Where has carbon pricing been successful? Where has it failed?

We learned with the European Union that once you go beyond the simple, idealized version of carbon prices and into implementation, it’s a very different thing. One of the things we found out: One of the problems with cap and trade [a system in which governments place a cap on countries’ carbon-dioxide pollution and companies then pay for, and trade, credits that permit them to pollute] is that it is dependent on predicting what future emissions will be. But if those projections are wrong, the system fails.

With the E.U., their projected carbon emissions were high, but the actual carbon emissions were low, and the carbon price fell drastically, from $30 to $40 per ton down to single digits. So the price was so low it did not have an effect in lowering emissions. It was flawed design. If the models had predicted too few emissions, and the price had gone to $1,000 per ton. we would have had a different problem.

The carbon tax has different problems, but not this one. The price of carbon is independent of the amount of emissions.

When I talk to people about how to design a carbon price, I think the model is British Columbia. You raise electricity prices by $100 a year, but then the government gives back a dividend that lowers internet prices by $100 year. In real terms, you’re raising the price of carbon goods but lowering the prices of non-carbon-intensive goods.

That’s the model of how something like this might work. It would have the right economic effects but politically not be so toxic. The one in British Columbia is not only well designed but has been politically successful.

What went wrong when President Obama tried to implement a carbon price in 2009?

I did not talk to Obama about this directly, but I spoke with many of his advisers over the years.