Eyes on the Prize: Federal Climate Policy Should Preempt State and Regional Initiatives

In just a few days, Senators John Kerry, Lindsey Graham, and Joe Lieberman will release their much-anticipated proposal for comprehensive climate and energy legislation – the best remaining shot at forging a bipartisan consensus on this issue in 2010.  Their proposal has many strengths, but there’s an issue brewing that could undermine its effectiveness and drive up its costs.  I wrote about this in a Boston Globe op-ed on Earth Day, April 22nd (the original version of which can be downloaded here).

Government officials from California, New England, New York, and other northeastern states are vociferously lobbying in Washington to retain their existing state and regional systems for reducing greenhouse gas emissions, even after a new federal system comes into force. That would be a mistake – and a potentially expensive one for residents of those states, who could wind up subsidizing the rest of the country.  The Senate should do as the House did in its climate legislation:  preempt state and regional climate policies.  There’s no risk, because if Federal legislation is not enacted, preemption will not take effect.

The regional systems – including the Regional Greenhouse Gas Initiative (RGGI) in the Northeast and Assembly Bill 32 in California – seek to limit carbon dioxide emissions from power plants and other sources, mainly by making emissions more costly for firms and individuals.  These systems were explicitly developed because the federal government was not moving fast enough.

But times have changed.  Like the House climate legislation passed last June, the new Senate bill will feature at its heart an economy-wide carbon-pricing scheme to reduce carbon dioxide emissions, including a cap-and-trade system (under a different name) for the electricity and industrial sectors.  (In a departure from the House version, it may have a carbon fee for transportation fuels.)

Though the Congress has a history of allowing states to act more aggressively on environmental protection, this tradition makes no sense when it comes to climate change policy.  For other, localized environmental problems, California or Massachusetts may wish to incur the costs of achieving cleaner air or water within their borders than required by a national threshold.  But with climate change, it is impossible for regions, states, or localities to achieve greater protection for their jurisdictions through more ambitious actions.

This is because of the nature of the climate change problem. Greenhouse gases, including carbon dioxide, uniformly mix in the atmosphere – a unit of carbon dioxide emitted in California contributes just as much to the problem as carbon dioxide emitted in Tennessee.  The overall magnitude of damages – and their location – are completely unaffected by the location of emissions.  This means that for any individual jurisdiction, the benefits of action will inevitably be less than the costs. (This is the same reason why U.S. federal action on climate change should occur at the same time as other countries take actions to reduce their emissions).

If federal climate policy comes into force, the more stringent California policy will accomplish no additional reductions in greenhouse gases, but simply increase the state’s costs and subsidize other parts of the country. This is because under a nationwide cap-and-trade system, any additional emission reductions achieved in California will be offset by fewer reductions in other states.

A national cap-and-trade system – which is needed to address emissions meaningfully and cost-effectively – will undo the effects of a more stringent cap within any state or group of states.  RGGI, which covers only electricity generation and which will be less stringent than the Federal policy, will be irrelevant once the federal system comes into force.

In principle, a new federal policy could allow states to opt out if they implement a program at least as stringent.  But why should states want to opt out?  High-cost states will be better off joining the national system to lower their costs. And states that can reduce emissions more cheaply will be net sellers of Federal allowances.

Is there any possible role for state and local policies?  Yes.  Price signals provided by a national cap-and-trade system are necessary to meaningfully address climate change at sensible cost, but such price signals are not sufficient.  Other market failures call for supplementary policies.  Take, for example, the principal-agent problem through which despite higher energy prices, both landlords and tenants lack incentives to make economically-efficient energy-conservation investments, such as installing thermal insulation.  This problem can be handled by state and local authorities through regionally-differentiated building codes and zoning.

But for the core of climate policy – which is carbon pricing – the simplest, cleanest, and best way to avoid unnecessary costs and unnecessary actions is for existing state systems to become part of the federal system.  Political leaders from across the country – including the Northeast and California – would do well to follow the progressive lead of Massachusetts Governor Deval Patrick and Secretary of Energy and Environmental Affairs Ian Bowles, who have played key roles in the design and implementation of RGGI, and yet have also publicly supported its preemption by a meaningful national program.

California’s leaders and those in the Northeast may take great pride in their state and regional climate policies, but if they accomplish their frequently-stated goal – helping to bring about the enactment of a meaningful national climate policy – they will better serve their states and the country by declaring victory and getting out of the way.

