The Skywriter

Half-empty or half-full? An economist's perspective on ACES

10
Jul

Half-empty or half-full? An economist's perspective on ACES

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From guest blogger Kristen Sheeran, director of Economics for Equity and the Environment Network (E3), a nationwide network of more than 150 economists, developing new arguments for environmental protection with a social justice focus.

It is easy to be disappointed with the climate bill that the House passed. After all, the science couldn’t be more compelling about how low the caps need to be set, and the economics couldn’t be clearer about why 100% of the allowances in the cap-and-trade system should be auctioned. Yet, the bill falls short on these fronts and others.

It is often said that economists never agree on anything. Therefore, to find the wealth of peer-reviewed economics literature on RealClimateEconomics.org that supports an immediate and effective policy response to climate change is surprising. It speaks volumes to the urgency of the crisis and the just how compelling the economic case for mitigating climate change really is. Economics supports a climate bill that achieves the targets scientists recommend, auctions permits, and invests sufficiently in new technologies. Should we settle for less?

ACES, though disappointing, is still worth passing. First, it will give the Administration the credibility it needs to help broker a global climate agreement this December. Economists understand that the solution to a global public good problem ultimately requires the participation of all countries. Second, it provides adequate provisions to protect low-income families from the direct and indirect effects of higher energy costs.

Most importantly, it creates a price signal for carbon for the first time. A price signal for carbon – however weak initially - will begin correcting the underlying inefficiencies in our economy and direct capital towards new and existing clean technologies. What innovations will be unleashed from this critical first step we do not yet know. What is certain that these innovations can never materialize as long as the price of carbon remains zero.

Indeed, the most troubling part of the ACES legislation from an economist’s perspective is that it may undermine the very price signal it pioneers to create. ACES gives carbon allowances to utilities with provisions that the utilities share the savings with consumers through lower rates. But suppressing the price signal for electricity provides the wrong incentives, while putting more pressure on other energy providers and energy-intensive sectors to achieve the reductions required by the cap. Consumer rebates are a better alternative that can offset the costs for vulnerable households, while preserving the effectiveness of the price signal.

All in all, it matters not whether the glass is half-empty or half-full. Our country is thirsty for climate legislation. As an economist, I am willing to hold my nose and drink up.

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