Carbon Pricing and its Green Critics

Carbon pricing is firmly entrenched as the go-to climate policy for economists, yet many with training in other sciences and social sciences remain skeptical. As one critic puts it, “Of the policy tools in the carbon toolbox, carbon pricing is the tiny flathead screwdriver used to fix glasses.” 

In my view, the skeptics have the wrong analogy. Instead of a tiny screwdriver, I like to think of carbon pricing as the drip irrigation of climate policy. Israeli farmers have shown how drip irrigation, used together with a suite of other policies, such as reusing treated sewage, finding and fixing leaks early, and engineering crops for harsh conditions, can make the desert bloom. Similarly, carbon pricing, although working quietly and largely out of sight, can serve as an integral part of a whole set of measures, such as performance standards, regulatory reform, and green industrial policy, which together can achieve the goal of deep decarbonization.

So why all the skepticism? Here are what I see as the main points at issue between the proponents of carbon pricing and their critics.

Has carbon pricing really been tried?

In truth, most critics do not reject the concept of carbon pricing altogether, but they see it as having much less practical value than most economists do. According to Jessica Green, (originator of the “tiny screwdriver” analogy), carbon pricing, where tried, has had only modest effects.

Green supports her conclusion with a broad meta-analysis based on previous studies of pricing in Europe and North America. She finds aggregate emission reductions from carbon pricing to lie "mostly in a range of 0 percent and 2 percent per year.”

Supporters of carbon pricing reply that there is nothing surprising in those findings, since most of the case-studies Green reviews have been half-hearted at best. A similar study revealed found that existing policies impose prices averaging $8 to $12 per ton of CO2, at best a third of the “social cost of carbon” that economists think they should aim for. What is more, those schemes, on average, cover less than half of each countries’ emissions. Even the most dedicated carbon price enthusiasts agree that more would be needed to achieve the holy grail of “deep decarbonization” – getting emissions down to net zero by the middle of the century.

But skeptics argue that just raising the price charged for emissions is not enough. They see pricing as inherently incapable of achieving transformative change. Pricing might be able to tweak efficiency at the margins, but in a paper last year, Daniel Rosenbloom and several co-authors “question whether efficiency should be an overriding priority of climate policy.” In another recent essay, Anthony Patt and Johan Lilliestam argue that carbon pricing “made sense as our primary tool against climate change when our climate policy ambitions were limited” but no longer do when the goal is complete transformation of the world’s energy system.

But deep decarbonization and efficiency should not be viewed as alternatives. On the contrary, ignoring efficiency makes transformative change harder, not easier. To see why, let’s take a closer look at the drip irrigation analogy by contrasting the Israeli and Soviet approaches to growing crops in an arid climate.

From the very start, efficiency has been the hallmark of the remarkable Israeli success, with drip irrigation as its signature technology. Those modest black plastic pipes work together with a whole suite of complementary policies, such as reusing treated sewage for farming, finding and fixing leaks early, engineering crops to thrive in onerous conditions, discouraging gardening, and making efficient toilets mandatory. Although individually, some of these policies make only incremental contributions, together they have been truly revolutionary.

Contrast that with the Soviet approach to growing cotton in Central Asia. If Soviet planners were good at anything, it was mobilizing mobilize vast resources on a clear goal, and damn the cost. In the 1960s, the they put that strategy to work to grow cotton in the Central Asian desert. Their first step was to dam the two great rivers that flowed through the region, pouring millions of tons of concrete to channel the water through a network of open canals and flood the cotton fields. The result: Lots of water wasted, lots of low-quality cotton (for a while), followed by salinization of the soil and diminished yields. That project was transformative, too, but not in a good way. It caused the almost complete disappearance of the Aral Sea, once the world’s fourth largest inland body of water, which had regulated the local climate. That, in turn, brought hotter, dryer weather, desertification, dust storms, and the death of a once-rich fishery.

Picking all the apples

And what of the concern that carbon pricing, however efficient, encourages only incremental changes? Time to switch to a different metaphor, courtesy of pricing skeptics Patt and Lilliestam: “Carbon taxes stimulate a search for low-hanging fruit. That ceases to matter when we know we must eventually pick all of the apples on the tree. Metaphorically we need a ladder.”

The ladder they have in mind is a mix of green industrial policy, regulations, and subsidies for low-carbon technologies. My reply is that the glamorous lure of transformative technologies is no reason to disdain the low-hanging fruit. Yes, we eventually want to pick all the apples on the tree, but Patt and Lilliestam’s version of the metaphor is incomplete.

Suppose you buy a house that has an apple tree in the backyard. The first day after you move in, you notice that the apples are ripe, but you can only reach the lowest branches. You call Home Depot. If you learn they can deliver a ladder tomorrow, you may as well wait until it gets there and pick the all the apples at one go. But suppose, instead, that they are out of ladders and won’t have any until next year. What then? You make a down payment and reserve a ladder for delivery next fall. Then you go out and pick all the apples you can reach now. Why let them rot on the tree?

The delayed ladder scenario is a good depiction of where we are with climate change. Even the most ambitious programs, like the recent Net Zero America proposal from Princeton University, do not aim to get to net zero in less than 30 years or so. Meanwhile, because of the persistent nature of CO2, even marginal decreases in emissions in the near term will mean a lower total atmospheric concentration, and permanently lower global temperatures, at the time emissions finally fall to zero.

Politics

All of the papers reviewed here emphasize that carbon pricing faces daunting political resistance. Rosenbloom et al.: “Carbon pricing has also attracted political resistance among the broader public, as it is perceived to challenge long-standing practices and livelihoods, such as car-based and suburban lifestyles, write Rosenbloom and his colleagues.” Patt and Lilliestam go even further: “We disagree about the need for higher carbon prices, and indeed view carbon taxes and permit fees as a dangerous political distraction.” As a case in point, Green notes that Washington state had two ballot initiatives proposing a carbon tax in 2016 and 2018, both of which failed due to “heavy investments from fossil fuel industry.”

