Carbon Pricing: The Price is Wrong

Gar W. Lipow, Guest Blogger

For U.S. climate activists to succeed, they must demand serious government spending on energy efficiency and renewables—spending comparable to the current war budget. Calling for hundreds of billions in annual green public investment has potential for the popular appeal needed to build a powerful grassroots climate movement. That investment would be the best policy as well. Massive clean energy spending would not only provide jobs and economic growth on a grand scale. It is the most effective way to reduce greenhouse gas pollution.

It is widely, though not universally, acknowledged that solving the climate crisis will require public investment and subsidies, efficiency regulations and clean energy requirements, plus a price on greenhouse gas emissions. (The idea behind a carbon price: polluters pay per unit of greenhouse gas pollution released.) But, in practice, policy advocates tend to fetishize the carbon price and drop other requirements. For example, James Hansen, perhaps the world’s leading climate scientists says “If we would put this price on carbon it would favor renewables, and it would favor energy efficiency, and it would favor nuclear power—it would favor anything that is carbon-free… ”[i] Charles Komanoff and James Handley of the Carbon Tax center describe a carbon tax as the “sine qua non of effective climate policy”.[ii] Mainstream environmentalism tends to favor cap-and-trade over carbon fees, which indirectly results in a price on carbon. Between carbon tax and cap-and-trade advocates, most climate change opponents prioritize carbon pricing. Few join Komanoff in referring to such pricing as the “sine qua non” of carbon policy. In policy discussions, however, most environmental economists start with cap-and-trade or a carbon fee, and many never discuss anything else.

What is wrong with this? Since we can’t phase out greenhouse gas pollution instantly, it seems fair to require polluters to pay something in return for the damage they cause until that pollution ends. Further, such payments provide some incentive to reduce the amount of greenhouse gas pollution emitted.

The problem arises when pollution prices are prioritized over other solutions. The climate crisis cannot be solved without huge infrastructure investments: wind turbines, solar panels, transmission lines, smart grid upgrades, trains, electric cars and efficiency improvements. Historically new infrastructure has never been built solely or largely as profit seeking, risk taking behavior in response to what economists call price signals.

Consider United States history. The Post Office was considered so essential it is mentioned in the Constitution. The Erie Canal, an early major infrastructure project in the United States, was financed primarily by New York State’s ability to borrow. Telegraph companies paid nothing for rights of way whose value far exceeded money invested to construct them,  and direct government funds besides. The great intercontinental railroads were granted free rights of way, plus land on either side of  the tracks for real estate development. Similarly, streetcars in cities flourished based on free or discounted rights of way, and other subsidies. Water and sewer infrastructure is mostly public in the United States, and always publicly subsided. Fossil fuel pipelines are granted public rights of way, and often delegated power of eminent domain to secure easements from unwilling private landowners. Electric lines, phone lines, broadband lines require similar arrangements. Public wireless spectrum is sold to private interests at far below market value. Highways, roads, airports and water ports are financed publicly, with very rare exceptions.

Maybe a massive transformation in energy producing and consuming infrastructure can reverse this. For the first time in history a change of this magnitude might be largely privately financed, with public involvement mainly being in the form of ’getting prices right’. Maybe direct public investment and regulation other than setting a carbon price can be supplements rather than the main means. But contemporary as well as historical evidence suggests otherwise.

When deciding where to invest money, businesses generally demand extremely high expected rates of return for energy savings, and other flow operating costs (such as water and raw materials) compared to returns on general investment[iii].  the primary reason businesses give is that energy (and other flow) savings are “not their core business.” In practice, “core business” usually equals increasing labor productivity.  Labor savings increase leverage over workers in a way that savings in energy and other flow costs do not increase leverage over suppliers.

Response to price increases is similarly sluggish in owner-occupied residential buildings. because capital is much more expensive for individuals than firms and because people feel the need to maintain savings for emergencies (including job loss). So individuals require much greater returns before, say, upgrading insulation in buildings than utilities require before investing in new generation. Renters have even less incentive to invest in insulation, which becomes a gift to their landlord whose value they may not recover before moving out.

Another reason price should not be the primary driver of change is that we simply cannot measure local emissions with a reasonable degree of accuracy or precision. Gases released into the atmosphere spread quickly, so taking samples in a few spots gives us a very good idea of worldwide greenhouse gas concentrations. But local emissions are very difficult to measure, and both precision and accuracy is very rough at that level. Charging a carbon price as far upstream as possible (upon extraction or import), as far downstream as possible (during use) or midstream (during refining or processing) makes no difference. Carbon content within similar types of fuel, and methane and black carbon emissions associated with extraction, transportation and combustion vary too greatly to measure pollution per unit of fuel with much precision. Even a highly imprecise and inaccurate price provides a better incentive to reduce use than a price of zero. But that rough-and-ready incentive is all a greenhouse gas emissions price provides, an incentive people respond to slowly and partially.

So far I have discussed policy reasons why a carbon price should not be the “headline” in climate change policy. But there are important political factors as well. Polls show that a majority of American oppose a carbon tax. One recent poll includes a fee-and-dividend where carbon tax revenues are returned to consumers, without significantly increasing support[iv]. In the same poll, opinion about cap-and-trade public opinion is mixed, divided roughly between support, opposition, and don’t understand/undecided, though opposition is larger than support.

Politically, cap-and-trade and carbon taxes have always been policies designed to bring powerful interest groups on board. The powerful political interests that oppose doing anything to solve the climate crisis, however, won’t yield to persuasion and deal making. They are not parties to a negotiation; they are obstacles that need to be bulldozed by a grassroots political movement. In terms of policy, the best chance of building such a movement is for supporters to headline popular concepts, such as public investment, rather than unpopular or weakly popular ones such as carbon pricing. Climate activists will find more success in a grassroots coalition built around popular large-scale green investments that directly provide jobs and economic growth than trying to attract support with an approach centered around pollution pricing policy.

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[i] Joe Conason. 2013. “An Interview With Pioneering Climate Scientist James Hansen.” Truthdig: Apr-26.

[ii] Charles Komanoff. 2012. “Carbon Tax on Trial: Chimera or Green Charm?” Carbon Tax Center.

[iii] Jerry Jackson. 2010. “Promoting energy efficiency investments with risk management decision tools.” Energy Policy 38(8):3865-73.

Catherine Cooremans. 2012. “Investment in energy efficiency: do the characteristics of investments matter?” Energy Efficiency 5(4): 497-518.

Surash Muthulingam, Charles J Corbett, Shlomo Benartzi, Bohdan Oppenheim 2009. Managerial Biases and Energy Savings: An Empirical Analysis of the Adoption of Process Improvement Recommendations. Los Angeles: Anderson School of Management – University of California Los Angeles.

Anderson, Soren T.; Newell, Richard G. 2004. Information programs for technology adoption: the case of energy-efficiency audits. Resource and Energy Economics 26(1):27-50.

Ramon Luis Maria Abadie, Arigoni Ortiz and Ibon Galarraga. 2010. The Determinants of Energy Efficiency Investments in the U.S. Bilbao,Spain:Basque Center for Climate Change.

[iv] Frederick Mayer, Sarah Adair, Alex Pfaff.  2013. Policy brief: Americans Think the Climate Is Changing and Support Some Actions. Durham, NC: Duke Nicholas Institute for Environmental Policy Solutions, Duke University.

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Gar Lipow is a long-time environmental activist and journalist; his book Solving the Climate Crisis through Social Change: Public Investment in Social Prosperity to Cool a Fevered Planet was published by Praeger Press last year.