Carbon Pricing: Taking Over

Carbon Pricing: Taking Over

This is the last in a series of 4 blogs exploring carbon pricing policies that make the true costs of emitting greenhouse gasses visible at key decision points so climate futures are always present. Here are links to the first, second, and third in the series. 

In this fourth and final installment of our series exploring a more inclusive definition of carbon pricing, we return to the canonical carbon price. That is, a carbon tax or a cap and trade system covering CO2 emissions from fossil fuels. Taking a global view, such policies are booming.  

This may surprise American readers, living as we do in the only developed national economy without one. Many developing economies have one too. Others want one, and they want rich countries to have them as well. For instance, the consensus opinion of September’s first ever African Climate Summit was that there should be a global carbon tax. In total, 23% of all global emissions are now covered by a carbon price, prompting the Economist magazine to recently publish an article titled “How carbon prices are taking over the world”. 

Nor are we talking about measly, small carbon prices here. The price of the European Union Emissions Trading System (EU ETS), covering 30 countries, eclipsed 100 Euros at several points last year. What’s more, last October the EU put into effect what they are calling a carbon border adjustment mechanism (CBAM). In effect, the policy described by this clunky acronym requires imports from other countries to pay a comparable carbon price to what EU-produced goods are already paying. It’s the international policy equivalent of the playground maxim “keep it even-steven”. 

Remarkably, given how widespread canonical carbon prices are, the EU is the first place to enforce such playground rules. But they will not be the last. Taiwan is set to start collecting fees later this year (thus ahead of the EU, which now demands reporting, but won’t demand payments until 2026), and the United Kingdom has proposed its own CBAM in some detail. Canada, Japan, Australia, South Korea, and India are all at various stages of study, consultation, and contemplation for their own versions. 

To be clear, the EU CBAM will probably help US exporters, because for the products the EU is targeting (cement, iron, steel, aluminum, hydrogen, electricity, and fertilizer), the US tends to be a relatively low-carbon producer. So, accounting for it means that US goods will appear like a better deal relative to similar goods from countries that pollute more to produce essentially the same goods. In economic terms, American goods are likely to capture a larger market share. However, the EU will exempt from payment goods from countries with comparable carbon prices. So, US producers will probably gain market share even if they have to pay at the border. It’s just they’ll be paying the EU governments instead of the US government. 

This loss of revenue is probably a large factor explaining why border carbon measures are one of the hottest climate topics in Congress of late, with both Republicans and Democrats showing interest. Given that 40% of all US imports come from countries with carbon prices expected to exceed $50 in 2024, politicians may also be figuring it can’t be long before American consumers begin to notice. 

Recent Congressional interest has focused on border carbon adjustments (BCAs) and border carbon tariffs1. The distinction is that a BCA is a policy that is paired with an explicit domestic carbon price, whereas a tariff is not. A border carbon measure could therefore only be properly considered a BCA if Congress also passed a national carbon price, or came up with a dollar amount for the thicket of regulations, environmental fees, and other related compliance costs on products we export. A carbon tariff would not adjust for any internal costs, explicit or imputed. Instead, it would simply put a price on goods coming into the US based on their carbon intensity (which is not straightforward to calculate). Countries sending goods to the US with a significantly higher emissions intensity would pay the tariff, goods from cleaner countries wouldn’t pay. 

The Foreign Pollution Fee Act, a Republican-sponsored bill in the Senate, is such a tariff. Intriguingly, this bill is clearly geared towards encouraging a climate club. To underscore the difference between BCAs and tariffs, the bill text also includes strong language against any possible interpretation that it enables a domestic carbon price. 

