Addressing Climate Change – A Needed Policy

The following editorial appeared today (25 April 2015) in the Washington Post:

““CLIMATE CHANGE can no longer be denied,” President Obama said in Everglades National Park on Wednesday. “It can’t be edited out. It can’t be omitted from the conversation.” No matter how much, Mr. Obama might have added, Republican presidential hopefuls would like to neglect the matter.
Since the GOP presidential season began, Sen. Ted Cruz (Tex.), the first major Republican to declare his candidacy, sounded the most extreme note on global warming, insisting that his attacks on scientists make him akin to Galileo standing up to 16th-century theological authorities. Shortly after announcing his candidacy, Sen. Marco Rubio (Fla.) offered some vague doubts about how much humans contribute to climate change. Former Florida governor Jeb Bush, who has not yet formally entered the race, said that he is “concerned” about climate change and that the United States should negotiate with other nations about it, but he also suggested that the private economy has already addressed the problem and that he’s more worried about the “hollowing out of our industrial core.”
The common element among GOP leaders is resistance to the notion that the government needs a significant policy against greenhouse-gas emissions. What would the national conversation be like if Mr. Obama got his way and they accepted the need to act with ambition?
Ironically, it wouldn’t be kind to some of Mr. Obama’s policies, but that’s not his fault. Because of the GOP’s abdication, the Obama administration has cobbled together a climate plan from legal authorities it could exercise without Congress’s say-so. The result is an awkwardly designed and inefficient approach. A more reasonable Congress could shape a more efficient plan, with an eye toward sparing the economy gratuitous pain.
Economists have known for decades how to do this. First, the government should eliminate energy subsidies of all kinds — for fmossil fuels as well as renewable energy. Then Congress should put a significant tax on carbon-dioxide emissions and set it to rise over time. The resulting market forces would decide how the economy would move to a greener state. Consumers and businesses would have more reason to consider wasting less electricity, buying efficient appliances and investing in products that require less carbon dioxide to make. Generators of electricity would have an incentive to use cleaner fuels and renewable sources of energy — when it makes economic sense, not when the Environmental Protection Agency decides they must. Companies that exploit giveaway subsidy policies would have to compete fairly.
Republicans, meanwhile, could return any revenue raised to taxpayers, either directly or by reducing taxes on labor, on corporations or in any manner of their choosing.
The nation’s climate debate has been impoverished by the absence of responsible conservative voices. A revenue-neutral carbon tax is a reform Republicans should love. It could end irrational federal subsidies, lower the GOP’s most-hated taxes and harness market efficiency to provide some insurance for the planet at a minimal cost. Instead, the party’s would-be leaders appear to be looking for any way to avoid engaging seriously.”

I don’t always agree with the Post’s editorial positions, but on this subject I agree strongly.  My views on the need for putting a price on carbon emissions to allow market forces to address global warming and climate change are well documented in several of the posts you will find on this blog web site. I also agree, and have written, that government subsidies to energy companies are unbalanced and need redress if not outright elimination so that energy technologies can compete on a level playing field. I also agree that using the resulting revenue proceeds of putting a price on carbon emissions to address inequities and reduce other taxes is a basis for bipartisan cooperation between Democrats and Republicans.

It is more than time for the U.S. Congress to get on the right side of history and address the global warming issue in a way that protects the long-term interests of the nation and the larger global community.

Bob Wyman

The benefit of a carbon tax comes from its increasing the marginal cost of high-carbon fuels. But, that is also its limitation. Ideally, end-use consumers would move to renewable technologies, most of which have very low or zero marginal cost, but high capital cost. Essentially, we need to move from an economy in which we pay for energy as we consume it to one in which we pay, in advance, for the capacity to produce and consume energy. In such an economy, the question isn’t what has the lowest cost, but rather how do you pay the up-front cost for capacity.

Consider a solar PV panel. You need to pay a great deal of money to buy the thing, but once you’ve done so, you have years of essentially “free” electricity. The same is true of a geothermal heat pump. You pay a lot to install it, but once you’ve done so, you’re heating and cooling bills will be much lower in the future. But, you’ve got to be able to pay up-front to get this lower marginal cost.

Unfortunately, as sensible as it might be for someone to convert from low capital cost, high marginal cost fossil fuels to high-capital cost, low marginal cost renewables, only those who are either wealthy or who have excess borrowing capacity can afford to do so. Only a minority of end-user consumers can afford to pay in advance for years of future energy consumption. The folk who would benefit the most from lower costs, the poor, are the least able to save money by paying these up-front costs.. It takes money to save money.

Now, the existing solar business isn’t driven by marginal costs. It grew to were it is today because of the essentially risk-free revenue that could be derived from the energy tax credits and the classification of solar as a “five-year property” for accelerated depreciation. These incentives are easily sold to tax-equity investors who will contribute *capital* to reduce the up-front capital cost of solar systems. Existing incentives cover between 50% and 60% of the cost of installing solar and thus allow these systems, when owned by third-parties, to end-use consumers at reasonable monthly rates. Tax equity investors like this method of funding because it is risk-free and because it pays back rapidly — only 5 to 6 years are needed.

In this new world of high-capital cost, low marginal-cost energy, the carbon tax won’t work quite as well as it would in a world where the choice might be between substitutes that had similar capital costs and varying marginal costs. The carbon tax would make a great deal of sense in the old energy economy, I don’t think it makes as much sense in the new energy economy which will hopefully be dominated by renewable energy.

Your characterization, as far as it goes, is correct – generally speaking, renewables have been capital intensive energy technologies with low or zero fuel costs, while fossil fuel-based technologies tend to be lower in initial cost but subject to uncertain fuel costs. I would also note that nuclear power is capital-intensive and relatively low in the cost of fuel. What is left out of this analysis in my view is the full range of costs associated with particular energy technologies, some quantifiable, some not – e.g., health costs, environmental costs, national security costs, foreign policy flexibility costs, and costs associated with planning for uncertain futures. This is where governments, with access to financial resources, come usefully into the picture by changing the marginal and the relative capital costs via policy and budget that is deemed to be in the national interest. This can include making access to capital easier for those of limited means, e.g., by stretching clean energy loan payments over the life of a mortgage as is now done in Berkeley, CA. BTW, listing policy and budget as separate items may be somewhat redundant – one of the first things I was told when I arrived to work in DC in 1974 is that “budget is policy”.

Thanks for your comment.

Gustaf Olsson

Very encouraging to read the article. Thank you for being so clear about the need for a carbon emission tax.