If we want immediate and durable climate action, the time is right.
In a recent essay in The Boston Review, Matto Mildenberger and Leah Stokes (M&S) made quite a splash by arguing against carbon pricing. Admitting carbon pricing is theoretically attractive, they argue that it has been a practical failure. Carbon prices have been too difficult to enact, too low to work, and too unpopular to maintain. Because of those challenges, any carbon price that could become law would not come close to solving the climate problem we face today. Mildenberger and Stokes conclude, therefore, that a new course for climate policy is necessary.
A better course for climate policy, in their opinion, would be to spend heavily on clean technology subsidies, establish sector-by-sector production standards, and hold carbon polluters accountable in the courts for the harms their products cause. Such a combined approach will be more effective because it will clearly articulate the benefits of climate action and build coalitional support over time. That coalitional support will act as a foil to the waning fossil fuel industry’s political power as it faces threats of legal liability and a loss of social license.
But the past need not be prologue. Lessons learned from the past can help policymakers design carbon pricing that commands lasting support today. And the opportunity to act is at hand. Historically, industry has opposed carbon pricing, but that has changed. Much of the business community, including a sizable portion of the fossil fuel industry, now favors climate action via carbon pricing. The remaining encampments of climate denial are shrinking both in industry and government.
I agree with M&S that we should have started decades ago, but a carbon price should still be part of the national response to climate change. Provided it is timed well with respect to recovery from COVID-19, a meaningful carbon price would start us on the path to decarbonization. Moreover, a carbon tax will start working almost immediately and be on solid legal ground, while complex regulations will take years for government agencies to craft and defend in court. If immediacy is necessary, then a carbon price is our best tool.
When the opposition is divided, why unite them?
M&S argue that climate policy needs to be front-loaded with benefits to build a winning coalition for future action. Then, a fossil fuel industry that is shrinking in market share, capitalization, and esteem, will confront the growing political influence of a population happy with more clean energy. With broader constituencies and vested interests now demanding more from policymakers, successive rounds of policy making will up the ante for climate action’s ambition and scale.
But what if we are already there? The oil and gas industry is already shrinking and eyeing real transition. Clean energy is now big business. Low-carbon energy accounts for more than half of new generation capacity added to the power grid. This summer, analysts at Goldman Sachs estimated that new capital investment in renewables would exceed new investment in upstream oil and gas exploration for the first time in 2021. They see a $16 trillion global investment opportunity over the next decade. Opportunities to scale up, and the beneficiaries of achieving that scale, already exist.
A marketplace that valued low-carbon production would immediately give many U.S. manufacturers competitive advantages. For example, the Boston Consulting Group estimates that American steel mills have half the emissions intensity of those in China. Overall, the Climate Leadership Council reports that U.S. goods are 80 percent more carbon-efficient than the world average. If that difference were recognized in prices, U.S. manufacturers would have an immediate competitive advantage and the incentive to build upon it.
Establishing a carbon price will give ambitious CEOs the pass to bring big decarbonization plans to their Boards and Shareholders. The benefits of reducing greenhouse gas emissions will be plain in excel sheets and tax calculations. Writing in The Hill, Curt Morgan, CEO of Vistra Energy, one of largest emitting companies in the U.S. power sector, says that “companies want to hasten the transition to clean energy. But they need regulatory predictability and market certainty to innovate and make clean energy investments with confidence.” Regulatory predictability and market certainty come from a carbon price, not from continually changing command-and-control measures.
Some segments of industry will resist any serious attempt at climate action. They will find political support from the few remaining climate skeptics and policymakers most opposed to climate policy, reflecting long-standing coalitional relationships on the right. But at this moment, that coalition is in tatters and isolated. The denial apparatus that formerly united the fossil fuel industry with their political allies is losing members as the coal industry shrinks, and the oil industry supports carbon pricing. Denialists are split from much of the business community, large segments of the fossil fuel industry, and the growing number of Republicans interested in climate action.
