Concentration of CO2 in the Atmosphere

Carbon Pricing Is Inevitable

When we do it matters!

Countries with carbon taxes and emissions trading systems (ETS). Source: World Bank, “State and Trends of Carbon Pricing 2022”, Washington, DC. Doi: 10.1596/978-1-4648-1895-0. License: Creative Commons Attribution CC BY 3.0 IGO

John Gage

The next major development in human civilization, the transition from fossil fuels to clean energy, is underway. Countries that produce the solutions enabling this transition will enjoy economic and employment benefits for decades. The Inflation Reduction Act is a big step forward. However, much more is needed to drive the U.S. investment, innovation, and change required to achieve critical climate goals. A high price on climate pollution will do that, enabling the U.S. to lead this next step in human progress.

Experts have long recommended one foundational policy to address global warming: carbon pricing. Some doubt Congress can overcome powerful pushback from the fossil fuel industry to charge it for its pollution, but internal and external pressures are mounting. Public alarm about climate change is growing. Cash-back carbon pricing is a proven popular solution with growing bipartisan support. Businesses increasingly support carbon pricing because of the predictability it provides and the competitive advantage it offers against dirtier-producing countries. Carbon pricing is spreading around the world, and U.S. exporters will soon pay carbon pollution tariffs in trade with a growing list of countries until we price it here.

Addressing a Market Failure

When pollution is free, we get too much of it. Economists warn that until the cost of climate pollution is reflected in the price of fossil fuels, market actors will fail to reduce it at the pace and scale required:

  • “We cannot solve the climate crisis without effective carbon pricing.” – US Treasury Secretary Janet Yellen.

  • “Explicit carbon prices remain a necessary condition of ambitious climate policies” – IPCC.

The fossil fuel industry enjoys global subsidies of $5.9 trillion annually, mostly in unpaid environmental costs (IMF). We can address the market’s failure to account for those external costs by charging coal, oil, and gas producers a steadily rising pollution fee based on the carbon in their products. This price signal will engage the market’s invisible hand, guiding carbon-reducing investments, innovation, and decisions throughout the economy.

What Price?

At COP27, leaders recommitted to limiting global warming to 1.5˚C above preindustrial levels. According to the IPCC, this requires reducing greenhouse gas emissions by 50% by 2030 and to net-zero by 2050. Over seventy countries have committed to net-zero targets (UN). Economists have calculated the carbon prices required to achieve those goals:

  • “For a 2050 net-zero CO2 emission target, prices are US$34 to US$64 per metric ton in 2025 and US$77 to US$124 in 2030” – Dr. Noah Kaufman et al. in Nature.

  • “Estimates for a Below-1.5°C pathway range from $135–$6050 / tCO2e in 2030” – IPCC.

Viability and Durability

A carbon tax could have a regressive impact on households and impose a competitive burden on manufacturers of energy-intensive goods. For those reasons (as well as manufactured resistance by the fossil fuel industry and free-market fundamentalists), political reluctance to price carbon has delayed important federal legislation for decades.

To address regressivity, ensure the policy is popular when implemented, and support the high price required, experts recommend giving the money collected from fossil fuel producers to households in monthly per-capita cash-back rebates:

  • “Carbon pricing is most effective if revenues are… returned to taxpayers corresponding to widely accepted notions of fairness” – IPCC.

  • “To maximize the fairness and political viability of a rising carbon tax, all the revenue should be returned directly to U.S. citizens through equal lump-sum rebates.” – Economists’ Statement.

To protect business competitiveness, economists recommend applying a commensurate carbon tariff on imports and rebating exporters to “level-ize” the built-in cost of climate pollution in trade with free-polluting countries:

  • “To prevent carbon leakage and to protect U.S. competitiveness, a border carbon adjustment system… would enhance the competitiveness of American firms that are more energy-efficient than their global competitors. It would also create an incentive for other nations to adopt similar carbon pricing.” – Economists’ Statement.

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Carbon Pricing Signals

Several trends indicate U.S. carbon pricing is coming soon.

  1. Carbon pricing has spread to 68 countries and regions, and prices are rising. The EU’s price recently tripled to $80 per ton of CO2. Canada uses “Carbon Cash-Back” and will reach $135 per ton of CO2 in 2030 (World Bank). All but two developed countries have a carbon price on fossil fuels.

