For Climate Change, Carbon Pricing is No Silver Bullet

by Renee Cho | July 18, 2016

My last blog, Carbon Pricing for the Climate: How It Could Work, explored the benefits of pricing carbon, a strategy many economists, scientists and policy experts believe is the most effective way to deal with global warming. But others argue that for numerous reasons—political, economic and social—carbon pricing is not a silver bullet for dealing with climate change.

Carbon pricing has been effective at gradually reducing greenhouse gas emissions, but climate scientists warn that fossil fuels must be phased out entirely as soon as possible since the greenhouse gases we’ve already emitted will stay in the atmosphere for centuries.

As emissions continue, we are exacerbating a climate system that’s already showing signs of serious disruption. To get to zero carbon emissions, we need to keep most of the remaining fossil fuels in the ground—that means drastically altering our energy, building and transportation systems so that they are not dependent on fossil fuels.

Pricing carbon encourages us to select the most efficient and cost effective choices among existing options, but it cannot bring about the radical changes needed.

Here are four reasons why.

It doesn’t always work as advertised

Price alone will not produce the technological innovation that we need to transform our energy system. Steve Cohen, executive director of the Earth Institute at Columbia University, acknowledges that some carbon pricing schemes around the world have had an impact on emissions. “But we’re a global economy,” he said. “If the carbon taxes in place are really working, why aren’t the substantive technologies being developed that could then be sold here? Where is the great innovative breakthrough that was being promised if the price of fossil fuels goes up?” According to David Driesen, a professor at Syracuse University College of Law specializing in environmental law, carbon pricing “encourages the cheapest options, not the most valuable technological advances.”

Opting for the cheapest and easiest carbon reductions can also create other environmental problems. For example, the shift to relatively inexpensive natural gas in the U.S. means we are investing in an infrastructure that will lock in years of fracking with its methane emissions and other environmental problems.

Most carbon pricing starts slowly and is incremental. While ideally the tax gradually rises or the cap is lowered, this does not occur automatically. Governments still must price carbon correctly in order for emissions to decline, and this is politically difficult.

Mark Jaccard, a professor of sustainable energy at Canada’s Simon Fraser University, helped study carbon pricing for the Canadian government. Last December, Canada was one of 195 nations that reached an agreement in Paris to reduce their greenhouse gas emissions. Jaccard’s research determined that for Canada to achieve its Paris accord goal of a 30 percent reduction in emissions from 2005 levels by 2030, a Canada-wide carbon price of $30 (Canadian dollars) per ton would need to reach $160 per ton by 2030. But in British Columbia, where the carbon tax was set to increase each year, it was capped at $30 a ton when a conservative government took over. Australia’s carbon tax of $23 (Australian dollars) per ton was repealed by a rightist government. As yet, no country in the world has implemented a carbon tax high enough or one rising quickly enough to achieve its Paris accord goal.

Systems can be gamed. After the Kyoto Protocol, emissions trading schemes were set up to encourage reductions. Carbon credits for new projects to help reduce emissions could be sold to countries needing to reduce their emissions. China set up companies to produce hydrofluorocarbons (used as refrigerants), which contribute to global warming, then destroyed them; because it was eliminating HFCs, it was able to make a profit selling carbon credits. In the early days of the European Union Emissions Trading Scheme, allowances were given out free to polluters who made money selling them while continuing to pollute under too lenient a cap.

Despite the intent of some carbon pricing schemes to be revenue neutral, they can lead to inequality, because low-income people use a higher proportion of their income on energy than wealthy people. Since there is as yet no real alternative to gasoline, or heat and electricity for the home, the poor will end up paying more. While some carbon pricing systems return a portion of the revenue to low- and middle-income families, poor people often cannot wait to get money from a tax credit or payback mechanism. In reality, elaborate redistribution schemes are complex and difficult to implement properly.

In the U.S., a carbon tax is politically unfeasible.

As noted above, even when carbon pricing is in place, it is subject to politics. Republicans, many of whom are climate deniers, currently control both houses of Congress. In 2015, the Senate passed a bill blocking a carbon tax, and just last month, the House of Representatives voted to condemn a carbon tax, even though none was being proposed.

