Climate Change Policy: Economic Approaches
In a world that’s increasingly dictated by the whims of the market and the function of capitalism, economic signals are one of the most popular forms of climate change policy approaches. If the issue is that dirty fossil fuels are cheaper than cleaner energy sources, an economic policy that puts its finger on the scale to tip it in the favor of the cleaner source can have a huge impact. And this tipping of the scale from carbon-intensive activities to ones that are better for the environment, public health, and the state of climate change can take many different forms, but in the end, the goal is to use these economic signals to allow for more of the activities we want and less of those that we don’t want, and doing so in clever ways can be fair, pragmatic, and successful.
Some of the more commonly discussed economic approaches to climate change policy include the following:
Carbon Pricing
What is it: Policies enacting carbon price allow utilities, industries, and others to continue emitting greenhouse gases, such as carbon dioxide, into the atmosphere, but it prices the externalities created and requires the emitter to pay for them. Because the damage from climate change would be economic and for everyone across the world, this method forces emitters to internalize those costs and often creates a business case for installing more efficient and clean equipment. And while carbon pricing is the commonly used term, it’s important to note that the term carbon is used here and throughout this page as shorthand for all greenhouse gases (including, but not limited to, methane, nitrous oxide, chlorofluorocarbons) assessed in terms of their global warming potential (also known as carbon dioxide equivalent).
Is it enacted anywhere: According to the New York Times, carbon pricing is enacted in a variety of places across the globe, including Canada, Mexico, the European Union, Australia, and more, as well as in 10 states across the country.
In Favor of Carbon Pricing:
“Climate change poses great dangers to us all. Carbon pricing makes investments in low-carbon or carbon-free technologies attractive and ensures that fossil fuels are used efficiently.”– Angela Merkel, Chancellor of Germany
“Here has to be a price on carbon because there is a price on carbon: it’s the consequences to health and the economy and to our climate. We face an existential challenge with the changes in our climate. The time to act is now.”– Jerry Brown, former Governor of California
“Climate change is a member of a special kind of economic activity known as global public goods.” To solve this problem, “At a minimum, all countries should agree to penalize carbon and other GHG emissions by the agreed upon minimum price.”– William Nordhaus, President of the American Economics Association
On carbon pricing, the pontiff said that humanity is called to use natural resources “wisely,” and their use can only be considered ethical when the economic and social costs of using them are transparently acknowledged and “are fully borne by those who incur them, rather than by other people or future generations.”– Pope Francis
“A fee on carbon polluters is a fee imposed on fossil fuels, ultimately intended to eliminate the emission of carbon dioxide. Vote Climate U.S. PAC believes that a fee on carbon polluters is an essential piece of the Green New Deal or any comprehensive legislation to slow climate change. A carbon fee would compel energy producers to switch from fossil fuels to clean, renewable energy or lose their competitive edge.” – Karyn Strickler, Vote Climate U.S. PAC
“From an economist’s perspective, carbon pricing (whether in a tax or cap-and-trade system) is still the most efficient way to control emissions. It does all the work for you, as long as you set the cap or price at roughly the appropriate level, conduct auctioning rather than allocating on emissions allowances, and emitters are more willing to pay the costs of emitting than to relocate to other jurisdictions.” – Alex Clark, Doctoral Researcher, Smith School of Enterprise and the Environment, Oxford University
“We have to put a price on carbon. We can’t let people pollute the world with carbon with its devastating effects on our environment and our society. If I had to choose one single climate policy measure, that would clearly be atop of my list, along with a somewhat more complicated concept around full cost accounting. We let businesses externalize their negative impacts onto the environment and society, and those negative externalities don’t show up on the balance sheets so they’re not held responsible.”– Jeffrey Hollender, Co-Founder of American Sustainable Business Council
“A price on carbon is the single most important tool for climate policy. Obviously, it will depend on how high is the price, where the money will go, and how do we ensure it doesn’t hit low-income people, but if we work out those design details then it’s the most important tool. While I think some of the money should then go to low-income relief, it’s most important that the price actually be established and is high enough. We’ve seen proposals defeated because of disagreements about where the money goes, and I’d rather have the price imposed to create a meaningful price signal than get overly concerned with use of the proceeds.” — Michael Gerrard, Professor and Founder of the Sabin Center for Climate Change Law, Columbia Law School
