Global carbon emissions are exacerbating the dangers of climate change — and according to the U.S. Energy Information Administration’s “Annual Energy Outlook,” carbon emissions levels will continue to rise throughout the 2030s. The United States is the country with the largest cumulative contribution to atmospheric greenhouse gases, despite individual pockets of progress across the country.
Current efforts to decarbonize all parts of the American economy are still woefully inadequate, but the energy sector has led the way in reducing carbon emissions and can continue at a faster rate if a feasible and economically efficient solution is enacted. This year, the federal government is taking a proactive look at one energy sector solution; on Sept. 30, the Federal Energy Regulatory Commission (FERC) convened a conference to discuss how carbon pricing in competitive power markets could spur cost-effective emissions reductions.
Economists widely suggest that this policy instrument is superior to others in addressing the climate crisis: charging polluters for their carbon emissions. On its own, it may not be enough to reverse climate change — but by relying on market forces, carbon pricing yields the greatest climate benefits for every dollar invested in emissions mitigation. Some sectors respond particularly well to a price on carbon, including the power sector.
Applied to electricity generators, carbon pricing incentivizes operational improvements and technological innovation, and generates revenue that can be used to reduce other burdensome taxes, for instance, or to fund public investment in research and clean infrastructure. Such a scenario is ideal in an economy still suffering the aftershocks of the first COVID-19 wave. Now, public budgets are strained more than ever, given lowered tax bases and record debt-financed spending. This makes revenue-generating policies all the more important.
When carbon is priced, generators are charged according to the scale of their emissions, meaning the most egregious polluters will pay substantially more than producers of clean energy will. Charging energy companies for the carbon they emit rewards corporate action to reduce emissions and stimulates the growth of renewables. It’s a broader alternative to government subsidies, and lets the market identify the most promising and cost-effective abatement opportunities, something governments are not always good at.
Establishing a carbon price in the energy market would reduce the need for other government interventions such as federal or state taxes to fund subsidies, which kill competition and homogenizes the energy mix to the detriment of the environment. In light of the recent economic turmoil, government subsidies are an inefficient use of taxpayers’ money.
A price on carbon also keeps carbon emissions in check from power generation technologies that are needed whenever renewable energy isn’t available — when the sun isn’t shining or when the wind isn’t blowing. Instead of relying on subsidies during an unstable economic environment, lawmakers can combat climate change and ensure grid reliability by protecting this energy mix with a price on carbon.
Some companies may lobby against pricing carbon, citing the cost as prohibitive. But that ignores two important facts: First, alternative climate policies — including subsidies — are even costlier, as a rule; and second, the burden imposed upon energy companies is nearly insignificant in the face of economic damages caused by climate change.
Dramatic natural disasters like droughts, floods and heatwaves as well as more incremental differences, such as an increase in sea level and global temperature, can wreak havoc on all economies. A study published by the National Bureau of Economic Research found that a consistent increase in average global temperature by 0.04°C per year, without comprehensive mitigation efforts, would reduce GDP per capita by nearly 8% by the year 2100.
The New York ISO was pushed to release their carbon pricing proposal after policymakers found evidence that the state was already experiencing negative, wide-scale effects of carbon pollution, and New Yorkers were paying the price. Air pollution, declines in fish populations, damages to coastal properties and vital infrastructure, and injuries to industries like forestry and tourism prompted legislators to act. Not only will the proposal aid and stabilize infrastructure and industry, but the NYISO estimates efficiency savings of $280 million to $850 million between 2022 and 2040.
Given the rising costs of inaction, politicians must revitalize efforts to use carbon pricing in the energy sector as an effective climate policy. If FERC’s fall conference gets us one step closer to successfully price carbon, the U.S. would make significant progress toward losing its current title as the largest carbon emitter in history, while avoiding further taxation and debt-financed spending. Most Americans agree: Carbon pollution is a pressing issue, worthy of our attention. Instead of subsidizing yesterday’s power generation technologies, let’s incentivize tomorrow’s.
• Sherman Knight is the president and chief commercial officer for Competitive Power Ventures. Michael Mehling is deputy director of the Center for Energy and Environmental Policy Research at the Massachusetts Institute of Technology (MIT) and a professor at the University of Strathclyde.