This US interest in border carbon measures is encouraging because though the US made historic investments to combat climate change in the first 2 years of the Biden Administration/ during the 117th Congress, we are falling short of our own metrics for success. To briefly recap, the passage of the CHIPS and Science Act, the Infrastructure, Investment and Jobs Act (IIJA) and Inflation Reduction Act (IRA) in the last Congress amounted to an historic investment in reducing emissions that has already led to a doubling of manufacturing investment in the US, with republican-voting states getting most of these investments. Together, these 3 policies are estimated to reduce US emissions by about 40% below 2005 levels by 2030. 

However, the US commitment under the Paris accord is a 50% reduction in emissions by 2030. More legislative solutions that complement these policies are necessary. We need both carrots and sticks. This trifecta of legislation has more or less maxed out politicians’ appetite for subsidies and incentives (carrots). Sticks are the only tool that’s left, and carbon prices are the most obvious way to do this. While things might have turned out differently, none of these 3 laws include a price on carbon dioxide emissions2

To conclude, carbon pricing is having a moment right now. Especially when you take a broader, more chemically and economically sound view of carbon prices. Look at all greenhouse gasses that include carbon, and think of how pricing affects decisions at more than just the point of sale, and you see them all around. This is especially true when you take a global view – carbon prices are indeed taking over the world. 

At the Pricing Carbon Initiative, these developments give us hope. We are interested in the spirit of the policy suite: making true costs visible at key decision points so climate futures are always present. We are following all these story lines, and we enjoy bringing them to our network. Better information in decision making is a bipartisan concern, and our focus on carbon pricing in all its many forms continues to be a productive focus for our diverse network.

Photo by Kyle Glenn on Unsplash

  1. While every canonical carbon price introduced in the US Congress over the last decade has included a BCA, this element has always played second fiddle to the domestic price. This is completely flipped in the current discussion. Compare, for instance, Senator Whitehouse’s recently reintroduced Clean Competition Act to his Save Our Future Act or American Opportunity Carbon Fee Act of previous Congresses. ↩︎
  2. As noted in the second blog in this series, the IRA did include a methane fee. ↩︎
Conceptual Carbon Prices: Big Ideas, Big Impacts

Conceptual Carbon Prices: Big Ideas, Big Impacts

This is the third in a series of 4 blogs exploring carbon pricing policies that make the true costs of emitting greenhouse gasses visible at key decision points so climate futures are always present. Here are links to the first, second, and fourth in the series.

If someone puts a price on carbon that no one pays, can that price still reduce emissions? Welcome to the strange and wonderful world of conceptual carbon prices. For the purposes of this series, we include in this category the social cost of carbon (SCC), voluntary carbon markets, and damage calculations used by insurance companies. While the policies we considered in the last blog were focused on direct chemical equivalents of the canonical carbon price, the policies here work at decision points aside from the point of sale for fossil fuels. 

I’ll begin with the SCC, which is an estimate of what people would pay today to avoid future climate damages in the future. Pay now to avoid emissions, or pay later to clean up after floods and hurricanes. It’s a dark concept, but perhaps we shouldn’t expect otherwise from the dismal science. 

Until very recently, the federal government had been using a temporary carbon price of $51 per metric ton. This was the same SCC used by the Obama Administration. The Trump Administration decreased it to around $1, and the Biden Administration reverted it back to $51, which the Supreme Court upheld in a recent challenge to that figure. At COP28, the Biden Administration announced a final rule that sets the SCC at $190. 

This is a big deal. The SCC is used in cost-benefit estimates for purchasing decisions and regulatory determinations. A higher SCC justifies more emissions-conscious decisions. So, for example, the fleet of vehicles used by the US military, the #1 user of gasoline in the world, will likely include more fuel-efficient or even more alternative fuel vehicles with a higher SCC. They have already successfully flown fighter jets on biodiesel derived from algae fat, and one might reasonably expect more such investments with a higher SCC. Furthermore, the EPA can issue more stringent regulations on greenhouse gasses because the required cost-benefit analysis it must do for every new regulation will more often tip in the direction of higher benefits with a higher SCC. 

