Just Putting a Price on Carbon Isn't Enough

Angela Johnson Meszaros

Director of Policy and General Counsel

California Environmental Rights Alliance

angelajm [at] envirorights.org

This week, the CBO released a new brief called “Climate-Change Policy and CO2 Emissions from Passenger Vehicles .“ The brief’s findings call into question, again, the often chanted mantra that all we need to do to address climate change is put a price on carbon. The CBO’s Executive Director, Peter Orszag, summarized the new brief writing in his blog:

Discussions about addressing climate change (e.g., through a cap-and-trade program or a carbon tax) often focus on the transportation sector. The brief argues, however, that most of the reduction in CO2 emissions would occur in other sectors (e.g., the electricity sector) and that the effects on vehicle emissions would be modest, especially in the shorter run.

Interesting, no? Maybe we should be focusing on how to increase the use of renewable, non-nuclear energy to meet our electricity goals since about two-thirds of our electricity comes from burning fossil fuel—the number one contributor to greenhouse gases. But I digress.

Director Orszag’s blog gets even more interesting as he explains:

To be sure, a cap-and-trade system or a carbon tax would raise the price of gasoline, encouraging consumers to drive less and to buy more fuel-efficient cars– but the magnitude of these effects would be relatively small. For example, CBO has estimated that a price of $28 per metric ton of CO2 in 2012 would lead to a reduction of about 10 percent in total U.S. emissions compared with a no-action scenario. Vehicle emissions, though, would remain relatively constant in the short run, and even over time they would decline only by around 2.5 percent — much less than the 10 percent reduction in overall emissions.

Several factors account for the relatively small influence that a price on CO2 emissions would have on passenger vehicles and driving behavior. First, a CO2 price of $28 per metric ton would raise gas prices by about 25 cents per gallon, far less of an increase than consumers have recently born with little behavioral result. (Between 2003 and 2007, gas prices increased from $1.50 to more than $3.00 per gallon. Vehicle miles driven, driving speeds, and the purchase of larger vehicles have all responded only modestly despite the dramatic increase in prices.) An increase in gas prices of 25 cents or so per gallon is unlikely to generate massive changes in driving behavior.

So, first, let’ recognize that the new east coast trading scheme, RGGI, just auctioned carbon allowances and the market clearing price was $3.07 per ton (see my previous blog entry about that). Not even close to $28. I know, I know, that’s a totally different thing. My point is it is unclear if or when carbon markets in the U.S. will get to $28 per ton.

Second, in California, the Air Resources Board has done some number crunching and decided:

the modeling results presented for the cap-and-trade program of the Preliminary Recommendation reflect a carbon price of slightly less than $10 per ton. It is important to note that the $10 per-ton figure does not reflect the average cost of reductions; rather, it is the maximum price at which reductions to achieve the cap are pursued. (page 13, emphasis in the original.)

That means we could expect even fewer reductions from California/WCI’s scheme than the one the CBO was imagining. I can’t wait to hear the explanation of why this is a good idea anyway.

All this means, is simply just “putting a price on carbon” isn’t going to get us the kind of reductions in green house gas emissions we need to avert climate catastrophe. The appeal to the “free market” to get us out of the climate crisis cannot work; and this is especially true when the “price on carbon” isn’t actually high enough to cause changes necessary to reduce greenhouse gas emissions.

That’s why we really need to focus on a policy approach that uses as its foundation regulations and standards, incentives, and a price on carbon established by a fee that funds incentives, supports carbon reduction efforts, cushions price shock from energy increases, encourages innovation, and supports mitigation and adaptation efforts.

Leadership from decision-makers. Is that too much to ask for?