Costs of Reducing Greenhouse Gas Emissions

The CBO released an issue brief on 11/23 - The Costs of Reducing Greenhouse-Gas Emissions (also see the CBO Director's blog entry on this which has links to several other CBO reports on this topic). The report provides some guidance on the costs and the challenges of estimating them.

The report states that market-based approaches, such as cap-and-trade allowances and taxes, are likely to be less expensive than the command-and-control approaches (nothing new there). I'm glad to see the CBO report continue to talk about GHG emission taxes rather than only the cap-and-trade approach in the House passed H.R. 2454 because I think we need to have a real discussion on the varying approaches, their pros and cons in terms of operations and effect and only then, see a bill passed in Congress. The following excerpt from the report is an example of why we should have a serious discussion of cap-and-trade versus tax before committing significant costs to creating and maintaining a cap-and-trade system:

“Most experts conclude that, in the face of such uncertainty, policies that set the year-by-year price of emissions to be consistent with the projected incremental benefits of reducing emissions (as with a tax) would probably yield higher net benefits than policies that specified year-by-year caps on emissions or even a cap on cumulative emissions over many years. The cost of meeting a fixed emission cap is likely to vary substantially from year to year—depending on the weather, economic activity, and the price of fossil fuels. A tax would ensure that firms and households had an incentive to make all reductions that cost less to achieve than that expected incremental benefit. By contrast, a cap could easily generate incremental reductions that cost substantially more or less than the expected benefit.” [p. 4; footnote omitted]

We have some structures in place that would make implementation of a GHG tax less expensive than creating and maintaining a cap-and-trade system. For example, the gasoline excise tax could be increased. Also, utility companies could collect a tax from their customers with the tax adjusted for the percent of energy produced from renewable sources. We know from recent high gasoline prices, that people do respond to them. That awareness leads to behavior changes that will further help to reduce GHG emissions.

Assuming Congress gets back to climate change issues, I hope that despite a House-passed cap-and-trade bill, that the Senate will pursue a discussion of that approach compared to a tax approach.

What do you think?