Whether in the form of a carbon tax or cap-and-trade regime, climate-change policy is coming and will have a profound effect on electric suppliers and consumers. EPRI studied the effects of high...
The Politics of Carbon
The 2008 elections portend federal regulation of greenhouse gases by 2010.
modest gains in the U.S. Senate. A weak economy could postpone passage of GHG legislation for a year, but the political winds seem likely to drive Congress to enact a cap-and-trade system that will impose moderate costs on carbon producers. It likely will have a modest cap, a low safety-valve price, and significant initial grandfathering of permits.
Such a compromise will allow proponents of GHG regulation to navigate the treacherous political waters of Washington, D.C., and also will give carbon producers time to develop new technologies to control their carbon emissions before regulation becomes more stringent and the price of carbon emissions rises.
1. The statutory incidence of the tax, that is, who pays the tax ( e.g., the producers of the carbon fuel, intermediate users, or consumers) usually depends on the costs of administering the tax. The economic incidence (who bears the costs) is more important and depends upon the price elasticity of demand and supply of carbon-based products.
2. Nordhaus, William, The Challenge of Global Warming: Economic Models and Environmental Policy, Yale University Economics Department working paper, 2007, available at http://nordhaus.econ.yale.edu/dice_mss_072407_all.pdf
3. Fourth Assessment Report, Climate Change 2007: Synthesis Report , p. 18, U.N. Intergovernmental Panel on Climate Change.
4. The Economist , May 31, 2007.
5. Wiener, Jonathan B., (forthcoming), “Think Globally, Act Globally: The Limits of Local Climate Policies,” University of Pennsylvania Law Review.
6. The Economist , May 31, 2007.
8. For a given cap, the effect of a binding price ceiling on the amount of emissions will depend upon the price elasticity of demand. Highly elastic demand for emissions will result in a large increase in the quantity of emissions (see Figure 1) .