The full impact of this update comes into clearer focus when you consider that the US federal government is the largest consumer in the world, spending more than $650 billion on products and services each year. Public sector employees account for a little over 15% of the workforce, with 6% working for the federal government. A recent executive order by President Biden requiring more agencies to do basic carbon accounting and consider the SCC in procurement means before the office supplies those worker use are bought, the buildings they work in are lit, even before the uniforms they wear are sewn together, someone will be making decisions based on the emissions all that will produce. Suppliers will notice, and are likely to shift production to be more climate-conscious, even for what they sell to the general public. So, can a carbon price that no one pays reduce emissions? The answer is yes. 

This brings us to the Commodity Futures Trading Commission’s (CFTC) recent work on Voluntary Carbon Markets (VCMs). VCMs have been around for decades. The Kyoto Protocol, adopted in 1997, created a market for carbon credits. The idea behind carbon credits is simple: pay people to take actions that either remove greenhouse gasses from the atmosphere (like planting trees), or that prevent them from being emitted in the first place (like preventing people from cutting down trees). However, these programs have long been rife with questions around transparency, duplication, comparability between projects, and ultimately, trust. The CFTC process is inviting stakeholder input about how to create trust in these markets. 

This is one instance where business is asking for regulations. Businesses would like the CFTC to regulate VCMs because without trust, even well-intentioned companies are very exposed to criticisms of greenwashing. A widely circulated October article in the New Yorker painted a blistering portrait of fraud in carbon credits. However, it is unclear if the CFTC has jurisdiction to directly regulate VCMs. They definitely can regulate derivative markets, such as futures of carbon credits, but it’s unclear if they can regulate the credits themselves. An act of Congress could help clarify this.

A closely related project is that of Natural Asset Companies (NACs). The New York Stock Exchange has partnered with a company called Intrinsic Exchange Group to file for a proposed rule pioneering a new class of listed company based on nature and the benefits that nature provides. The proposed rule was filed on Oct. 4, 2023. Interest in NACs goes beyond removing carbon from the atmosphere, to keeping terrestrial and marine natural carbon sinks intact and functioning. Scientists have highlighted this as extremely important for carbon accounting, preserving biodiversity, and sustaining the livelihoods of over 3 billion people, among other reasons. The NAC effort ties into a larger, global effort, colloquially known as “30 by 30,” with both an international agreement and action by the Biden Administration responding to the science.

Of course, participation in a VCM is voluntary. Similarly, should they win SEC approval1, no one need buy NACs. Yet, both create incentives to reduce emissions, particularly for those interested in long-term planning2. In this way, they bring climate futures into present-day decisions by creating a price.   

The final conceptual carbon price I’ll consider here is linked to recent jarring announcements by insurance companies that they will no longer provide insurance on new homes in large states, such as California and Florida, among others. Because most mortgage lenders require home insurance both to purchase a home and throughout the term of a mortgage (commonly 30 years), this has profound implications for millions of Americans. In some instances, it means people hoping to buy a house cannot do so. In others, it means the insurance they can buy is lower quality, covering fewer expenses, leaving them more exposed to financial ruin in the case of a climate-fueled disaster. In Florida, there are already instances of insurance companies not renewing a “very small percentage of higher exposure homeowner’s policies.” Where such homeowners are not able to find replacement insurance, they could lose their homes that they’ve been making payments on for decades. 

What does this have to do with carbon pricing? Insurance companies are making these determinations based on risk models and the real costs they have incurred due to climate-related disasters. Their example highlights something that had previously been rather theoretical about the SCC: that it gives us a choice. Pay now, or pay later. For Californians and Floridians, and better than 1 out of every 6 Americans is one or the other, the choice has been removed. 

This cuts directly to the American Dream. While there are many versions of the American Dream, most of them include owning your own home. To the extent that this is true, the system that has enabled the American Dream for tens of millions of families is broken, and climate change broke it. To be rather dismal, the bill has come due, and for many families in California, Florida, and in other states, the price is the American Dream.

