How to Build a Better Climate Policy

Frank Ackerman and Elizabeth A. Stanton

Congress has – once again – considered a new climate and energy bill, and then blinked, instead of passing it. As in the movie Groundhog Day, they seem condemned to keep starting, over and over, until they get it right. It’s a good thing there’s not much at stake, aside from the fate of the earth’s climate, the disastrous dependence on oil, and the costs to the American taxpayers to clean up this mess.

In a recent study, released by Economists for Equity and the Environment (E3 Network), we analyzed the economic impacts of climate policies on households throughout the country. We found there are two basic principles for designing a fair and effective climate policy. First, we need to put a price on carbon dioxide emissions, to send a clear market signal that these emissions need to be reduced. The higher the price, the faster the reduction in emissions – regardless of how wisely, or not, the carbon revenues are used.

And second, we should use the revenues wisely. If most of the carbon revenues are refunded to households, on an equal per capita basis, then a large majority of Americans, including the average household in every state, will come out ahead. That is, the refunds will be larger than the amount you pay for carbon emissions – regardless of how high the price is set.

What would a successful policy look like? To reach the widely discussed goal of a 20-percent reduction in greenhouse gas emissions by 2020, the price of emitting a ton of carbon dioxide in that year should be $75. That sounds scary by itself: It could mean a price hike of 75 cents per gallon at the gas pump. But remember, you’re going to get it back, and more, in your refund check. If 85 percent of the carbon revenues are refunded to households, then four-fifths of the country, including a majority in every state, will come out ahead. The other 15 percent of the revenues can be used for investment in energy efficiency, providing additional jobs while reducing emissions even more.

All of the bills proposed in Congress this year contain some useful elements, but none would do enough, either for the climate or for the taxpayer. They typically have limits, which are much too low, on the allowable price on emissions – keeping it at around $40 per ton or less in 2020, roughly half the level that is needed. And they typically distribute some money, but not enough, to households. The Cantwell-Collins bill comes closest to our recommendation, with a 75-percent refund, but according to our model, even that is not quite enough.

We are not – like Bill Murray in the movie – doomed to repeat our past mistakes. Congress can get this right, avoiding the worst climate damages while building a new, high-tech green economy, and putting money in the pockets of most Americans.

Elizabeth A. Stanton is a senior economist with the Stockholm Environment Institute (SEI-US).