About Robert Stavins

Robert N. Stavins is the Albert Pratt Professor of Business and Government at the Harvard Kennedy School, Director of the Harvard Environmental Economics Program, Chairman of the Environment and Natural Resources Faculty Group at the Kennedy School, Director of Graduate Studies for the Doctoral Programs in Public Policy and Political Economy and Government, Co Chair of the Harvard Business School Kennedy School Joint Degree Programs, and Director of the Harvard Project on International Climate Agreements. He is a University Fellow of Resources for the Future, a Research Associate of the National Bureau of Economic Research, the Editor of the Review of Environmental Economics and Policy, and a Member of: the Board of Directors of Resources for the Future, the Board of Academic Advisors of the AEI Brookings Joint Center for Regulatory Studies, the Editorial Boards of Resource and Energy Economics, Environmental Economics Abstracts, B.E. Journals of Economic Analysis & Policy, and Economic Issues. He is also an editor of the Journal of Wine Economics. He was formerly a member of the Editorial Board of Land Economics, The Journal of Environmental Economics and Management, the Board of Directors of the Association of Environmental and Resource Economists, a member and Chairman of the Environmental Economics Advisory Committee of the U.S. Environmental Protection Agency's (EPA) Science Advisory Board, the Chair of the Scientific Advisory Board of the Massachusetts Executive Office of Environmental Affairs, a Lead Author of the Second and Third Assessment Reports of the Intergovernmental Panel on Climate Change, and a contributing editor of Environment. He holds a B.A. in philosophy from Northwestern University, an M.S. in agricultural economics from Cornell, and a Ph.D. in economics from Harvard. Professor Stavins' research has focused on diverse areas of environmental economics and policy, including examinations of: market based policy instruments; regulatory impact analysis; innovation and diffusion of pollution control technologies; environmental benefit valuation; policy instrument choice under uncertainty; competitiveness effects of regulation; depletion of forested wetlands; political economy of policy instrument choice; and costs of carbon sequestration. His research has appeared in the American Economic Review, Journal of Economic Perspectives, Quarterly Journal of Economics, Journal of Economic Literature, Science, Nature, Journal of Environmental Economics and Management, Ecology Law Quarterly, Journal of Regulatory Economics, Journal of Urban Economics, Journal of Risk and Uncertainty, Resource and Energy Economics, The Energy Journal, Energy Policy, Annual Review of Energy and the Environment, Explorations in Economic History, Brookings Papers on Economic Activity, other scholarly and popular periodicals, and several books. He is the co-editor of Architectures for Agreement: Addressing Global Climate Change in the Post-Kyoto World (Cambridge University Press, 2007), editor of the fifth edition of Economics of the Environment (W. W. Norton, 2005), co editor of Environmental Protection and the Social Responsibility of Firms (Resources for the Future, 2005), editor of The Political Economy of Environmental Regulation (Edward Elgar, 2004), co editor of the second edition of Public Policies for Environmental Protection (Resources for the Future, 2000), and the author of Environmental Economics and Public Policy: Selected Papers of Robert N. Stavins, 1988 1999 (Edward Elgar, 2000). Professor Stavins directed Project 88, a bi partisan effort co chaired by former Senator Timothy Wirth and the late Senator John Heinz, to develop innovative approaches to environmental and resource problems. He continues to work closely with public officials on matters of national and international environmental policy. He has been a consultant to the National Academy of Sciences, several Administrations, Members of Congress, environmental advocacy groups, the World Bank, the United Nations, the U.S. Agency for International Development, state and national governments, and private foundations and firms. Prior to coming to Harvard, Stavins was a staff economist at the Environmental Defense Fund; and before that, he managed irrigation development in the middle east, and spent four years working in agricultural extension in West Africa as a Peace Corps volunteer.
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5 Responses to Eyes on the Prize: Federal Climate Policy Should Preempt State and Regional Initiatives

  1. Drew says:

    I’m from South Africa, where we are usually amongst the last of the countries to catch up with the rest of the 1st world. We just recently implemented a CO2 emissions tax on all new cars in an effort to appear to be doing something about the environment.

    Perhaps this climate policy will migrate down here in about 5 years?

  2. Jhon says:

    Thanks for this informative information. but not only in USA but also all the leading countries mainly G-8 and also the G-20 countries must follow all the environmental protocols. If all the leading countries follow this rest of the countries will follow automatically.

    But it is very unfortunate that U.S.A is one of the biggest source of environmental pollution. Though they reduce the rates in recent years but what about the damages that have already done to the nature?

    It’s really high time for us to take some action to save our environment and world. I really appreciate the steps taken by Senators.

  3. Should other initiatives as i.e. those aiming towards a different energy source be subsidize/financed by the Government? I think regional initiatives by themselves are not enough to tackle the real source of the problem

  4. I think now, it has managed to introduce the idea of ​​climatic importance, but not yet great strides have been made, countries should take greater initiatives, not only economic. countries must create a line of progress in that way.

  5. Not only in USA but also all the leading countries mainly G-8 and also the G-20 countries must follow all the environmental protocols. If all the leading countries follow this rest of the countries will follow automatically.

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