Can Carbon Pricing Reduce CO2 Emissions?
What is carbon pricing, how is it different from carbon emissions permits, and could such a policy reduce carbon dioxide emissions sufficiently to slow down global warming? We discuss these and many other questions with James Boyce of the Political Economy Research Institute
SHARMINI PERIES: It’s the Real News Network. I’m Sharmini Peries, coming to you from Baltimore.
A sad but not unexpected milestone was reached last April, when the atmospheric concentration of carbon dioxide was measured at 410 parts per million for the first time in recorded history, according to the National Oceanic and Atmospheric Administration. For 800000 years for which there are records, carbon dioxide concentrations fluctuated between 170-280 parts per million. Then with the beginning of the industrial era, carbon dioxide concentrations began to spike and are currently increasing steadily by two parts per million each year.
Now, according to science the evidence is clear. Therefore, leaving the issue of carbon emission controls to the invisible hand of the free market is not only irresponsible on the part of policymakers and regulators, but it is downright negligent. The companies responsible for polluting our air with carbon emissions have put their profits above the needs of the planet, sinking us into a zone of no return. The Paris Agreement goal to limit global temperature rise from 1.5-2 degrees above the pre-industrial levels cannot be achieved without government regulation. There are many ways to restrict carbon emissions, but as long as there are companies which can profit from extracting or from burning carbon, regulating it becomes extremely difficult in this political environment.
A new report by the Political Economy Research Institute titled “Carbon Pricing: Effectiveness and Equity” addresses this point. Its author James Boyce joins us today from Amherst. James K. Boyce is professor of economics at the University of Massachusetts Amherst. He is the director of the program on development, peacebuilding, and the environment at Political Economy Research Institute, which is also at UMass. I thank you so much for joining us today, James.
JAMES BOYCE: Thanks for having me, Sharmini.
SHARMINI PERIES: James, let’s start off with you explaining to us the difference between carbon pricing and carbon trading.
JAMES BOYCE: Sure. That’s a great question, because often these things get confused in people’s minds. Carbon pricing simply means that we put some sort of limits on the amount of fossil fuels entering our economy. And we do that in order to try to protect the climate, ideally; to try to meet the Paris Agreement goals, at a minimum. And when we do that, when we limit the amount of fossil fuels entering the economy it pushes up their price, and the resulting price increase in prices of oil, coal, and natural gas is the carbon price. So carbon pricing refers to any policy that raises the price of these fossil fuels, restricts their supply. And in so doing, it then send signals to users of fossil fuels that they need to conserve on the amount they’re using and invest in new technologies to come up with alternatives or improve energy efficiency.
Carbon trading is something quite distinctive. Carbon trading is something that would result if, and only if, the way that we tried to implement carbon pricing was through what’s called a cap and trade program. And a cap and trade program puts a limit on the amount of carbon being used in the economy, and then gives away permits up to the ceiling set by that limit to corporations. And the corporations then are free to trade those permits among themselves. So that’s cap and trade, and trading, carbon trading only is necessary if you give away permits for free to corporations rather than auctioning them off, or using a carbon tax, or using some combination of the two.
SHARMINI PERIES: All right. So then let’s take one of these at a time. In your paper you discuss attempts to regulate carbon with carbon trading systems, such as the European Union’s emissions trading system and China’s national emissions trading system, and the cap and trade program for power plants in the U.S. Now, what happened? Why aren’t these working?
JAMES BOYCE: They work to a very limited extent. And the main limitation is that the prices that these programs have resulted in are very, very low. We’re not talking about prices anywhere near what would be necessary to put us on a path to meet the goals of the Paris agreement. For example, in the EU emissions trading program, the price on carbon is roughly 10 euro per tonne of CO2. That adds a few cents to the price of a liter of petrol, very small. If it were for petrol. Actually it’s for power plants, mainly. It’s a very small amount. It’s not enough to make a big difference. In the United States the biggest cap and trade program is that of the state of California, where the price is about $15 per tonne of CO2. And to make that number something that people can understand, roughly speaking, $1 per tonne of CO2 translates into one cent extra costs on a gallon of gasoline.
So $15 per tonne, the California price, is 15 cents on a gallon of gasoline. Well, that’s not a price that’s going to get us terribly far in terms of reducing our use of fossil fuels. Again, nowhere near where we need to be in order to hit those Paris targets.
SHARMINI PERIES: So then what are the ways in which you can price carbon in effective, in more effective ways?
JAMES BOYCE: Well, the key thing, Sharmini, is to make sure that you have a policy that limits the total amount of fossil fuels coming into your economy. In other words, a policy that keeps fossil fuels in the ground. A policy that says this is how much coal, oil, natural gas we’re going to allow to be burned, and no more. And then you let the price be whatever is needed in order to meet those strict quantitative limits. So that can be done in either of two ways. One is to set a cap on the amount of fossil fuels coming into the economy, and auction off the permits, not give them away. So you’re not talking about carbon trading, here. You’re talking about auction permits. Firms buy as many permits as they want, and they bid whatever the market will bear given the constraint on the amount of fossil fuels coming into the economy, that amount being set by the cap.
