3533. Global Warming: Planning Not Pricing

By Michael Roberts, Michael Roberts Blog, July 22, 2021

Carbon pricing and carbon taxes are now proposed by international institutions and mainstream economics as the main solutions to ending global warming and destructive climate change.  For some time, the IMF has been pushing for carbon pricing as ‘a necessary if not sufficient’ part of a climate policy package that also includes investment in ‘green technology’ and redistribution of income to help the worst-off cope with the financial burden.  The IMF is now proposing a global minimum carbon price — along the lines of the global minimum floor on corporate taxes which has recently secured agreement.

At the recent meeting of the G20 finance ministers, carbon pricing was endorsed as one of “a wide set of tools” to tackle climate change.  Speaking at the Venice International Conference on Climate, Christine Lagarde, president of the European Central Bank, also underscored the need for carbon pricing, emphasising the importance of an “effective carbon price that reflects the true cost of carbon”.  An agreed carbon price would then be a precursor to the establishment of a carbon border tax, which would serve as a tariff on imports from countries without carbon pricing.  This would be an incentive for others to join the ‘coalition of the willing’.

The EU Commission announced what it calls ‘Fit for 55’ plan to achieve a carbon-neutral EU by 2050 and reduce carbon emissions by 55% below 1990s levels before the decade is out.  Again, it looks to carbon pricing to achieve this, as well as carbon import taxes. The EU commission proposes gradually increasing minimum taxes on the most polluting fuels such as petrol, diesel and kerosene used as jet-fuel over a period of ten years. Zero-emissions fuels, green hydrogen and sustainable aviation fuels will face no levies for a decade under the proposed system. Paolo Gentiloni, Brussels economics commissioner, has called the reform a “now or never moment”.

It was no accident that the EU and G20 have turned to William Nordhaus, an American economist and Nobel laureate for economics advice on climate change.  Nordhaus gave the keynote address at the Venice conference.  He said that “It is a painful, painful realisation, but I think we need to face it: Our international climate policy, the approach we are taking, is at a dead end.”  But what was Nordhaus’ answer to this dismal conclusion?  He called for a “climate club” of countries willing to commit to a carbon price.  “A key ingredient in reducing emissions is high carbon prices,” he said, adding that a “climate club” would have to impose a penalty tariff on countries that did not have carbon pricing in place.  Nordhaus said such an approach would help solve the problem of ‘free riding’, which has plagued existing global climate agreements, all of which are voluntary.

Nordhaus has been a major advocate of a ‘market solution’ to climate change.  Nordhaus has constructed so-called integrated assessment models (IAMs) to estimate the social cost of carbon (SCC) and evaluate alternative abatement policies.  Nordhaus’ IAMs assume that the world economy will have a much larger GDP in 50 years so that even if carbon emissions rise as predicted, governments can defer the cost of mitigation to the future.  In contrast, if you apply stringent carbon abatement measures eg ending all coal production, you might lower growth rates and incomes and so make it more difficult to mitigate in the future. Instead, according to Nordhaus, with carbon pricing and taxes we can control and reduce emissions without reducing fossil fuel production and consumption at source. 

It is the tobacco/cigarette pricing and taxing solution.  The higher the tax or price, the lower the consumption, without touching the tobacco industry. Leaving aside the question of whether smoking has really been eradicated globally by pricing adjustments, can global warming really be solved by market pricing?  Market solutions to climate change are based on trying to correct “market failure” by incorporating the nefarious effects of carbon emissions via a tax or quota system.  The argument goes that, as mainstream economic theory does not incorporate the social costs of carbon into prices, the price mechanism must be “corrected” through a tax or a new market.  But as a recent essay pointed out, the problem is that climate change is not one market failure (like tobacco) but several: in capitalist transport, energy, technology, finance and employment.

Economists who have attempted to calculate what the ‘social price’ of carbon should be have found that there are so many factors involved and the pricing must be projected over a such a long time horizon that it is really impossible to place a monetary value on the ‘social damage’– estimates for the carbon price range from $14 per ton of CO2 to $386! “It is impossible to approximate the uncertainties in low-probability but high-damage, catastrophic or irreversible outcomes.” Indeed, where carbon pricing has been applied, it has been a miserable failure in reducing emissions, or in the case of Australia, dropped by the government under the pressure of energy and mining companies.

