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Photo of flag of COP26 UN 2021 climate change conference

Photo of flag of COP26 UN 2021 climate change conference

Two Climate Moments of Truth Loom for Carbon Pricing Policy

Bold leadership in climate change policy is required now—in the U.S. and abroad.


Two climate moments of truth loom on the immediate horizon. The first will occur in Washington, D.C. in the coming days, and pertains to whether the United States Congress will enact a measure to price carbon nationally in line with its social cost. The second will occur between Sunday and November 12 in Glasgow, Scotland, and pertains to whether the global community will come together at the United Nations conference known as COP26 to produce an agreement for achieving a sensible global carbon pricing mechanism.

Carbon emissions from human activities lie at the heart of the climate crisis. A key reason we have a crisis at all is that these emissions have been, and continue to be excessively cheap. In this regard, emissions have been priced for decades, indeed subsidized, in a way which ignores their causal impact on global temperatures.

If the participants at COP26 manage to produce an agreement for achieving a sensible global carbon pricing mechanism, the market implications are enormous. Over the next decade, emissions trading volume can reasonably be expected to grow by a factor of 25.

It is vitally important that the U.S. play a key leadership role at COP26, but will be hampered if its stance is “Do as I say, not as I do.” This means that the U.S. will only be able to exercise real leadership if it can pass sensible climate measures as part of the Reconciliation bill now being debated in Congress. Among these measures is a carbon tax, meaning being a fee which if imposed will raise the relative price of any product in a way that reflects the carbon emissions embedded within the product.

For this to occur, both the U.S. and the world at large need strong and bold leadership, and need it now.

President Biden and John Kerry, United States Special Presidential Envoy for Climate, will both be attending COP26. Recently, Kerry told the BBC: “So this is really what Glasgow is about, the last best hope to do what the scientists tell us we must which is to avoid the worst consequences of climate by making decisions now and implementing them now.” However, and this is characteristic of his longtime view, Kerry made no mention of the need for carbon pricing. As for President Biden, while he did support the idea of a carbon tax at one point during his run for the Presidency, he ceased being a strong advocate for it after he was elected.

The idea of a national carbon fee has been the subject of public discourse for decades, and there is an important and simple psychological reason why it has not yet been adopted in the U.S. The reason is that it works!

It works because of the law of demand: when the price goes up, quantity demanded goes down. Americans who have difficulty delaying gratification, because of a problem with self-control, or denial, or both, will resist a measure inducing them to delay gratification by paying relatively more for carbon intensive products.

Conversely, voluntary mechanisms by themselves do not work. This is why green house gas emissions since the Paris Agreement concluded in 2015 have grown more quickly, but for the COVID-year of 2020, than the targets to which member states agreed in Paris.

A fee on carbon is like a tax on gasoline. Every state in the Union imposes gasoline taxes. Generally, people who live in states which impose higher gasoline taxes, like Pennsylvania and California pay more at the pump than people who live in states, like Texas and Alaska, which impose lower gasoline taxes. In the 1970s, we saw that after OPEC quadrupled the price of crude oil, Americans switched from driving large fuel inefficient cars to driving more fuel efficient compact cars. Recent work by economists shows that this was not an isolated event, and that Americans generally substitute compact cars for larger standard cars in response to increases in gasoline prices. This is in line with the law of demand. It also makes good climate sense.

According to the Yale Program on Climate Change Communication, 63% of Americans favor a carbon tax—a clear majority. In fact, a survey conducted by the Yale Program indicates that on average, Americans are willing to pay 14.4% more for energy as a result of a carbon tax. The great majority of Democrats support the idea of a carbon tax—94% of liberal Democrats and 84% of moderate Democrats. However, Republicans are different, with only 48% of moderate Republicans supporting a carbon tax, and 31% of conservative Republicans.

The obstacle to passing a sensible national carbon pricing measure in the U.S. is that the minority rules, not the majority. The minority rules even within the Democratic party, as evidenced by the pivotal power exercised by Senator Joe Manchin, who represents the coal producing state of West Virginia.

Of course, Senator Manchin is representing the interests of West Virginia, which is what the people of West Virginia elected him to do. His opposition to a carbon tax makes clear that climate change policies create both winners and losers, and that it is important to take into account the interests of potential losers, and address them.

A knowledgeable reader asked me whether my point about Senator Manchin and the people of West Virginia could be supported with data. I checked the Yale Climate Project data from 2020 for West Virginia, and the people there rank 49 or higher out of the 50 states plus Washington D.C. on every Yale climate survey question.

A key issue in any carbon tax bill is what to do with the revenues collected. One idea is to make any carbon tax revenue neutral by distributing the monies collected back to the general population as a carbon dividend. Another idea is to use the revenues to subsidize clean energy alternatives. A third idea is to use the revenues to fund programs to equip people in high carbon intensive industries like coal production with skills for functioning in low carbon intensive industries. It is time to be creative to unblock the obstacles to passing sensible national carbon pricing legislation, by using carbon tax revenues to provide a safety net for those who will be adversely impacted by such legislation.

The Reconciliation bill is a budget bill, falling within the responsibilities of the Senate Budget Committee, chaired by Senator Ron Wyden of Oregon. Senator Wyden is looking for a way to include a carbon tax as part of the Reconciliation package. However, progressive Democrats have voiced concerns about such a tax harming low income Americans. For this reason, Senator Wyden has proposed excluding gasoline from any carbon tax. Doing so would be a major mistake, if the goal is to reduce carbon emissions. Here again, I suggest, is a need for creativity, as work by the Citizens’ Climate Lobby has demonstrated that carbon tax revenues can be distributed in a way that protects those with low incomes.

The country needs strong, bold, creative leadership to arrive at a national carbon pricing policy which the majority already supports.

Robert Litterman, a co-director of the Climate Leadership council, places the odds at 50-50 that the Congress will pass a sensible carbon pricing policy by the end of October. He notes that the European Union is serious about imposing a border carbon adjustment mechanism, and that China, which has been making significant progress at decarbonizing, has recently instituted a carbon pricing mechanism of its own. In Litterman’s view, if the U.S. manages to pass carbon tax legislation, if the European Union institutes a border carbon adjustment, and if China joins together with the U.S. and the EU with a cohesive tax and carbon adjustment policy, the rest of the world is bound to follow.

Only 20% of the the world’s carbon emissions are currently priced, and that price is excessively low. So the stakes for COP26 are high.

COP26 has four major goals: maintaining global temperature rise below 1.5 degrees Celsius, fostering strategies for adapting to climate change, structuring global finance to support climate change initiatives worldwide, and finalizing the uncompleted portion of the rulebook developed as part of the Paris Agreement. Finalizing the Paris rulebook needs to be done because the carbon pricing initiatives that were part of the Paris negotiations did not make it into the final agreement, and got kicked down the road. These issues pertain to what is known as Article 6, part of which entails establishing a global price for carbon along with associated emissions trading systems.

In respect to the COP26 goals, adaptation will be paramount going forward, no matter what, and finance will be a big part of any serious decarbonization effort. However, the other two goals for COP26 involve harmonized mechanisms for pricing carbon at its social cost; and doing that successfully is vital for the future condition of human life on Planet Earth.

For this, we need bold leadership from world leaders, especially President Biden and John Kerry, leadership which to date has been sorely lacking.

 

This column originally appeared in the Oct. 21, 2021 edition of Forbes.    

Sustainability, Faculty, Business, Leadership, Finance, Economics, Energy, Global, Science, Innovation, LSB
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