CHAPTER IN A CHART Current U.S. Policy is Piecemeal and Often Expensive

Low Carbon Fuel Standards $2971 Solar Photovoltaics Subsidies $2151 Cash for Clunkers Weatherization Assistance Program CAFE Standards Wind Energy Subsidies Renewable Portfolio Standards Renewable Fuel Subsidies Livestock Management Policies Reduced Federal Coal Leasing Agricultural Emissions Policies Methane Flaring Reduction ECONOMY-WIDE APPROACHES Clean Power Plan Reforestation Put a Price on It: The How Behavioral Energy E!ciency Direct Air Capture and Why of Pricing Carbon -200 0 200 400 600 Abatement Cost ($ per ton of CO2, 2018 USD) Michael Greenstone, Milton Friedman Distinguished Service Professor in Economics; Low High Director, EPIC; Director, Becker Friedman Institute Ishan Nath, Postdoctoral Scholar, EPIC Source: Authors' analysis with data from Gillingham and Stock (2018).

Carbon pricing policies are widely recommended by Heart of the Problem Cheap, reliable fossil fuels play a primary role in powering the U.S. economists and other experts as the most cost-e!ective approach to reducing emissions. These policies allow Energy is essential to the modern world, heating homes, economy and appear on track to continue dominating the global for the greatest environmental bene"t at a given price lighting o#ces, powering factories, and fueling cars. No energy system for decades to come. Though fossil fuel energy appears by giving "rms and consumers the option to choose the country in the world has gotten rich without consuming cheapest ways to reduce emissions, as well as to engage large quantities of energy per capita. Today, that energy inexpensive to consumers, it creates severe harms to society that are in emitting activities that bene"t them more than the comes predominantly from coal, oil, and natural gas; not re$ected in its price, from air pollution that damages health and cost to society. While many countries around the world these sources provide approximately 85 percent of global and several jurisdictions within the United States have primary energy consumption and 81 percent in the shortens lifespans to carbon emissions that cause climate change priced carbon through either a carbon tax or an emissions United States.1 Fossil fuels dominate the energy landscape that will become increasingly dangerous as the earth warms. As the trading system, existing federal U.S. climate policy instead because they are reliable and cheap, a condition that consists of a piecemeal arrangement of regulations and is unlikely to change for the foreseeable future. This world grows richer and energy demand increases, avoiding serious mandates for speci"c actions and technologies. This creates a challenge for policymakers facing competing climate change damages will require emissions reductions on a approach has not been e!ective overall, with many priorities: how to mitigate the harms caused by burning existing policies achieving little environmental bene"t fossil fuels, including climate change and air pollution, massive scale. This underscores the critical importance of policy that at a relatively high cost. Putting a price on carbon is an while continuing to reap the bene"ts of the energy the makes ambitious mitigation goals attainable at a manageable cost. alternative approach that ensures that society undertakes fuels have long provided. For the Biden administration, only the most cost-e!ective forms of carbon abatement the challenge is even more speci"c: how to use American and thereby minimizes the cost associated with urgently policy to address a global challenge without putting an needed ambitious climate mitigation. undue burden on the U.S. economy.

1 BP plc, BP Statistical Review of World Energy 2019.

50 U.S. ENERGY & CLIMATE ROADMAP EPIC.UCHICAGO.EDU U.S. ENERGY & CLIMATE ROADMAP 51 FIGURE 1 Global Fossil Fuel Reserves-to-Production Ratios Though continued technological improvements are never guaranteed, the best estimates suggest that, at least 250 Years on the time scales that matter for restraining climate change, there are functionally unlimited global supplies of fossil fuels. Various experts place the range of possible 200 resources at 3-4 times current proven reserves for oil, 7-60 times for natural gas, and 14-23 times for coal.8 If future 150 Coal technology allows people to tap into these reservoirs, Natural Gas global markets could have access to hundreds or even Oil thousands of years of carbon-based energy. 100 Despite improvements in fuel e!ciency over recent decades, Energy use is plateauing in the United States and the rest transportation remains a major source of emissions in the United States.

