Today, I dived into the deep end of the public policy pool and listened to economists almost all day. My agenda for the day revolved around one main question: which public policy tool achieves the most carbon pollution reductions for the lowest cost – cap and trade or carbon tax?
Economists from the Massachusetts Institute of Technology, Harvard, and Tufts – among others –debated the merits of each approach. There are several examples of jurisdictions that have adopted each approach, although most cap and trade policies that have been implemented were adopted relatively recently. So, the jury is out on which approach is most economically efficient.
There were two waves of carbon tax adoption – the Scandinavian countries adopted carbon taxes in the 1990s and then there was a second wave in the 2000s. Sweden was one of the earlier jurisdictions to adopt a carbon tax when it did so in 1991, while British Columbia implemented its carbon tax in 2008.
The European Union began its Emissions Trading System (ETS) in 2005. China has had seven test markets for cap and trade, some of which started in 2010, and plans to unite them into a nationwide market soon.
Here at the climate talks in Bonn, the Parties to the Paris Agreement are working out the details to each Article in the Agreement. Article 6 deals with emissions trading schemes, and the hope is that Article 6 will eventually lead to global markets that will reduce carbon pollution most cost effectively. The tricky questions are: how do you link different kinds of markets? Can a jurisdiction with a carbon tax trade credits with a jurisdiction that has cap and trade? And, how will we make sure that the trading is fair, credible, and reliable?
Academic economists are here sharing their research with one another and with the Parties that are negotiating the details. The academics hope to influence policymakers to adopt policies which make the most sense from an economic point of view. At the same time, the academic economists understand that policymakers cannot implement policies they cannot get enacted in their home countries. Sometimes, the policies that can gain popular support, get passed by legislatures, and get signed into law are not the most optimal approaches from a purely data-centric point of view.
The great thing about a COP is that it pulls together people from all over the world to exchange ideas, research, and evidence from on-the-ground implementation of policy. The participants have different cultures, different economic systems, and different governance models. What’s nice is that each of us are exposed to points of view that we wouldn’t hear about if we just stayed home in our own countries and talked to people from our own country about how to solve problems. The differences between Democrats and Republicans are tiny in comparison to the differences in culture and economic systems.
I need to do a lot more reading, thinking, and talking to economists and fellow policymakers before I figure out whether carbon taxes or emissions trading markets have been more effective at reducing carbon pollution. The jury is still out!