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Energy and the Environment

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Energy and the Environment: Policy Advice for the New Administration The MatrixThe Principle of Targets and InstrumentsTargets & instrumentsMy favorite example of hitting several birds with a single stone is a gas tax. I claim this one instrument hits 7 targets:But my main point: independent policy instruments have independent effects. A policy measure that helps one goal might hurt another.Another example,Slide 7Slide 8* Measures to reduce GHG emissions include a wide variety of possible policies --Most of these GHG measures would also work in the same direction with respect to local air pollution, traffic congestion, accidents, and improving national security.GHG measures continuedUsing the table for policy-makingLet’s move to today’s policy context, January 2009Current political context, cont.Three ways to make energy tax more palatable politicallySlide 16Appendix: In two places, I have distinguished the long run from a shorter or medium run2. The SPREnergy and the Environment: Policy Advice for the New AdministrationThe MatrixJeffrey FrankelHarpel Professor for Capital Formation and Growth, Harvard Kennedy SchoolJoint session of the American Economics Association and the Association of Environmental & Resource EconomistsSan Francisco, January 3, 20092The Principle of Targetsand Instruments3Targets & instruments•Politicians are tempted to think that a policy to help one environmental goal will also help other environmental goals, and sometimes even non-environmental goals -- that it will be “good for everything.” (E.g., Porter hypothesis.)•Economists tend to presume tradeoffs, and the principle of targets & instruments, –which says you cannot expect to hit more than one bird with one stone, except by coincidence. •Examples go either way.4My favorite example of hitting several birds with a single stone is a gas tax. I claim this one instrument hits 7 targets:•Traffic congestion (time lost)•Traffic accidents•Local air pollution (including health benefits)•Global climate change•National security (cutting oil import dependence)•Trade deficit (oil imports are a big component)•Budget deficit, or else use revenue from a higher gas tax to reduce other distortionary taxes (fix AMT or eliminate payroll taxes on low-income American workers).5But my main point: independent policy instruments have independent effects. A policy measure that helps one goalmight hurt another. •An example of an initiative that successfully addressed one important environmental goal with the side effect of making another worse: the Montreal Protocol. –It successfully addressed stratospheric ozone depletion,–but banning CFCs led to substitution of HFCs and (worse) PFCs, which are Greenhouse Gases (GHGs).6Another example,•arousing greater passion:whether to start building nuclear power plants again. –On the plus side, nuclear power is an energy source that does not create GHGs; –on the minus side, nobody wants to store the nuclear waste in their state.•Even the national security implications go both ways: –on the plus side it helps reduce dependence on imported oil, –on the minus side, nuclear plants in other countries increase proliferation risk.7•Government in practice makes major decisions in largely independent policy processes (“stovepipes”). •We need an overarching framework such as the matrix I am now suggesting. –Across the top are the labels of columns each of which represents a different objective:–Down the side are the labels of rows each of which represents a different policy instrument.8 Objectives → Policy Measures ↓ Miti-gateGCCClean AirCuttraffic Natnl.Secur-itySpeciesHabitat & Bio-diversityWaterTaxes/Budget & Econ.efficiency GHG measures, e.g., energy taxes *+ + + + +/-Drill Medium Run Long run- - -+-_Coal-to-liquids- --+- -Ethanol Subsidies-+--End import quotason Brazil sugar + + + +Help Everglades;Hurt Amazon?+ +R&D+ + + +Forestation (vs.ag.)+ + + + +Ban fossil fuel subsidies+ + + +SPR: Short Run Long Run+-+-+--++Nuclear+ + - +9* Measures to reduce GHG emissions include a wide variety of possible policies --•Domestic measures include:–Tightened CAFE standards–Subsidy of renewables–Price•Cap & trade for power sector•Oil tax•Gas tax•Carbon tax•Effects of some differ from others’. Thus they cannot all be captured by the single first row.•Any measure to cut GHGs would of course more likely help slow GCC if undertaken as part of a multilateral successor to the Kyoto Protocol.10Most of these GHG measures would also work in the same direction with respect to local air pollution, traffic congestion, accidents, and improving national security.•But CAFE standards – –as other performance standards or “command & control” policies, are an inefficient way to attain a given environmental goal, and so should receive a “minus“ in the Economic Efficiency column. –The decision to grant more lenient standards to “light trucks” probably allowed the SUV craze, thereby perversely worsening emissions and increasing congestion & traffic accidents.11GHG measures continued–Alternative energy sources (wind, solar, nuclear & hydro…) would help plug-in hybrids come in on a mass scale, reducing tailpipe emissions. •But they (like R&D to improve gas mileage) would continue the trend toward higher miles driven, and thus have adverse effects in the “Traffic congestion & accidents” column. –Subsidies to renewables of course have a negative effect on the budget. –Most of the other measures, however, could both correct a distortion & raise revenue. –Hence the “+/-“ entry in 2nd-to-last column.12Using the table for policy-making–In principle, the President should choose simultaneously a combination of policy measures that are listed along the left column, so as to attain the goals along the top. –Technically, it is a matter of formulating a big objective function, and then solving Lagrangian equations (or linear programming, if environmental constraints are absolute)–Of course one could debate the signs of some entries – I particularly welcome such a discussion – and one could add some additional policy measures & goals. –But this sort of framework is the appropriate approach, not the “stove pipe” approach government uses.13Let’s move to today’s policy context, January 2009•Priority #1 for the new Administration will be a fiscal stimulus


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