And while there is much talk about raising carbon emission prices, little or nothing is said about the huge subsidies that governments continue to make to fossil fuel industries.  EU Commissioner Gentiloni admitted as such: “Paradoxically, [the current energy taxation directive] is incentivising fossil fuels and not environmentally friendly fuels. We have to change this.”

The G20 countries have provided more than $3.3tn (£2.4tn) in subsidies for fossil fuels since the Paris climate agreement was sealed in 2015, a report shows, despite many committing to tackle the crisis.  The report says all 19 G20 member states continue to provide substantial financial support for fossil-fuel production and consumption – the EU bloc is the 20th member. Overall, subsidies fell by 2% a year from 2015 to reach $636bn in 2019, the latest data available.

But Australia increased its fossil fuel subsidies by 48% over the period, Canada’s support rose by 40% and that from the US by 37%. The UK’s subsidies fell by 18% over that time but still stood at $17bn in 2019, according to the report. The biggest subsidies came from China, Saudi Arabia, Russia and India, which together accounted for about half of all the subsidies.

The report found that 60% of the fossil fuel subsidies went to the companies producing fossil fuels and 40% to cutting prices for energy consumers.  A recent report by the International Institute for Sustainable Development concluded that reforming fossil fuel subsidies aimed at consumers in 32 countries could reduce CO2 emissions by 5.5bn tonnes by 2030, equivalent to the annual emissions of about 1,000 coal-fired power plants. It said these changes would also save governments nearly $3tn by 2030. The International Energy Agency’s road map for net-zero emissions by 2050 calls for a 6 per cent decline in coal-fired generation annually. Yet coal will grow by almost 5 per cent this year, and another 3 per cent in 2022, hitting a new peak.

Nordhaus is right.  Current climate change policies are at a dead end and the impact of climate change and environmental destruction is getting worse by the day.  Earthquakes, storms, floods and droughts — the number of recorded loss events resulting from natural disasters – has been increasing for some years now.

The report also examined how G20 countries were putting a price on carbon pollution. It found that more than 80% of emissions were covered by such prices in France, Germany and South Africa. In the UK, 31% of emissions are covered but the UK has one of highest carbon prices at $58 per tonne of CO2. Just 8% of US emissions are covered and at the low price of $6 per tonne. Russia, Brazil, and India do not have any carbon prices. In his address to the G20, Nordhaus showed that the current average global carbon price is under $2 and 80% of global emissions have no carbon emissions pricing market at all!

So the carbon pricing and taxation solution, even if it worked to lower emissions, is a pipedream as it can never be implemented globally before global warming reaches dangerous ‘tipping points’. All the latest climate science suggests that the tipping points are approaching fast and allowing fossil fuel production to continue while trying to reduce its use by ‘market’ solutions’ like carbon pricing and taxes will not be enough. Even the IMF has admitted that market solutions have not worked. 

Market solutions are not working because for capitalist companies it is just not profitable to invest in climate change mitigation: “Private investment in productive capital and infrastructure faces high upfront costs and significant uncertainties that cannot always be priced. Investments for the transition to a low-carbon economy are additionally exposed to important political risks, illiquidity and uncertain returns, depending on policy approaches to mitigation as well as unpredictable technological advances.” (IMF)

Indeed: “The large gap between the private and social returns on low-carbon investments is likely to persist into the future, as future paths for carbon taxation and carbon pricing are highly uncertain, not least for political economy reasons. This means that there is not only a missing market for current climate mitigation as carbon emissions are currently not priced, but also missing markets for future mitigation, which is relevant for the returns to private investment in future climate mitigation technology, infrastructure and capital.” In other words, it ain’t profitable to do anything significant.

What is the alternative? Mark Carney, former Bank of England governor and climate change envoy for the UN and many multi-nationals, reckons it is ‘regulation’.  “We need clear, credible and predictable regulation from government,” he said. “Air quality rules, building codes, that type of strong regulation is needed. You can have strong regulation for the future, then the financial market will start investing today, for that future. Because that’s what markets do, they always look forward.”

