Carbon Pricing To Combat Climate Change

by James K. Boyce & Mark Paul

reposted from Jacobin

Climate change is the biggest challenge facing humanity today. We need to think deeply about the consequences — environmental, distributional, and political — of the strategies being proposed for a clean energy transition. A recent Jacobin article discussed a range of strategies and concluded that carbon pricing, a strategy currently being actively promoted by environmental groups and policy makers, should not be part of the answer to the climate crisis.

We disagree. A carbon price coupled with complementary regulation is actually a viable way to combat climate change and hasten the transition to a green economy. And it’s something economists across the political spectrum largely agree on. With the Clean Power Plan likely to be dismantled under the Trump administration, a carbon price is needed now more than ever. A well-designed carbon tax or carbon cap can bring real, lasting benefits to current and future generations and help us reclaim common ownership over our environment.

Why a Price on Carbon?

Carbon emissions are not being curbed nearly fast enough (even with the Paris agreement) to fundamentally alter the current path that will take us past the 2 degree Celsius mark. We live in a market-based economy in which the majority of states do not place a price on carbon emissions. In this sense it’s reasonable to think of CO2 pollution as a massive economic externality. Externalities are costs — health impacts from air pollution, or coastal Florida going underwater in the not-too-distant future, for example — that are not currently priced into the market. When you pay for gasoline at the pump, you don’t pay for the environmental damages caused by burning it.

Putting a price on carbon changes incentives. It encourages everyone — individuals, government agencies, and most importantly companies — to curtail their use of fossil fuels. Something that used to be free — our use of the limited carbon absorptive capacity of the biosphere — now costs money. By turning what used to be an open-access resource into a form of property, putting a price on carbon compels us as a society to decide how this new property right will be distributed, above all who will get the money that people pay to emit carbon.

Choosing a Plan

Carbon pricing can be achieved via either a tax or a cap. A tax sets the price of carbon and allows the quantity emitted to vary. A cap sets the quantity of carbon that can be emitted and issues permits up to that cap, allowing their price to vary. The two can be combined, for example by setting the tax rate (or “price” or “fee”) so that it automatically increases if targets for reducing the quantity of emissions are not achieved, as is done, for example, in Switzerland’s CO2 levy.

Commentators frequently assume that a cap means cap-and-trade. This need not be the case. When the government caps carbon emissions by issuing a limited number of permits, trading is needed only if permits are given away free to corporations — typically according to a formula based on past emissions.

This model is not a given. Rather than giving the permits away, we can sell the permits via auctions (as has been done since 2008 in the northeastern US states under the Regional Greenhouse Gas Initiative). With permit auctions no trading is necessary; firms simply buy what they want at the auction. Without trading, there is no scope for market speculation or profiteering.

Regardless of whether permits are auctioned or given away, the cap results in higher prices for consumers. As the quantity of fossil fuels is reduced by the cap, their price goes up. Firms pass along the cost of buying permits at the auction — or, in the case of cap-and-trade, the “cost” of not selling permits they got for free — to consumers, who pay in proportion to the carbon embedded in the goods and services they buy.

The difference is who gets the money. When permits are given away to polluters in cap-and-trade, the corporations get to keep the money — they get the permits for free, and pocket the higher prices paid by consumers. When permits are auctioned, the money is available to the public.

A cap-and-auction permit system, like a carbon tax, allocates rights to the limited carbon absorptive capacity of the biosphere to the public, but what the government does with this money matters. Congressman (now Senator) Chris Van Hollen (D-MD) introduced the Healthy Climate and Family Security Act of 2015 — a bill to implement a carbon cap to reduce economy-wide emissions by 40 percent by 2030, selling the carbon permits at auction. The bill does not propose that the government keeps the money, but instead that the carbon revenue will go to all of us in equal and common measure in the form of a dividend — an equal payment to every woman, man and child with a Social Security number.

Benefiting the People, Not the Corporations

Many economists worry more about the size of the pie than about how it’s sliced. Growth — how fast we can expand the pie — is their obsession. Reading the Wall Street Journal we see economists poring over the recent GDP numbers. Even tuning into “Marketplace” on your local public radio station you’ll be bombarded with “the numbers” — how the stock market is doing. They’re not focusing on Main Street, where distribution matters. How are ordinary Americans faring?

We believe that in the United States today, the distribution of the pie is what matters most. After all, despite the growing pie, most Americans today are no better off than forty years ago. As Nobel laureate Joseph Stiglitz argues, “inequality is a choice.”

