Beyond Price: The Cost of Carbon
The Economics at the Heart of Climate Action: Putting a Price on Emissions
By Collin Murphy, January 12, 2021
We need to reduce our emissions. The scientific community agrees. But the U.S. Chamber of Commerce continues to obstruct progress towards legislation capable of making a dent in the problem. As a society, we are faced with the question of how to reduce our emissions equitably and efficiently. In capitalist economies, like the U.S., we have long trusted the invisible hand to provide and price products and maintain equilibrium in the economy. But it is a well-known fact that with no government intervention whatsoever (laissez-faire), monopolies will form and externalities will be neglected, harming the general public. Some regulation is necessary, and 3589 Economists have come to the conclusion that carbon dividends are a necessary step, but the US Chamber of Commerce has yet to support any type of significant measures to halt climate change.
The FMC Corp plant on which millions of pounds of toxic materials are stored
Externalities are the outside consequences of industrial or commercial activities, representing how the effects of business go beyond the businesses themselves. Externalities create market inefficiencies by pushing the cost or benefit of action away from the parties involved and potentially harming shared resources. While externalities can be positive, negative externalities (an externality as a cost rather than a benefit) are the crux of many current issues facing the global population and economy.
For example, when farms use a lot of artificial fertilizer, it runs off into the bodies of water and may damage surrounding ecosystems. This might hurt other industries, like fisheries, at no cost to the farmer. The damage done to an ecosystem or a fisherman is an externality that you, the consumer, did not have to pay for when you bought your product. To date, the U.S. Chamber of Commerce has fought fiercely to ensure that large corporations and private industry do not pay for their externalities, diverting the cost to the public taxpayer whenever possible. For example, in FMC Corp. v. Shoshone-Bannock Tribes, the U.S. Chamber fought to ensure that FMC Corp would not have to pay fees for storing hazardous materials on tribal land, leaving the externality of pollution to fall on the Shoshone-Bannock Tribes. Another externality the US Chamber fails to address is the damage caused by the burning of fossil fuels.
When fossil fuels are extracted, sold, and burned, the resulting emissions cause tremendous damage to the economy, the environment, and individuals. The costs of these damages are currently not included in the price of fossil fuels, and as a result, the invisible hand does not push people away from fossil fuels and towards renewable energy. This is estimated to cause increasing damage to the economy, environment, and individuals each year until global temperatures begin to decrease. Projections for the economic cost of climate change vary, from two percent of the annual U.S. GDP to as high as twelve percent of the U.S. GDP. In dollars, this translates to between hundreds of billions to tens of trillions of damages annually. This cost in reference to carbon emissions is often called the “Price of Carbon”. This price represents the external costs of burning or using carbon-emitting products, giving it a dollar value by which to price the negative impacts of carbon emissions. In 2019, the International Monetary Fund calculated that the fossil fuel industry receives a $600 billion annual subsidy because their emissions and the related costs are not regulated.
A price on carbon will allow the market to account for the externality of emitting greenhouse gasses into the atmosphere. In an economic system, trade and pricing are a means to achieve the most efficient allocation of resources. Having multiple suppliers and buyers means that the market is able to push prices in order to reflect the scarcity of resources and thus determine how much of what resources go where. When the price of a good does not match its scarcity, the market reaches a point of inefficiency. In the case of the negative externality of carbon emissions, that inefficiency results in too much oil and gas being produced as the actual price of carbon (considering its overall cost) is too low. This sends a false message to the market that it should produce and buy more fossil fuel products than is efficient. A price on carbon will face this inefficiency by correcting the actual cost of producing and using fossil fuels. This will benefit the environment as it will raise the price of carbon products. Through this raising price, the market will be disincentivized to buy fossil fuels and to look for alternatives, such as renewable energy. As renewable sources, such as solar, are becoming less and less expensive, this will cause a greater shift from nonrenewable energy and reduce the overall usage of fossil fuels.
From that ‘Carbon Price’ there are a number of ways to implement a cost for polluting. The price of carbon can be integrated through a carbon tax that will require money paid to the government for carbon used or emitted. This would be similar to current taxes on tobacco and some unhealthy food, making the producer pay a relative fee for their negative externalities.
Currently, the EU and other governments are taking a more market-centric approach to put a price on carbon. They use a “Cap and Trade” system which puts a cap on how much carbon can be emitted by a company. Through this cap on each company, all of the business is given a total amount of carbon emissions they are able to release. The interesting mechanism is that the market is able to trade shares of the carbon cap within itself in the form of carbon credits. If one company emits less than the cap, they are able to trade that surplus for money with another company that emits more than what the cap allows for. In this way, some companies will be allowed to emit more than the cap but the total amount of emissions will be limited by the totality of the cap.
