Economists wary of sector-by-sector climate plan

The Senate trio that’s trying to craft compromise climate legislation have bowed to the political reality that a sweeping cap-and-trade bill akin to what passed the House won’t fly in the upper chamber.

Instead Sens. John Kerry (D-Mass.), Lindsey Graham (R-S.C.) and Joe Lieberman (I-Conn.) are looking at a hybrid approach for their work-in-progress bill: Start with a cap-and-trade system for utilities, bring other industrial facilities under a cap at a later date (much later, hopes Democratic Sen. Carl Levin of Michigan), while motor fuels would be addressed through some sort of tax or fee.

But some economists are wondering whether the attempt to gain political traction is coming at the expense of what makes the most sense policy-wise.

Over at Solve Climate, Julia Harte lays out the views of economists and other experts who believe this fragmented system isn’t the most efficient or effective way to go.

From their piece:

“Strictly from an economic efficiency perspective, you're better off with either an economy-wide cap-and-trade policy or an economy-wide carbon tax,” says Michael Livermore, executive director of the Institute for Policy Integrity at New York University Law School.

Unless the carbon tax on fuel is exactly equal to the price of the permits traded between power plants — in which case it's no different than an economy-wide cap-and-trade system — electrical companies and oil companies will have different financial incentives to offset the same quantity of emitted carbon, Livermore says.