Next week, world leaders will meet at the United Nations in New York City at the invitation of UN Secretary-General Ban Ki-moon. The purpose of the meeting is to discuss actions the leaders will take to limit their country’s emissions of greenhouse gases in an effort to forestall global climate change. For many, success of the meeting will be measured by the ambition of the stated actions—that is, how aggressive will the emissions reductions offered by each country be?
Although ambition may be a good measure of success, climate policy watchers will be just as interested in the specific actions that give rise to the stated emissions reductions. It is the efficacy of the action that makes stated ambition credible but, unfortunately, there are many ineffective actions that can be taken.
One heavy-hitting climate policy watcher is World Bank Special Envoy for Climate Change Rachel Kyte. Earlier this year, Kyte reiterated her support for climate policy actions that take the form of prices on emissions of carbon dioxide (often termed “carbon pricing”). She encouraged “countries, sub-national jurisdictions, and companies to join a growing coalition of first movers to support putting a price on carbon.” The governments and organizations comprising this coalition are not supporting a specific level of ambition in terms of emissions reductions; rather, they are supporting a specific effective action—carbon pricing.
This is incredibly good news to those anxiously awaiting private sector movement on large scale investments in a global, low-carbon future. Not only does a price on carbon immediately tilt the rate-of-return on investment to low-carbon projects, but it simultaneously incentivizes R&D expenditures in new low-carbon technologies—something only a price can accomplish. Surely, other actions can complement a carbon price, but the establishment of carbon price is the only foundational action upon which credible ambition can be based.
President Obama endorsed this view when he told columnist Thomas Friedman earlier this year “if there’s one thing I would like to see, it’d be for us to be able to price the cost of carbon emissions.” Sadly, the United States, the country that first implemented prices on air pollution in 1990 under the highly successful Sulfur Dioxide Acid Rain Program, has seemingly reached a state of paralysis regarding a national and economy-wide pricing policy for carbon dioxide emissions. After the Waxman-Markey bill stalled in the Senate in 2010, the alternative pathway became regulating carbon under the Clean Air Act (required by law after the Supreme Court’s 2007 decision in Massachusetts vs. EPA). While EPA has taken steps to provide states with flexibility and even the ability to pursue pricing approaches within the electric power sector, the prospect for an economy-wide, federal pricing policy appears off the table for the short and medium term.
Contrast the current US reluctance to embrace carbon pricing with that of its major economic rivals. The European Union integrated carbon pricing into its climate policy in 2005 and the program now serves to regulate half of all EU carbon emissions. China has five regional carbon pricing markets up and running to serve as pilot tests for a future, country-wide system.
The environmental efficacy and economic efficiency of carbon pricing are not lost on these major US competitors. It may very well be the case that efforts to maintain international economic competiveness with these heavyweights will force the United States to reconsider its approach. If and when that time comes, the policy is ready and waiting. Termed a “revenue-neutral” carbon tax, the policy prices carbon by simply placing a tax on the carbon content of fossil fuels. Unlike cap and trade, a carbon tax eliminates the need to allocate allowances, establish and police allowance markets, and operate allowance auctions. Moreover, and perhaps most important, the revenues from the tax can be used dollar-for-dollar to draw down existing US taxes that slow economic growth—capital and labor taxes topping this list.