  1. U.S. exporters will soon pay some countries’ carbon prices on exports of energy-intensive goods, starting with the EU’s Carbon Border Adjustment Mechanism (CBAM). They won’t have to pay when the U.S. is pricing carbon. Canada, Japan, and the UK are also considering CBAMs.

  1. Businesses recently pressured the Senate to ratify the Kigali Amendment to the Montreal Protocol to reduce hydrofluorocarbon climate pollution. Why? To avoid future trade restrictions and for a competitive advantage (Grist). The Senate ratified this international climate treaty with strong bipartisan support. Carbon pricing will be next for similar reasons.

  1. Support for “Carbon Cash-Back” is growing in Congress. All but one Democrat senator supported including a variation in the Inflation Reduction Act (Inglis). The House’s Energy Innovation and Carbon Dividend Act has 96 co-sponsors.

  1. 33% of all Americans are now alarmed about climate change, up from 18% in 2017 (Yale CC). National polling by CLCouncil and Yale Climate Communications find 70-75% support the Carbon Cash-Back solution. In New Hampshire, 75% of the 45 towns that have voted on it passed a resolution asking for legislation of Carbon Cash-Back at the state and federal levels.

Carbon pricing is inevitable. But whether Congress does it in time for the U.S. to lead the global transition to clean energy and give the world its best chance for a safe climate future is up to us. Please tell Congress you support Carbon Cash-Back at cclusa.org/write-cfd.

John Gage volunteers with Citizens’ Climate Lobby as state coordinator for New Hampshire.

6 comments to Carbon Pricing Is Inevitable

  • Yes! Conspicuously absent on map are some top oil producers: U.S.A., Russia, Saudi Arabia, Iran, Iraq, Kuwait, United Arab Emirates, and with the largest reserves, Venezuela > https://www.eia.gov/tools/faqs/faq.php?id=709&t=6 Kudos to Canada, China, and Brazil!

  • E. Marianne Gabel

    What I like about Carbon Cash-back is that under the cash-back plan, with the monthly rebates direct to households, about 2/3 of all households will break even or receive more cash than they will pay in higher energy prices. And across the board, everyone will have a reason to economize on their carbon use in order to save more of the cashback. This plan sounds simple, fair and probably could be implemented quickly.

  • Wes Tator

    Really great job, John. The piece missing here is how to protect American businesses and American consumers from countries that are not pricing carbon. The mechanism for this is called the Carbon Border Adjustment whereby imported goods would be assessed a fee if their country of origin is not pricing carbon. The EU has already established such a program scheduled to roll out in the near future. At that point, our goods will be subject to such fees.

  • Wes Tator

    My apology to John; the carbon border adjustment is addressed in John’s last paragraph. Hopefully, my comments serve to expand on what John has written.

  • Sorry – one correction at the end:

    This is a thought-provoking, informative, and well-written article. As a “soft” economist and urban planner, I could make a pretty cogent argument that carbon pricing already exists, and has existed for many years. Whenever there is a storm of exceptional strength, an additional wildfire, a longer drought, or a deeper flood than would have been the case with a lower-carbon environment we all pay for it, some much more than others. Higher insurance premiums, loss of life, property damages, more tax dollars to fund disaster relief, and other recovery contributions as well as the cost of added resiliency measures to infrastructure and systems. These things are externalized costs that the agents that are primarily responsible for creating the costs – including us – aren’t counting effectively. Sound carbon pricing policies simply seek to internalize these costs to produce a better, more-realistic marketplace where innovation will thrive and positive changes happen organically and with great synergy.

  • @J. Scott Lane, thank you for your kind words. I fully agree with you that we are paying a price for the pollution after the fact. I hinted at that when I wrote, “Economists warn that until the cost of climate pollution is reflected in the price of fossil fuels, market actors will fail to reduce it at the pace and scale required.” As long as the cost of pollution is not reflected in the price of fossil fuels, market actors will mainly ignore that cost and not work hard to reduce it. Carbon pricing, as you say, “internalizes those external costs”, thus enabling the market to make more fully informed decisions so it works to reduce pollution in the most cost-effective ways throughout the economy. Those external costs are enormous – the IMF estimates that those implicit subsidies plus the explicit subsidies we give the fossil fuel industry total %5.9 trillion a year. They are the root of what UK economist Nicholas Stern says is “the biggest market failure of all time.” Cash-back carbon pricing with a CBAM addresses that market failure in a way that works well for families and businesses.

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