Design Principles and Remaining Needs for U.S. Federal Climate Policy: Emission Fees

Abstract

Reducing greenhouse gas emissions almost certainly requires adding a price to those activities that cause emissions. Policy makers have largely overlooked the most direct option, which is to set a price on emissions (an emission fee), and therefore may be missing an opportunity to reduce the risks of climate change. The advantages of emission fees are considerable, because they create a clear price signal to discourage emissions, help reveal who wins and loses from climate policy, are easy to administer, avoid nefarious market manipulation, and offer the potential for extremely strong emissions reductions in response to breakthrough opportunities. But emission fees also have notable disadvantages because they do not ensure limits on emissions, can be framed unfavorably in political debates, remain at an immature stage of policy development, and could be undermined by plausible political compromises. As a result, careful policy design is necessary to maximize the advantages of emission fees to society and to minimize their disadvantages. Critically, policy design can strive for favorable distributional effects, ensure a ?safe? level of climate protection, and create the potential for even larger emission reductions if breakthroughs occur. Even then, additional climate policy needs will remain for both emission fee approaches, in particular, and climate change risk management more broadly. Most notably, a family of policies that includes mitigation, adaptation, and possibly geoengineering will be needed for comprehensive management strategies of climate change risks. Nevertheless, emission fees could provide one important component of this larger set of tools for dealing with the threat of climate change.