“I’m supportive of carbon pricing, but it’s not my number one priority when it comes to climate policy. That’s because there are a number of big challenges when it comes to putting a price on carbon. First, it’s very difficult to set the price high enough for it to be effective in the time frame we have left. Second, it’s incredibly politically difficult: I’d rather spend my political capital passing a package like the Green New Deal that will create millions of new jobs, rather than a ‘tax’ whose impacts are more diffuse. If putting a price on pollution (a far better frame than ‘carbon pricing,’ in my opinion) is part of paying for that package, fantastic, but as a stand alone policy, it won’t get the job done.” — Jamie Henn, director of Fossil Free Media and co-founder of 350.org
“Since 2010, we’ve been advocating for a carbon fee and dividend style policy and having it get done on a bipartisan basis. The Energy Innovation Act puts a standardized fee on carbon emissions right on the source, returns that revenue to households on a per capita basis, and it adapts border adjustments to make sure we’re not putting our own manufacturing on an non-level playing field. In this way, we create two lines in the sand: 1) focusing on the effectiveness of carbon pricing towards decarbonization and 2) looking out for lower and middle income families across the country.” — Brett Cease, Volunteer Education & Engagement Coordinator at Citizens’ Climate Lobby
“Shell and Exxon aren’t extracting fossil fuels, dumping them in a swimming pool, and lighting it on fire. The reality is that at the other end of an oil drill bit is me holding onto a gas pump. This isn’t victim-blaming – it’s just an honest acknowledgement that there’s a demand-side to the equation. Carbon pricing is one way of communicating externalities to market but climate warnings on gas pumps literally make these hidden costs visible. In the end, I think they’ll be much more compelling than small increases to the price of gasoline.” – Rob Shirkey, Executive Director at Our Horizon
“There are a lot of policy levers to pull, and I’m inclined to support the economic ones. In early 2004, I went to Washington DC and lobbied Senators and Congressmen and that’s where I learned the importance of the economic message. These representatives understood climate change, they weren’t denying it, but they were saying they couldn’t win their elections based on that alone and they said to come back when business is on your side. So, the economic aspects continue to drive things to this day.” – Will Steger
“A low-carbon future can be unlocked with a policy that puts a price on carbon, which would help to correct for negative externalities and create financial incentives for farmers to utilize techniques and tools that reduce greenhouse gas emissions. For example, if you have a price on carbon emissions that applies to the dairy industry, perhaps that comes in the form of the farmer getting, say, $50 per ton to mitigate emissions. You’d then see on the ground more biogas digesters to turn manure from dairy operation into biogas, which they would use to run a power generator, run their operations on a net neutral basis, and even sell excess electricity into the grid. That circular food economy, with dairy farms as an example, could be unlocked with a carbon price.” – Evan D. G. Fraser, PhD, Director, Arrell Food Institute, Dept. of Geography, Environment, and Geomatics at the University of Guelph
Against Carbon Pricing:
“Existing carbon-pricing schemes tend to squeeze only certain sectors of the economy, leaving others essentially free to pollute. And even in those sectors in which carbon pricing might have a significant effect, policymakers have lacked the spine to impose a high enough price. The result is that a policy prescription widely billed as a panacea is acting as a narcotic. It’s giving politicians and the public the warm feeling that they’re fighting climate change even as the problem continues to grow.”- Jeffrey Ball, scholar-in-residence at Stanford
“Carbon pricing is what the economic profession has been recommending for 20 years now. More and more, though, I’m discovering that carbon pricing is far from sufficient for solving the problem. We should pursue whatever will give us the most reductions in the most sustainable way given the political constraints we’re facing, and in a lot of ways I think that’s not carbon pricing, but a portfolio of policies, including approaches like clean energy standards. We’ve seen that carbon pricing is more politically challenging than other policies, so I tend to think other approaches may be better strategies, though that will obviously vary based on jurisdiction.” – Emil Dimanchev
Read more:
Pricing Carbon – World Bank Group
These Countries Have Prices on Carbon. Are They Working? New York Times
About Carbon Pricing – United Nations Framework Council on Climate Change
Cap and Trade
What is it: Cap-and-Trade is one specific type of carbon pricing mechanism, whereby the price of carbon or other greenhouse gas emissions is set based on market forces. Under a cap-and-trade system, the governing body dictates the level of emissions that are permitted and issue allowances equal to that amount, and every emitter would be required to hold those allowances equal to the amount they produce. Emitters that reduce their greenhouse gas output below their allowance can then auction their extra allowances to those who exceeded their limit on the open market.
