as a randomised field experiment." 

The effects on employment during the first year of the experiment (that is in 2017) turn out to be essentially nonexistent

Of the persons who in November 2016 received an unemployment benefit from Kela, 57 per cent had no earnings or income from self-employment in 2017. The figures also reveal that the average income of those who had been in employment was only around 9,920 euros. ... [T]he experiment did not have any effect on employment status during the first year of the experiment. The number of annual days in employment for the group that received a basic income is on average about half a day higher than for the control group. Overall, receipt of any positive earnings or income from self-employment, either from the open labour market or the subsidised labour market, is about one percentage point more common in the treatment group. However, resulting earnings and incomes from self-employment turned out to be 21 euros smaller.

In other results based on phone surveys, those who received the universal basic income expressed greater confident in their own future, and they expressed a belief that it would be easier to accept a future job offer. It will be interesting to see if these attitudes lead to actually higher employment as the 2018 data becomes available .

It's important to note that like all practical experiments, the Finnish experiment was not a completely pure universal basic income. For example, the experiment targeted the long-term unemployed, not the working poor as a group, and those receiving the benefit still dealt with the government for other support programs, like housing assistance. In adidtion, the experiment would need to be considered in the context of Finland's overall labor market. So the results are preliminary in a number of ways. But it's hard to spin them as encouraging.

For those who would like a bunch of links to discussion of the Finnish experiment and broader recent discussions of a universal basic income, a useful starting point is the extended blog post at the Brueghel website byCatarina Midoes, "Universal basic income and the Finnish experiment" (February 18, 2019).

For a pragmatic discussion of how a true universal basic income--that is, a payment to everyone that does not phase out regardless of income--might work in a US context, interested readers might start with Universal Basic Income: A Thought Experiment" (July 29, 2014).  If one took all the money from US (nonhealth) antipoverty programs, as well as a number of tax breaks that tend to benefit the middle-and upper-class, one could fund a universal basic income for the US of about $5800 per year.  

 -- via my feedly newsfeed

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Prices Are Not Enough [feedly]

From triple crisis, a good discussion of tax vs cap and trade market approaches to emissions reduction. And their limitations.

Prices Are Not Enough
http://triplecrisis.com/prices-are-not-enough/

y Frank Ackerman

Fourth in a series on climate policy; find Part 1 here, Part 2 here, and Part 3 here.

We need a price on carbon emissions. This opinion, virtually unanimous among economists, is also shared by a growing number of advocates and policymakers. But unanimity disappears in the debate over how to price carbon: there is continuing controversy about the merits of taxes vs. cap-and-trade systems for pricing emissions, and about the role for complementary, non-price policies.

At the risk of spoiling the suspense, this blog post reaches two main conclusions: First, under either a carbon tax or a cap-and-trade system, the price level matters more than the mechanism used to reach that price. Second, under either approach, a reasonably high price is necessary but not sufficient for climate policy; other measures are needed to complement price incentives.

Why taxes and cap-and-trade systems are similar

A carbon tax raises the cost of fossil fuels directly, by taxing their carbon emissions from combustion. This is most easily done upstream, i.e. taxing the oil or gas well, coal mine, or fuel importer, who presumably passes the tax on to end users. There are only hundreds of upstream fuel producers and importers to keep track of, compared to millions of end users.

A cap-and-trade system accomplishes the same thing indirectly, by setting a cap on total allowable emissions, and issuing that many annual allowances. Companies that want to sell or use fossil fuels are required to hold allowances equal to their emissions. If the cap is low enough to make allowances a scarce resource, then the market will establish a price on allowances – in effect, a price on greenhouse gas emissions. Again, it is easier to apply allowance requirements, and thus induce carbon trading, at the upstream level rather than on millions of end users.

If the price of emissions is, for example, $50 per ton of carbon dioxide, then any firm that can reduce emissions for less than $50 a ton will do so – under either a tax or cap-and-trade system. Cutting emissions reduces tax payments, under a carbon tax; it reduces the need to buy allowances under a cap-and-trade system. The price, not the mechanism, is what matters for this incentive effect.

