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?

Are We Saving the World Yet? RGGI Starts and So Does the Spin

Yesterday, the East Coast trading program--the Regional Greenhouse Gas Initiative or "RGGI," had its first market-launching auction. The “market clearing price,” the price were supply and demand were equal, was $3.07 per TON of carbon.

The Spin Machine at RGGI immediately got to work, announcing that the program was "off to a strong start." Yeah. Right.

Basically, since it has been clear for more than a year that RGGI was over allocated, there were two things that could happen. Either all of the allocations would not sell, because there were more than needed, and the price would not rise above the price "floor" of $1.86 set by RGGI; or all of the allocation would be sold and held as “investments”, which would push the price slightly higher. Either way, people knew the program won't do anything to reduce greenhouse gas emissions. The New York Times reported on September 15th:

“The supply of allowances is more than what the market needs,” said Milo Sjardin, Head of the North America division of New Carbon Finance, a research and analysis firm. “Prices are not going to be high, not for the foreseeable future.” He also noted that the market was also “not going to produce a lot of emission reductions” as long as the supply of allowances outstrips utilities’ need.”

So, the "market" took the option of buying everything available as an investment. Probably a better idea than leaving the money in a bank.

You know, even dry grass costs $257 more than carbon! Is it too cynical of me to ask what kind of impact they expect $3.07 a ton to have? The Wall Street Journal's environmental blog sized up the situation like this:

So will RGGI’s new carbon pricetag drive big changes in power generation? Not likely. Any price above $5 a ton makes traditional coal less attractive, granted, and makes utilities prefer natural gas for power plants. But thanks to lowish prices for the stuff, utilities are already diving massively into cleaner-burning natural gas, anyway—that’s one reason the ten states in RGGI have more wiggle room than they expected under the program.

The low pricetag won’t do much to promote “clean coal,” either. An Australian study estimates that carbon has to cost at least $25 a ton just to cover the added expense of sticking coal-plant emissions underground—and that doesn’t include the added expense of building and running clean-coal plants in the first place. Nuclear power fares even worse. The Congressional Budget Office figures carbon has to cost at least $45 a ton for nuclear economics to make sense. Neither RGGI’s early auction, or any of the climate-change bills rattling around Washington, come close to putting such a high pricetag on carbon.

Over time, as other regional schemes like the Western Climate Initiative kick off, and Washington designs its own nationwide scheme, the price of carbon might raise enough to make a difference. But for now, RGGI’s cautious approach doesn’t appear it will make much difference.

If you ask, the enviros and business supporting this scheme will say the important thing isn’t that the price is high, but that the auction “worked.” As in, "look, ma, we know how to operate an auction!" But "working" doesn't actually mean reducing greenhouse gas emissions? So, how does that "work”?

When do we get to saving the planet from climate collapse? In case you haven't heard--TIME IS OF THE ESSENCE. As NASA scientist James Hansen said in 2006:

“I think we have a very brief window of opportunity to deal with climate change ... no longer than a decade, at the most."

Angela Johnson Meszaros
Director of Policy and General Counsel
California Environmental Rights Alliance
angelajm@envirorights.org