Policy vs. Politics: Cap-and-Trade as a Policy Tool for Addressing Global Climate Change

August 14, 2012
By Doug Gavel

Policymakers would be wise to heed some of the best practices developed to combat acid rain as they debate strategies for addressing global climate change. But a new Harvard Kennedy School (HKS) Faculty Working Paper co-authored by HKS Professor Robert Stavins casts doubt on whether even the best designed cap-and-trade policies can withstand the current political dogfights in Washington.
"Two decades have passed since the Clean Air Act Amendments of 1990 (CAAA) were signed into law, launching a grand experiment in market-based environmental policy," the authors write. "By the close of the twentieth century, the SO2 allowance trading system had come to be seen as both innovative and successful. It has become exceptionally influential, leading to a series of policy innovations in the United States and abroad to address a range of environmental challenges."
Stavins and co-author Richard Schmalensee (of the Massachusetts Institute of Technology) reach four primary conclusions regarding implementation of the landmark SO2 cap-and-trade system:
1) In enacting an ambitious – and successful – policy to reduce SO2 emissions to curb acid rain to protect aquatic ecosystems, the government essentially did the right thing for the wrong reason, because the the real benefits have been through reduced human mortality risk, as a result of less deposition of small sulfate particles;
2) Although the program appears to have been successful on nearly all dimensions, a substantial source of its cost-effectiveness was an unanticipated consequence of the deregulation of railroad rates in the late 1970s and early 1980s;
3) It is ironic that cap-and-trade has come to be demonized by conservative politicians in the last few years, since this market-based, cost-effective policy innovation was championed and implemented by Republican administrations from that of President Ronald Reagan to that of President George W. Bush;
4) Court decisions and subsequent regulatory responses have led to the virtual collapse of the SO2 market, demonstrating that what the government gives, the government can take away.
Stavins and Schmalensee argue that while cap-and-trade "is a viable option for tackling large-scale environmental problems," political rhetoric currently stands in the way of pragmatic policy.
"At a time when environmental protection in general and climate policy in particular have become highly polarized in the U.S. Congress, the outlook for an efficient and effective national climate policy is not good. In particular, the tarnishing of cap-and-trade by conservatives as a potential instrument of action may make it even more difficult to give serious consideration in the future to this and other market-based approaches to environmental protection," the authors conclude.
The paper, titled "The SO2 Allowance Trading System: The Ironic History of a Grand Policy Experiment," was prepared for The Journal of Economic Perspectives.

Robert N. Stavins, Albert Pratt Professor of Business and Government

Robert Stavins, Albert Pratt Professor of Business and Government

"At a time when environmental protection in general and climate policy in particular have become highly polarized in the U.S. Congress, the outlook for an efficient and effective national climate policy is not good," write the authors.

 


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