Carney’s answer is really an excuse for continuing to expand fossil fuel production.  Although the IEA recently said that the world was to stay within 1.5C Paris target increase in global heating, there could be no more exploration or development of fossil fuel resources, Carney argues that countries and companies could still carry on exploiting fossil fuels, if they use technology such as carbon capture and storage, or other ways of reducing emissions. “With the right regulation, with a rising carbon price, with a financial sector that is oriented this way, with public accountability of government, of financial institutions, of companies, yes, then we can, we certainly have the conditions in which to achieve [holding global heating to 1.5C“.

This is disingenous nonsense.  Carbon pricing schemes just hide the reality that, as long as the fossil fuel industry and the other big multinational emitters of greenhouse gases are untouched and not brought into a plan for phasing them out, the tipping point for irreversible global warming will be passed. Instead of waiting for the market to speak, and for ‘regulation’, we need a global plan where fossil fuel industries, financial institutions and major emitting sectors are brought under public ownership and control. 

Who are the biggest emitters or consumers of carbon apart from the fossil fuel industry?  It is the richest wealth and income earners in the Global North who have excessive consumption and fly everywhere. It is the military (the biggest sector of carbon consumption).  The waste of capitalist production and consumption in autos, aircraft and airlines, shipping, chemicals, bottled water, processed foods, unnecessary pharmaceuticals and so on is directly linked to carbon emissions.  Harmful industrial processes like industrial agriculture, industrial fishing, logging, mining and so on are also major global heaters, while the banking industry operates to underwrite and promote all this carbon emission. 

A global plan could steer investments into things society does need, like renewable energy, organic farming, public transportation, public water systems, ecological remediation, public health, quality schools and other currently unmet needs.  And it could equalize development the world over by shifting resources out of useless and harmful production in the North and into developing the South, building basic infrastructure, sanitation systems, public schools, health care.  At the same a global plan could aim to provide equivalent jobs for workers displaced by the retrenchment or closure of unnecessary or harmful industries.  Planning not pricing.

 

2550. A Conservative Case for Climate Action

By Martain S. Feldstein, Ted Halstead, and N. Gregory Mankiw, The New York Times, February 8, 2017

CRAZY as it may sound, this is the perfect time to enact a sensible policy to address the dangerous threat of climate change. Before you call us nuts, hear us out.

During his eight years in office, President Obama regularly warned of the very real dangers of global warming, but he did not sign any meaningful domestic legislation to address the problem, largely because he and Congress did not see eye to eye. Instead, Mr. Obama left us with a grab bag of regulations aimed at reducing carbon emissions, often established by executive order.

In comes President Trump, who seems much less concerned about the risks of climate change, and more worried about how excessive regulation impedes economic growth and depresses living standards. As Democrats are learning the hard way, it is all too easy for a new administration to reverse the executive orders of its predecessors.

On-again-off-again regulation is a poor way to protect the environment. And by creating needless uncertainty for businesses that are planning long-term capital investments, it is also a poor way to promote robust economic growth.

By contrast, an ideal climate policy would reduce carbon emissions, limit regulatory intrusion, promote economic growth, help working-class Americans and prove durable when the political winds change. We have laid out such a plan in a paper to be released Wednesday by the Climate Leadership Council.

Our co-authors include James A. Baker III, Treasury secretary for President Ronald Reagan and secretary of state for President George H. W. Bush; Henry M. Paulson Jr., Treasury secretary for President George W. Bush; George P. Shultz, Treasury secretary for President Richard Nixon and secretary of state for Mr. Reagan; Thomas Stephenson, a partner at Sequoia Capital, a venture-capital firm; and Rob Walton, who recently completed 23 years as chairman of Walmart.

Our plan is built on four pillars.

First, the federal government would impose a gradually increasing tax on carbon dioxide emissions. It might begin at $40 per ton and increase steadily. This tax would send a powerful signal to businesses and consumers to reduce their carbon footprints.

Second, the proceeds would be returned to the American people on an equal basis via quarterly dividend checks. With a carbon tax of $40 per ton, a family of four would receive about $2,000 in the first year. As the tax rate rose over time to further reduce emissions, so would the dividend payments.

Third, American companies exporting to countries without comparable carbon pricing would receive rebates on the carbon taxes they’ve paid on those products, while imports from such countries would face fees on the carbon content of their products. This would protect American competitiveness and punish free-riding by other nations, encouraging them to adopt their own carbon pricing.

Finally, regulations made unnecessary by the carbon tax would be eliminated, including an outright repeal of the Clean Power Plan.