With the political coalition that has historically opposed action divided and much of industry in favor of climate action, climate hawks should take advantage. Enacting a policy that much of industry has pledged to support, and many do so sincerely, will secure the gains that M&S argue can happen. Companies will make investments, change business plans, and provide low-carbon goods and services for consumers searching for market share. They will have a stake in the maintenance of the policy. The Clean Air Act Amendments of the 1990s, which aimed to reduce acid rain, were not only enacted but sustained because large parts of the regulated industry found value in the program. Once it had invested in new equipment, it saw value in permit trading.
The alternative is to introduce policies that will cause the traditional opponents of climate to unite against climate action or work to see it repealed after political winds shift.
M&S caution against embracing business support of carbon pricing if it comes at the expense of regulatory rollbacks or freezes. “Beware of fossil fuel companies bearing gifts.” Gernot Wagner,writing in Bloomberg Green, cautions against any carbon price deal based on a carbon price that is too low and regulatory relief that is too generous to industry.
The challenge here is not to accept the first offer, but to discover a package industry will support, accept, or want to keep. Industry has given public policymakers plenty to work with, without sacrificing critical environmental and social goals. Last month, the Business Roundtable released a climate policy platform. It called for market-based climate policies and complementary measures to limit the transition costs for fossil fuel communities and the poor, maintaining competitiveness of U.S. manufacturing, and ensuring government support for new technologies throughout the innovation pipeline. This is precisely the framework that can lead to immediate results and set up the U.S. for long-term decarbonization.
But would a carbon price work?
Climate activists insist that meaningful climate action at the national level will be needed to put us on a credible path to net-zero emissions by mid-century. So, can a carbon price be designed to drive enough emissions reductions to put us on track? And if so, could such a carbon price gain support?
It is hard to know the exact carbon price needed to meet a given climate target 30 years from now. Scientists and engineers are beginning to understand what a net-zero economy will look like, but models are not useful that far out. If we narrow our view to the next decade or so, we can ascertain what range of emission reductions would effectively get the U.S. on track toward net-zero emissions. A recent study by Kaufman et al. found prices in the range of $36-64 per ton of CO2 emissions by 2025 and $77-124 per ton by 2030 would put emissions reductions on a pathway to net-zero within 20 to 40 years.
Carbon pricing supporters are already working in that range. Of the ten carbon pricing bills introduced in this Congress, nine set a carbon price in 2025 greater than $36 per ton (the exception is a measure sponsored by Representatives Rooney and Lipinski and has a 2025 price of $35.75 per ton), and half set a carbon price greater than $50 per ton. If any were enacted, the United States would immediately have the most aggressive carbon pricing regime on the planet. Were a prospective Biden Administration to sign such a measure into law, it would offer a credible path back into the Paris Agreement all by itself.
Clean energy would not immediately supplant dirty energy, even if priced fairly. We will need technological innovation to eliminate emissions from power, industry, and transportation. A well-drafted carbon price will be on our side in achieving that goal. Price signals are a major pull for innovation. After Congress increased the 45Q tax credit for carbon capture technology (which pays companies a bounty up to $50 per ton for capturing and storing CO2 from emissions sources), private investment flooded into new deployments of that technology. Now, over half of large-scale carbon capture facilities are in the United States. Carbon pricing is a path to technology-neutral clean energy innovation and would spur investment in new technologies.
A carbon tax would not entirely fix underinvestment in scientific research, nor would it alter firms and households’ tendencies to underinvest in energy efficiency. Further, it wouldn’t eliminate the cost premium and limited selection facing prospective buyers of electric vehicles. But these challenges can be resolved by complementary policies. Increased research and development funding, procurement or production standards, and targeted tax credits are all tools for reducing costs and barriers to entry for clean technology and improving energy efficiency. Such tools will be more effective in a world where carbon pricing is a certainty. The private sector will then be chasing opportunity instead of compliance.
Furthermore, a well-drafted carbon price can be implemented quickly and with minimal risk from legal and constitutional challenges. Given the newly conservative judiciary, the straightforward path to implementing a carbon price should appeal to climate activists. Congress has the constitutionally articulated power to lay and collect taxes. Even the most conservative judiciary will be hard-pressed to find a constitutional objection to levying an excise tax on carbon dioxide emissions.
