The right tool for the job. Anyone who’s ever fixed something around the house understands what this means. A spanner for a nut; a screwdriver for a screw; a hammer for a nail—but if you pick the wrong tool you’re liable to make things worse, not better.
So what’s the right tool for driving down carbon emissions?
Many economists would have us believe that there is only one tool for the job. For instance, the economists at the Ecofiscal Commission in Canada have stated that: Governments should continue to make carbon pricing the central plank of their climate policy, and they should add well designed non-pricing policies only when carbon pricing alone can’t do the job.
There’s only one problem with this statement : it’s not true.
Let’s go back to the guys who knew what they were talking about. In the 2017 Report of the High-Level Commission on Carbon Prices—the most authoritative text on the subject, two of the world’s top economists come to a different conclusion stating : It is theoretically both unsound and impractical to rely on carbon pricing only—carbon pricing should be complemented by other well-designed policies.
Unsound and impractical?
Let’s break it down.
There are essentially four economic sectors where carbon emissions need to be drastically cut back: electricity generation, transportation, industry, and the built environment.
To reduce emissions from power plants the first step is to phase out coal. It’s really not that complicated. Ideally you switch to renewable energy : solar, wind or hydro. But if you’ve got lots of cheap natural gas in your back yard, we can understand the inclination to take that route. Do you need carbon pricing to make this change? Of course not. Shutting down coal requires strong government commitment and concerted action. Many national governments and state/provincial governments have accomplished this without a fuss. And utility-scale solar photovoltaic plants and wind farms are already the least-cost option—even compared to natural gas. Intermittency? Not a problem. You build megawatt-scale renewable energy systems coupled up to megawatt-scale storage. It’s already being done.
Let’s look at transportation. We all know the future is electric. But how to get there–and fast? Here, we might agree that carbon pricing could play a role. A price on carbon will lead to higher gas and diesel fuel prices and, according to economic theory, these price signals will induce people to drive less, or buy smaller cars, go electric, or switch to public transport. It works. But the problem is : it works very, very slowly.
There are plenty more tools in this tool box–and they work a whole lot faster. Because in this toolbox there’s also a bunch of carrots and a big stick. Let’s start with the stick. Operating a gasoline or diesel vehicle is going to cost you a lot more money. Most jurisdictions charge some kind of annual license fee for you to operate your vehicle. This fee has to go up substantially. Electric vehicles are more expensive; but there are lots of people who would like to own an electric car—if only they could afford it. So governments need to skew the economics towards electric vehicles. There are lots of ways they can do this—but none of them involve putting a price on carbon. This is where we need those carrots.
The industrial sector is more difficult. An emissions cap and trade system works for this sector. But again, it’s not the only way to get things done. Economists like to bang on about ‘efficiency’ and ‘flexibility’, and these are factors that should be taken into account. But they are not the only ones that count.
Who’s your mother?
They say that necessity is the mother of invention. But is it true that regulation is the mother of innovation? Research published in 2005 by academics at Carnegie Mellon University in the US, showed that when companies know that they have to meet a firm regulation with a definite deadline, they respond—and innovate. So when governments set limits on emissions, legislate efficiency standards, set renewable energy targets–and give enough advance notice, industries will get to work and figure out how to adjust by developing new technologies or processes that enable them to comply at the lowest possible cost. More efficient and state-of-the-art technologies replace obsolete ones, and emissions come down in the process. Check out California.
The built environment is already highly regulated. There are building codes for practically everything. Do we need a price on carbon to order to achieve higher building thermal efficiency, or compel a switch to ground- or air-based heat pumps and district heating? Or a solar panel on every roof; and smart meters, and demand management? No we don’t. What it takes is a consensus among policymakers that this has to get done. It’s the same with public transport. Price signals can help induce people to switch from private cars to public transport but the transition will really never take off until public transport is cheap, convenient, and takes you where you want to go. So governments need to invest substantially in public transport.
