Some Inconvenient Truths About Climate Change Policy

Economists often point to Pigouvian taxes and cap & trade programs as the preferred policy tools for reducing greenhouse gases. In contrast, policymakers have relied on measures that either explicitly or implicitly subsidize low carbon fuels. We simulate a transportation-sector cap & trade program (CAT) and three policies currently in use: ethanol subsidies, a renewable fuel standard (RFS), and a low carbon fuel standard (LCFS). Our simulations confirm that the alternatives to CAT are quite costly—2.5 to 4.5 times more expensive. What explains the persistence of these alternative policies in spite of their higher costs? We provide evidence that the answer lies in the political economy of carbon policy. We find that the alternatives to cap & trade exhibit a feature that make them amenable to adoption—a right skewed distribution of gains and losses where many counties have small losses, but a smaller share of counties gain considerably—as much as $7,200 per capita, per year. We correlate our estimates of countylevel gains from CAT and the RFS with Congressional voting on the Waxman-Markey cap & trade bill, H.R. 2454. Because Waxman-Markey would weaken the RFS, House members likely viewed the two policies as competitors. Increases in a district’s CAT gains are associated with a increase in the likelihood of voting for Waxman-Markey while increases in a district’s RFS gains are associated with decreases in the likelihood of voting for Waxman-Markey. ∗The authors thank Mark Jacobsen and seminar participants at the Heartland Environmental and Resource Economics Conference, Iowa State University and the University of California Energy Institute for helpful comments. Knittel gratefully acknowledges support from the Department of Economics and Institute of Transportation Studies at UC Davis and the Energy Institute@Haas. Department of Economics, University of North Carolina at Greensboro. Department of Economics, University of Colorado at Boulder. William Barton Rogers Professor of Energy Economics, Sloan School of Management, Massachusetts Institute of Technology. National Bureau of Economic Research. Institute of Transportation Studies, University of California, Davis.