“The Congress of the United States is not going to pass a carbon tax,” said Cohen. “Even if the Democrats take the Congress and the White House, it’s unlikely that they would then go about raising the price of gasoline. That would be the best way to ensure that they’d get voted out of office two years or six years later. This is a country that doesn’t like to pay taxes.”

Since carbon pricing is politically impossible, he believes the best way to change the energy system is to lower the price of renewable energy. “There’s going to come a point where renewable energy will be cheaper and more convenient than fossil fuels. When that happens, people will start using it,” Cohen said.

Carbon pricing alone cannot change the structural environment

Fossil fuel technologies became locked in to our economy over the last century because of past government policies, actions and the building of physical infrastructures. To unlock them, we need direct initiatives from government to disrupt old ways of doing things and provide a long-term strategy to get us where we need to go.

Most importantly, that means government investment in research and development in clean energy and cutting-edge technology. We still need some basic breakthroughs in technology and science to develop renewable energy technology better than that currently available today. But new technologies don’t just appear out of the blue. Because they often start out with high costs that get cheaper as they are scaled up and more widely used, they usually require large up-front capital investments that often only government can provide.

Wind power, for example, has become competitive because of decades of government investment in research and development.

The Internet developed because the Department of Defense established ARPANET for military researchers. It is government that must choose which new technologies to support through funding incentives and research and development, and tightening standards, especially for this fundamental a transformation.

To implement clean energy technology and develop new technology, a number of experts believe the United States needs to invest $15 billion to $25 billion each year on energy research and development, with additional funds as incentives for deployment and scaling up.

We also need government to invest in large-scale infrastructure projects such as modernizing and extending our aging grid so that renewable energy can be transmitted around the country.

And while energy efficiency is actually the most cost-effective way to reduce carbon emissions, price does not always motivate people to implement energy efficient measures, so government subsidies are key. In an article about the limits of carbon pricing, Driesen explained that consumers are sometimes unaware of the energy efficiency technology available or are not able to pay the up-front costs even if they will get a quick payback.

Smart regulations are also essential to reducing emissions. Driesen points out that France’s low greenhouse gas emissions are not the result of a pricing scheme, but are due to the country’s decision to ramp up nuclear power.

Germany has become a leader in solar power, not because of carbon pricing, but because of a feed-in tariff, which encourages the development of renewable energy technologies by paying them a fee above the retail electricity rate and providing long-term security. According to Jaccard, the vast majority of California’s current and projected emissions reductions cannot be attributed to its cap and trade program, but to smart regulations on electricity, fuels, vehicles, buildings, appliances and more.

People respond better to carrots than sticks

People do not respond to price alone. They are motivated by a variety of cultural and psychological influences. To change behavior, these need to be understood and factored in.

“The thing that environmentalists do is scold people. ‘You must behave differently. You’re polluting,’” said Cohen. “But people like their SUVs, they like their suburban homes… so do you really want to be putting yourself in that position? Or would you rather be in the position of saying, ‘I can get you your energy cheaper…That SUV, you’ll have it in 10 years, but it will be an electric SUV powered by renewable energy.’” The idea of telling people they can’t do something, particularly in the U.S., he said, is a losing political strategy—you need to give people tangible benefits.

Ultimately, climate policy must reduce greenhouse gas emissions as well as develop and implement a new energy system. The fundamental question then is how do we bring about widespread technological change and get people to change their behavior?

To move the whole economy out of fossil fuels, Driesen feels a combination of strategies is necessary. “A carbon tax would be good, even if it was not as high as it needs to be, to reinforce other policies and raise revenue,” he said. He also stressed the need to phase out coal and oil production over time, raise fuel efficiency standards, make massive investments in energy efficiency and employ subsidies, net metering and feed-in tariffs.

Cohen believes a carbon tax could be useful provided you can create the right policy environment around it. But he maintains that the most practical and equitable way to change behavior is to lower the price of renewable energy through government-funded research into renewable energy, energy efficiency and energy storage. Tax policy can then be used to encourage companies to commercialize the technologies and consumers to adopt them.

“There’s no single way to do it,” said Cohen. “In different cultures, different things are going to work, different political approaches work, and you have to think about it, experiment, and if it doesn’t work, try something else… policy analysis is a craft, and you have to put the solutions together piece by piece.”

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