Centrarian.Com

The U.S. has finally come to accept that something needs to be done about global warming. The question now is how to do it. The fact that we don’t know how much of a reduction in emissions is necessary or how much a given reduction will cost makes the choice very difficult. Although the cap-and-trade has become the mechanism of choice in the United States and is the clear favorite for curbing greenhouse gases (eg. the Environmental Defense Fund supports cap-and-trade), there are still doubts. For one thing, as Samuelson says “no plausible ‘cap and trade’ program would significantly curb global warming.” For another, with quantity-based systems, there is no yardstick for determining equity among countries. Since the main reason the United States gave for refusing to ratify the Kyoto Protocol was that undeveloped countries were not asked to do their fair share, this is no small problem.

In theory, using a price-based mechanism like a carbon tax would be better 1) nationally because incentives could be set at an affordable level and the market used to find cost-effective solutions and 2) internationally because having every country control to same marginal cost would be a good basis for equity. But politically the carbon tax is impossible and any politically acceptable tax would be insufficient to have much impact.

It is to resolve this impasse that a feebate makes perfect sense: it uses prices to drive reductions in greenhouse gas emissions but it does so without collecting any net revenue.

The idea of a feebate is to combine a fee and a rebate in such a way that the incentive effect remains even though the tax effect is neutralized by the rebate. The most well-known feebate is a vehicle feebate, which puts a fee on gas-guzzling vehicles and uses the funds to provide rebates for hybrid cars. But there have been other less publicized feebates that can be used to reduce pollution from industrial sources such as power plants. Such a feebate was developed for controlling SOx in Phila in 1980s (but not implemented) and a version of it implemented in Sweden to control NOx in 1990s.

In the Swedish version companies are simultaneously charged a fee for each ton of pollution and paid a rebate for the amount of energy generated. Companies that have high emissions-to-energy output ratios pay net fees and companies with low ratios collect net rebates. Although this version has worked well - producing a 40% reduction in NOx in its first year - it would probably be politically impossible in this country because the same coal-burning power plants that would have to pay high fees are also ones with significant political clout.

In the Philadelphia version of the feebate, each company is assigned a breakeven emission level (BEL) - which could be based on previous emission levels or by some other formula (as long as the total BELs add up to the initial total of emissions). A feebate “rate” in dollars per ton of CO2 is established for all companies. To make fees equal rebates, the BELs are adjusted each year by the average overall reduction among all companies (if total emissions are down by 10%, then each company’s BEL is reduced by 10%). Those companies whose emissions are above their adjusted BEL pay the feebate rate for each ton over that level and those whose emissions are below the adjusted BEL collect the feebate rate for each ton below that level. Over a period of time - say ten years - the BELs could be based on the average emission-to-power-output ratio for all companies (BEL = avg ratio x power output of the given plant).

The resulting feebate has a number of advantages. As with a carbon tax, incentives can be set at an affordable level and then the market allowed to find the best solution. In contrast to the cap-and-trade which does not provide continuing incentives to reduce once the cap has been achieved, the feebate does. If lower cost ways of achieving reductions emerge, companies have the incentive to take advantage of them up until the new marginal cost equals the feebate rate. In contrast to both the carbon tax and the cap-and-trade which provide little flexibility in determining the distribution of costs among companies, the feebate, with BELs that are independent of the control level, allows vertually any distribution.

Although the feebate is not applicable to all situations and is hardly a silver bullet, it does need to be added to the list of possible mechanisms - and in the case of reducing greenhouse gas emissions from power plants - may be the optimal choice.

© 2007 by Centrarian.com