Our own analysis finds that a carbon dividends program starting at $40 per ton would achieve nearly twice the emissions reductions of all Obama-era climate regulations combined. Provided all four elements are put in force in unison, this plan could meet America’s commitment under the Paris climate agreement, all by itself. Democrats and environmentalists may bemoan the accompanying regulatory rollback. But they should pause to consider the environmental value proposition.

These four pillars, combined, invite novel coalitions. Environmentalists should like the long-overdue commitment to carbon pricing. Growth advocates should embrace the reduced regulation and increased policy certainty, which would encourage long-term investments, especially in clean technologies. Libertarians should applaud a plan premised on getting the incentives right and government out of the way. Populists should welcome the distributive impact.

According to a recent Treasury Department study, the bottom 70 percent of Americans would come out ahead under a carbon dividends plan. Some 223 million Americans stand to benefit.

The idea of using taxes to correct a problem like pollution is an old one with wide support among economists. But it is our unique political moment, combined with the populist appeal of dividends, that may turn the concept into reality.

Republicans are in charge of both Congress and the White House. If they do nothing other than reverse regulations from the Obama administration, they will squander the opportunity to show the full power of the conservative canon, and its core principles of free markets, limited government and stewardship.

A repeal-only climate strategy would prove quite unpopular. Recent polls show that 64 percent of Americans are concerned about climate change, 71 percent want America to remain in the Paris agreement, and an even larger share favor clean energy. If the Republican Party fails to exercise leadership on our climate challenge, they risk a return to heavy-handed regulation when Democrats return to power.

Much better would be a strategy of “repeal and replace.” This would be pro-growth, pro-competitiveness and pro-working class, which aligns perfectly with President Trump’s stated agenda.

Martin S. Feldstein was the chairman of the Council of Economic Advisers under President Ronald Reagan and N. Gregory Mankiw was the chairman under President George W. Bush. Ted Halstead is the founder and chief executive of the Climate Leadership Council.

2516. Donald Trump Should Know: This Is What Climate Change Costs Us

By Michael Greenstone and Cass R. Sunstein, The New York Times, December 15, 2016

Last week, Donald J. Trump’s transition team sent a startling questionnaire to the Department of Energy. Among other things, the questionnaire asked for the names of all employees and contractors who attended meetings of the Interagency Working Group on the Social Cost of Carbon, as well as all emails associated with those meetings, and the department’s “opinion” on the underlying issues — a request it essentially refused.

Though Mr. Trump’s transition team later said that the questionnaire was sent in error, it should be understood in tandem with a memorandum, leaked last week, from Thomas Pyle, the leader of the transition’s energy team and president of the American Energy Alliance, which promotes “free market” policies. Mr. Pyle described the steps the Trump administration will probably take to reduce environmental regulations, including “ending the use of the social cost of carbon in federal rule makings.”

If that happens, it will defy law, science and economics.

In 2009, the two of us — one from the Council of Economic Advisers and the other from the Office of Management and Budget — convened the first meetings of the working group to which the questionnaire referred. Our aim was to quantify the social cost of carbon for the United States government by drawing from the latest research in science and economics. This comprehensive measure would reflect the monetary cost of the damage caused by the release of an additional ton of carbon dioxide into the atmosphere, accounting for the destruction of property from storms and floods, declining agricultural and labor productivity, elevated mortality rates and more.

The working group, which consists of officials from agencies throughout the federal government, now estimates that cost at about $36 per ton of carbon dioxide. This figure plays a central role in the cost-benefit analyses that agencies use in deciding whether to issue regulations to limit greenhouse gas emissions, and how stringent such regulations should be. Thus far, it has been used for 79 regulations, including energy-efficiency rules for refrigerators and washing machines, fuel-economy rules for cars and trucks, and the Clean Power Plan, which requires reductions in greenhouse gas emissions from existing power plants.

Without it, such regulations would have no quantifiable benefits. For this reason, the social cost of carbon can be seen as the linchpin of national climate policy.

And yet not everyone is a fan of this concept. Those who think that climate change is a hoax, or who oppose regulation as a rule, have a major problem with the social cost of carbon, because it indicates that limits on emissions can deliver significant benefits. Others believe that the $36 per ton figure is too high, overstating the benefits of regulations.

