A Call for Change: Putting a Price on Carbon
Using economics to battle climate change
By: Lindsay Johnson
Sixty-seven-year-old Una Taylor and her husband could only watch, flabbergasted, as the March 2019 flood waters breached the dry creek banks cutting across their 180-acre yak ranch in Northwest Nebraska.
Taylor watched as the fences her husband, Tim Hardy, put up by hand got slammed with debris, dead branches and trees and completely washed out the gravel road and underlying culverts on their Chadron ranch. This cut off their main access to feeding their yaks, with only the young bulls braving the freezing flood water to get to higher, dry ground. The extreme cold weather and limited food killed 10 of their 40 calves.
“The bulls when they finally tried to traverse the flooded pasture to get to the higher ground, they had to go under the railroad to get to that pasture, and the water was pretty deep and full of ice and snow. The younger bulls plunged right in, but the big bulls stood on one side for quite a while and then decided to turn around and go back. The young ones, meanwhile, got up on top of the hill and they just started to romp and dance and box each other with their horns. They were so happy.” – Una Taylor
“We were just stunned by it,” Taylor said of Nebraska’s bomb cyclone and flooding disaster that caused over $1 billion of damage to the state.
This extreme weather – increasingly experienced over the last decade in Nebraska – was not the first disaster that Taylor experienced. In the 14 years since moving to Chadron from the Northeast, each drought, fire, flood and blizzard racked up costs for repairs and replacements. With each disaster, the cost to recover increases, giving Taylor a first-hand account of the mounting impacts of climate change on Nebraska.
Taylor is not alone. A 2020 survey found that more than seven in 10 Nebraskans recognize the necessary and immediate action needed to address climate change.
“I believe in climate change. I believe that it’s real. And I believe that it causes extremes in weather,” said Taylor.
One solution to reduce carbon dioxide emissions that’s endorsed by the world’s top economists and research groups is putting a price on carbon. This would, experts say, incentivize a reduction in greenhouse gas emissions and energy efficient innovation. The practice is already supported by major corporations and receives national bipartisan support through specific bills.
After all, treating the atmosphere as a dumping ground for greenhouse gases should not be free, Taylor said.
“It’s like putting trash in the landfill,” Taylor said. “I mean, you have to pay for that.”
Between 1751 and 2010, 63% of worldwide industrial carbon dioxide and methane emission have been traced to 90 “carbon major” entities. Moreover, 71% of greenhouse gas emissions have been traced back to 100 companies since 1988.
But those actors, whose quantity of carbon emissions has led to human-amplified climate change and the resulting impacts, are not held accountable for damaging the planet. That is what a price on carbon does. The ultimate goal is to make emitting carbon far more expensive and encouraging carbon emitters to seek out less carbon intensive and more energy efficient technologies. Experts say this is the most cost-effective way to rapidly decrease carbon emissions within the limited time frame.
Yet, putting a price on carbon is not actually an additional cost.
Every year since 2016, the US has experienced 10 or more individual billion-dollar disasters (exceeding $600 billion and averaging more than $120 billion a year), with 2020 experiencing 22 individual billion-dollar events at a cost of $95 billion, smashing the prior record of 16 events.
And climate change is largely to blame for the near doubling of these disasters since 2000, according to a recent UN report.
“It is baffling that we willingly and knowingly continue to sow the seeds of our own destruction, despite the science and evidence that we are turning our only home into an uninhabitable hell for millions of people,” said Mami Mizutori of the UN Office for Disaster Risk Reduction.
While America’s carbon emissions fell by 14% between 2005 and 2017, the US is still at least 15% above its emissions reduction target outlined in the Paris Climate Agreement, from which the US withdrew on Nov. 4, 2020, only to re-enter via an executive order by President Joe Biden on Jan. 20, 2021. Meet the goal set by the Paris Climate Agreement requires a 45% reduction in global carbon dioxide emissions by 2030 and achieving net-zero emissions by 2050, according to a 2018 report by the Intergovernmental Panel on Climate Change.
Under current business as usual scenarios, the US will see little to no reduction in its emissions in the coming decade, which could lead to more catastrophic climate change impacts such as:
Excerpts have developed a tool to help policy and decision makers understand the economic impacts of emitting one additional ton of greenhouse gases into the atmosphere. This is the “social cost” of carbon.
Burning fossil fuels and releasing carbon into the atmosphere results in widespread direct and indirect damages, including human health, mass extinction of plants and animals, social instability and water insecurity, to name a few. This results in a market failure, where the consumer price does not take into account all associated costs of damage caused by climate change. A price on carbon aims to correct this market failure by levying fees on greenhouse gases and providing incentives for citizens to invest in energy efficiency and alternative energy such as solar and wind.
Economist statement of support for carbon pricing. Graphic by The Washington Post
Like many economic theories, there are numerous ways to implant the pricing policies. Carbon pricing found throughout the world takes two main forms: carbon tax and cap-and-trade.