If Congress wrote a law to collect a $50 per ton carbon tax on fossil fuels, the Treasury Department could write the relevant regulations in a year, and the carbon price will be in effect soon after that. Even before affecting home heating bills or prices at the pump, future tax obligations from the carbon price would drive investment decisions for every power plant, factory, and pipeline in favor of low-carbon alternatives. A carbon tax combines the economic efficiency of a market-based solution with minimal need for administrative interpretation, complex trading schemes, or the risk of agencies acting outside statutory authority.
But can we price carbon?
M&S are concerned that, to date, carbon prices have been set too low. The reasons are straightforward. Carbon taxes increase prices for users of today’s energy and infrastructure, and that is unpopular. They concentrate costs on particular interests, leading industry and labor to lobby to limit the price’s scope, indicating industry acquiescence is only part of the equation. As Matto Mildenberger explains in his book Carbon Captured, legislators are wary of raising their constituents’ energy prices. With that history, why should we expect a future carbon price to dodge the same maladies?
As Charles Komanoff writes, M&S are probably too pessimistic in their review of carbon pricing policies in British Columbia and elsewhere in Canada. They are also too critical of the maturing carbon pricing systems operating in Europe, which have no discernible economic cost. Knowing and understanding the challenges, policy entrepreneurs have crafted approaches to address the costs imposed by carbon pricing. The research and analysis exist to help policymakers address how a carbon price will affect households and industry transitions. Tradeoffs will be required, but policymakers can go in with clear eyes and concrete solutions for their constituencies.
M&S make much of the fact that higher energy prices disproportionately affect lower-income households. That is a real issue, but not a difficult one to address. All or part of the revenue raised by a carbon tax can be returned to consumers as dividends or tax credits. According to analyses of U.S. Treasury data on household consumption, returning carbon tax revenue as a per-capita dividend would reduce the total tax burden for more than 70 percent of households. Such a policy would be especially beneficial to poorer households, which spend less on energy in absolute terms than higher-income households. Other approaches include rebating carbon tax revenue via social security benefits, increasing the earned income tax credit and child tax credit, or reducing other taxes. Using some of the carbon tax revenue to cut other taxes or extending tax cuts from the 2017 tax reform set to expire could lead to large environmental benefits while allowing for faster economic growth (important for the next decade of COVID recovery).
A carbon price would have harsh effects on some industries. Coal would immediately be priced out of power markets, leading to plant retirements and less coal demand. This would filter down to lost municipal funding streams and unemployment. In response, revenue from a carbon price could support community transitions and earn support from coal regions.
A small fraction of carbon tax revenue could support municipal budgets that would lose excise tax revenue, jobs programs, economic development, and diversification. Jesse Jenkins proposes that carbon pricing revenue be used to speed the energy transition by subsidizing clean energy production and infrastructure, to build alternatives to fossil production and build a constituency for action This has been the long-standing model employed by most state participants in the Regional Greenhouse Gas Initiative, including recent entrants New Jersey and Virginia.
Policies such as these represent opportunities to limit the costs of transitioning to a low-carbon economy while softening the economic impact of that transition on households and communities.
Meanwhile, carbon pricing is fairly popular when framed as a tax on fossil fuel polluters for the damages caused by their products. The Yale Climate Opinion maps show that 68 percent of Americans favor making fossil fuel companies pay for carbon in their products. They even show majority support for that framing across all Congressional districts. Also, making a clear connection between the carbon price and support for clean energy, new infrastructure, and community transition increases support for a carbon price with the public. Returning the revenue to households, which would accomplish progressive goals, also tests as popular. Frank Lunz’s polling firm found bipartisan support for a carbon tax and dividend proposal (4-1 overall) and particularly strong support from younger Republicans (3-1).
What do the alternatives require?
For all the political challenges of carbon pricing, the alternatives offered by M&S may be no easier to pass into law or implement as effective climate policy at the national level. A plan based on standards, investments, and justice may help build a left-wing coalition, or even pass in California or a few East Coast states. But at the national level, it will require significant new regulations, funding, and administrative capacity.
