Ken, I browsed some of the REP papers and read your article on Gates. You write well. I think the social cost of carbon is a distraction. I suspect you agree. You and I both seem to focus on paying for abatement, not for emissions. If a social cost of carbon tax is 20 $/MT but a polluter's abatement cost is 40 $/MT, we have gained nothing except manipulation of consumer demand.

I must admit much of the math in the REP articles is beyond me. The basic concept, however, does have appeal - charge for tonnes emitted and rebate in proportion to production. One paper suggested rebating in proportion to emission reductions. This is basically a bifurcated intensity-based performance standard. Money is collected in $/MT and is rebated in $/production. It doesn't take much math to conclude the goal is better production/MT or, inversely, lower MT/production.

This is much the same as the MDC performance standard except in REP polluters seek their own implied performance standard based on whether the tax and potential rebate justify the investment to abate. MDC sets an explicit performance standard but with two flexibility features. First, the MTPY limit is proportional to production value. So, a polluter's emission limit can go up in good years. Second, MDC has a true market where credits are bought and sold giving some polluters a way to buy compliance without investing in the current year (maybe the construction loan doesn't close in time) and others a way to raise money from relatively low control costs.

I am uneasy, however, with the idea of pulling money into government and sending it back out. Seems like a bit of wheel spinning to me and risks appropriation by politicians. The scheme might be equitable across sectors if production is measured in monetary value and not in mass, volume or other physical units. However, I do not see a way to trade credits across sectors or between polluters without an explicit performance standard. Trading creates a real emission reduction market and benefits both high and low reduction cost polluters. The one gets cheaper compliance and the other profits from selling it. Trading adds two new degrees of optionality to the system. Under a tax and REP polluters can either pay or abate. Trading allows them also to sell and buy. Working for a petroleum refiner, I witnessed first hand the huge economic value of having just one or two more options for operating one's plant.

While I understand the potentially binding effect of a cap, which might drive an overly restrictive performance standard, I think a cap may be necessary to sell a national, multi-sector program politically. I believe we will have to trust the political/regulatory/governmental process to set a cap that eases us into the process of eliminating and offsetting emissions. Without a cap, REP is left with increasing the tax to make emission reduction more attractive. To the extent RAP fees do not incent emission reductions, they only serve to raise prices for consumers. Not something I favor. I lean toward a cap, not enforceable by itself, but driving a performance standard that is enforceable. I am, however, not yet ready to die on that hill and am eager for further discussion.

We have yet to dive into the subject of leakage and border adjustments. Not sure how to compare MDC and REP on that front. Will think about it. Thanks again for the great conversation. In local conversations, this subject clears rooms in seconds. 😊

Best,

Bob