Photo by Scott Webb on Unsplash

  1. Update: the New York Stock Exchange withdrew its request for approval of NACs after this blog was published online. ↩︎
  2. Both VCMs and NACs are arguably better discussed in the previous post regarding carbon equivalent prices. However, since both are inclusive of credits for not emitting as well as for sequestering carbon, and NACs consider other ecosystem services as well, I thought this was a better fit. ↩︎
Simple Math: Carbon-Equivalent Prices

Simple Math: Carbon-Equivalent Prices

This is the second in a series of 4 blogs exploring carbon pricing policies that make the true costs of emitting greenhouse gasses visible at key decision points so climate futures are always present. Here are links to the first, third, and fourth in the series.

The first post in this series suggested 3 rough categories using a wider, and more chemically inclusive definition of “carbon prices”. Here we consider the first rough grouping: carbon equivalent prices, which are just a simple units conversion away from more traditional carbon prices. Methane fees, severance fees or royalties, and various carbon removal efforts all fall into this category. 

Methane is second only to carbon dioxide in terms of the warming its excess emissions have caused since the industrial revolution. It has a well-defined and well-understood CO2-equivalent value. That is, how many molecules of carbon dioxide it would take to equal the warming caused by one molecule of methane (CH4). Such values are calculated not just for methane, but for many greenhouse gasses. For methane, this value includes its indirect effects – the cumulative impact methane has on other atmospheric constituents that either warm or cool the planet as the molecule breaks down. Such values are commonly expressed after both 20 years and 100 years (IPCC AR6 WG1 Table 7.15). 

Politicians tend to favor the lowest of these numbers in policymaking, i.e. the 100-year value. Multiply a CO2 price (expressed in dollars per ton of emitted CO2) by the 100-year CO2-equivalent value of methane, currently 27, and you get the carbon equivalent price of methane, expressed in dollars per ton emitted methane. 

Little noticed in the Inflation Reduction Act (IRA) was a methane fee. The United States is one of only two countries to impose such a fee, with Norway being the other. The IRA prices methane emissions at $900/ton in 2024, $1,200/ton in 2025, and $1500/ton in 2026, where the fee will stay. The fee only applies to methane emissions that greatly exceed the industry average, and it is designed to work in tandem with regulations that were announced in the first days of COP 28. 

The fee only applies to big facilities that emit over 25,000 metric tons of carbon dioxide equivalent per year, and exceed applicable waste emissions thresholds. In other words, the biggest and least efficient producers. If the company mining the methane is in full compliance with the regulations, no fee is due. A Congressional Research Service report estimates that 2,172 facilities will be subject to the methane fee. It would not apply to wells permanently plugged in the previous year nor to emissions caused by an unreasonable delay in environmental permitting of transmission pipelines. Combining carrots with sticks, the program further provides $1.55 billion for the EPA to fund and provide technical assistance for methane abatement in the oil and gas sector. 

Similarly, severance fees or royalties are just a simple units conversion away from a carbon price. Severance fees are in place in 36 states. They may be assessed based on the market value of the fuel extracted, the volume extracted, or some combination thereof. However, because the chemistry of these fossil fuels is so well characterized by the companies that extract them (since that in turn determines their value), and because it is a safe assumption that all the fossil fuels so extracted will be burned, it is easy to convert these units into dollars per ton of CO2

Royalties are similar. The distinction is that severance fees are levied on resources extracted from private lands, and royalties are collected from resources extracted from public lands. Both severance fees and royalties are spiritually quite different from carbon prices, however, in that they are not intended to slow the mining of fossil fuels. Eliminating them is also quite problematic for some states, such as Alaska, where such revenues not only have enabled them to get along without a state income tax, but to fund wildly popular government programs, such as the Alaska permanent fund

The financial and cultural repercussions of threatening such programs are frequently, and counter-productively, ignored by climate advocates. Accordingly, such programs have not been effectively turned into rallying cries for more carbon prices. However, they are an effective riposte to arguments one sometimes hears on mechanical grounds; i.e. that it’s administratively too difficult to price carbon. 