But it is disingenuous for climate activists to blame the defeat of the Washington referendums entirely on the fossil fuel industry or on suburbanites determined to protect their car-based lifestyles. The fact is that Washington’s green organizations either opposed the referendums outright or gave only lukewarm support, especially in 2016, when the chances of passage were best. (See two long analyses for Vox by David Roberts for a detailed post mortem on the 2016 and 2018 referendums.)

What is more, political pushback is not limited to price-based policies. Almost any kind of climate action gets its share, and from all sides. On the right, we saw that the Trump administration’s withdrawal from the Paris Agreement was supported by a large share of conservative Republicans. On the green side of the spectrum, environmentalists in Oregon and Idaho, seeing threats to wildlife and the beauty of the landscape, sued to stop a new transmission line intended to help utilities meet a pledge for 100 percent clean power. Still other regulatory measures draw pushback that is hard to classify as right or left. Try reading some of the hundreds of thousands of Google hits for “I hate low-flow showerheads!”

In my view, the lesson to be drawn here is that we are still in the early days when it comes to designing policies that are both economically effective and politically feasible. Available policy choices span the spectrum in both respects. What we need is to start with the policies that generate the least political pushback per ton of carbon saved, but we don’t know exactly what those are.

Fortunately, there are lots of promising ideas. One widely discussed idea for mitigating political resistance to carbon pricing is to use some or all of the revenue from pricing schemes to compensate key constituencies. The Citizens’ Climate Lobby, for example, proposes to rebate the entire proceeds of a carbon tax equally to everyone. Other plans limit payouts more narrowly to low-income households, which tend to spend a higher share of their budgets on home heating, gasoline, and other types of energy. Targeting rebates on low-income households would leave more revenue available for other policies that would help build political support, such as job-creating infrastructure projects or research to help industries transition more smoothly to a zero-emissions future. (See here for a full discussion of the compensation issue, with charts and sources.)

Proper policy sequencing is another idea for reducing political resistance to carbon pricing. Jonas Meckling, Thomas Sterner, and Gernot Wagner make a case for beginning with green industrial policies such as support for research and development, subsidies, loan guarantees, and direct mandates. Such policies, even on a modest scale, would build support for adding carbon pricing to the mix later. One reason is that they would build a constituency among producers of low-carbon goods and services, who would then back carbon prices to boost demand for their products. Another reason is that early investments in research would help low-carbon technologies move “up the learning curve and down the cost curve,” so that the incentive effects of carbon prices, when they were introduced, would produce greater gains at a lower cost. Early investment in infrastructure would also help. For example, a price incentive for wind and solar power would become more effective once a transmission network was in place to move it from where it was most cheaply generated to where it was most in demand.

Danny Cullenward and David Victor, authors of Making Climate Policy Work, suggest a sectoral variant of policy sequencing. Recognizing both the theoretical appeal of carbon pricing and the reality of political resistance, they suggest that pricing should be introduced first in sectors like electric power, where political resistance is relatively low. Other sectors (transportation, for example), “where the public is inordinately sensitive to sticker prices,” should, in their view, be handled with nonprice strategies, at least initially. Cullenward and Victor also make a persuasive case that in terms of results achieved per unit of political resistance, carbon pricing works better in the form of carbon taxes than cap-and-trade.

The case for a mixed strategy

Textbook presentations sometimes leave the impression that climate policy should consist solely of setting the right price for carbon (possibly a very high one) and then letting the market do the rest. In practice, however, there is a strong case for a mixed strategy that combines carbon pricing with appropriate regulatory reforms and green industrial policy. That case is especially strong when political realities are considered and when the goal is deep decarbonization at the earliest feasible date.

Endre Tvinnereim and Michael Mehling are among those who make a strong case for a mixed strategy. They do not argue against carbon pricing in principle, but rather to caution against placing too much faith in it. Over time, they go on to say, as tolerance for higher prices increase, pricing may unleash more of its potential. Meanwhile, they say, “the presence of a price on carbon emissions can send an omnibus signal that policy makers are serious about tackling global warming, and that long-term investments need to be made with expectations of future carbon constraints in mind.”

An intriguing new working paper by two of Mehling’s MIT colleagues, Emil G. Dimanchev and Christopher R. Knittel, clarifies the case for a mixed policy. Those authors, like many before them, find that a pure carbon pricing policy is more cost-effective than one based on standards alone. However, using both theory and modeling, they add an important twist. They find that beginning from complete reliance on standards, the benefit of adding a carbon price to the mix is large at first, and then gradually diminishes. That, they say, demonstrates that even a modest carbon price can have large efficiency benefits. Whereas Cullenward and Victor argues that regulations, not pricing, “do the majority of the work” in mixed policy regimes, Dimanchev and Knittel stand that view on its head. Their work suggests that the modest pricing component is exactly what allows the regulatory part of existing mixed regimes to work effectively.

In short, skeptics that rule out pricing altogether or limit it to the margins of policy go too far. I my opinion, Green’s “tiny screwdriver” characterization inadequately accounts for the synergistic interactions between carbon pricing, green industrial policies, and appropriate regulations. I also strongly disagree with Patt and Lilliestam’s characterization of carbon pricing as nothing but a “dangerous political distraction.” On the contrary, it seems to me that the need for wholesale transition is a reason for enthusiastically supporting the use of every weapon in the decarbonization arsenal.

Based on a longer version published at NiskanenCenter.org. Photo courtesy of Wikimedia Commons