We face this choice in carbon pricing, too. We can choose a carbon policy that benefits all Americans, not just corporate shareholders. Due to consumption patterns, a carbon price in itself is a regressive tax: it falls disproportionately on lower-income households, because they spend a larger share of their income on carbon-intensive goods than do the rich. The average worker spends $2,600 a year commuting, but that’s a larger share of one’s income for the middle class than it is for the rich. But the net distributional impact of carbon pricing — how much money one has after taking account not only of higher prices for fossil fuels but also of where the money goes — depends crucially on who gets the revenue.

If the money is returned to the people as equal dividends per person, the policy’s net impact is progressive: the poor receive more in dividends than they pay in higher fuel prices, while the rich pay more than they get back as dividends for the simple reason that they consume more of just about everything, including carbon. Calculations reveal that the majority of households in every state would be better off under such a policy.

A carbon price-and-dividend policy would not only make a modest contribution to reducing income inequality, but would also help to ensure that carbon pricing remains politically sustainable even as higher fuel prices kick in across the economy. In this respect, as Suresh Naidu wrote a few years ago, “[t]he political economy of climate change looks a whole lot like the political economy of redistribution.” Who will come out ahead depends on who will get the revenue from a price on carbon.

No Free Rides for Polluters

There’s no need to rely solely on carbon prices to solve the problem, but they’re surely part of the solution. In fact, when we decide as a society to use prices as a remedy for externalities, we invariably combine them with regulations. For example, when we install parking meters to allocate scarce parking space along our streets, we also have rules about parking between the lines in designated spaces. A combination of prices and rules can be applied to parking carbon in the atmosphere, too.

Regulations, like fuel economy standards for automobiles or the Clean Power Plan for electricity producers, can be important tools in pushing technological change in specific directions. Regulations, like prices, provide incentives — but only to comply with the regulations, nothing more. These alone have proven inadequate to address the climate crisis. Carbon pricing provides incentives to reduce the use of fossil fuels across the board — oil, coal and natural gas alike — and also to figure out new ways to reduce their use.

Regulations alone, in the absence of carbon pricing, are like dams against a river’s flow: they may hold the water in check, but it always wants to flow downhill — in this case, towards the cheapest energy source. Carbon pricing levels the terrain for clean energy. And it has the support of a majority of rank-and-file Republicans, whereas regulations do not.

Moreover, when regulations are the only game in town, polluters continue to use the scarce carbon absorptive capacity of the biosphere for free. Those who pollute the most get the biggest free ride. With carbon pricing, the polluters pay. If we design it right, the public gets the money via dividends, government revenue, or a combination of the two.

Redistribution

Putting a price on carbon by means of a tax or auctioned permits does not mean turning nature into a commodity, any more than installing parking meters turns our public streets into a commodity. It means protecting nature from abuse.

Implementing a carbon price and returning all or most of the money to the people as dividends, similar to the dividends that are paid annually by the State of Alaska to all its residents in the Alaska Permanent Fund — an institution that is supported across the state’s political spectrum — will curtail the use of fossil fuels and speed investments in energy efficiency and clean renewables. At the same time it will put a dent in inequality, by charging for use of our atmospheric wealth and returning the money to all of us on the principle that we own it in common. It’s a win for the environment, and a win for most people.

There is one powerful group for whom it’s not a win: owners of fossil fuel reserves. Keeping these under the ground will substantially reduce their value. This distributional conflict is at the heart of climate policy.


Green State America: How to Keep America’s Climate Change Promises

By Frank Ackerman (reposted from Dollars & Sense)

In January, Donald Trump will endorse climate denial, renouncing the Clean Power Plan and climate targets in general. This will damage the fragile global momentum toward emission reduction, established in last year’s Paris agreement. If the United States refuses to cooperate, why should much poorer, reluctant participants such as India do anything to cut back on carbon?

But among many things that this dreadful election did not represent, it was not a statement of (dis)belief about climate change. Large parts of the country recognize the validity of modern science, understand the urgency of the problem, and remain committed to ambitious carbon reduction targets.

Suppose that many of our state governments got together and told the rest of the world about our continuing commitment to action: we are still abiding by the U.S. pledges under the Paris agreement, or even planning to do more. Not just NGO reports, blog posts, or individual signatures, but an official, coordinated announcement from government bodies with decision-making power over emissions—primarily states, perhaps joined by Indian tribes and major city governments.

