Carbon pricing has long been relegated to the dregs of policy wonks and economists, but it has been gaining popularity in recent years. A 2019 poll found that about two-thirds of respondents favored a carbon tax. Even with huge spreads between Democrats and Republicans, there was some bipartisan support. This looks likely to grow over time as well with frequent extreme weather events. Texas, for example, just gave us a visceral example, both of what climate change can do, and what can happen if we are unprepared for its results.
The theory went that carbon pricing hampered the economy, but that it was important nonetheless. Wealthy countries were to bear the brunt of the costs in the Paris Climate Accord (which, by the way, President Joe Biden just signed us back onto) and poorer countries were given more of a break. Economists talked about the free rider problem and worried about countries not pricing carbon gaining a competitive advantage. Think tanks talked about how to structure taxes to prevent dirtier economies from outcompeting us on our own soil. It turns out, though, all this worrying was for naught.
Data from economies pricing carbon contrasted with those that did not show a slight bump in economic growth from pricing carbon after a couple years – and this is before health effects are taken into account. It seems that the productivity gains from modernizing outweigh the costs of switching. Long-term gains are much larger as carbon emissions are associated with higher levels of health problems for people residing near heavily trafficked areas such as logistics hubs (with older, more pollutive trucks) and even worse issues for people living within miles of a coal powerplant. There is only one loser: legacy energy producers.
Therein lies the problem. Passing carbon pricing schemes is fiendishly difficult since the costs are concentrated on an industry with large (but shrinking) stores of cash while benefits are distributed to everyone. People living near coal power plants typically do not have stores of resources to fight big political battles. Even if a majority of people support it, enough have to care about it that they could change their vote because of it. Either that or Democratic leadership has to push it through budget reconciliation, which appears unlikely at the moment. The majority is simply too slim in the Senate and the deciding vote, Senator Joe Manchin, represents West Virginia (possibly the most coal-friendly state in the nation).
As it stands, the US has two separate carbon markets, both of which are ‘cap and trade.’ California has its own market and a group of 10 states on the east coast (with another pending) make up another. Both have been fairly successful in reducing carbon emissions. The rest of the country sporadically trades carbon via voluntary offsets for businesses that wish to signal a commitment to being green and, in some rare cases, individuals who wish to offset their own carbon emissions. These are all positive steps, but the markets are opaque and poorly defined. Some brokers do their part by helping businesses navigate this thicket. This all costs time and money and it prevents the markets from growing particularly quickly. It shouldn’t be this difficult.
By combining these markets, we could simplify compliance, making being green both cheaper and easier. We would make it easier to innovate for people looking to provide companies with the ability to reduce their emissions or offset the emissions they do have. We would get to those productivity gains I talked about earlier much quicker. With the enormous COVID stimulus package looking increasingly likely to pass through budget reconciliation, complexity could provide cover for Manchin. The time to act is now.