Climate Policy as Wealth Creation, Part 3

James K. Boyce

This is the third installment of a five-part series on climate policy adapted from regular Triple Crisis contributor James K. Boyce’s March 31 lecture for the Climate Change Series at the University of Pittsburgh Honors College. This installment focuses on the costs associated with the institution of a carbon price, both the private costs of measures to reduce emissions and the larger private costs that would be paid for emissions that are not eliminated. The first two installments of the series is available here and here.

The full lecture and subsequent discussion are available, as streaming video, through the University of Pittsburgh website. Click here or on the image below.

Just How Much Would It Cost?

Back in 2009, the Speaker of the House of Representatives, John Boehner (R-Ohio), commented in the debate running up to the vote on the American Clean Energy and Security Act—known as the Waxman-Markey bill, after its main sponsors, Henry Waxman (D-Calif.) and Ed Markey (D-Mass.)—that if this bill were passed, it would be the biggest tax increase on working families in American history.

Now, that was probably political hyperbole, but Boehner wasn’t entirely wrong. It would be like a tax increase, and it would be substantial. It has to be substantial if it’s going to engender the kinds of changes in consumption of fossil fuels that are needed to push forward the clean energy transition. We’re talking about big changes: an 80% reduction in our emissions by the year 2050 below some baseline level. We’re talking about really a revolution in energy, and the kinds of price increases that would be ultimately needed to drive that forward are not inconsequential, and so Boehner had a really serious argument there.

What was the Democratic response? “No, no, it’s not a tax, really it’s not like a tax, and really it’s not a big price increase, it’s not going to hurt people all that much, it’s equivalent to a postage stamp a day.” Now, that postage-stamp-a-day estimate came from an estimate of something quite different from the price increases that households would face.

The graph below has, on the horizontal axis, the percent of current emissions, so as you move to the right on that axis, you’re moving to greater and greater emissions reductions. On the vertical axis is the price on carbon associated with that level of emissions reduction, and the red line is what economists call “marginal abatement cost,” the cost of reducing emissions. The basic economics is that once there is a price on carbon and you have to pay more for fossil fuels, if at a relatively low cost you can avoid having to buy those fossil fuels, you will do it.

Resource Cost and Allowance Value in CO2 Cap-and-Trade Program

The relatively low cost ways to do it often involve many kinds of energy-efficiency investments—those things are cheaper to do than paying the extra price on carbon emissions. So that little triangle down at the bottom, where the red line comes to meet the blue one, that’s the total cost of that abatement, of reducing the emissions to 75% of their current level. That’s an actual resource cost, that’s money that firms or individuals have to pay in order to cut their emissions. When the Congressional Budget Office did a study of the impact of the Waxman-Markey bill, or the prospective impact of the bill, in 2009, that’s what they estimated as being very modest, as being equivalent to a postage stamp a day for every household in the United States.

That’s not a huge cost because, in fact, there’s a lot of low-hanging fruit out there in terms of investments. The consulting firm McKinsey & Company did a study a few years back that showed there are even investments that could be made that have a negative cost, if you can imagine that. In other words, if you make that investment to reduce carbon emissions, you actually get money back because it’s so efficient to make those investments. So you can achieve reductions at a fairly modest cost. But what I want to draw your attention to is the much larger area in this blue rectangle. What’s that? That’s the price of emissions, which is the height of that vertical blue line multiplied by the emissions you’re not reducing—the 75% that we’re not cutting. That’s the price that people are paying, the higher price consumers are paying for their use of fossil fuels, and that’s the primary reason for the price increases you will see at every gas pump in the United States, on every electric bill in the United States, and you will see it trickling through into the prices of other commodities in proportion to the use of fossil fuels in their production and distribution.

Let me remind you that gasoline prices are the most politically visible price in the United States. They’re advertised in 12-inch high numbers on street corners across America. Let me remind you that during the 2008 Presidential campaign, when all the major candidates were talking about global warming and were in favor of limiting carbon emissions with a cap-and-trade policy—including John McCain and Hillary Clinton—gas prices went up. They were up to around what they are now, around $3.50 a gallon, something like that, but those were high prices at the time. And both Clinton and McCain said, “This is a terrible burden on the American people, we need to have a federal gas tax holiday for the summer to relieve this burden.” Well, the federal gas tax is around 18 or 19 cents a gallon—it’s really not that much. And they were saying, “That’s really tough, we need to lift that tax in order to relieve the pressure on the public of these high gas prices.”

Well, in terms of the price increases that we’re going to see if we have a serious climate policy, I hate to tell it to you folks, but 18 or 19 cents rounds to about zero. We’re going to see gas prices going well above $5 a gallon in the first few years of the policy, and ultimately higher than that. How are you going to have a policy that squares the circle between, on the one hand, the need to price those emissions in order to address the problem of climate change and, on the other hand, even politicians who see climate change as a problem saying “we can’t let the price of gas go up because it’s going to hurt the American family”?

The reality is, you’re going to see serious price increases here. Frankly, I think you would have a really hard time trying to convince the American people that it’s only going to cost them the equivalent of a postage stamp a day to do it. I mean, it just doesn’t pass the sniff test for reality. We’re not going to address global warming by having gas at $3.50 a gallon. It’s really not plausible to most people, I believe, that you can price carbon emissions to address the problem of global warming without significantly hitting them in the pocketbook, and that is a contradiction that the Republicans have found, correctly identified, and pointed to. And it’s one of the big impediments to achieving a climate policy in the United States.

Triple Crisis welcomes your comments. Please share your thoughts below.

6 Responses to “Climate Policy as Wealth Creation, Part 3”

  1. […] Climate Policy as Wealth Creation, Part 3 Triple Crisis. Makes the point that there is a lot of climate-change related low-hanging fruit, meaning numerous projects with a negative cost, in that they save more than the expenditures involved. […]

  2. david battabong says:

    Here in Europe, I’ve paid well over 5$/day equivalent prices for gas for many years. It’s really easy to integrate into a life-style. Maybe the fact that I haven’t had to buy a postage stamp for years now is a big factor.

    In other words, America, get over yourselves.

  3. hb says:

    “There in Europe,” you don’t have to drive nearly as much as we do “here in America.” We have much greater distances to drive to work each day and have a vastly larger land mass. Maybe it is correct that carbon emissions should be reduced, maybe it isn’t – I’m not a climatologist, chemist, or geologist. That aside, don’t lecture us on the ease of integration because your experience and demonstrated lack of imagination doesn’t permit you to do so.

    In other words, European, butt out until you can think clearly.

  4. Irrational says:

    Both david battabong and hb have a point.
    If I, as a stupid European, oversimplify: everything is simply bigger in the US – including distances – and it is hard to see how you can build public transport networks profitably in sparsely populated regions.
    However, Europe has generally also chosen to invest in its infrastructure (although we may be going the wrong way now), enabling more people to use public transport for getting to work or to the other end of a country (we still need work on borders!).
    Both are policy choices, conscious or not, but they have repercussions on the rest of the system, i.e. if you want to use more public transport you need to have more people in cities where it is viable etc. This is something that requires long-term strategic planning to get there and has to be supported by the electorate at large.
    In the US I am not sure that petroleum products are the low-hanging fruit – I think building insulation is the low-hanging fruit: less heating in winter and less cooling in summer. It will cost more than slapping up the standard houses that the big construction companies like now, but it will pay back for the house buyer if it is integrated in the planning from the start (even though I would suspect that US homes are easier to retrofit than European ones).
    Caveat: I have not read the two first articles, so if these points have been made don’t get rude.