When a government fails to collect or undercharges for a severance or royalty fee for a fossil fuel, this is considered an explicit subsidy. Note, even for these explicit subsidies, it is not a direct payment by a government to a fossil fuel company. Rather, it is a failure to collect revenue that would otherwise be owed. This is a point of confusion for many people, and I believe there is further confusion when, for instance, one hears news from the IMF that there were over $7 trillion of subsidies for fossil fuels worldwide in 2022. While some of this amount is due to explicit subsidies (18%), the bulk of this astonishing number (82%) is due to implicit subsidies. The IMF defines implicit subsidies as undercharging for environmental costs and forgone consumption tax revenues. For both explicit and implicit subsidies, the only way to remove them is to actually charge or charge more for fossil fuels. In other words, to call for removal of all fossil fuel subsidies is to call for universal carbon prices. 

Finally, we consider carbon dioxide removal. This is less a change of units and more a shifting of those units from one side of the ledger to the other. Warming is caused by carbon dioxide equivalent emissions in the atmosphere. It is not caused by carbon dioxide stored in the ocean, underground, or tied up in the organic matter of living things. These correspond to the four major reservoirs of carbon on earth; the atmosphere, the hydrosphere, the lithosphere, and the biosphere. Moving carbon dioxide from the atmosphere to one of these other reservoirs addresses the problem of global warming, though it might have other negative effects we’d like to avoid, such as ocean acidification in the hydrosphere, induced seismicity in the lithosphere, or nutrient removal in the biosphere. All these side-effects should be responsibly addressed for any efforts at such reservoir-shifting. 

Perhaps the most widely-known (and controversial) method for such reservoir shifting is carbon capture and sequestration (CCS). This generally refers to the capture of CO2 from a smokestack, and sequestering (i.e. storing) it permanently underground. Carbon dioxide removal (CDR) is a more general and inclusive term. CDR need not happen at a smokestack, and the term is applied to processes that may or may not include sequestration. When the process includes sequestration, the storage may not be as permanent. Plants, for example, perform CDR when they photosynthesize. Direct air capture (DAC) is another three-letter acronym (TLA) that only refers to removing CO2 from the well-mixed air we breathe. It says nothing of sequestering the captured CO2 for any length of time. The IPCC has grown increasingly unequivocal in its reports about the need for CDR. In a factsheet to accompany its most recent report, it states flatly that “CDR is required to limit global warming to 1.5oC”. 

Each of these TLAs has a cost associated with it, and thus puts a price on the carbon being removed from the atmosphere. This creates a very direct linkage between such projects and carbon pricing. There is, in fact, a bit of a gold rush going on right now, with a lot of money going into technologies and processes for removing CO2 from the atmosphere and storing it. This is being driven in part by federal investments made both in the Infrastructure Investment and Jobs Act (also known as the Bipartisan Infrastructure Package) passed in 2021, and the IRA. These two bills created a number of incentives for various kinds of CDR, but perhaps most eye-catching is the increase in the value of the subsidy the federal government is willing to pay under section 45(q), which was updated to pay $180 per ton of CO2 removed by DAC that is sequestered geologically. 

Companies are also increasingly interested in paying such high prices for the certainty of permanent removal. For example, a company called Heirloom opened the first commercial direct air capture facility in the United States only in November, with a contract from Microsoft, and plans to open a second facility soon. Companies are deciding today that it’s worth it to pay very high prices to actively remove and sequester CO2 from the atmosphere. This payment for removal suggests a mirrored price to avoid emitting it in the first place. 

