Climate policy options
There are basically three policy options for dealing with greenhouse gas emissions -- cap and trade, carbon tax, and policies and measures. For the most part, countries that ratified the Kyoto Protocol have tried the cap and trade approach. Sweden and some northern European countries have gone the carbon tax route and the U.S. has relied on policies and measures.
The EU Emission Trading System has revealed all of the problems with cap and trade. When targets proved too economically binding, governments have provided relief but the effect has not kept electricity prices from rising rapidly or companies from moving productive capacity to more business friendly nations. In addition, there have been a large number of reports of gaming the system, fraud, and abuse. There is no evidence that the system has worked as hoped for.
The Swedish reliance on a carbon tax has been more effective as almost every economic analysis concluded that it would be. In terms of reductions in carbon intensity--the amount of carbon used to produce of unit of economic wealth, Sweden has done better that the EU cap and trade nations, reducing its intensity by one-third since 1997.
Finally, there are policies and measures -- actions like CAFÉ, efficiency standards, tax incentives and the like. While the US is often accused of failing to act responsibly in reducing its greenhouse gas emissions, the record from 1997, when the Kyoto Protocol was approved, through 2006, the last year of EIA published data, is superior to most EU-15 nations, especially Germany and the UK. Europe reduced its intensity by 17 percent during this period while the U.S. reduced its by 19 percent.
Of the three policy options, a carbon tax is the simplest and most efficient. While policies and measures can and have proven effective, they can be more costly and produce a larger number of unintended consequences. But, they are likely to be superior to cap and trade because no one has the knowledge needed to accurately set an economy wide cap a decade or more into the future and the knowledge or means to avoid the volatility in permit prices which will chill investment and distort market forces.
Looking forward to Copenhagen, nations would do well to return to first principles. When the Framework Convention on Climate Change was approved almost two decades ago, it was based on the concept of each nation developing a program that reflected its national and economic circumstances. That concept is as valid today as it was then. Challenging but realistic objectives and actions to achieve them that reflect economic, energy, and technology realities will prove more effective than a one size fits all global agreement that is built on the flawed Kyoto approach or EU trading system.
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