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It’s Time to Abandon Carbon Pricing

Carbon pricing programs like cap and trade carry enormous political costs and few environmental benefits. We should abandon them — and instead pursue transformative climate policies that deliver immediate material gains to workers.

Campaigners protest during a climate change action day on September 20, 2019 in Edinburgh, Scotland. (Jeff J Mitchell / Getty Images)

As environmental economists, oil companies, and policy wonks gather in New York for Climate Week, they will debate the finer points of carbon pricing. They shouldn’t.

Is carbon pricing a good idea? In theory, yes. We really should make bad things more expensive. Has it worked? Depends on the yardstick. In environmental terms, carbon pricing has produced marginal climate benefits in the form of gradual emissions reductions.

But politically, it’s done more harm than good. Carbon pricing has contributed to the extreme polarization of the climate issue. It’s stoked class divisions, reinforcing the myth that climate policy necessarily penalizes the poor and working class, and sparking revolts like the Yellow Vests in France. That myth, in turn, has slowed progress on decarbonization — all while convincing politicians and the public that we’re making real headway on climate change. (We’re not.)

These political costs just aren’t worth the incremental environmental improvements they produce. We need to abandon carbon pricing, at least for the time being, and instead focus on investments that build broad coalitions for aggressive climate policy, like rapidly expanding clean energy and green housing. Only after generating political and policy momentum to support these investments should we return to carbon pricing to help complete the energy transition.

What’s in a Number?

Carbon prices largely reflect the “known knowns” of the social and environmental damages of emissions — what economists refer as “the social cost of carbon” (SCC). But, of course, there’s no reliable way to predict the future — or the cost of future damages. In practice, the SCC is a political number that varies widely, depending on a variety of normative assumptions like how much people value the present versus the future.

As it happens, the vast majority of carbon pricing schemes are lower than even conservative estimates of the SCC. Fully half of all priced emissions worldwide are priced below $10 a ton. The Intergovernmental Panel on Climate Change (IPCC) estimates that in order to keep warming below 1.5°C, carbon prices would have to range from $135 to $6,050 per ton by 2030.

Cap and trade, the other main carbon-pricing tool, is also riddled with problems. In cap and trade, the government sets a ceiling, or a cap, on the total amount of emissions that can be pumped into the air. Companies purchase allowances and then trade with each other to meet their targets.

The problems here are different, but just as fatal. Too many allowances can create a glut, driving down prices and generating “hot air,” a situation where compliance occurs on paper but fails to shrink emissions. Many cap-and-trade systems also permit carbon offsets, allowing market players to outsource carbon reduction to other places. In addition to being morally dubious, offsets have come under criticism for weakening carbon pricing schemes.

Finally, even these lackluster efforts to price carbon are undercut by subsidizing fossil fuels. A recent working paper from the International Monetary Fund (IMF) estimates that fossil fuel subsidies totaled $5.2 trillion in 2017 (though, admittedly, this depends on how subsidies are defined). These subsidies are directly at odds with carbon-pricing policies, since they reduce the cost of fossil fuels artificially.

In short, the very mechanism that makes carbon-pricing politically palatable — a modest price — renders it ineffective at drastically reducing emissions. Sure, a low carbon price would raise some revenue and change behavior at the margins. But it will barely make a dent in the climate crisis.

A Zombie Policy

Given its spotty track record, why are policymakers so keen on carbon pricing? In the United States in particular, it’s the climate policy that won’t die. Bill Clinton proposed a carbon tax in the early 1990s (the BTU tax) that failed in the Senate and contributed to Democrats losing control of the House in the 1994 midterm elections. In 2009, Democrats tried a new tack with cap and trade, which again failed in the Senate (though narrowly this time). Obama then resurrected carbon pricing as an optional approach for states in the Clean Power Plan (which the Trump administration has since repealed).

The obsession with carbon pricing is the result of three main factors.

First, it’s a simple policy. In his book Can We Price Carbon?, Barry Rabe notes that some see it as a “public policy silver bullet” — a quick fix to a very complex problem. Putting a price on carbon, whether through emissions trading or a carbon tax, is much more straightforward than, say, figuring out how to expand public transportation networks through public planning.

Second, mainstream economists tend to dominate climate policy discussions. Take Project 88. A group of economists, Project 88 pushed for emissions trading of acid rain–causing sulfur dioxide in the United States in the late 1980s. The success of the program led the group to advocate exporting the model to greenhouse gases — never mind that most European countries decreased their emissions through traditional government regulation. In early international climate negotiations, Project 88 made carbon pricing a critical feature of global climate policy and the political linchpin of the 1997 Kyoto Protocol, the most important global climate agreement until the 2015 Paris Agreement. That pattern continues to the present. The IPCC Working Group on policy is filled with mainstream economists, who are naturally biased toward market solutions.

