Could Carbon Caps Work As A Stimulus? Maybe!

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Later this year, when the debate over capping carbon emissions starts gathering steam, there’ll no doubt be plenty of conservatives arguing that a recession is precisely the worst time to start regulating greenhouse gases. I wrote a piece for TNR a few months ago about why I think this argument is faulty, but, as a quick follow-up, agricultural economist Michael Roberts points out another way in which carbon legislation could actually boost the economy in the near term:

Committing to future CO2 emission reductions now, by either establishing a future carbon tax schedule or future cap-and-trade schedule, could have a strong stimulative effect in the short run. The reason is that owners of carbon-based fuels (oil, coal, and natural gas) would then have a huge incentive to extract resources more quickly in the short run before they are taxed or capped.

I strongly suspect this would cause energy prices to decline. Prices are not especially high at the moment but they are starting to edge up, and lower prices would be stimulative in the short run.

In any case, there is no reason to put a hold on climate policy because of the global recession. Just legislate policy that wouldn’t kick in for another year or two and would then be phased in gradually.

From a green perspective, a wild extraction frenzy probably wouldn’t be ideal, but it would be stimulative… Also, on Roberts’s point about the need to phase in a cap slowly, well, that’s a given—any complex cap-and-trade regime will take a few years to set up, so it’s unlikely the cap would start chomping down while we’re still mired in recession (and, in any case, Congress can always set the initial cap at pre-recession levels—since emissions are well below that right now, and will be for some time to come, permit prices ought to be cheap—as they are in Europe right now). In the meantime, businesses and utilities would finally know what carbon rules were on the way, which would remove a source of uncertainty that’s been hampering some investment decisions. I’m not sure how much of a stimulus effect that would have, but it couldn’t hurt right now.