These rates of increase would be dependent upon the agreement of economists, scientists and policy makers and the desired rate of greenhouse gas emissions reduction. The faster the reduction desired, the greater the annual tax increase.
One group, the Environmental Protection Agency’s Interagency Working Group on Social Costs of Carbon, came up with an estimate of $40 per metric ton. This price would be implemented at the point of fossil fuel extractions and increase gas prices by 36 cents a gallon. It would add $0.02 to the price of a kilowatt-hour of electricity.
But this price is on the low end. To keep global temperatures from rising above 1.5 degrees Celsius by 2030, the UN recommends a carbon tax between $135 and $5,500 per ton, according to a New York Times analysis.
- The added cost reduces emissions by motivating consumers to seek cleaner energy
- Boosts economic growth by substantially increasing government revenue
- Funds agencies managing climate change effects
- A carbon tax is regressive
- A sudden increase in a carbon tax would shock the economy
- It penalizes those who can’t switch to alternatives
A Wall Street Journal ad of major businesses and organizations in agreement of the climate consensus. Graphic by The Wall Street Journal
- The cap limits the maximum emissions of greenhouse gases by companies in a region.
- The trade part is a market for companies to buy and sell emissions allowances that limit the amount of greenhouse gas emissions per permit; with prices set by supply and demand.
The total emissions cap is split into allowances (permits), permitting a company to emit the amount of greenhouse gas emissions dictated by the number of permits owned by the company, which will typically decline over time. The government distributes these allowances to companies, either for free or through an auction.
Trading gives companies a strong incentive to save money by cutting emissions in the most cost-effective ways and provides additional revenue for companies that do not need all of their government-allotted emissions permits.
- It encourages aggressive climate change goals.
- Government revenues increase with cap and trade.
- Agencies can purchase credits to retire them.
- It eliminates the need for another tax in the economy.
- It is a system which gives consumers more choices as well.
- It does not encourage some industries to change their behavior.
- It can also encourage some companies to cheat.
- The caps on this system must be rigid for them to work.
- It provides an unpredictable system of costs
- The government ultimately dictates how many credits are available.
The European Union (EU) in 2005 created the world’s first multi-national cap and trade program with the goal of reducing carbon emissions. In 2019, the EU estimated that there would be a 21% reduction in emissions from sectors covered by the system by 2020.
Both methods harness the free-market to allow for companies and consumers to drive emissions reduction without the use of government regulations. Cap-and-trade differs from a tax in that it provides a high level of certainty about future emissions (cap), but not about the price of those emissions (fluctuating costs of emissions allowances), where carbon taxes provide more confidence for future costs that companies can build into their business plans.
Examples of both forms of carbon pricing can be found regionally, nationally and globally. Canada, Australia and Sweden are countries with a carbon tax. The European Union has the best known cap-and-trade program.
But is one better than another?
Not according to most economists, said former Republican South Carolina Rep. Bob Inglis.
“There’s not a dime’s worth of difference between a carbon tax and a well-designed cap-and-trade system. And I believe that to be true,” said Inglis.
Bob Inglis, former Republican congressman from South Carolina, details some conservative policy approaches to combating climate change. Photo by Carnegie Council for Ethics in International Affairs
For Inglis, the problem is being able to convince others of the difference. He voted against the “hopelessly complicated” 2009 American Clean Energy and Security Act cap-and-trade bill.
Part of his decision came down to the complexity of the bill. Before selling the American people on the 2009 cap-and-trade bill, Inglis tested the policy on his father, a retired industrial engineer, figuring if his father struggled to understand the bill, most people would.
“I sat with my parents at the kitchen table where I grew up… and described cap-and-trade to them,” said Inglis. “If I can’t sell it to my parents at the kitchen table, this can’t be sold.”
Inglis, a lifelong conservative and advocate of free enterprise, said carbon pricing is a way “to spawn an energy revolution, similar to the tech revolution. And the reason the tech revolution worked is it started with the government.”
The 2009 cap-and-trade bill was passed in the House by a vote of 219-212 but was never brought to the floor of the Senate for discussion.
But that doesn’t mean a price on carbon cannot work in the US, said Lucas Sabalka, Ph.D., a climate activist, chief scientist and computer vision specialist at Ocuvera and Lincoln Electric System Advisory Board member.
“The failure of the 2009 cap-and-trade bill was a low point for the climate movement and a disappointment across the board,” Sabalka said. “I think Republicans were burned by it. Democrats were burned by it. Environmentalists were burned by it. Everyone kind of walked away from that dejectedly…but coming off of that there were still opportunities to reassess, reorganize and reengage what was happening.”
For Ursula Kreitmair, Ph.D., assistant professor of political science at the University of Nebraska–Lincoln, carbon pricing would leverage the best of America to benefit the environment without further increasing regulation.
“You can allow business to innovate, to maximize their profits using those true costs (of carbon) and the beauty of this is, it’s going to lead in the direction that’s beneficial to everyone, because we’re not hampering the economy,” said Kreitmair.
