On the future of climate policy

A response to William Nordhaus’s comments about how essential carbon taxes are to addressing climate change

William Nordhaus recently (and deservedly) won the Nobel Prize for Economics for his work on the economic implications of climate change and policies to respond to climate change. In the press coverage after the award, some comments were attributed to Nordhaus that I think are important to consider in more depth – in part because understanding the implications of those comments is central to understanding how we can develop effective policy responses to the climate crisis that is unfolding around us.

Nordhaus is a major proponent of developing a carbon tax as a solution to the problem of climate change, and in an interview after receiving the award he said:

“There is basically no alternative to a market solution,” Nordhaus said. “The incentives are market prices — to raise the price of goods and services that are carbon intensive and lower the ones that are less carbon intensive.”

Nordhaus may well be right in the long run that the only major solution to climate change is a carbon tax. But I think he is wrong when it comes to the short-run, and in fact I would argue that a single-minded focus on carbon pricing – at the expense of other policy approaches – would be harmful to efforts to develop policy solutions to address climate change. In fact, it seems that the best way to get to the high-price carbon tax that we will need to truly decarbonize the global economy will be by using tools other than carbon pricing to get there.

The basic problem is the political resistance to enacting climate change policies – these policies, if they involve explicit prices on carbon, require voters today to impose significant economic impacts on themselves to benefit future generations and people around the world. (That is inevitable, given the long-term and global nature of the problem of climate change.)

Moreover, the problem is even worse because a carbon tax would significantly harm some of the most powerful economic interests in the world – not just the fossil fuel industry (which many activists have noted has driven much of the opposition), but also wide sectors of the modern industrial economy.

So it is probably no surprise that countries and sub-national units around the world that have attempted to enact carbon taxes (or its close cousin, a cap-and-trade program) have run into huge political obstacles (see, e.g., Australia where climate policy just brought down the government yet again; and Canada; and Washington state).

And it is also probably no surprise that places (such as the European Union or California) that have enacted some form of a carbon tax or cap-and-trade system initially began with significant subsidy and regulatory efforts to support emergent decarbonization technologies and build up industries like renewable energy. (See this article in Science that I co-authored that provides this data (unfortunately paywalled, though a useful press release is here).) In these countries, these regulatory and subsidy programs built political support for additional, more stringent climate change policy, including carbon taxes and cap-and-trade. Increased political support could come both in the form of increasing the interest group and lobbying power of the industries that benefit from climate policy and weakening the power of those that oppose climate policy, and also in the form of voters observing direct potential economic benefits from acting on climate change.

Indeed, a move immediately to carbon taxation right now might be counterproductive in the long-run, if that move diverted political capital and policy attention away from other policy tools. Many of the existing carbon tax or cap-and-trade programs have very small fees (the EU’s program has often been less than 20 euros/ton). Those are the kinds of fees that are politically feasible at the moment. But those are not the kinds of fees that will support substantial innovation or investment in decarbonization industries and technologies. But it is substantial innovation and investment that we will need both to facilitate the technological breakthroughs that are essential to addressing the crisis (for instance, developing cheap and efficient direct carbon removal technologies), and also to build the political support and interest groups needed to advance more aggressive climate policy in the future.

Thus, what matters now, in the short-term, are policies that are politically feasible and that will encourage investment and innovation that can change the political landscape in the future so that we can advance more aggressive climate policy in the future. (For a paper that I co-authored that begins to develop the theory behind this approach, click herehere’s a blog post I did recently on that article.)

That doesn’t mean pursuing a carbon tax now is not a bad idea – so long as it does not prevent the aggressive use of complementary policy approaches such as regulations or subsidies that can facilitate innovation and investment. (There are other risks with starting off with a low-priced carbon tax, such as locking in that low price for a significant period of time, when that price needs to rise rapidly in the future.) In particular, I’m concerned that the political backlash that carbon taxes currently appear to produce means that governments that might otherwise support important regulation and subsidy policies get (at best) distracted and (at worst) voted out of office.

