The Role of Policy Logic in U.S. Climate Legislation

Abstract

The Waxman-Markey climate bill, passed by the U.S. House of Representatives in June, 2009, is grounded on a cap-and-trade regulatory ideology that favors cost reductions over emission reductions even when costs are well within acceptable limits and when emission targets do not approach sustainability requirements. Carbon taxes, by contrast, could create stable emission-reduction incentives that are not limited by predetermined targets; but carbon taxes are politically handicapped by proponents’ insistence that tax policy function primarily to extract revenue from regulated industries. Greenhouse gas regulatory policy could be vastly more efficient if the dogmatic ideologies of both cap-and-trade and carbon taxes were eschewed in favor of rational and pragmatic policy logic, recognizing the overriding political constraint of cost acceptability and the efficiency advantage of using carbon pricing revenue to reduce regulated industries’ emissions.

Keywords: cap-and-trade, carbon tax

JEL Classification: H21, O38, Q28, Q48