But the working group’s process and output have been validated by the courts. In August, a federal court of appeals rejected a legal challenge to the social cost of carbon by a trade association of refrigerator companies. The association contended that the government lacked the legal authority to consider the social cost of carbon and that its judgments were arbitrary.

The court responded that it had “no doubt that Congress intended” to allow consideration of the social cost of carbon and that the government’s judgments were reasonable.

In fact, in 2008, a federal court of appeals ruled that the government essentially had to specify a social cost of carbon: It was not permitted to ignore harms from climate change, the court said, when setting regulatory policy.

The federal government is also required to quantify environmental damages under prevailing executive orders. President Ronald Reagan started the practice in 1981, when he required federal agencies to analyze the benefits and costs of their regulations; his Democratic and Republican successors have followed his lead.

New scientific and economic evidence suggests that climate change probably poses an even greater risk than the $36 figure reflects. For example, the West Antarctica ice sheet appears to be retreating faster than we thought, raising the specter of multimeter sea level rise in the next century. Recent research also found that climate change will lead to shorter and sicker lives, primarily because of the harmful effect of more extremely hot days on health. Extreme heat is also projected to reduce worker productivity and increase energy consumption, while changes in temperature and precipitation globally are expected to increase food prices and violence. Thus, there is a strong case that if anything, the government’s estimate of the social cost of carbon should be higher than it is.

To be sure, the exact number is uncertain, and the Trump administration will make its own judgment. But a credible assessment must be based on the best science and economics, not politics. And there is no justification for a chilling investigation of civil servants who are just doing their jobs.

Ultimately, the social cost of carbon provides a necessary guidepost in decisions about how to balance costs to our economy today with the coming climate damages. Wishing that we did not face this trade-off will not make it go away.

Any effort to eliminate the social cost of carbon would reflect a neglect of science and economics — and it would be quickly struck down in court.

Michael Greenstone is a professor of economics at the University of Chicago. Cass R. Sunstein is a professor at Harvard Law School.

1651. A Carbon Tax Could Bolster Green Energy

By Eduardo Porter, The New York Times, November 18, 2014

A couple of years ago, the smart money was on wind. In 2012, 13 gigawatts worth of wind-powered electricity generation capacity was installed in the United States, enough to meet the needs of roughly three million homes. That was some 40 percent of all the capacity added to the nation’s power grid that year, up from seven gigawatts added in 2011 and just over five in 2010.

But then a federal subsidy ended. Only one gigawatt worth of wind power capacity was installed in 2013. In the first half of 2014, additions totaled 0.835 gigawatts. Facing a Congress controlled by Republicans with little interest in renewable energy, wind power’s future suddenly appears much more uncertain.

“Wind is competitive in more and more markets,” said Letha Tawney at the World Resources Institute. “But any time there is uncertainty about the production tax credit, it all stops.”

Wobbles on the road to a low-carbon future are hardly unique to the United States. In its latest Energy Technology Perspectives report, the International Energy Agency noted that the deployment of photovoltaic solar- and wind-powered electricity was meeting goals established to help prevent temperatures from rising more than 2 degrees Celsius (3.6 degrees Fahrenheit) above the average in the preindustrial era, the limit agreed to by the world’s leaders to avoid truly disruptive climatic upheaval.

In the same report, however, the organization noted that other technologies — bioenergy, geothermal and offshore wind — were lagging. And it pointed out that worldwide investment in renewable power was slowing, falling to $211 billion in 2013, 22 percent less than in 2011.

These wobbles underscore both the good news and the bad news about the world’s halting progress toward reducing the greenhouse gas emissions that are capturing heat in the atmosphere and changing the world’s climate.

The good news is that humanity is developing promising technologies that could put civilization on a low carbon path that might prevent climate disruption.

These technologies allowed the Environmental Protection Agency to pass new rules aimed at achieving a 30 percent reduction in carbon dioxide emissions from American power plants by 2030, compared with 2005.

They allowed President Obama last week to promise that the United States would curb total greenhouse gas emissions by 26 to 28 percent from 2005 levels by 2025 — a big step that, White House officials say, can be achieved without further action from Congress. And they allowed China to commit to start cutting emissions after 2030.