The other way to do it is through a carbon tax. But with a carbon tax a tax sets the price, doesn’t set the quantity. So you need to have some automatic mechanism by which the tax rate rises to meet those quantitative emission reduction goals. And it’s possible to do that. That’s what Switzerland has done, for example, in its carbon levy for power plants.
One way to do it is to combine, really, a tax and a cap by saying here’s the price we’re going to charge on carbon, for carbon permits. And if demand for permits exceeds the cap, the amount that we are willing to supply, then we’re going to let an auction happen and let the price rise accordingly. So that’s a combination that combines a tax and a cap, where the tax basically acts as a floor price on how permits will be sold at auctions. And again, if demand is greater than we want to allow, then we auction off the permits and let the price rise accordingly.
The key thing, again, is to have hard quantity targets for emissions reductions. If we want to reduce emissions to, say, 80 percent below their current levels by the middle of the century, which is the kind of target that’s often discussed in the context of the Paris goals, then we’re talking about cutting emissions by a little more than 5 percent per year every year between now and then. So every year, you would have a ceiling on the amount of carbon that’s burned in the economy that would go down by 5 percent below the year before. And you can do that, and you get a price increase as result of that, and whatever that price increase turns out to be it’s the carbon price. It’s likely to be a lot higher than 15 cents on a gallon of gasoline.
SHARMINI PERIES: Some people argue that this is turning carbon and carbon in nature into a commodity, which is perhaps the problem we have with fossil fuels, that companies, you know, who have taken something that’s nature and turned it into a commodity that then ends up with the emissions polluting our environment and affecting our health, and so forth. So are we in the danger of that happening with carbon pricing?
JAMES BOYCE: Well, again, it depends on how you do the carbon pricing. If you have a cap and trade system, Sharmini, one of those where you give away permits for free and let corporations trade them, then you are really turning the right to put carbon into the atmosphere into a commodity. But there’s absolutely no need to do it that way. In fact, there are very, very good reasons not to do it that way. Among other things, giving away the permits for free means that as the prices go up the corporations pocket the money as windfall profits. That’s money that comes out of the pockets of every consumer of fossil fuels in the country, which is to say from everybody, and it’s transferred to them.
So there’s really no good reason in my mind to give away permits for free. And if you don’t do that, if instead you have a carbon tax, again, keyed to quantity targets, or you have a cap and permit auction system as is done, for example, in the Regional Greenhouse Gas Initiative in the northeastern states for power plants, then you’re not really turning this into a commodity any more than putting parking meters on the streets turns the streets into a commodity. Right? The reason we have parking meters on the streets is to limit congestion. If parking were free in many places there just be too many cars trying to squeeze into the limited number of spaces. Well, at the moment we’re trying to put too much carbon into the limited carbon space we have, and so putting a price on it is a way to limit that congestion.
It’s a way to recognise that this is not an unlimited supply it’s not free it shouldn’t be theory but it doesn’t mean it’s a commodity because it can’t be bought and sold any more, as I said, than putting your quarter into the parking meter means that the streets have turned into a commodity. It’s not a commodity. It’s something we have to pay for. Having a price doesn’t mean you have a commodity.
You know, last week there was a press conference in California when Gov. Brown and his Attorney General Xavier Beccera were announcing that California is suing the Trump administration, together with a number of other states, to be able to proceed with implementation of the fuel economy standards for automobiles that the Trump administration wants to repeal. And Attorney General Beccera made a comment which I think really gets at this question. He said, the earth is not flat, pollution is not free, and the health and safety of our children is not for sale. And I think that’s, that’s absolutely right. You know, if we don’t want the health and safety of our children to be for sale, we can’t let pollution be free. We have to make it costly. And the question is how we do it, and how we ensure that when we do it, rather than the public being burdened excessively by higher prices for fossil fuels, we return the money back to the people. And the way that this can be done is through equal per person dividends for every woman, man, and child. We return it to the people so that they maintain their purchasing power in the face of rising prices without diluting the incentive for everybody to cut their emissions of fossil fuels.
Similarly, it’s important to return some of the money to governments, local state and federal government, to maintain governmental purchasing power in the face of these fuel price increases. And this is not a difficult thing to do as long as we auction the permits or have a tax, rather than giving away, giving away the permits for free to corporations.
SHARMINI PERIES: All right. Finally, would carbon pricing make other regulations on greenhouse gas emissions unnecessary? In other words, will this deal with it all?
JAMES BOYCE: Great question, Sharmini. There are some really good reasons to have regulations, as well as carbon pricing. These things are not mutually exclusive. Think again about parking as an example. We not only have parking meters, but we have rules about when you can park, how long you can park. You have to park between the lines. You can’t park by a driveway or a fire hydrant. There are certain parking places reserved for people with disabilities, et cetera, right? We have rules together with pricing, similarly, to limit the use of tobacco. We have taxes on tobacco, and we have rules about who can buy tobacco and under what circumstances, et cetera, right? Rules and pricing are not mutually exclusive, and they shouldn’t be mutually exclusive in the case of fossil fuels and carbon more generally, either.
