It's Time to Abandon the Delusion of a Carbon Tax

This photo taken May 5, 2014 shows the stacks of the Homer City Generating Station in Homer City, Pa. Three years ago, the op
This photo taken May 5, 2014 shows the stacks of the Homer City Generating Station in Homer City, Pa. Three years ago, the operators of one of the nation’s dirtiest coal-fired power plants warned of “immediate and devastating” consequences from the Obama administration’s push to clean up pollution from coal. Faced with cutting sulfur dioxide pollution blowing into downwind states by 80 percent in less than a year, lawyers for EME Homer City Generation L.P. sued the Environmental Protection Agency to block the rule, saying it would cause a painful spike in electricity bills and grave harm to power producers like itself. (AP Photo/Keith Srakocic)

At the United Nations last week, President Obama urged the nations of the world to follow our lead and begin to reduce greenhouse gas emissions. The president has moved aggressively to use the powers of the Clean Air Act to begin the decade-long process of regulating greenhouse gases as air pollutants. Still, even though the president is articulating a strong policy on climate change, he is being criticized because the U.S. is not willing to set a price on carbon. As Coral Davenport reported in the New York Times:

...a major new declaration calling for a global price on carbon -- signed by 74 countries and more than 1,000 businesses and investors -- is missing a key signatory: the United States. The declaration, released by the World Bank the day before Mr. Obama's speech at the United Nations Climate Summit, has been signed by China, Shell, Dow Chemical and Coca-Cola. It calls on all nations to enact laws forcing industries to pay for the carbon emissions that scientists say are the leading cause of global warming.

The Times article notes that 40 countries have some form of carbon pricing and the European Union has had cap-and-trade for nearly a decade. It also reported the administration's sympathy for a carbon price that they would happily push if only they could get it approved by the conservatives in Congress. Unfortunately, even an American and European carbon tax would just be a drop in the carbon bucket. The real problem is not in the District of Columbia, but in China and India. Greenhouse gases are being reduced in Europe and the U.S. but are growing worldwide anyway.

It is easy to blame the conservatives in Congress for making a carbon tax politically infeasible in the United States. My guess is that even without the Tea Party, a carbon tax would be a heavy lift around here. Since we can't even raise the level of gas taxes to pay for pothole repairs, I don't think a carbon tax would get very far in any American congress.

While I consider global warming one of the great policy and management challenges of our time, I do not take seriously this effort to reduce greenhouse gases by raising the price of fossil fuels. A generous interpretation of the proposed carbon tax is that it is an act of political symbolism or perhaps impassioned idealism. A less generous interpretation would label it cynical baloney. No political leader responsible for ensuring the material well-being of his or her people in the modern global economy is going to willingly raise the price of something so central to that economy as the price of energy. This is especially true in the developing world. It makes for interesting cocktail party chitchat and impassioned rhetoric in global talks and academic conferences, but it bears no resemblance to political or economic reality. Fortunately, while price influences corporate and public behavior, and a carbon tax could work, we have other policy tools at our disposal that are politically feasible.

We will make the transition to a fossil fuel-free economy because our survival depends on it, but we won't do it through a tax or treaty that prices energy at its complete cost. I know some economists consider a carbon tax, or internalizing the price of externalities, to be the magic bullet of environmental policy. They seem to have sold many climate scientists (and possibly our Secretary of State) on its mathematical elegance, but any realistic analysis of political and economic power and the force of self-interest make it clear that a global carbon tax will never happen. The political leaders of the developing world need to ensure that they have the energy required to grow their economies. Their political power and survival depend on it. Right now, that means they need fossil fuels. In the developed world, the fossil fuel companies will continue their ultimately futile battle to hold back the forces of technological change. They will fail because new technology creates new wealth and shifting wealth tends to alter the balance of economic and political power.

The real battle -- and the one we should be fighting -- is not over the economics of carbon, but over public funding of the basic research needed to make the transition to a fossil fuel-free economy. Raising the price of energy does not magically create new renewable energy technologies. While it would force some efficiency, innovation and fuel substitution, energy is so central to modern life that price alone may not force carbon reduction. I live in a city where the high cost of housing is borne as the price of living around here. People pay whatever it takes. Perhaps energy is different from housing in New York City. Still, politics blocked Mike Bloomberg's effort to enact congestion pricing in New York despite the gridlock that only gets worse. In other words, even if one grants the theoretical attraction of a carbon tax and the power of price on behavior, it is still not politically feasible.

What we need is a combination of government-funded basic research along with public-funded private incentives to stimulate rapid commercialization and widespread global diffusion of new renewable energy technologies. We need to lower the price of renewable energy directly and drive fossil fuels from the marketplace. Renewables need to be cheaper, more reliable and more convenient than fossil fuels. That should be the basic climate policy strategy pursued by the United States and the rest of the world. That is a policy prescription rooted in history and reality. It is true that the fossil fuel companies will fight this policy with all the force they can muster, but it will not be enough. They will lose.

The history of economic development over the past two centuries (and longer) has been a story of technological development. Technology advances, reaches its limits, and is replaced by new technologies. New technologies change the way we live and improve our standard of living. Sometimes companies change with the times and continue to thrive like IBM and GE; other times they fail to keep up and struggle like Kodak and the folks who make the Blackberry. I do not see divestment from fossil fuel companies as a moral imperative, but as a reasonable investment strategy focused on the future.

In addition to R&D, a meaningful climate policy would include an emphasis on energy efficiency, smart grid infrastructure and the use of short-term bridge fuels such as natural gas. It would also include a strong signal from government, possibly in the form of a command and control regulation that the fossil fuel era is going to gradually come to an end. That is why the president's admonition to reduce greenhouse gases and his use of executive authority to do so is a meaningful and important piece of climate policy. America knows how to limit pollutants through regulation. Our air is cleaner today than it was in 1970 because of the Clean Air Act. That old-fashioned, blunt-edged policy tool has two profound advantages: We know how to implement it and we know that it works. The fact that the U.S. has not signed onto a meaningless non-binding resolution on the way to another round of meaningless climate talks in Paris next year is a non-issue.

Instead of wasting time and effort on a futile attempt to tax carbon, we should be gearing up our national laboratories, research universities and high-tech sector on a massive effort to invent new forms of renewable energy. New battery technology, carbon capture and storage, new energy efficiency technologies and smart energy transmission technologies should be part of the mix.

While we work on technological innovation, we should do everything we can to reduce greenhouse gases using existing technologies. But we should focus on steps that are politically feasible. We should take steps that have a high probability of adoption, ones that are aligned with economic and political reality. A carbon tax is an elegant policy poorly suited for our messy and inelegant political world.