Cap and Trade is not a new idea. In fact, the European Union created their’s in 2005. At the same time in America, Cap and Trade was becoming a popular means to address environmental damages caused by corporations. One of the reasons it has not been implemented in the United States is because of the lobbying done by a number of pro-oil organizations, one of those being the U.S. Chamber of Commerce. In the same year the EU created their Cap and Trade program, the U.S. Congress voted on “The Energy Policy Act of 2005”. The bill had bipartisan support yet was thwarted by the successful mobilization of Congressional votes by the U.S. Chamber of Commerce. The U.S. could have already had a system to account for the externality of carbon but was prevented from doing so, by aggressive lobbying by the fossil fuel industry and its allies.
President Bush signing The Energy Policy Act of 2005
Cap and Trade is not a new idea. In fact, the European Union created their’s in 2005. At the same time in America, Cap and Trade was becoming a popular means to address environmental damages caused by corporations. One of the reasons it has not been implemented in the United States is because of the lobbying done by a number of pro-oil organizations, one of those being the U.S. Chamber of Commerce. In the same year the EU created their Cap and Trade program, the U.S. Congress voted on “The Energy Policy Act of 2005”. The bill had bipartisan support yet was thwarted by the successful mobilization of Congressional votes by the U.S. Chamber of Commerce. The U.S. could have already had a system to account for the externality of carbon but was prevented from doing so, by aggressive lobbying by the fossil fuel industry and its allies.
The reason why Cap and Trade has been preferred to a straight carbon tax is due to the innovation and efficiency it promotes through the market. As companies are able to make revenue from emitting less, there is a greater incentive to actively pursue and design operations that reduce carbon emissions. However, past Cap and Trade mechanisms have not been as comprehensive as a carbon tax could be. While Cap and Trade works towards the same end as a carbon tax, it is generally more complicated, politically vulnerable, and requires more resources to implement correctly. In California, cap and trade policies have been weakened by multiple political concessions and have failed to reduce the emissions of the oil industry, resulting in a 3.5% increase in emissions since the program began.
Beyond these two options, 3589 US economists have recently united behind the idea of carbon dividends. Supporters include the last four chairs of the Federal Reserve, twenty-eight Nobel laureate economists, and fifteen former chairs of the council of economic advisers.
Carbon dividends include two main components: a tax on the carbon content of fuels, and a dividend where the majority of this tax is paid back to the public. Adding a price to the carbon content of fuels serves to correct the externality of greenhouse gas emissions and thus harness the power of the free market in order to reduce emissions. Returning the majority of the tax back to individuals in the form of a dividend will ensure that the tax is equitable and palatable to voters, thus making it more politically viable. It is also socially equitable because equal dividends to all Americans will yield dividends greater than what the majority of Americans would lose in increased energy prices.
Currently, the US has not implemented a price carbon. While some states like California have been able to implement regulations on the externalities of carbon emissions outside of federal mandates, the United States has not been able to fully address this market failure. In fact, only 12 states have implemented any system that puts a price on carbon. Even in cases of carbon pricing, the results are nowhere near certain. In certainty, there needs to be a broad and genuine effort to both understand and implement a price on carbon. In removing a market externality, the market will be able to prosper no longer at the expense of the environment from which we all draw from.
While renewable subsidies can offer incentives to invest in emerging clean technology, it is not enough to save us from the inevitable tragedy that will result from neglecting the health of the environment. Subsidies do not solve the problem of externalities but only push an opposing sector forward, not accounting for cost or preventing carbon-based fuels from continuing to dominate the market. The energy sector has already caused immense damage to our environment and will continue to do so if left unchecked. Renewable subsidies may make renewables cheaper, but as demand for fossil fuels decreases their price will as well in a rebound effect, leaving fossil fuels even cheaper than before (Shi-Ling Hsu, The Case for a Carbon Tax, 2011). This is not an argument against subsidizing renewables, merely a reason why a subsidy on renewables alone will not fix the problem. To keep the price of fossil fuels accurate, a tax is necessary. Normal regulations (command and control) may also prove necessary at some point, but will cause more harm to the economy than the market-based carbon tax.
The U.S. Chamber of Commerce, the country’s largest corporate lobbying group, has historically been a major hurdle to cross in any climate change action. While they have not spoken out against Cap and Trade in general, they have opposed a number of bills that would have implemented a price on carbon. They continually support Congress members that stagnate or prevent climate action, indirectly preventing the necessary measures from being taken. In refusing to support a price on carbon, the U.S. Chamber of Commerce is preventing the necessary structures to push our system towards a more efficient and accountable market.
Whether it is a carbon tax or a carbon Cap and Trade system, the United States needs to implement a way to price the harm being done through greenhouse gas emissions. Scientists agree economists agree, the global community agrees, yet here we are. The fossil fuel industry’s lobbying must be stopped. #ChangeTheChamber