Is it enacted anywhere: According to the Center for Climate and Energy Solutions, cap-and-trade is the form of carbon pricing being used in the European Union, Mexico, and a numerous U.S. states.
In Favor of Cap-and-Trade:
“Putting a price on carbon emissions via cap and trade is among the best possible ways to get emissions down quickly and cheaply.”- Gernot Wager, economist with the Environmental Defense Fund
Against Cap-and-Trade:
“The strategy of buying and selling carbon credits can lead to a new form of speculation which would not help reduce the emission of polluting gases worldwide. This system seems to provide a quick and easy solution under the guise of a certain commitment to the environment, but in no way does it allow for the radical change which present circumstances require. Rather, it may simply become a ploy which permits maintaining the excessive consumption of some countries and sectors.”- Pope Francis
When asked about cap and trade Warren Buffet said, “In the utility business, it’s going to be borne by customers. And it’s a tax like anything else.” He added that the “tax is probably going to be pretty regressive.”- Warren Buffet, American business magnate
“A full-blown fleecing of the middle class, it would raise electricity prices, increase gasoline prices, and ship American jobs to countries like China and India”- John Boehner, former Speaker of the House
Read more:
How cap and trade works – Environmental Defense Fund
Cap and Trade Basics – Center for Climate and Energy Solutions
Cap and Trade and Carbon Taxes – Union of Concerned Scientists
Carbon Taxes
What is it: Carbon taxes are the other type of pricing greenhouse gas emissions, other than cap-and-trade, where the governing body sets the price on emissions and collects that tax accordingly. Whereas cap-and-trade offers defined emission reductions with uncertain prices, carbon taxes offer defined greenhouse gas prices with uncertain emission reductions.
Is it enacted anywhere: According to the Center for Climate and Energy Solutions, carbon taxes are being used in certain parts of Canada, as well as in Boulder, Colorado.
In Favor of Carbon Taxes:
“The real right way to correct [the subsidy] would be to establish a carbon tax. If you ask any economist they will tell you that is the obvious thing to do, put the correct price on carbon because we currently have an error in the economy which misprices carbon at zero or something closer to zero. It is a fundamental economic error.”- Elon Musk, CEO of Tesla, Inc.
“A global carbon tax levied on a relatively small number of large sources can be monitored by satellite and checked against the annual surveillance of fiscal and economic polices already carried out by IMF staff. Thus, the accounting involved is much more precise and much less subject to the vagaries of corruption and conflict over which industries and companies get their free handouts of carbon credits — carbon pork — than in a cap-and-trade system.”- Ralph Nader, American political activist, attorney, and author
“The only way I can see the problem being solved is through a gradually increasing carbon tax. I like Jim Hansen’s idea of a fee and dividend where the tax is collected and redistributed evenly so if you emit less CO2 than average you’ll make money every year. This gives incentive to not dump carbon into the atmosphere and create technology to reduce the amount of carbon they emit.” – Alan Robock, Rutgers University
“A carbon fee or carbon tax is an important tool, particularly an aggressive one that really affects the price of fossil fuels and accounts for the damage that they do. For example, an aggressive carbon fee could be charged and then the funds collected can be distributed equally to all citizens in a way that helps environmental justice issues and reducing the burden on low-income homes. Further, the check that comes in regularly from such a fee and dividend would also be quite useful for keeping the political momentum behind such a move.” – Robert (Bob) W. Howarth, Ph.D. The David R. Atkinson Professor of Ecology & Environmental Biology Cornell University, Ithaca, NY USA
Against Carbon Taxes:
“Energy is the lifeblood of any economy. A carbon tax would increase energy prices and thus cost jobs, making it difficult for U.S. companies to compete with foreign rivals and punishing the poor.”- H. Sterling Burnett, Senior Fellow on Energy and the Environment at the Heartland Institute
Read more:
Cap and Trade and Carbon Taxes – Union of Concerned Scientists
Carbon Tax Basics – Center for Climate and Energy Solutions
The 5 Most Important Questions About Carbon Taxes, Answered – Vox
