Beware Scorched-Earth Strategies

• Author: Robert N. Stavins
• Position: Albert Pratt Professor of Business and Government at the John F. Kennedy School of Government, Harvard University, and Director of the Harvard Environmental Economics Program
• Pages: 14-14

Page 14 ❧ THE ENVIRONMENTAL FORUM Copyright © 2010, Environmental Law Institute®, Washington, D.C. www.eli.org.

Reprinted by permission from The Environmental Forum®, Sept./Oct. 2010

By Robert N. Stavins

Beware Scorched-

Earth Strategies

With the apparent collapse of Sen-

ate consideration of climate

policy, it is important to ref‌lect on what

could be a serious long-term casualty of

these acrimonious debates, namely the

demonizing of cap-and-trade and the

related tarnishing of market-based ap-

proaches to environmental protection.

In an op-ed in the Boston Globe,

Richard Schmalensee of MIT and I

commented on this outcome of the po-

litical debates and noted the irony that

the attack on cap-and-trade — and

carbon-pricing, more broadly — has

been led by conservatives, who should,

in fact, take great pride as the creators of

these cost-ef‌fective policy innovations.

In the debates on climate policy

throughout 2009 and 2010, conserva-

tive Republicans dubbed the cap-and-

trade proposals “cap-and-tax.” But

regardless of what they think about cli-

mate change, they should resist demon-

izing market approaches to environ-

mental protection and reverting to pre-

1980s thinking that saddled business

and consumers with needless costs.

Market-based policies should be em-

braced, not condemned by Republicans

(as well as Democrats). After all, these

policies were innovations developed by

conservatives in the Reagan, George H.

W. Bush, and George W. Bush admin-

istrations.

In the 1980s, the Reagan EPA suc-

cessfully put in place a cap-and-trade

system to phase out leaded gasoline.

e result was a more rapid elimina-

tion of leaded gasoline from the mar-

ketplace than anyone had anticipated,

and at a savings of some $250 million

per year, compared with a conventional

command-and-control approach.

In June 1989, President George H.

W. Bush proposed the use of a cap-and-

trade system to cut by half sulfur di-

oxide emissions from coal-f‌ired power

plants and consequent acid rain. An

initially resistant Democratic Congress

overwhelmingly endorsed the proposal.

e landmark Clean Air Act Amend-

ments of 1990 passed the Senate 89 to

10 and the House 401 to 25. at cap-

and-trade system has cut sulfur dioxide

emissions by 50 percent, and has saved

electricity companies — and hence

shareholders and ratepayers — some $1

billion per year compared with a con-

ventional, non-market approach.

In 2005, George W. Bush’s EPA

issued the Clean Air Interstate Rule,

aimed at achieving the

largest reduction in air

pollution in more than

a decade, including re-

ducing sulfur dioxide

emissions by a further

70 percent from their

2003 levels. Cap-and-

trade was again the policy instrument

of choice in order to keep costs down

and achieve the rapid reductions at

minimum economic pain. (e rule

was later invalidated by the courts, and

is now being reformulated.)

To reject this legacy and embrace the

failed 1970s policies of one-size-f‌its-all

regulatory mandates would signify uni-

lateral surrender of principled support

for markets. If some conservatives op-

pose energy or climate policies because

of disagreement about the threat of cli-

mate change or the costs of those poli-

cies, so be it. But in the process of de-

bating risks and costs, there should be

no tarnishing of market-based policy

instruments. Such a scorched-earth ap-

proach will come back to haunt when

future environmental policies will not

be able to use the power of the market-

place to reduce costs.

Economists have diverse perspectives

on the policy alternatives that could be

used to address climate change, but

virtually all suppor t market-based ap-

proaches to the problem. Some favor

carbon taxes combined with revenue-

neutral cuts in distortionary taxes,

whereas others support cap-and-trade

mechanisms — or “cap-and-dividend,’’

with revenues from auctioned allow-

ances refunded directly to citizens.

But concerns among economists

about specif‌ic cap-and-trade legislative

proposals pale in comparison with con-

cerns about conventional regulatory ap-

proaches advanced as “painless alterna-

tives.” ose alternatives — a plethora

of standards, special-interest technology

subsidies, and tax breaks — are incapa-

ble of doing the job, and will be unnec-

essarily expensive. e cost dif‌ferences

among the various carbon-pricing de-

signs are trivial when compared with

the ver y large costs of command-and-

control approaches. At a time at which

we are struggling to re-

vitalize the economy, we

can least af‌ford to turn

our backs on markets

and impose unnecessary

costs on businesses and

consumers.

A price on carbon is

the least costly way to provide meaning-

ful incentives for technology innovation

and dif‌fusion, reduce emissions from

fossil fuels, and drive energy ef‌f‌iciency.

In the long run, it can reduce our use of

oil and drive our transportation system

toward alternative energy sources.

Market-based approaches to en-

vironmental protection — including

cap-and-trade — should be lauded,

not condemned, by political leaders, no

matter what their party. Demonizing

cap-and-trade in the short term will

turn out to be a mistake with serious

long-term consequences for the econo-

my, for business, and for consumers.

In debating risks and

costs, there should

be no tarnishing of

market instru ments

Ro ber t N . St avi ns is the Albert Pratt Profes-

sor of Business and Government at the John

F. Kennedy School of Government, Harvar d

University, and Dir ector of the Har vard En -

vironmental Economics Program. He can b e

reached at rob ert_stavins@har vard.edu.

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