The participating states could in theory be on either side of the partisan divide, but of course one side is more likely to sign on at present. Think of Green-State America, initially, as the states that voted for Clinton, and have either a Democratic governor or both houses of the legislature controlled by Democrats. (As it happens, that’s all the states that voted for Clinton except Maine and New Hampshire.) Those 18 states plus the District of Columbia account for 30% of U.S. greenhouse gas emissions. The governor or the legislative leadership of each state could sign the Green-State Climate Agreement, pledging their state to continued dialogue, cooperation, and rapid reduction in emissions. Tribal leaders and city mayors could do the same for their jurisdictions.

Green-State America is the world’s fifth-largest emitter, behind only China, the rest of America, India and Russia. We emit more greenhouse gases than Japan, Brazil, or Germany. If we were a separate country, our participation would be essential to international climate agreements. Even though we are states rather than a nation, we might be able to help reduce the international damage, by letting the world know that much of America still cares about the global climate.

Why should we address global plans at the state level? The United States is a federation of states, governed by archaic eighteenth-century interstate agreements—aka “the wisdom of the Founding Fathers”—such as the electoral college. (If we were a one-person, one-vote democracy, Hillary Clinton would be our next president, just as Al Gore would have been 16 years ago.) The expected assault on environmental and other regulations is likely to include efforts to give more power back to the states, reducing the role of federal rule-making in favor of state-level pollution control. State-level international climate policy is just one step further down that road.

Green-State America is less carbon-intensive than our neighbors; with 30% of national emissions, we have 43% of the U.S. population and 49% of GDP. Our emissions amount to 12 tons of CO2-equivalent per capita, compared to 21 tons in the rest of the country. There is more to be done to control carbon emissions in America—but it will be easy for other states to join us, one at a time.

And this could be a model for other issues. Green-State America might also want to support international treaties on the rights of women, the treatment of migrants, the rights of indigenous peoples, and more.

For now, it’s time to act to protect the climate. It’s time to tell the world that Green-State America keeps its promises, because climate change trumps the election returns.


Richard Tol on climate policy: A critical view of an overview

By Frank Ackerman. This is an excerpt from a more detailed commentary, available here.

Richard Tol’s 2013 article, “Targets for global climate policy: An overview,” has been taken by some as a definitive summary of what economics has to say about climate change.[1] It became a central building block of Chapter 10 of the recent  IPCC Working Group 2 report (Fifth Assessment Report, 2014), with some of its numbers appearing in the Working Group 2 Summary for Policymakers.[2]

After extensive analysis of multiple results from a number of authors, Tol reaches strong and surprising conclusions:

  • climate change will be a net benefit to the world economy until about 2.25°C of warming has occurred
  • the optimal carbon tax is a mere $25/tC (or $7/tCO2)
  • the economically “efficient” climate scenario is likely to lead to atmospheric concentration of greenhouse gases of more than 625 ppm CO2-equivalent by the end of this century; lower targets might have ruinously high costs

Despite, in the end, almost acknowledging the peculiarity of these conclusions, Tol continues to claim that no compelling argument to the contrary has been made: “A convincing alternative to the intuitively incorrect conclusion that continued warming is optimum, is still elusive.”

Tol’s conclusions in this article do not follow logically from his data and analysis. Though claiming an authoritative and objective stance, he offers, in fact, a controversial reading of climate economics. Continue reading…


The Road from Carbonville: A New Series on the Misconceptions Surrounding Climate Policy and How to Avoid Them

By Peter Dorman, originally published on Econospeak

This post begins a new series on policies to combat climate change, with an emphasis on clearing away the misconceptions that have grown up around the subject and now practically strangle it.  While it would take a much bigger effort—a book really—to develop and document all the ideas to come, I’ll do what I can with a series of short, bite-size mini-essays, hopefully one per day.  Given the format, they will sidestep most of the scholarly detail to make their case in the simplest, most direct possible way.  I’d love to do a longer-form version of this series: maybe later.
Continue reading…


Calling out the delayers

Originally published by McClatchy and Tribune Newspapers by Kristen Sheeran

The steady accumulation of recent landmark climate reports is drawing a new form of pushback: not denial, but delay. In a world where denial has no scientific basis, delay provides a fig leaf of legitimacy. But actions speak louder than words and by this metric, delay and denial are indistinguishable.

