At CEEPR Workshop, Taxing Carbon is the Name of the Game

Disclaimer: The arguments outlined in this blog are not attributable to any single participant of the CEEPR workshop (including myself) but are, to the best of my abilities, representative of some of the key take-aways that emerged over the two-day event.

Last week in Cambridge, the MIT Center for Energy and Environmental Policy Research hosted its 2019 Spring Energy and Environmental Policy Workshop. This workshop brought together industry leaders, academics, and policy makers for an off-the-record discussion on the implications of recent research on the future of energy and environmental policy in the United States. The resulting conversation over the two-day workshop spanned a wide range of topics from emerging battery technology, the future of distributed solar, price elasticity of demand for electric vehicles, the viability of electric heating, and the return on investment of building efficiency retrofits.

Across all of these conversations, one overarching conclusion emerged: The existing rate of market innovation and consumer adoption is woefully insufficient for meeting the challenges of decarbonization. Even with the rapidly falling costs of solar, wind, and battery technologies, there is an urgent need for more ambitious fiscal policies and financial incentives to accelerate the adoption of clean energy.

During one session, concerns were raised that many of the projections about the rate of electrification and system decarbonization may be severely over-optimistic. One researcher shared an analysis which indicates that we should expect at least a doubling in national electricity demand if we are going to meet our emissions pledge to the Paris Agreement. This will require a major scaling-up of investment not only in renewable generation, but also in distribution circuit carrying capacity. Without sufficient investment in the grid, distribution level blackouts as a result of increased demand from vehicle electrification and electrified heating will become increasingly common and could stymie market penetration of cleaner, electrified end-uses.

The seasonal variability of a heavily electrified system—largely attributable to the electrification or residential and commercial heating—also presents a difficult-to-overstate storage challenge. Put simply, utility-scale electrochemical storage is still many years from commercial viability, and even if it weren’t, the chemistry of lithium ion batteries make them poorly suited for long-term storage of the kind an electrified society would require. Development and deployment of alternative methods of energy storage such as hydrogen production through electrolysis will be necessary. Lastly, we have dug ourselves into such a deep hole of carbon debt that there is now no clear path to a 1.5 or 2 degree increase in global temperatures without relying somewhat on negative emissions. This means that finding ways to deploy large-scale carbon capture and sequestration is of the utmost importance, yet there exists very little market incentive to innovate in this area.

The obvious answer to these myriad challenges, based on discussions at the CEEPR workshop, is a national carbon tax that effectively and fairly allocates the externalized marginal cost of emissions throughout all sectors of the economy. This is the best tool we have to trigger a system-wide response to the climate crisis because of three key attributes:

1. A carbon tax provides an incentive for investment in clean energy without reducing the cost of energy to the consumer. Subsidies on the other hand reduce the price of renewables, but consequently increase demand for energy—making them an inefficient deployment of public resources. 
2. A carbon tax does not get undermined by complementary energy and emissions policies, as do cap-and-trade programs. For example, a subsidy on EV’s within a cap-and-trade system will reduce demand for emissions credits, thus leading to a drop in price and increased emissions demand by other emitters within the system.
3. Finally, a carbon tax ought to be more politically feasible than climate regulation. Rather than using regulations and incentives to target specific sectors or products and likely requiring a supermajority in congress, a comprehensive, revenue-neutral carbon tax could get passed with a simple majority and would allow us to completely restructure the motivation behind market innovation, without imposing an increased burden on consumers.

Public investment, subsidies, regulation, and visionary projects such as those included in the Green New Deal all have an important role to play in facing the challenges of the global energy transition; however, none of these policies will be up to the task of launching a full-scale response to the climate crisis without the support offered by a system-wide carbon tax.

It is imperative that policymakers come together to realize this fundamental building block of a sustainable economy and not allow it to get pushed aside by easier to implement and all-together insufficient regulatory policies and incentives.

Oscar Serpell

Deputy Director

Oscar Serpell oversees all student programming, alumni engagement, faculty and student grants, and visiting scholars. He is also a researcher, writer, and policy analyst working on research initiatives with students and Center partners.