So the reasons why one might want to have regulations in addition to carbon pricing is, include the following. One is that carbon dioxide from fossil fuels is not the only cause of global climate change, of global temperature increases. There’s also carbon emissions from other sources, like deforestation. There are also other greenhouse gases like methane, and regulations are needed to deal with these. Carbon pricing alone won’t do the trick.
Secondly, along with carbon dioxide, when we burn fossil fuels we made a lot of other nasty stuff. Particulate matter, sulfur dioxide, and so on. And one thing one really needs to try to avoid is the creation or exacerbation of what are called pollution hotspots, where certain communities, and these tend in the United States to be low income communities and communities of color, where certain communities are really disproportionately burdened with the pollution resulting from the burning of fossil fuels. And so carbon pricing alone won’t ensure that you don’t get those hotspots. You need to have some sort of additional regulatory mechanisms in order to make sure that you don’t perpetuate or exacerbate those disparities.
And finally, in some cases regulation can play an important role in helping to drive forward the process of innovation and the diffusion of new technologies. So if you think about the fuel economy standards for automobiles, for example, that I mentioned a moment ago, those are standards which can and will, if implemented, greatly increase, greatly accelerate the rate at which automobile makers manage to improve fuel efficiency in automobiles, which will be a big economic benefit as well as a climate benefit for everybody. Government regulations have often played a role in driving technology.
Now, finally, does this mean that any and all regulations would still be needed if you had a real serious carbon pricing system with real serious carbon prices? No. There would be some regulations that would be made redundant by the fact that you now have a price on carbon that can do a lot of the heavy lifting.
So to give one concrete example, one that’s very much in the news these days, if you think about the Clean Power Plan of the Obama administration, which was designed to reduce emissions from power plants and in effect to shut down most, if not all, coal burning power plants, that was a regulation that the Obama administration came up with when they failed to get carbon pricing in place. When they realized they weren’t going to get that through Congress, and so they tried to do this by executive action. Now, if we had a serious price on carbon emissions, that would probably make much of the Clean Power Plan regulation unnecessary. It would make it redundant, because the price of burning coal as a way to generate electricity would become so high that no utility and no consumer would want to continue with that anymore.
So there would be some regulations that would no longer be needed if you had serious carbon pricing in place. Doesn’t mean you couldn’t keep the regulations there, just to be on the safe side. But the fact is the carbon price will be what will do the job.
SHARMINI PERIES: Very interesting. I think that would almost be attractive to the administration in Washington at the moment, who are advocating getting rid of some of the regulations that are there. But we have to make sure they’re the right ones that they want to get rid of.
JAMES BOYCE: Well, I mean, it would be attractive to folks who think that regulation is always a bad way to go about improving environmental quality. As I’ve said, in some cases regulation is absolutely necessary to do so. But when it comes to fossil fuels, we do have this other potential policy in the toolkit. And indeed, it’s the only policy, carbon pricing tied to emissions targets, tied to keeping the fossil fuels in the ground, that’s the only policy that can really guarantee that we’re going to hit the emissions reductions targets that we need to hit in order to achieve the Paris goals.
The starting point is to keep fossil fuels in the ground, Sharmini. This is what the climate justice movement has advocated for years. Keep the fossil fuels in the ground, keep the oil in the soil, keep the coal in the hole, et cetera. And a key thing to realize is that if we do succeed in keeping fossil fuels in the ground, if we block the construction of new pipelines, if we convince countries to stop pumping oil, et cetera, right, what that’s going to do is it’s going to raise the price. And that price increase is going to be passed through to consumers, and it’s going to be hitting people in their pocketbooks, including working families. In fact, it’s going to hit the poor and middle income households particularly hard, because fuels are a necessity and not a luxury.
So one of the reasons to make sure that we do this using a carbon pricing policy is that by setting a cap we’re guaranteed to keep the fossils in the ground, and we can capture that money that is coming from people in higher prices by auctioning the permits or by using a tax, and then we can recycle it back to people as dividends in order to maintain family purchasing power in the face of the fossil fuel price increases which are absolutely necessary in order to achieve the clean energy transition. There’s no way we’re going to meet those Paris goals unless we keep the fossil fuels in the ground, and thereby raise their prices. And the key issue is how to do that to make sure that we meet those objectives, and in a way that’s equitable and politically sustainable for the people of the United States, and other countries facing the same problem.
SHARMINI PERIES: All right. Jim, I thank you so much for joining us today. We will put a link to your paper just below the player here if there’s many, I hope there are many people out there who wants to explore your proposal here further. I thank you for joining us today.
JAMES BOYCE: OK. Thanks very much, Sharmini. It’s always a pleasure talking with you.
SHARMINI PERIES: And thank you for joining us here on the Real News Network