August 9, 2009. Developing countries, especially India and China, are demanding that industrialized countries cut their emissions by 25% to 40% below the 1990 level by 2020. As seen above, Waxman-Markey brings us about 20% below business as usual by then, but still above the 1990 level. To achieve even the 25% reduction would mean more than twice as deep a cut and perhaps four times the cost.
But even the current bill will be hard to pass because neither China nor any developing country has made any firm commitment. The root of this problem is the demand by the U.S. that poor countries accept caps. They reject them because they see it as unfair to be asked to accept a cap far below our own emission level.
Remarkably, this problem was diagnosed and solved years ago by the top three economist to work on it: Joseph Stiglitz (Nobel prize), William Nordhaus (our top energy/climate economist for 35 years), and Gregory Mankiw (Bush's top economist). Their agreement has nothing to do with politics as they span the political spectrum. It's just the result of good economics and a lot of practical knowledge.
The solution is to ask developing countries to agree to a carbon tax. This would be set at the same level that we expect as the price for carbon permits under the Waxman bill. A carbon tax avoids the two capping objections of poor countries: (1) that their caps are set far below ours, and that a cap can stand in the way of their development if they grow rapidly.
A carbon tax also solves the problem that our Senate needs to see a solid commitment from China. Economists agree that a tax and a cap are exactly equivalent if the tax rate equals the permit price. (Actually a tax is a bit better because prices are risky.)