The latest assessment, the Third National Climate Assessment, raises an obvious question: with so much evidence, why has there been no action? In my home state of Oregon, warming is projected to threaten our iconic forests and the industries they support, and reduce fresh water available for agriculture and industry through declining snow pack. Sea level rise and inundation pose threats to homes and business throughout the Northwest, where ocean acidification (another sad consequence of climate change) is already imperiling our fishing industries. You’d think people would be convinced, but some still find creative ways to rationalize their inertia. Continue reading…


Where Should the Divestors Invest?

The stunning success of the fossil fuel divestment movement has caught many of us off-guard. Almost daily, new universities and foundations are committing to redirecting their endowments from companies that are destroying the planet into ones that are not. Now, on the heels of their successful campaigns, activists are clamoring for guidance on what types of investments they should advocate for. They know that their victories will be ashes in their mouths if their universities simply divest from Exxon and into a “green” Coca-Cola.

Emulating the anti-apartheid Sullivan Principles, there are efforts under way to certify investments as fossil-free. But a “moral screen” that simply rules out fossil fuel companies and perhaps a few other morally questionable investments is a necessary, but not sufficient, step. Continue reading…


Going beyond Buy Nothing Day

By Juliet Schor, originally posted on Al Jazeera America.

As the days count down toward Black Friday and its opposite, Buy Nothing Day — both celebrated the day after Thanksgiving, the traditional start of the holiday shopping season, by buying things or not buying things, respectively — it’s time for the planet’s most fortunate to mount more than a symbolic protest of refusal on the nation’s favorite day of consumer excess. It’s all well and good not to buy for a day, or even a weekend. But after Hurricane Katrina, Hurricane Sandy, Typhoon Haiyan, record droughts and mounting climate casualties, the logic of securing this year’s latest toy just doesn’t cut it. (Did it ever? Who remembers pet rocks and Chicken Dance Elmo?) Nor does a cashmere twin-set and pearls. This year we need to give the gift of survival, to ourselves and the planet. Continue reading…


Guest Blog Posts

Economics for Equity and the Environment Network is a national network of economists developing new and better arguments for protecting people and the planet. Through applied research and public engagement, we seek to improve decision making and further understanding of the relationship between economy and ecology. If you are an economist who shares our vision of an applied, relevant, and realistic economics that is committed to social equity and environmental sustainability at its core, we invite you to join the E3 Network.

Our blog features essays and commentaries by E3 Network economists and those aligned with the mission of the E3 Network. It is great opportunity to share your latest research, findings, and expert opinions. If you would like to contribute, please send us your piece for consideration.


Beyond Reasonable Debate

By Kristen Sheeran

It appears that scare tactics, slander, and intimidation are no longer exclusively the domain of climate denialists seeking to discredit climate science research. According to the actions of Richard Tol, an economist at the University of Sussex, it would seem that these are now acceptable forms of academic debate in economics.

Tol has waged a campaign to damage the reputation of economist Frank Ackerman. Ackerman’s crime? He published a peer-reviewed technical article in a highly reputable journal (“Climate Damages in the FUND Model: A Disaggregated Analysis,” Ecological Economics, 2012.) that critiques Tol’s signature contribution to the climate economics literature – the FUND model. Since then, Tol has written to Ackerman’s employer and publishers accusing him of libel.

As a well published academic, Tol understands that disagreement is not only common, but encouraged by the academy. When you publish your work, you expect others to critique it. Sometimes you agree with the criticisms; other times you do not. But as an academic, you understand that this is how a body of knowledge evolves. It is an expected part of the process. And no academic, no matter how well accomplished, is immune to critique.

It appears that all of the proper channels to facilitate a healthy and productive academic debate have been pursued – and then some. The article was subject to peer-review prior to publication. Ecological Economics then published a commentary by Tol and Anthoff and a reply by Ackerman and Munitz. It even published an editor’s letter on the controversy. Why then, is Tol still trying to silence a legitimate academic debate?

A statement of support has been signed by Terry Barker, Stephen DeCanio, Paul Ekins, Duncan Foley, Michael Hanemann, Julie Nelson, William Nordhaus, Robert Pollin, J. Barkley Rosser, Juliet Schor, and dozens of other economists. It affirms that the Ackerman-Munitz article is a legitimate, peer-reviewed publication making a valuable contribution to the economics of climate change, and urges scholars to pursue criticisms of each other’s work through normal channels of academic debate. If you are an economist who agrees with this statement, Ackerman invites you to add your signature (e-mail frankackerman12 at gmail.com).

In the interest of full disclosure, Ackerman is a founding member of E3 Network. He blogged about the FUND model on Real Climate Economics back in 2011 We also published Tol’s response to that blog post.