June Developments Point to Inevitability of National Carbon Price
This piece was first published in Forbes on June 30, 2020. It is reprinted with their permission.
The only certainties in life are death and taxes, said Ben Franklin, and the latter must now include a tax on carbon dioxide emissions. This conclusion might seem overly bold in today’s America, particularly given the absence of any carbon price outside of the liberal enclaves of the Northeast and California, both of which have cap and trade programs.
Yet carbon-tax wielding barbarians stand at the gates of mainstream national policy, and the relevant question in America today is not whether a carbon price will be enacted, but when. And sure, there are still regions in this country that stand by the old guard of fossil fuels, and which continue to fight any effort to hold polluting industries accountable for the damages they cause by using the atmosphere as their private landfill.
But most of us Americans don’t get to toss out our garbage for free. We pay a fee to have our household waste hauled away and properly disposed of, minimizing its environmental impact. It’s only fitting that polluting industries be held similarly financially accountable for their carbon waste and the damage it inflicts, overwhelmingly on others, through ever-more frequent flooding, fires and droughts.
It’s also fitting, in stating that a carbon price is now inevitable, to take a look at how much the conversation around carbon pricing has changed just in the past month.
On June 15, BP chief executive Bernard Looney more than doubled his company’s carbon price forecast to $100 for the year 2030. The forecast reflects BP’s view that the world will have aggressively committed to a transition away from oil, coal and even natural gas toward cleaner alternatives by the end of the decade. BP, which has pledged carbon neutrality by 2050, also announced that it would write off up to $10 billion in untapped reserves, an acknowledgement that the world’s hunger for fossil fuels will fall below past expectations.
Closer to home, on June 25 the regulator of the U.S.’s wholesale electricity markets, the Federal Energy Regulatory Commission, announced that it will hold a September conference to discuss the introduction of carbon pricing into the markets that supply two-thirds of America’s electricity. Conferences are, of course, largely talk. Yet the very fact that the FERC is providing the forum reflects a fundamental shifting of the balance in the electricity sector toward clean energy, and an interest in accelerating the energy transition.
The conference may also be an implicit acknowledgement that electricity markets would be well served by a single carbon price, rather than the patchwork of state supports for clean energy that the FERC has ruled distort electricity markets, but don’t appear to be going away anytime soon. Along these lines, it’s worth noting that the nation’s first carbon cap and trade market for the power sector, the Regional Greenhouse Gas Initiative (RGGI), is set to add Virginia and Pennsylvania to its list of 10 member states by next year, its first wholly new members since trading began in 2009.
Also in June, House Democrats published a congressional action plan to build an American clean energy economy, with a price on carbon serving “to internalize the cost of climate change in energy prices.” And to round out the month, the Pew Research Center released a poll finding that the overwhelming majority of Americans are in favor of corporations being taxed on their carbon emissions.
Yet the clearest indicator that an overarching carbon price is on the way can be found in Washington D.C. There are eight carbon pricing proposals in circulation in the current, 116th Congress, all but one of which explicitly touts a carbon tax. Most telling, given the divided politics of climate change, is the fact that four of the proposals have Republican sponsors.
The 800 lb. gorilla of carbon pricing proposals is the Carbon Dividends Plan, the creation of former Republican Secretaries of State James Baker and George Schulz, and former Treasury secretary Hank Paulson. The plan, which now counts the support of all living former Federal Reserve chairs, aims to cut U.S. carbon dioxide emissions in half by 2035 by implementing a carbon price of $40 per ton, which would rise 5% in excess of the inflation rate each year.
Clearly, the momentum for carbon pricing is strong, and a carbon tax, in particular, is the favored vehicle of many prominent economists. Policymakers’ challenge will be to craft a carbon tax that reflects the social cost of carbon, which is a cost estimate of the future damages caused by releasing a ton of carbon dioxide into Earth’s atmosphere today. Under the Obama Administration, estimates of the social cost of carbon hovered around $50.
“But if you look at the Trump administration, you get a dollar a ton,” notes Gilbert Metcalf, a Tufts University economist and research associate at the National Bureau of Economic Research.
“I don’t think anyone who is seriously looking at climate change takes the Trump number seriously,” he says. “And I think mainstream economists, by and large, would view the Obama estimates as the lower bound.”
On the bright side, this year’s Congressional proposals start with a price near the higher value, or ramp up to it in just a few years.
Regardless of the final value, the increasingly obvious fact is that the carbon price cat has been let out of the bag. A future that does not include a price on carbon is no future at all.
