Carbon pricing deserves to make a comeback. By Matthew Yglesias

www.slowboring.com

11 - 14 minutes

This past weekend, I am at the Breakthrough Institute’s ecomodernism conference, which is always a good time. It got me thinking that while I find myself largely agreeing with Breakthrough these days, I used to have a low opinion of them. And that’s true even though I’ve always found the broad concept of ecomodernism very appealing.

I’m not an outdoorsy person or a nature-lover by temperament, but I do take the facts about pollution and its harms very seriously.

And I think the divergence between people who care about pollution because of its impact on humanity and people who subscribe to a kind of anti-modern, anti-human, nature-centric worldview is real and important. I’m on the humanistic, tech- and progress-friendly side of that divide, and that’s the idea behind ecomodernism and the Breakthrough Institute. So why didn’t I like them?

I discussed this when I reviewed Breakthrough’s founders’ book in 2008, but the big topic in climate policy back then was carbon pricing, which they saw as part of the bad anti-modern politics of limits. I was then (and am now) much more of a generalist than a climate writer, and I argued that this was missing the important tax policy aspect of carbon pricing. A prosperous, technologically dynamic society with a growing economy needs some sources of tax revenue. And taxing things that have negative externalities is a great source of tax revenue. It’s not that you price carbon dioxide emissions into non-existence, but you do limit them with the price, and then you use the revenue for things you think are important.

I wrote that in January of 2008, but later that year the global economy imploded and we entered a nearly 15-year period in which my green eyeshade view of the situation was basically wrong. There were no particular fiscal tradeoffs involved with anything that happened during the Obama or Trump years, so the only reason anyone would be interested in a broad-based and somewhat regressive new tax genuinely was hairshirt environmentalism.

Today, though, while inflation has fallen, it remains above the Fed’s 2% target. And the interest rate hikes the Fed has used to bring inflation under control are putting a meaningful squeeze on all kinds of things, including new investments in energy production. And in a world of limits — fiscal limits — it’s time for carbon pricing to make a comeback.

The point Danny Cullenward and David Victor and David Roberts make in their left critique of carbon pricing is that we’ll never have a carbon price that’s high enough or comprehensive enough to achieve the climate goals that they aspire to. That is completely true, and when Roberts writes in this piece that carbon pricing is not and should not be the be-all end-all of energy policy, he’s entirely correct. At the same time, the reason we can’t possibly implement a high enough carbon price to achieve the left’s climate goals is that the goals themselves are unrealistic.

The Biden administration is considering saying, for cost-benefit analysis purposes, that the social cost of carbon is $190 per tonne of CO2 emitted, much higher than the $51.50 social cost estimate they inherited from the Obama administration, but lower than economist Danny Bressler’s suggested $258 per tonne. One reason the numbers vary is that people have different estimates of the impacts of global warming. But the bigger disagreements are about how to discount the future and how to consider harms to non-Americans.

Imagine taking that high-end estimate and imposing a carbon tax of $258 per tonne.

That would be like a $2.32 per gallon increase in the price of gasoline (you can use this handy calculator to work out the gas price impact of various carbon prices if you want to be really fun at parties). It’s almost certainly politically toxic, but would leave us with roughly the gas prices of contemporary France or Germany, and probably a bit lower than Finland or the Netherlands. Obviously per capital fuel consumption is a lot lower in those high-tax European countries than it is in the United States. But it’s not like French and German people don’t drive at all or that those countries will see universal EV adoption in 10 years. Cars are very useful. And when you tax gasoline heavily, people burn less of it than they do in the United States, but they don’t stop doing it altogether.

The climate left wants to eliminate fossil fuel use on a rapid schedule, but even politically implausible estimates of the social cost of carbon don’t generate carbon prices high enough to guarantee eliminationist outcomes. But I think that’s exactly what makes the case for carbon pricing: You run the numbers on the negative externalities associated with fossil fuel use and come up with a figure that is larger than zero but still finite. In other words, there are some cases where fossil fuels are currently burned and it would be better for the world to not burn them, but there are other cases where it’s better to keep burning them. The social cost is real, but the usefulness is also real. It’s not a difficult concept to articulate, but the price is the means of turning that intuition into something concrete, where public policy can both acknowledge the reality of climate change as a problem and also acknowledge the practical benefits of coal, oil, and gas.

Without a carbon price, contemporary American environmental politics are dominated by dogfights over specific pieces of fossil fuel infrastructure, specific leasing agreements, and lots of fussing about pipelines.

This has spillover impacts on innovation and deployment of other forms of energy, too.