Follow the money
One of the advantages of pricing carbon is that government revenues from carbon taxes and cap-and-trade schemes are very substantial—hundreds of millions of dollars; and if the money is earmarked for clean energy initiatives, significant reductions in emissions can result. But it’s not so easy. In many jurisdictions—British Columbia is the most well-known, most of the revenue is recycled back to taxpayers in order to offset the inevitable higher cost to households of gasoline, natural gas, and electricity. This policy makes a carbon tax or cap-and-trade more acceptable to voters who, for the most part, are not keen on voting for a political party that says it intends to introduce a price on carbon.
In other jurisdictions, like Quebec for example, where there is a consensus among all political parties that a price on carbon is the right thing to do, most of the carbon revenues are channeled into clean energy technologies and efficiency improvements that rapidly bring down emissions of greenhouse gases. It’s the same policy in Connecticut, Massachusetts, Vermont and New York. But even in jurisdictions where a carbon tax is widely accepted and uncontroversial, regulatory mechanisms and legislative action will bring more rapid results. So the optimal policy is a synergistic combination of regulatory intervention and carbon pricing. But again, this can only work if the political environment is conducive to this approach.
So where does the money for clean energy and energy efficiency programs come from if introducing a price on carbon is not feasible because of conflicting positions on the issue among the contending political parties? Policymakers are going to have to be innovative. We have already mentioned one way—increasing the cost of licensing a gasoline or diesel vehicle. A small increase in the excise tax on gasoline and diesel fuel—which would occur anyway under a carbon pricing mechanism, would send a price signal economists would presumably approve of. In reality, there are lots of ways governments can raise funds to finance clean energy initiatives without resorting to a price on carbon. My favorite for Canada would be ringfencing tax revenues from the now legal marijuana trade for ‘green’ energy programs.
What are developing countries to make of this recommendation that all they need to do is to put a price on carbon to bring down emissions of greenhouse gases? In India and China, where urban air pollution from the combustion of fossil fuels is atrocious, strong regulatory intervention and strict enforcement is the only way that emissions are going to be rapidly reduced. Some subnational jurisdictions are trying out a carbon tax but you can bet it’s not the only tool in a very large toolbox.
The most damaging application of the unilateral carbon pricing philosophy is likely to occur in smaller developing countries and small island developing states. You can imagine politicians in Haiti saying: The Canadian government says we should introduce a carbon tax to reduce our emissions of greenhouse gases. Canadians are smart people, let’s do it.
So the price of gasoline and diesel fuel goes up; the cost of riding a taptap doubles; the cost of transporting agricultural produce by truck up to Port-au-Prince increases; food prices rise, and before you know it, people are in the streets. Recommending carbon pricing as the most appropriate and effective tool for developing countries seeking ways to meet their obligation under the Paris Agreement is both irresponsible and reckless. But unless Canadian government publications on carbon pricing take into account their international reach and influence, emission reduction measures for many developing countries based on this policy are likely to be hugely damaging.
To check out the sources take a look at:
Clearing the air: How carbon pricing helps Canada fight climate change. Ecofiscal Commission, April 2018. Available at: https://ecofiscal.ca/wp-content/uploads/2018/04/Ecofiscal-Commission-Carbon-Pricing-Report-Clearing-the-Air-April-4-2018.pdf
Report of the high-level Commission on carbon prices. Carbon Pricing Leadership Coalition. May 2017. Available at: https://www.connect4climate.org/sites/default/files/files/publications/CarbonPricingReportFinal.pdf
Taylor, M., Rubin E.S., Hounshell D.A., Regulation as the Mother of Innovation: The case of SO2. Law and Policy, Vol 27, Issue 2, April 2005. At : https://dor.org/10.111/j.1467-9930.2005.00203.x. I came across the reference to ‘regulation as the mother of innovation’ in the book by Naomi Oreskes and Erik Conway: Merchants of Doubt, which should be required reading by anyone concerned about climate change.
For information about the American RGGI states and the way they allocate their carbon revenues, see the report from the Analysis Group: The economic impacts of the regional greenhouse gas initiative on nine northeast and mid-Atlantic states. Available at: http://www.analysisgroup.com/uploadedfiles/content/insights/publishing/analysis_group_rggi_report_april_2018.pdf
See also the article by Chris McDermott in the National Observer: Is it time to torch the carbon tax debate? https://www.nationalobserver.com/2018/10/18/opinion/it-time-torch-carbon-tax-debate