A Price on Carbon is Unavoidable

Ted Nordhaus and Michael Shellenburger have made their careers out of challenging the mainstream environmental movement.  Their most recent article about why cap-and-trade is, at best, a pipe dream and, at worst, a decidedly bad for the environment, continues this pattern.  Echoing their conclusions, if not their reasoning, Naomi Klein suggests in her recent interview that the only way to solve the problem of climate change is to completely throw out the free-market.  It seems that the cause du jour  among environmental pundits is complete dismissal of Economics 101.

Thankfully, a former guest on this blog, Gernot Wagner, has come to the defense of basic economics and provided a thoroughly reasonable articulation of why both N&S and Klein are wrong in their conclusions.  As Wagner notes, the idea that emissions can be limited without a price or a cap on carbon “is bunk.”

Nordhaus & Shellenburger build their case around the idea that building the political consensus necessary for cap-and-trade or a carbon tax is too time consuming and costly.  As a result, it is unreasonable to expect that there will be a price on carbon in the near future.  Further, if there were to be any price on carbon, the political cost of getting that price passed would require concessions to polluting interests that would render the cap meaningless.  They say that these concessions make working towards a carbon price pointless, and perhaps counterproductive,.  Rather, all of the energy devoted to solving climate change and lowering emissions should be targeted at achieving massive technological breakthroughs that lower the cost of eliminating carbon from the energy sector.  They claim that all of the major achievements in solving the carbon problem have come from technological improvement.  As an indicator of the success of this approach, they point to the low cost of gas due to, they claim, the research funded by the government over the last 30 years into alternative means of extracting natural gas.

In fairness, N&S are not totally wrong.  They are correct in saying that innovation in clean technology will be critical in the fight against global warming and arguing that a price on carbon will not be easy.  However, it may not be as difficult as they believe.  But regardless of how hard a carbon price may be to achieve, to claim that improvements in technology are the only reason why wind and solar are being adopted now dismisses the critically important policy tools, such as the PTC, that also have pushed adoption.  N&S, by advocating only for increased funding of R&D, leave out a critical tool for promoting renewable development.  As Wagner points out, their oversights extend beyond just ignoring policy tools like the PTC: their message that a carbon price is unnecessary is rife with errors.  However, Wagner leaves out two critical, additional reasons why N&S are wrong.

The first is simply that environmental protection is not a zero sum game.  It is possible, and advisable, to pursue multiple options.  N&S may attract attention by claiming that there is no effective means to fight global warming besides technological innovation but this strategy does little to advance other efforts to stop global warming.  Giving up on a carbon price because it is politically difficult is, at best, irresponsible.  Further, as Wagner notes and any observer can see, the US is not flush with excess cash to spend on R&D in new technologies.  The research funding that N&S so loudly call for must come from somewhere.  A carbon tax or a cap-and-trade system with auctioned permits, though admittedly a steep challenge politically, could provide some of the needed revenue to fund the necessary research.

The second, and more critical reason, why a price on carbon cannot be abandoned is because the world simply does not have time.  The R&D strategy that N&S point to needs a second D – deployment.  The great R&D success that N&S point to – research into fracking techniques – took 30 years to have a significant impact on emissions.  While the technology for widespread renewable deployment is not 30 years away, the developments necessary to shift from fossil fuels to renewables are not going to happen overnight. Unfortunately, overnight is effectively the timeframe in which the world must shift from fossil fuels to renewables if the worst aspects of global warming are to be avoided.

A price on carbon helps address this time-sensitive crisis in two ways: making carbon more costly and making renewables more cost-effective.  Making carbon more expensive to emit incentivizes the reduction in absolute levels of emission of carbon.  These kinds of behavior changes alone will not solve global warming, but a gas tax that causes Americans to drive 10% fewer miles each year is certainly a step in the right direction.  Since global warming is an urgent problem, relying solely on R&D solutions that take years to produce is unwise.  Additionally, making carbon more expensive makes renewables more cost competitive almost overnight.  Technological improvements begin to lower the cost barrier of renewables, but the same goal is achieved by making traditional fossil fuels more expensive through a carbon price.  However, instead of suggesting pursuing a carbon price and technological improvements simultaneously, N&S say that a carbon price might only be useful after technological improvements have run their course.  Why wait? Encouraging wider adoption of renewables now will likely speed the pace of technological improvement and bring more private funding to R&D.  Waiting to price carbon does nothing to help adoption of renewable technology, while pricing it now could have substantial benefits.

Finally, leaving aside considerations of which approach is most effective at lowering emissions, there is a moral component to the need for a price on carbon.  Carbon is a pollutant and emitting pollutants have a negative cost.  Right now that cost is born by society.  And as the elder Nordhaus has pointed out, it is not an insignificant cost.  But regardless of the size of the cost, it is immoral that those who benefit from inflicting the cost do not pay the cost.  If a price on carbon only corrected this balance, it would serve a useful purpose.

Pricing carbon will, as N&S argue, be very politically challenging.  They are wrong, however, to suggest that it is an option not worth pursuing.  Technological innovation alone will not solve global warming.  A price on carbon could quickly lower emissions through behavior change and would almost certainly spur deployment of renewable technology.  This, in turn, would speed the technological innovation that N&S seek.  As they say, there is no substitute for cheap renewable energy in the fight against global warming.  But with all the moral and economic reasons for doing so, there is no excuse for not pricing carbon.