The bad news is that civilization is mostly not yet on such a low carbon path. While promising technologies to get there have been developed, it is unclear whether nations will muster the political will and mobilize the needed investments to deploy them.

New energy technologies have become decidedly more competitive. The United States’ Energy Information Administration projects that the levelized cost of onshore wind energy coming on stream in 2019 — a measure that includes everything from capital costs to operational outlays — could be as little as $71 per megawatt-hour measured in 2012 dollars, even without subsidies. This is $16 less than the lower cost projection four years ago for wind energy coming online in 2015.

Similarly, projections for the levelized cost of energy from photovoltaic solar cells have tumbled by more than 40 percent, much faster than the cost projections of energy from coal or natural gas.

Challenges remain to relying on intermittent energy sources like the sun or the wind for power. Still, experts believe that hitching solar and wind plants to gas-fired generators, and using new load management technologies to align demand for power with the variable supply, offer a promising path for aggressively reducing the amount of carbon the power industry pumps into the atmosphere, which accounts for nearly 40 percent of the nation’s total carbon dioxide emissions.

And new Energy Information Administration projections to 2040 show prices for renewables falling even lower. By then, electricity from photovoltaic solar plants could be generated for as little as $86.50 per megawatt-hour, without subsidies. In some areas wind-based plants could produce it for as little as $63.40.

Nuclear energy is also becoming more competitive. Without any subsidies, new-generation nuclear power coming on stream in 2040 could cost as little as $80 per megawatt-hour, all costs considered. This is only marginally more expensive than electricity produced with coal or natural gas, even without the added cost of capturing the carbon dioxide.

And there are much more optimistic cost assessments out there than the Energy Information Administration’s.

But for all the optimism generated by cheaper renewable fuels, they do not, on their own, put the world on the low-carbon path necessary to keep climate change in check.

Progress is faltering on several fronts. The precipitous fall in the prices of photovoltaic cells from 2008 to 2012 pretty much stopped in 2013, after rapid consolidation of the industry.

The International Energy Agency now projects that installed global nuclear capacity in 2025 will fall 5 percent, to 24 percent below what will be needed to stay on the safe side of climate change. And carbon capture technologies, which will be essential if the world is to keep consuming any form of fossil fuel, remain hampered by high costs, meager investment and scant political commitment.

“The unrelenting rise in coal use without deployment of carbon capture and storage is fundamentally incompatible with climate change objectives,” noted the International Energy Agency in its Technology Perspectives report.

Despite the falling costs of renewable energy in the United States, the Energy Information Administration’s baseline assumptions project that in 2040 only 16.5 percent of electricity generation will come from renewable energy sources, up from some 13 percent today. More than two-thirds will come from coal and gas. Without some carbon capture and storage technology, drastic climate change is almost certainly unavoidable.

What is necessary to get us on a safer path?

White House officials trust that the administration has the tools, including fuel economy and appliance efficiency standards, the Environmental Protection Agency’s new limits on power plant emissions and regulations to limit other greenhouse gases.

Yet the Energy Information Administration’s projections suggest how hard the task will be. Though they were developed before the Environmental Protection Agency issued its new rules, they included hypothetical outlines that could mimic some of its effects. In one, coal power plants were decommissioned more quickly; in another, subsidies to renewable energy were kept until 2040. In another, the price of renewables fell faster than expected. None of them did much to move the carbon dial.

There is one tool available to trim carbon emissions on a relevant scale: a carbon tax. That solution, however, remains off the table.

If a carbon tax were to be imposed next year, starting at $25 and rising by 5 percent a year, the Energy Information Administration estimates, carbon dioxide emissions from American power plants would fall to only 419 million tons by 2040, about one-fifth of where they are today. Total carbon dioxide emissions from energy in the United States would fall to 3.6 billion tons — 1.8 billion tons less than today. By providing a monetary incentive, economists say, such a tax would offer by far the most effective way to encourage business and individuals to reduce their use of fossil fuels and invest in alternatives.

Is this enough? No. This proposal still leaves the United States short of the 80 percent cut in greenhouse gas emissions that the White House is aiming for and that experts consider necessary by 2050 to prevent climatic havoc. But at least it’s in the same order of magnitude.

Most important, perhaps, the Energy Information Administration’s estimates make clear that the real constraint lies not in our ability to develop the necessary technologies but in our political will to deploy them.