A review of the economics literature on carbon taxes vs. cap-and-trade systems found a number of other points of similarity. Either system can be configured to achieve a desired distribution of the burden on households and industries, e.g. via free allocation of some allowances, or partial exemption from taxes. Money raised from either taxes or allowance auctions could be wholly or partially refunded to households.  Either approach can be manipulated to reduce effects on international competitiveness.

And problems raised with offsets – along the lines of credits given too casually for tree-planting – are not unique to cap and trade. A carbon tax could emerge from Congress riddled with obscure loopholes, which could be as damaging to the integrity of carbon pricing as any of the poorly written offset provisions of existing cap-and-trade systems. More positively speaking, either approach to carbon pricing can be carried out either with or without offsets and tax exemptions.

 

Why taxes and cap-and-trade systems are different

Compared to the numerous similarities between the two approaches, the list of differences is a shorter one. A carbon tax is easier and cheaper to administer. In theory, a carbon tax provides certainty about the price of emissions, while a cap-and-trade system provides certainty about the quantity of emissions (in practice, these certainties can be undone by too-frequent tinkering with tax rates or emissions caps).

Cap-and-trade systems have been more widely used in practice. The European Union's Emissions Trading System (EU ETS) is the world's largest carbon market. Others include the linked carbon market of California and several Canadian provinces, and the Regional Greenhouse Gas Initiative (RGGI) among states in the Northeast.

Numerous critics have pointed to potential flaws in cap-and-trade, such as overly generous, poorly monitored offsets. Many recent cap-and-trade systems, introduced in a conservative era, began with caps so high and prices so low that they have little effect (leaving them open to the criticism that the administrative costs are not justified by the skimpy results). The price must be high enough, and the cap must be low enough, to alter the behavior of major emitters.

The same applies, of course, to a carbon tax. Starting with a trivial level of carbon tax, in order to calm opponents of the measure, runs the risk of "proving" that a carbon price has no effect. The correct starting price under either system is the highest price that is politically acceptable; there is no hope of "getting the prices right" due to the uncertain and potentially disastrous scope of climate damages.

Perhaps the most salient difference between taxes and cap-and-trade is political rather than economic: in an era when people like to chant "no new taxes", the prospects for any initiative seem worse if it involves a new tax. This could explain why there is so much more experience to date with cap-and-trade systems.

 

Beyond price incentives

Some carbon emitters, for instance in electricity generation, have multiple choices among alternative technologies. In such cases, price incentives alone are powerful, and producers can respond incrementally, retiring and replacing individual plants when appropriate. Other sectors face barriers that an individual firm cannot usually overcome on its own. Electric vehicles are not practical without an extensive recharging and repair infrastructure, which is just beginning to exist in a few parts of the country. In this case, no reasonable level of carbon price can, by itself, bring an adequate nationwide electric vehicle infrastructure into existence. Policies that build and promote electric vehicle infrastructure are valuable complements to a carbon price: they create a combined incentive to move away from gasoline.

Yet another reason for combining non-price climate policies with a carbon price is that purely price-based decision-making can be exhausting. People could calculate for themselves the fuel saved by buying a more fuel-efficient car and subtract that from the sticker price of the vehicle, but it is not an easy calculation. Federal and state fuel economy standards make the process simpler, by setting a floor underneath vehicle fuel efficiency.

When buying a major appliance, it is possible in theory to read the energy efficiency sticker on the carton, calculate your average annual use of the appliance, convert it to dollars saved per year, and see if that savings justifies purchase of a more efficient appliance. But who does all that arithmetic? Even I don't want to do that calculation, and I have a PhD in economics and enjoy playing with numbers. My guess is that virtually no one does the calculation consistently and correctly. On the other hand, federal and state appliance efficiency standards have often set minimum levels of required efficiency, which increase over time. It's much more fun to buy something off the shelf that meets those standards, instead of settling in for an extended data-crunching session any time you need a new fridge, air conditioner, washing machine…

In short, the carbon price is what matters, not the mechanism used to adopt that price. And whatever the price, non-price climate policies are needed as well – both to build things that no one company can do on its own, and to make energy-efficient choices accessible to all, without heroic feats of calculation.

Frank Ackerman is principal economist at Synapse Energy Economics in Cambridge, Mass., and one of the founders of Dollars & Sense, which publishes Triple Crisis. 

 -- via my feedly newsfeed