The Climate Club Adopts Eli Rabett's Simple Plan

In the New York Review of Books, William Nordhaus(the intelligent one, not Ted of the BTI) looks Climate Shock: The Economic Consequences of a Hotter Planetby Gernot Wagner and Martin L. Weitzman. Nothing in the review and book will come as a surprise to bunnies who have been paying attention.  Nordhaus discusses the three themes of the book, that attempts to control climate change have a serious free rider issue, that tail risks must dominate any discussion of policy to deal with climate change and that geo-engineering to control climate change has serious risks that make it inadvisable (see, Eli can be nice).

The free rider issue is the key to action,

If the fat tails of climate change are perilous, and geoengineering is itself a dangerous solution, what remains? Here, Wagner and Weitzman largely follow the standard economists’ prescription: “Stick it to carbon.” We might think that capitalism is the problem because economic growth has led to rising emissions. But, they argue, a modified invisible hand is the only workable solution: “It’s capitalism with all its innovative and entrepreneurial powers that is our only hope of steering clear of the looming climate shock.” 

 and Nordhaus has another suggestion

The major challenge for climate policy is to overcome free-riding. The answer, I would suggest, is to rethink the design of climate treaties. We can look at successful treaties such as the European Union, the World Trade Organization, or military alliances as models for a more promising climate treaty.The essence of these successful treaties is the “club model.” A club is a voluntary group deriving mutual benefits from sharing the costs of producing an activity. Members get the benefits but also pay the dues. The benefits of a successful club are sufficiently large that members will pay dues and adhere to club rules in order to gain them. If we look at successful international clubs, we might see the seeds of an effective international system to deal with climate change.

I recently described a possible Climate Club in the American Economic Review.4 Under the club rules, participating countries would undertake harmonized but costly emissions reductions. For example, they might agree that each country would implement policies that produce a minimum domestic carbon price of $40 per ton of CO2. The easiest way to raise the price is through a carbon tax, but countries might prefer other approaches such as setting quantitative limits on emissions, or hybrid approaches.

A crucial aspect of the club is that countries who are outside the club—and do not share in the burden of emissions reductions—are penalized. Penalties for those outside the club are central to the club mechanism, and penalties are the major difference from all other proposals from Kyoto to the upcoming meeting in Paris. Economic modeling indicates that the most promising penalty is uniform percentage tariffs on the imports of nonparticipants into the club region. A country considering whether to undertake costly abatement would have to weigh those costs against the potentially larger costs of reduced trade with countries in the club.

This, of course, is Eli Rabett's Simple Plan to Save the World, proposed in 2007

Nations wishing to make major progress on decreasing greenhouse gas emissions should introduce emission taxes on all products. These taxes should be levied on imports as well as domestic goods at the point of sale, and should displace other taxes, such as VAT, sales taxes, and payroll (e.g. social security, health care) in such a way that tax revenues are constant, and distributed equitably. 

These should be introduced as an Emissions Added Levy (avoiding the bad jokes). EAL would be imposed on sale for emissions added in the preceding step and inherent to the consumption of the product, as would be the case for heating oil and gasoline. Manufacturers would pay the EAL on electricity they bought, and incorporate this and the levy on emissions they created into the price of the product they sell.

Imports from countries that do not have an EAL would have the full EAL imposed at the time of import. The base rate would be generic EALs based on worst previous practices in the countries that do have EALs, which would be reduced on presenting proof that the actual emissions were lower.

All countries with EAL systems would reserve a portion (say 5%) for assisting developing countries with adaptations (why not use acclimations?) and mitigating programs.

By basing the levy on emissions rather than carbon all greenhouse gases stand on a common level, sequestration is strongly encouraged as well as such simple things as capturing methane from oil wells and garbage dumps (that gets built into the cost of disposal). The multipliers would come from CO2 equivalents on a 10 year basis.

The process can be effective without across the board agreement which means the ability of countries such as the US to bargain the process down is decreased. Further, early adopters will control the process and establish the base rates in concert. Imagine a world wide EAL system controlled by the early adapters. The Simple Plan will advantage them and the world.

Paul Krugman adopted the Simple Plan in 2014, and now Nordhaus comes on board.