The Relationship Between Policy Design Choices, Carbon Prices and Ambition: Evidence from the Field

August 2018–Emily Pechar, Brian C. Murray, and William A. Pizer

As carbon pricing draws increased attention as a policy mechanism to address climate change, stakeholders may consider ambition, defined here as the reduction in emissions compared to business-as-usual (BAU), as an important policy goal. Understanding how policy design affects ambition, particularly the choice between a carbon tax or cap-and-trade mechanism, however, can be a challenge. Emissions reductions compared to BAU are difficult to measure and can be attributed to a variety of other factors unrelated to the carbon pricing policy itself. This paper discusses how the carbon price level may serve as a proxy for ambition when direct measures of emission reduction below BAU are elusive, and how other design choices can also contribute to policy ambition.

Horizontal Equity Effects in Energy Regulation

July 2018–Carolyn Fischer and William A. Pizer

Choices in energy regulation, particularly whether and how to price externalities, can have widely different distributional consequences both across and within income groups. Traditional welfare theory focuses largely on effects across income groups; such “vertical equity” concerns can typically be addressed by a progressive redistribution of emissions revenues. This paper reviews alternative economic perspectives that give rise to equity concerns within income groups, or “horizontal equity,” and suggests operational measures. It applies those measures to a stylized model of pollution regulation in the electricity sector. In addition, it looks for ways to present the information behind those measures directly to stakeholders. It shows how horizontal equity concerns might overshadow efficiency concerns in this context.