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Economists have for decades recommended that carbon dioxide and other greenhouse gases be taxed – or otherwise priced – to provide incentives for their reduction. The USA does not have a federal carbon tax; however, many state and federal programs to reduce carbon emissions effectively price carbon – for example, through cap-and-trade systems or regulations. There are also programs that subsidize reductions in carbon emissions. At the 2022 meetings of the American Economic Association, the Society for Benefit-Cost Analysis brought together five well-known economists – Joe Aldy, Dallas Burtraw, Carolyn Fischer, Meredith Fowlie, and Rob Williams – to discuss how the USA does, in fact, price carbon and how it could price carbon. Maureen Cropper chaired the panel. This paper summarizes their remarks.

For political, jurisdictional and technical reasons, environmental regulation of industrial pollution is often incomplete: regulations apply to only a subset of facilities contributing to a pollution problem. Policymakers are increasingly concerned about the emissions leakage that may occur if unregulated production can be easily substituted for production at regulated firms. This paper analyzes emissions leakage in an incompletely regulated and imperfectly competitive industry. When regulated producers are less polluting than their unregulated ounterparts, emissions under incomplete regulation can exceed the level of emissions that would have occurred in the absence of regulation. Converseley, when regulated firms are relatively more polluting, aggregate emissions under complete regulation can exceed aggregate emissions under incomplete regulation. In a straightforward application of the theory of the second best, I show that incomplete regulation can welfare dominate complete regulation of emissions from an asymmetric oligopoly. The model is used to simulate greenhouse gas emissions from California's electricity sector under a source-based cap-and-trade program. Incomplete regulation that exempts out-of-state producers achieves approximately a third of the emissions reductions achieved under complete regulation at more than twice the cost per ton of emissions abated.

Author(s): Auffhammer, Maximilian; Blumstein, Carl; Fowlie, Meredith | Abstract: The key finding of an influential paper that received the International Association for Energy Economists' Best Paper Award (2004) is that utilities have been overstating electricity savings and underestimating costs associated with energy efficiency demand side management (DSM) programs. This claim is based on point estimates of average DSM-related savings and costs implied by an econometric model of residential electricity demand. In this response we first argue that the choice of test statistics, by not weighting estimated savings and costs by utility electricity sales and DSM expenditures respectively, biases results in favor of rejecting the null hypothesis that utility-reported electricity savings reflect true values. We also note that utility estimates of average program savings and costs are rejected based on point estimates alone; no attempt is made to evaluate the uncertainty surrounding these estimates. We use the same data and econometric model to estimate the appropriate test statistics. We then construct nonparametric bootstrap confidence intervals. We fail to reject the average electricity savings and DSM program costs reported by utilities using both the weighted and unweighted test statistics. Our results suggest that the evidence for rejecting utility estimates of DSM savings and costs should be re-interpreted.