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Many of you have seen the attached CBO report on carbon policy, but
Don Fullerton, Dept. of Economics, U.Texas, Austin, TX 78712
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Today, CBO issued a study on "Policy Options for Reducing CO2 Emissions" (attached).
The study notes that:
** Most analyses suggest that a carefully designed program to begin lowering emissions of carbon dioxide would produce greater benefits than costs.
** An important criterion is the efficiency of a policy--that is, how well it balances the costs and benefits of reducing emissions, even when both are uncertain.
** Approaches that provide incentives for businesses and individuals to reduce emissions would be more efficient than a "command and control" approach, in which the government would specify how much individuals entities could emit or what technologies they could use.
** Analysts generally conclude that a tax on carbon or on carbon dioxide emissions would be more efficient than a fixed cap on emissions. Such a tax would provide firms with the incentive to undertake more emission reductions when the cost of doing so was relatively low and allow them to reduce emissions less when the cost of doing so was particularly high.
** In contrast, an inflexible cap-and-trade program would require that annual caps be met regardless of the costs. Available research suggests that in the near term, the net benefits of a tax (over and above costs) could be roughly five times greater than the net benefits of an inflexible cap.
** A cap-and-trade program could incorporate features that would achieve many of the efficiency advantages of a tax on emissions. Such features include a "safety valve" (a ceiling on the price of emission allowances), a floor on allowance prices, "banking" and "borrowing" (allowing firms to move allowances and emissions between time periods), and a "circuit breaker" (which would stop a cap from becoming more stringent if the price of allowances rose too high).
The paper assesses these various alternatives on the basis of three criteria: efficiency, ease of implementation, and interactions with the emissions programs of other countries. Other criteria could also be significant in making policy choices.
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Earlier this week, CBO released an analysis (attached) of the increases in funding over the past several years for military activities in Iraq, Afghanistan, and elsewhere in the war on terrorism. Appropriations have risen from $76 billion for fiscal year 2003 to $165 billion for 2007; the Administration has requested $188 billion for fiscal year 2008.
Most of the spending is concentrated in two categories---operation and maintenance, which has roughly doubled from 2004 to 2008, and procurement, which has increased tenfold over that period. The reasons for some of the increases are difficult to determine precisely because only limited data are available on the pace of operations and some of categories used for reporting spending are very broad.
Some of the increase resulted from funding to repair or replace damaged equipment, often with costly upgrades to repaired items. In the past two years, the Defense Department has substantially expanded its procurement of new equipment---replacing damaged equipment with newer models, accelerating planned purchases of new systems, and enhancing its capabilities for the longer-term war on terrorism. Little of the increase in funding is directly related to the number of troops deployed, which hasn't varied a great deal over that period.
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Also attached is CBO's cost estimate for the recently enacted stimulus legislation, which is estimated to cost $152 billion in fiscal year 2008 and $16 billion in 2009, and to save $44 billion from 2010 through 2018.
Preview of coming attractions---coming out on Friday, a CBO paper on geographic variation in health care spending. Stay tuned.....
Bob Sunshine
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