Part of the tug-o-war over permitting reform in Congress is that removing some of the regulatory barriers to renewables and transmission lines will probably require also doing away with some of the litigation tools that are used to block oil and gas pipelines. Many environmentalists are reluctant to give those tools up, which winds up hurting our deployment of clean energy as well. It’s perverse, but it reflects in part the not-crazy sense that cheap fossil fuels impose harms on the world and someone should do something about it.

The problem, conceptually, is that to the extent this kind of “supply-side” policy works at all, it works through the exact same mechanism as a carbon tax. Except that because the market for oil and gas is global, blocking one barrel of domestic oil extraction reduces global oil consumption by much less than one barrel. So it’s as if you created a carbon tax and then handed the revenue over to MBS and Vladimir Putin. Whatever the political impediments to imposing a high domestic carbon price, they are trivial compared to the impediments of accomplishing an equivalent amount via creating windfall gains for foreign dictators.

One benefit of the price, in other words, is that it restrains emissions.

But the other benefit of the price is that it constructively channels concern into haggling over what the price should be. That then means that our conversation around permitting, NEPA, and whatever else can be the same conversation we should be having about how we smooth the path to deploying nuclear, renewables, geothermal, carbon capture, and the rest. It’s not viable to try to address the externalities of fossil fuels through supply-side constriction. But we keep seeing that it’s not really viable to ignore these externalities either. Innovation and technology is the ultimate solution, but in a world where money does matter, pricing is a vital complement to innovation and a substitute for supply-side wrecking.

On the flip side, Breakthrough’s Alex Trembath argues that scarcity and prices don’t drive transformation, innovation and abundance do:

    History reveals that prices and scarcity have rarely, if ever, driven large-scale energy transitions. We transitioned away from whale oil after discovering much more abundant and useful petroleum-derived kerosene, not because we were running out of whales. Electricity and the internal combustion engine emerged after decades of technological toiling and created whole new uses for energy. War, perhaps the most state-directed of all enterprises, accelerated the diffusion of several key energy technologies, most notably the internal combustion engine, jet turbines, and nuclear reactors. Today, hydraulic fracturing in shale emerged from government-funded labs and has diffused because of its usefulness in cost-effectively accessing previously hard-to-reach natural gas deposits. This is the work that governments have done since Alexander Hamilton invented industrial policy, not as a corrective to proliferating market failures, but as foundational and continuous policy to create and shape markets themselves.

That seems correct to me as a big picture account of human affairs — I am on the ecomodernist side of this argument, or at least I want to be.

But it doesn’t get at what troubled me in 2008. Wartime innovation wasn’t just conjured out of thin air; it took a lot of money. The details of WWII financing in the United States were complicated and multifaceted, but a big piece of the puzzle was taxes. Raising taxes is, genuinely, politically challenging. And for a good long while between my review and the present day, it genuinely seemed pointless — why not borrow the money?

That’s out now. I’ve been a little surprised that the small bipartisan deficit reduction bill from May hasn’t been followed by any bipartisan commissions or efforts to get a bigger deficit package done. But directionally, it’s clear that the new era of fiscal politics is one in which spending is going to have to go down and taxes are going to have to go up. If that were politically easy, it would have happened already. But the nature of the difficulty is that all the options are politically tough. So, yes, a carbon tax would be very tough. But tougher than cutting Medicare or Social Security? The best hope for any of this is to have a bipartisan package that addresses both revenue and spending, and that reduces the political risks because it’s bipartisan and people like bipartisan stuff.

At that point what really matters is elite perception of what’s important. Which is why even though I don’t think anyone should be running for office on a carbon tax platform, I do want to talk it up in this vein. Democrats rightly insist that any big deficit deal should be balanced between taxes and spending. Carbon taxes are regressive, but they’re less regressive than cutting Medicaid or SNAP. And they can be paired with pro-growth regulatory reforms on both the fossil fuel and alternative energy sides.

I recognize that everyone who participated in the Waxman-Markey process is traumatized, and there’s tremendous enthusiasm about the success of the subsidy-oriented strategy of the Inflation Reduction Act. But while we can justify many of these subsidies as temporary measures — we subsidize EV early adopters to spark the creation of a domestic industry and to get charging networks built — it doesn’t make sense to have our permanent policy be taxing people in order subsidize clean cars rather than simply taxing dirty cars. And in other areas, subsidies don’t seem remotely plausible — we’re not going to have a program to get people discounts on electric boats. More to the point, even if the most optimistic scenarios for something like carbon capture come to fruition, it’s never going to be cheaper to capture carbon dioxide than to simply not capture it. The only way to make it work is an open-ended fiscal commitment of some kind, and in a world of strained budgets, it’s actually easier to commit to a tax on pollution than a subsidy.