Finally, carbon pricing is consistent with “liberal environmentalism” — the widely accepted notion that capitalism and environmental protection can happily coexist through things like eco-labeling and pollution markets. Liberal environmentalism emphasizes voluntary approaches, public-private partnerships, and, of course, markets, in lieu of government regulations. After all, markets maximize choice and efficiency – at least in theory.

Big Fights Over Small Effects

All over the world, carbon pricing has become a political litmus test of climate commitment — with damaging political effects.

The federal carbon price in Canada has prompted several provinces to challenge the legality of the tax (thus far, unsuccessfully), despite the fact that 48 percent of Canadians favor a federal climate policy (only 30 percent favor a province-first approach). In Australia, Julia Gillard was replaced by Tony Abbott because he vowed to “axe the tax” (i.e., the carbon tax) that she had proposed. Carbon pricing generates massive battles over the deck chairs on the Titanic, rather than the looming iceberg.

This polarization also translates to inconsistent policies, which shift with elections. The possibility of interstate carbon trading in the United States disappeared with the repeal of the Clean Power Plan. Similarly, the right-wing populist premier of Ontario, Doug Ford, canceled the province’s participation in a cap-and-trade market with California and Quebec, which will cost the province over CAN$3 billion. The lack of stability further undermines the efficacy of carbon pricing, since changing policies cannot establish a consistent market signal.

And, finally, since carbon pricing emphasizes costs over benefits, it fails to build a broad coalition of support. Most people are understandably concerned more about what they will pay immediately than the future climate benefits. This applies both to the average resident, who may face higher fuel and energy costs, as well as workers in emissions-intensive industries, who justifiably worry about the economic impacts on their job security. At a time when we need to broaden support for climate policy as quickly as possible, carbon pricing does just the opposite.

Supply-Side Regulations, Not Carbon Pricing

Instead of expending huge amounts of political capital on incremental policies, we should be pushing transformative measures that provide up-front benefits to the broadest possible swath of workers. The Green New Deal (GND) has this potential — but only if it omits a price on carbon, at least for the time being.

The Green New Deal should focus on policies that create political support for the clean energy transition in the short term and construct institutions that will ensure the durability of that support in the long term. In the immediate future, this means investing in public goods: expanding carbon-free public transportation and heavily subsidizing the cost for riders (ideally making it free); creating more zero-carbon affordable housing and green spaces, particularly for those most affected by climate change.

A Green New Deal will also have to directly reduce the supply of fossil-fuel energy, including through eliminating subsidies. But workers shouldn’t have to shoulder the burden of a shrinking fossil-fuel industry: the GND must include compensation, buyouts, and pension guarantees for workers. In Eastern Kentucky, miners have been striking for six weeks, since the mine owner Blackjewel LLC filed for bankruptcy and stopped paying its workers. Thus far, the solution has been a donation to workers from a former coal tycoon. Such ad-hoc approaches cannot become the norm — we need robust, generous, institutionalized compensation for displaced workers.

A GND should also make it easier for workers to organize. As Timothy Mitchell notes, the advent of coal fostered the rise of mass politics in the nineteenth and early twentieth centuries. This not only brought improvements in working conditions, but also lasting egalitarian institutions. We need a return to this type of politics — where workers across industries can organize for a more equal society.

“How will we pay for all of this?” asks the media pundit. Supply-side regulations will raise the costs of energy; the transition to a decarbonized society will not be free. But as political scientist Henry Farrell recently pointed out, the question is not how to pay for climate change, but who will pay for it. The IMF estimates that the United States alone spent $649 billion in direct and indirect subsidies to the fossil fuel industry in 2017. Even partially removing these subsidies could free up funds for consumers who face rising energy costs and workers who face unemployment. Hiking corporate taxes, which sit at historic lows in the United States, and scrapping offshoring incentives could also help fill the gap.

Others will say: we need an “all of the above” policy. We shouldn’t take anything off the table given the urgency of the climate crisis. This pernicious logic — that incrementalism will always help — is now part of the problem. A carbon price of $15 or $20 a ton does little to actually reduce emissions — and it either inspires false optimism (“We’re doing something about climate change!”) or sows further opposition (“Why should I pay more?”). Neither helps.

Carbon pricing has poisoned the well of climate policy, with little in the way of emissions reductions. Once governments invest in infrastructure, housing, transportation, and adaptation, perhaps later they can use carbon pricing to speed things along. But for now, it’s time to move on.