Yet, while the benefits of decreasing carbon emissions would be widespread, Kreitmair said transitioning out of fossil fuels will hit certain areas more than others.
“Areas such as Pennsylvania or Appalachia,” said Kreitmair, “they’re going to be suffering most — not because they’re so heavily fossil fuel relied, but it’s really a question of these being some of the last well-paid jobs you can have without necessarily a college degree.”
In Nebraska, State Sen. Dan Hughes also fears a painful transition from fossil fuels.
“We are heavy users of energy, diesel fuel, gasoline, so much, a lot of electricity,” he said. ‘Through irrigation, chemicals are pretty much all derived from our petroleum products. Nitrogen fertilizer comes from natural gas.”
And that’s not where his concerns end. He worries about any type of legislation mandating what his options are.
“Any time the government gets involved, you lose the free-market system,” he said. “That can be very beneficial, but it can also be very brutal as well.”
Despite the pros and the cons of carbon pricing as a climate policy, many agree that climate change is a major threat and the decision on how to solve climate change includes a market-based solution.
“Carbon pricing is probably one of the best shots we have,” said Kreitmair who, along with many economists and business leaders, advocates for carbon pricing as a climate policy. “It’s extremely efficient and allows the market to work…(allowing) capitalism to function and to figure out the solutions.”
The impact of carbon pricing will go beyond the fossil fuel industry to the sectors that are reliant upon fossil fuels, like agriculture. This raises concerns with states, like Nebraska, that have carbon-intensive economies.
Boone McAfee, Nebraska Corn Board research director, said one of the most important things for Nebraska is listening to farms when it comes to carbon pricing.
“I think that’s the biggest area that we look at is just how to make sure that farmers’ voices or producers’ voices are heard,” said McAfee.
Sabalka agreed. “There would be increased costs for farmers,” he said, “but it’s not as much as you might fear.”
In his opinion, farms “should be rewarded.
“We should be paying our farmers to take carbon out of the air,” Sabalka said.
And more than the incentives, Sabalka believes in the farmers. “Farmers are intelligent and adaptive and resourceful.”
“In Nebraska … if you talk about limiting fossil fuels, you’re talking about increasing air quality, you’re talking about saving people’s lives,” said Sabalka, referencing a 2014 Regional Economic Models, Inc (REMI) report.
Graham Christensen, founder of GC Resolve, would support a price on carbon but urges careful consideration so that “heavy polluting industries are not allowed an exemption from true emissions reductions. We do not have time to play games. We must demand real emission reduction goals.”
There is also the argument for what to do with the revenue from a fee on carbon. “Instead of dividend we (farmers and ranchers) really need well-defined re-investment and security,” said Christensen. “We need to ensure that we are a part of this important conversation so that any carbon fee re-investment program is practical for various farmers and ranchers in different geographical landscapes, regions and ecosystems across the county.”
Infographic explaining how the Energy Innovation and Carbon Dividend Act. Graphic by energyinnovationact.org
While some share concerns about carbon pricing and the disproportionate impact that farmers might feel from a carbon tax, others like Sen. Hughes described carbon pricing as “more of a stick approach than a carrot approach.”
“If you want to reduce carbon, you’re really hammering someone that may not have an alternative,” Hughes said, adding that he is not opposed to reducing carbon emissions but he does not agree with renewable energy because of its unreliability.
“There’s a lot of small, localized nuclear plant technology that I think would be a much better way to go if, indeed, we really want to cut our carbon footprint, and still maintain a cheap, reliable source of electricity, which has been key to the financial success of the United States,” he said.
But Sabalka sees an energy revolution being the catalyst for the US regaining its leadership on the global stage.
“We’ve been leaders in the world. And I think we did a relatively good job of leading for a long time, but we are not leading around climate change. There is a power vacuum internationally right now around climate change,” Sabalka said, adding that America’s competitiveness is at risk.
“If we don’t act, we’re going to get left behind,” he said. “Most of the rest of the world is on board with reducing carbon emissions. The longer you wait to stop that slider from sliding, the worse it gets. So we might not be able to get 1.5 degrees warming … but that is not a reason to not act.”
Meanwhile, activists like Kirchner said there is not a quick fix for climate change; it’s up to consumers to make change happen.
“Young people have a lot of passion and energy for this,” he said. “We have allies and lots of different spaces … It doesn’t happen with one protest, with one sit-in … It’s a marathon, not a sprint.”
The best thing Nebraskans can do, Kirchner said, is to make their voices heard and advocate and vote for candidates who support climate action.
“There’s a lot of people realizing that pollution should not be free,” he said. “We should not be able to pollute for free as just ordinary citizens. I don’t take my trash out to the curb for free. There’s taxes that pay for that.”
Summed up Kirchner: “There’s no silver bullet to solving the climate crisis. We are paying our carbon price right now. We paid it in health care. We pay it in climate change. We pay it in sea-level rise. We pay it in the forest fires and in the floods of Nebraska last year … It’s all of us that have to bear that burden.”