However, just as M&S criticize past carbon pricing policies as being too timid to have much effect, in practice, past attempts to enact regulations and standards have been typically quite modest given the dramatic emissions cuts needed to reach net-zero. Twenty-nine states have enacted clean or renewable energy standards for their own power generation, but less than half (CA, CT, HI, ME, NV, NJ, NM, NY, VA, WA, WI) have a target for 100 percent clean energy. None of those aim to see that before 2040. It is equally common to see a state with a near-term target of 10-25 percent of its energy coming from renewable or clean sources. Extending to the national level, It is not clear that a clean electricity standard will be easier to pass than an ambitious carbon price.
As Stokes shows in her book Short Circuiting Policy, clean energy laws have been subject to industry meddling, especially in red and purple states where these mandates have faced significant backlash or challenges to their successful implementation. While economists argue that such standards can be as cost-effective as a carbon price, the practical cost of energy standards has been higher than one might think. In an estimate that met some controversy, Michael Greenstone and Ishan Nath found that portfolio standards effectively reduce greenhouse gas emissions, but at a cost that ranges from $115 to $530 per ton of CO2. That cost is paid by ratepayers through power prices and is thus obscured for both consumers and policymakers, making it hard to monitor and redress for those most adversely affected.
Enough government investment in the right places could offset the costs imposed by new mandates. But we do not know what scale of spending would be necessary, effective, traceable, or politically acceptable. Nor is there any proposal for how to finance ongoing investments. In the recovery from COVID-19 and the recession, there is a case for debt-financed stimulus spending that will yield climate benefits. Still, decarbonization is a 30-year project that will require shifting hundreds of billions of dollars per year into low-carbon infrastructure. The market, properly incentivized, can provide that scale of investment.
Subsidies could potentially blunt the costs of climate action for today’s consumers, but caution is warranted layering these policies over one another. As standards are getting more ambitious and subsidies apply to different clean energy sources, power markets are fracturing, and costs are piling up. Power producers and grid operators are appealing to the Federal Energy Regulatory Commission to allow carbon prices in the power sector for the sake of efficiency and cost reduction. Federal standards might resolve some of the challenges of using offsetting standards and subsidies across different states, but a federal carbon price would be one step better.
This approach will have to resemble California’s, with a complex mix of policy instruments to reduce emissions from transportation, homes and buildings, and industry. While that state is making substantial progress toward its renewable energy goals, it stands to miss its climate targets. And while standards and subsidies are credited with cutting more emissions than the state’s cap-and-trade program, the State’s Legislative Analyst Office estimates the costs of standards in the electricity sector to be 3-10 times those of the cap-and-trade system per ton reduced. Meanwhile, cap-and-trade revenues help fund rebates for low-income power consumers and provide a steady funding stream for investing in the energy transition.
Standards and subsidies are a powerful tool for developing new energy technologies and deploying them at scale to reduce costs. And they won’t be the economic disasters that the opponents of climate action will claim. But they will also come with challenges in design and implementation. With carbon pricing, policymakers have a well-vetted set of proposals to address political challenges and pursue positive outcomes with a direct and observable approach.
The steady march of climate change and continued emission of greenhouse gases demands climate policy to pass, work, and survive. M&S are right that economists’ dreams of solving the climate problem with carbon pricing alone have not materialized anywhere. However, even if policymakers are not willing to rely on pricing alone, it is clear that almost any conceivable set of standards and regulations would operate more rapidly and efficiently if combined with a carbon price. A carbon price, combined with standards and regulations, could deliver meaningful emission reductions while minimizing the chances for administrative mistakes or malpractice. And while it has taken far too long to arrive, the coalition that can support such a combined policy is at hand.
M&S write that “[c]arbon pricing has dominated conversations around climate policy for decades, but it is ineffective. Only a bold approach that centers politics can meet the problem at its scale.” I argue that as soon as we are having an actual conversation about imposing a climate policy that meets the problem at its scale, a carbon tax will live.