In this blog, we considered three very concrete examples of carbon-equivalent prices: the US methane fee, the severance fees and royalties that state and federal authorities have levied (or not) for decades, and the price companies are willing to pay for shifting carbon dioxide from the atmosphere to the lithosphere. The next blog in the series will consider conceptual carbon prices. While these policies address less tangible prices that, in some cases, no one will ever pay, the impact they have on people’s lives and their decisions is very, very real. 

Featured photo by Anne Nygård on Unsplash

Carbon Pricing: What’s in a Name?

Carbon Pricing: What’s in a Name?

This is the first in a series of 4 blogs exploring carbon pricing policies that make the true costs of emitting greenhouse gasses visible at key decision points so climate futures are always present. Here are links to the second, third, and fourth in the series.

From an American perspective, pricing carbon seems to be down and out. It rarely makes the news, and it often seems as if environmental groups and those who fund them have given up on it, despite their standing endorsements for the policy suite strongly endorsed by economists and scientists

This may be true for the canonical carbon prices, a carbon tax or a cap-and-trade system, but these are not the only ways to make it more expensive to pollute. There are, in fact, many exciting efforts underway in the United States at all levels of government to make the cost of pollution more visible, and so affect decision-making about emissions. 

Before diving in, some context: why does anyone want to price carbon in the first place? In economic terms, when someone is able to burn fossil fuels without paying a price for the greenhouse gasses they emit, it is a market failure. It evokes the tragedy of the commons that British writer William Forster Lloyd wrote about in 1833. The original metaphor referred to a field, or a “common”, free for all to use, where farmers grazed their cattle. However, this led to overgrazing, the grasses on the field died, with the result that no cows could be fed. It came to be a foundational metaphor in both economics and ecology. In ecology, for similar human overuse of natural resources, and in economics for “market failures”, when a market fails to price appropriately a behavior that imposes costs on society.  

Environmental market failures are very common. It has proven very easy for humans to underprice the value we all receive from clean air and clean water. Pricing pollution dumped into a commonly shared atmosphere is an attempt to correct this failure, and to make polluters pay a fair price for this damage. 

While carbon taxes and cap-and-trade programs that put a price on fossil fuels at the point of sale are the most obvious and farthest-reaching ways to do this, they are not the only ways. After all, fossil CO2 is not the only carbon pollutant changing the climate. Chemically speaking, “carbon price” is a sloppy term, since other climate forcers such as methane (CH4), hydrofluorocarbons (HFCs), chlorofluorocarbons (CFCs), and of course fine particulates collectively known as “black carbon” all also include carbon. In the above list, it’s even spelled out in the name of each except methane. Usually, “carbon price” is understood to refer only to CO2. Making it more expensive to emit any of these greenhouse forcers into the atmosphere could, chemically, be properly considered a carbon price. 

Nor is the point of sale the only place where decisions on how much to pollute are made. Consumers make such decisions when they budget for the future, consider the lifetime costs of an appliance or a vehicle, and even where they want to live and in what kind of house. Companies do likewise when making a 5-year plan, evaluating their logistics, deciding on suppliers, and in how they market to which consumers. Businesses and consumers are of course not the only ones making decisions on emissions. Governments, with their enormous purchasing power, consider not only direct costs for their buildings, fleets of vehicles, and militaries, but how their decisions affect the voters they serve. It is easy to see how factoring in a price for emissions in any of the decision processes listed above could lead to outcomes that are better for the climate. 

When you consider all the greenhouse forcers with carbon in them, and all the decision points where a little price information about how consumer, business, and government actions will affect our common atmosphere, pricing carbon becomes a much more compelling policy space. In the coming weeks, we will be exploring where policymakers are pursuing this broader conception of pricing carbon in a series of blog posts. Limiting our consideration to current efforts or policies, we group them into 3 rough categories: carbon-equivalent prices, conceptual carbon prices, and variations on the canonical carbon price at different levels of government. We hope you will find this series informative, thought-provoking, and a source of that rarest of resources among climate advocates: hope.

Featured Photo by Thomas Richter on Unsplash