When we have moved further along the curve of decarbonization, the efficiency of carbon taxes and cap-and-trade systems may well be essential and those tools may be the primary or even exclusive approach that we use. In other words, in the long-run (or at least the medium-run). But we can’t get to the long-run unless we move through the short-run first, and there a single-minded focus on carbon pricing is probably misleading us. The short-run, in fact, is all the more important given the terrible urgency of the climate crisis that faces us, as the IPCC made clear early this month…

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Reader Comments

11 Replies to “On the future of climate policy”

  1. To someone not actively engaged in climate policy, it may indeed look like there’s a single minded focus on carbon taxes. But there’s good reason for that: “money, money, money, makes the world go round.” No other solution covers as much of the economy at so little cost.

    Readers should also know that several leading carbon tax proposals do not in fact require voters to raise prices on themselves, a point incorrectly made in this post. When revenues are returned to households, most households actually come out ahead. Proposals from Citizens’ Climate Lobby and the Climate Leadership Council have this feature, which, by the way, is a form of insurance for a carbon tax: if voters are receiving a monthly check from a carbon tax dividend, what politician is going to want to be associated with taking it away?

  2. Eric said;
    “…..The basic problem is the political resistance to enacting climate change policies…”

    Dear Eric,
    The basic problem is that humanity cannot control global climate. Carbon taxes have no effect on global climate and are technically worthless. Anyone who claims that carbon taxes mitigate climate change, but cannot back-up such claim with scientific proof, should be promptly dismissed as a dishonest Atty.

    The basic problem is not political resistance, the basic problem is phony baloney fraudulent “climate mitigation” that has never been successfully demonstrated to have any measurable effect on the global climate. All climate mitigation scams both universally and consistently fail to actually mitigate climate. That is the absolute undeniable basic problem with climate change policies. We demand proof of mitigation, put up or shut up.

      1. Solar energy
        Carbon dioxide emission reduction regulations
        Wind energy
        Renewable energy
        Vehicle GHG emission standards
        Carbon taxes
        Cap & Trade
        Paris Agreement
        Clean Power Plan
        all of the above combined
        etc, etc, etc.

        1. There are two very different things; say and do. Say is ineffective no matter what. Only do works. I don’t see much do in your list. Even those things which have been done to some extent haven’t been done enough yet. Some are beginning to be tried, but in the words of another sage; “Do or do not; there is no try.”

          Why don’t you prove your point by working to actually implement all of the above and then when they have been in place for a decade, then you can start chortling again.

          We have tried the other side of the experiment, pouring unlimited carbon dioxide into the atmosphere for over a hundred years and we are just now beginning to see the results of that experiment.

  3. Great post, Eric. I would, however, separate your analysis about carbon taxes from cap and trade. There are at least some reasons to think that cap and trade is more politically durable and less controversial than a tax (despite conservative efforts to label it cap and tax), in part because the system of allowance allocation creates a valuable commodity for allowance holders and therefore creates some political buy in by allowance holders. Also, the handing out of at least some allowances for free, while controversial, also lessens political resistance to the program initially. Finally, it’s not a tax even though it functions as one. Labels matter, I think, in environmental policy making.

    1. Dear Ann,

      Cap and trade has the same basic problem as carbon taxes. Cap and trade schemes have no effect on global climate and are technically worthless. Anyone who claims that cap and trade mitigates climates change, but cannot back-up such claim with scientific proof, should be promptly dismissed as a dishonest Atty.

      We demand proof of mitigation, please either put up or shut up.

    2. Ann, free allowances continue to enable the continued externalization of the social and environmental costs of high-carbon emission-related commodity production. Free allowances amount to continued subsidies for the industries that are driving the baking of the planet. We don’t have time to continue with that approach

  4. As a small, somewhat off-topic note to remind ourselves of the amount of carbon going into the atmosphere, I was underway last summer in the port of Duluth / Superior and happened to be following the MV Paul R. Tregurtha (currently the largest ship on the Great Lakes) under the Duluth lift bridge. She was loaded to her marks with 63,000 L Ton of coal bound down lake for a power plant in Indiana, where it would be burned in 18 hours, putting about 210,000 tonnes (metric) of CO2 in the atmosphere. She was part of a multi-ship, five day rotation supplying just one plant.

    The effect of each of us may be small, but there are a lot of eaches.

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Eric Biber

Eric Biber is a specialist in conservation biology, land-use planning and public lands law. Biber brings technical and legal scholarship to the field of environmental law…

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