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Hank Paulson on Climate: Regulate!

Hank Paulson was relaxed, and why not? For a change, the treasury secretary wasn't on the defensive about failing to save Lehman Brothers, or changing direction on TARP. Instead, he was expounding on a favorite topic: saving the planet from the threat of climate change.

Ever the loyalist, he praised President Bush for insisting that any solution to the climate change problem be global, including China, India and the rest of the developing world.

But in his last week in office, he also broke with the Bush administration to say that the U.S. needs a regulatory scheme that will put a price on carbon dioxide emissions. The Bush team has argued that voluntary actions will do the job.

"I'm a big believer in price signals," Paulson said. "This will lead to the development of new technologies."

Accompanied by his wife, Wendy, Paulson spoke this afternoon at Resources for the Future, a widely-respected nonprofit research outfit that analyzes environmental and energy policy. He knows the group well and, in fact, last year hired one of its top economists, Billy Pizer, to lead environmental initiatives at treasury.

Phil Sharp, a former congressman who's now president of RFF, interviewed Paulson. He asked whether Paulson favored a carbon tax to regulate GHG emissions or a cap-and-trade system that would auction or allocate permits to pollute. Paulson declined to say, although he did allow that he had told government officials in China that cap-and-trade has been an effective way from the U.S. to regulate other pollutants, like SOX and NOX from coal plants.

"All you're going to get from me at this juncture is that you need clear price signals that are predictable and gradual," Paulson said. "I want something that's fair, credible, efficient and transparent."

"Depending on how things get done, it may be a distinction without a difference," he added, referring to the choice between a carbon tax or cap-and-trade.

Of course, the Bush administration and outgoing Congress gave us neither.

Still, as Paulson noted, the administration has shifted the global debate over climate change in a useful way, persuading other western countries that the developing world – China, India, Indonesia, Brazil and the rest – needs to sign onto a global treaty to regulate greenhouse gas emissions. The failure of poor countries to sign onto the Kyoto treaty is one reason why it was rejected by Congress a decade ago.

Developing countries need to be part of a post-Kyoto treaty, he argued, even though they emit much less CO2 on a per capita basis than do the U.S., the E.U. and Japan.

Developing countries can be asked to slow the rate by which they increase emissions, even as wealthy countries are required to reduce emissions, dramatically but gradually, on an absolute basis.

"Anything we do, it needs to be global," Paulson said. "Otherwise we're going to export our emissions (actually, the industries that generate the emissions) to other countries."

Paulson also gave the administration credit for supporting a global clean technology fund, administered by the World Bank, that will help poor countries afford clean technology. The fund, for example, would subsidize clean energy projects so they would be no more expensive that conventional fossil fuel projects.

"There is no way that we are going to solve the enormous problems we have before us without the deployment of a great deal of new technology," Paulson said, meaning many billions of dollars of new investment are needed.

The former CEO of Goldman Sachs, Paulson has long been an environmentalist. He's an avid bird watcher and the former chair of The Nature Conservancy, and his wife runs a small environmental NGO. I profiled him last September for FORTUNE and came away impressed by his energy, brainpower and courage. Whatever you say about his handling of the financial meltdown—and it will take time to arrive at a measured judgment—I think he's always acted with the best interests of the populace in mind, despite the criticism that he's been too quick to bail out Wall Streets and too slow to help the little guy.

What's next for Paulson? He wouldn't say, other than to suggest that he'll be spending a good chunk of his time on the environment.

"All I can is I'm going to take some time and plan the next steps," Paulson said, glancing towards his wife. "Wendy's been not just a partner but the leader here. The two of us will figure out what the next step will be when it comes to conservation and the environment."

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