Kellogg School Corner | Obama’s energy policy options

Kellogg School Corner | Obama’s energy policy options
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First Published: Mon, Jan 12 2009. 10 18 PM IST

Illustration: Jayachandran / Mint
Illustration: Jayachandran / Mint
Updated: Mon, Jan 12 2009. 10 18 PM IST
The incoming Obama administration will list combating climate change high on its policy agenda when it takes office, although the policy which is most likely to result might take an entire presidential term to implement fully, according to two Kellogg School of Management faculty members who focus on environmental policy and its economic impacts.
Illustration: Jayachandran / Mint
Associate professor Ben Jones sees a cap-and-trade system for carbon, in which a fixed number of permits to issue carbon emissions are traded on the open market, just like a stock, as the most likely scenario for working to limit global warming.
Although such a system might seem politically problematic during a recession, given estimates that it would raise coal-fuelled energy prices from 15% to 30%, the recession will likely be over before the system comes fully online due to the complexities in the numbers and types of carbon sources, says Jones, a member of Kellogg School’s management and strategy department whose research also includes national leadership, higher education and development economics.
“The implementation process here is going to be pretty extensive,” agrees Lynne Kiesling, senior lecturer in the Kellogg social enterprise curriculum. “The ability to move speedily is limited.”
Economists and policymakers have been debating the differences between the cap-and-trade system and a straight tax on carbon which would be simpler to implement, says Jones. With the tax, policy directly affects the price, whereas with cap-and-trade, it exerts a more indirect effect by controlling the supply and letting the market find the right price, he explains.
“They’re theoretically equivalent in a perfect world with no transaction costs or political economy,” says Kiesling. “A lot of economists would argue for a carbon tax because it doesn’t seem as manipulable in the political process. I’m probably one of the few economists who would say the tax code is pretty manipulable too.”
Although the coal industry and companies with coal-fired capacity might not like the idea of limiting carbon emissions, says Jones, from a business standpoint the justification is that such pollution amounts to a “negative externality”—a cost which is imposed broadly on society but which is not reflected in what the consumer pays for a good or service.
“The private market doesn’t get it right. These things are too cheap,” he says. “Private firms and individuals don’t account for the environmental damage that’s caused. That might be the reason why it’s good for the economy overall, even if it’s bad for certain sectors.”
There could also be positive impacts on the US economy if limiting carbon emissions reduce the country’s dependence on foreign oil, which could improve the nation’s security, says Jones.
Kiesling points out the influence of consumer demand on the energy market. “The only way we’re going to reduce our dependence on foreign oil is to consume less oil, period,” says Kiesling. “The more we’re using electricity to fuel our transportation, the more that tends to be fuelled by domestically- generated fuels.”
Beyond the focus on carbon, another way in which the new administration could dramatically alter environmental and energy policy is through the economic stimulus package of up to $1 trillion (about Rs48.6 trillion) which is under discussion and likely to land on President-elect Obama’s desk on day one, says Jones.
“From a public, government point of view, it’s a time of enormous opportunity,” he says. “There are a number of things the Obama team can do that make sense from a public investment point of view, the kinds of thing the private sector isn’t going to do.”
For example, he says, the federal government could subsidize the purchase of higher-mileage or hybrid cars. “You then radically readjust the stock of transportation vehicles in the United States toward much higher fuel efficiency,” says Jones, “which dramatically reduces oil consumption (and) creates demand for the car companies. You’re dealing with a number of things we want to do, simultaneously.”
Other areas that offer potentially beneficial intersections are those between energy and low-income housing policies and another industry in trouble, home renovation, says Kiesling. The government could subsidize better insulation and other energy-saving technologies being put into public or subsidized housing, lowering energy bills, providing work for unemployed construction workers and helping the environment all at once, she says.
With such recession-fighting policies, Kiesling emphasizes, the government should proceed with two cautions. “Once you have a programme in place, it takes on a certain inertia—it gains a constituency and it’s hard to get rid of the policy. We have to be careful about creating these permanent entitlements in this area,” she says. “We also have to be careful of the ‘make-work’ project. We run the risk of having a broken-windows policy, where we think we’re creating value by breaking a window and paying someone to fix it. There is an opportunity cost.”
Ed Finkel is a staff writer at Kellogg School of Management.
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First Published: Mon, Jan 12 2009. 10 18 PM IST