September 18, 2008
This morning I'm testifying on climate change before the Committee on Ways and Means in the House of Representatives.
Global climate change is one of the nation's most significant long-term policy challenges. Reducing greenhouse-gas emissions would be beneficial in limiting the risks associated with climate change, especially the risk of potentially catastrophic damage. Reducing those emissions, however, would also impose costs on the economy. Our political system arguably has difficulty addressing this type of issue, in which there are short-term costs required in order to reap expected long-term benefits.
As I've discussed in other recent testimonies (see here and here), policymakers designing a cap-and-trade program for greenhouse gas emissions face important decisions about how to allocate allowances: whether to sell or give them away, and if they are sold, how to use the revenue generated. In addition, policymakers would face decisions about the degree of flexibility offered to firms -- especially the flexibility to reduce emissions in those years in which it is least expensive to do so. These decisions can have substantial effects on the costs of meeting any given climate target.
Today's testimony also includes a discussion of additional complexities that arise for energy-intensive U.S. industries facing foreign competition (the steel and aluminum industries, for example). Under stringent cap-and-trade policies, these industries would face increased import competition (and export competition in third countries) from countries with less stringent policies on greenhouse gas emissions, which could not only reduce domestic production in those industries but also undermine part of the environmental benefit from an emissions reduction scheme. In my testimony, I examine a few recent proposals intended to mitigate these concerns.