Eyes on Environment: carving a path towards carbon pricing

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Read the original post here at Nature’s Eyes on Environment blog!

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The carbon tax has long been touted as the holy grail for reducing greenhouse gas emissions. Placing a price on carbon should motivate businesses and energy producers to cut emissions and find low-carbon methods of energy production. This will incentivize renewable technology research and decrease costs of alternative energy paths.

The only problem is that carbon pricing is still a rare policy across the globe. In fact, the economy has moved in the opposite direction, giving carbon a negative price after accounting for trillion-dollar fossil fuel subsidies.1 A paper by Gernot Wagner and colleagues in Nature takes a look at why the seemingly sensible policy has not taken hold and what regulators and policymakers can do to make carbon pricing a favorable choice for governments in the future.1

Why haven’t we already implemented a carbon price or tax?

The idea of carbon pricing is simple and theoretically sound: carbon dioxide is a pollutant and therefore known as a ‘negative externality’ in the economic world. Negative externalities are costs to individuals or groups not directly involved in an economic transaction. For example, let’s say I buy a dog from a local rescue for 100 dollars. When I bring her home, the dog begins barking incessantly through the night and my neighbor loses four hours of sleep, hindering his work productivity. The rescue and I are directly involved in the transaction, but my neighbor suffers negative externalities (loss of sleep) – economic theory would state that I would need to pay my neighbor some agreed-upon amount to offset the cost of losing sleep.

Jumping back to carbon, the same situation holds when I buy coal-powered electricity from a power plant to turn my lights on in Florida. The carbon dioxide and sulfur dioxide emitted by the power plant float into the atmosphere, contributing to global warming and pollution, a cost incurred by the rest of the public that is not included in the price I pay. This avoided cost is seen as a market failure since the true cost of the commodity is not correctly represented.

So if economic theory knows about these negative externalities, why haven’t we already instituted a carbon price to account for the effects of pollution and climate change? Some states and countries have: California and Quebec lead the way in North America, pricing carbon at $12 per tonne. Sweden currently posts the highest price at $125 per tonne and hopes to be the world’s first oil-free economy by 2020. But these few shining examples haven’t caused many other states or countries to follow suit.

The problem lies in convincing policymakers that carbon pricing will lead to a low-carbon economy that is more affordable than the current fossil-fuel-based one. Otherwise, lawmakers see no reason to change course, especially if they don’t believe the overwhelming evidence of anthropogenic global warming and its associated external costs from droughts, fires, sea level rises, etc. However, the only way to show the lower cost of a low-carbon economy is to incentivize renewable technology research, which would happen most efficiently with a carbon price. This circular argument has essentially gridlocked any progress in setting carbon prices in most countries!

Routes to renewables

Wagner and colleagues argue that we should give up trying to directly create a carbon policy in the short-term and instead focus on developing policies that reduce the cost of renewable energy alternatives, thus making carbon prices more palatable to policymakers in the long-term. The authors recommend several policy directions to accomplish this:

  1. Prioritize modernizing the grid with improved energy storage so that it is amenable to solar and wind power sources. The current electrical grid and related policies are specifically designed for fossil-fuel-based power generation – several capital-intensive power plants that provide centralized power disseminated long distances by transmission lines. Modernizing to a smart grid with distributed generation power generation coupled to local energy storage will move the grid toward a decentralized network tailored to renewable energy sources, further lowering their prices. Many energy companies would rather preserve their current assets than change their business model to account for the modernized grid, mainly due to the fact that savings from the smart grid are mainly seen by customers and not utilities.2 Policymakers must take up the challenge of working with utilities to make this change more appealing.
  2. Provide well-designed subsidies for renewable energy paths. Not all renewable energy is created equally – some biofuels will only increase carbon emissions due to fossil-fuel-intensive manufacturing methods or deforestation and land use changes. Subsidies should only be provided for those sources known to reduce emissions with minimal environmental costs (mainly wind and solar).
  3. All policies should make a carbon price more likely in the future. If a current policy no longer fits this description, then end it. For example, the Clean Power Plan recently enacted in the US creates a framework for states to trade as a way to meet emission standards. Such a policy creates a great foundation for future carbon pricing and should continue to be promoted.
  4. Break up non-competitive arrangements regarding access to the electrical grid. This is a crucial policy change to move away from centralized power plants to decentralized distribution. For example, a battle is currently being fought in Florida to allow companies independent from utility monopolies to offer up to 2 MW of solar power to residential customers. Utilities are opposing the measure, again feeling the inertia of having to change to a more flexible grid, but exposing power generation to market forces will continue to make renewables more affordable.
  5. Couple renewable energy policies to climate policies. Improving renewable energy use is only helpful in the long-term if it ends up reducing emissions. Germany has used mainly solar energy to reduce its carbon emission total, but European Union emission levels have not decreased because carbon caps are set for the entire Union. Thus, other countries have increased emissions to compensate for Germany’s decrease. Such a policy seems to miss the central point of encouraging renewables and should be changed.

These policy recommendations will surely encounter significant resistance, but new tactics must be tried to create an effective carbon price. If the idea of negative externalities alone cannot sell the idea, then countries must find ways to continue to decrease renewable energy costs until their market value cannot be denied.

References

  1. Wagner, G et al. “Push renewables to spur carbon pricing.” Nature, 525, 27, 2015.
  2. Fox-Penner, P. Smart Power: Climate change, the smart grid, and the future of electric utilities. Island Press: Washington, DC, 2014.

Photo Credit

Photo of Erlasse solar farm in Germany courtesy of Rainer Lippert via Wikipedia

 

Wagner, G., Kåberger, T., Olai, S., Oppenheimer, M., Rittenhouse, K., & Sterner, T. (2015). Energy policy: Push renewables to spur carbon pricing Nature, 525 (7567), 27-29 DOI: 10.1038/525027a

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One Response to Eyes on Environment: carving a path towards carbon pricing

  1. andyextance says:

    It does seem a somewhat circular argument, carbon pricing is an unpopular idea because it’s perceived as expensive, so let’s promote other policies that will also be seen as expensive. It might be worth a try, but I think there’s a difficult balance to be struck for pushing more important policies that are less acceptable and less important ones that are more acceptable.

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