50 of the wealthy world but global usage is growing rapidly, fueling historic improvements in human development. Between 2005 and 2019, global consumption of oil, The Health and Climate 0 coal, and natural gas rose by 16 percent, 20 percent, and 1980 1985 1990 1995 2000 2005 2010 2017 Consequences of Fossil Fuels 41 percent respectively, with increases concentrated Burning fossil fuels causes both local and global Source: EPIC analysis based on data from BP. in developing countries.9 The world’s poor and middle environmental damage with serious consequences for class have growing access to a wide variety of comforts human welfare. Particulate matter air pollution, primarily and necessities—refrigerators, televisions, and cars— dominant technology with a substantial cost advantage. driven by local fossil fuel combustion, has been linked Fossil Fuels Are Not On Track to Go Away and the share of the world’s population living below At current battery prices, the price of oil would have to a wide range of social harms, including low infant In the electricity sector, coal and natural gas provide the World Bank’s de"nition of extreme poverty ($1.90 to rise to $180 per barrel to make an EV with 250 miles birthweight, high infant mortality, chronic heart and lung both baseload capacity, which produces a constant, per day) has fallen from 37 percent in 1990 to under 10 of driving range cost-competitive with traditional ICE- conditions, reduced worker productivity, and diminished steady stream of power, and dispatchable generation, percent in 2015.10 engine vehicles. Unless battery prices fall signi"cantly or academic performance by school-age children.13 One which ramps up and down to meet $uctuating consumer oil prices rise dramatically, gasoline and oil are in position Despite these gains, recent estimates suggest that 3.5 study showed that early childhood exposure to air demand. Both these sources do so at low prices. to continue fueling the U.S. transportation sector for the billion people still lack access to reliable electricity and pollution reduces wages and labor force participation Electricity costs about 3 cents per kilowatt hour (kWh) foreseeable future.5 nearly 800 million have no access at all.11 As of 2018, the even at age thirty.14 While the United States has made when produced by existing coal plants and just under average person in India consumed less than a tenth of the considerable progress on reducing air pollution through 5 cents per kWh from new natural gas plants, making Meanwhile, the supply of fossil fuels is virtually electricity of the average American; the average person in the enforcement of the Clean Air Act and subsequent them the cheapest among currently available “baseload” limitless. Figure 1 shows that global proven reserves of China just over a third.12 The extraordinary global progress legislation, in 2018 11 percent of the U.S. population still options.2 While the costs of renewable sources have oil, coal, and natural gas—de"ned as known deposits of the last twenty years deserves celebration. Yet, there is faced exposure to annual pollution levels above the World declined rapidly in recent years, their total cost to the that are technically and economically recoverable at little doubt that billions of people around the world will Health Organization’s guideline of 10 micrograms per grid remains higher than fossil fuels because they current market prices—account for many decades of demand continued energy consumption growth in the cubic meter. Globally, the consequences have been even depend on backup generation or storage capacity (for production. More importantly, despite rising U.S. and next several decades. Under current policy and market more severe: particulate matter pollution reduced average more, see "Fueling Technology Deployment with a Clean global consumption, technological advances have actually trends, fossil fuels appear poised to be the primary source life expectancy around the world in 2018 by about 1.9 Electricity Standard", page 88). It is no surprise then that increased reserves over the last twenty years. In the for meeting this growing demand. years per person.15 together coal and natural gas account for 62 percent of United States, for example, oil and gas reserves expanded U.S. electricity generation.3 by 100 percent and 171 percent respectively between 2000 and 2018 due to new hydraulic fracturing (“fracking”) 8 McGlade and Ekins, “The geographical distribution of fossil 13 Chay and Greenstone, “The impact of air pollution on infant The current outlook in the transportation sector is similar. techniques.6 Exploratory wells now strike oil more than fuels.” McGlade and Ekins summary from the Federal Institute for mortality”; Currie and Neidell. “Air pollution and infant health”; While electric vehicle (EV) sales have grown in recent Geosciences and Natural Resources, the International Energy Agency, Currie and Walker. “Tra#c congestion and infant health”; Currie et 50 percent of the time—a sharp rise from rates below 30 years, they still account for under 2 percent of all new and the Global Energy Assessment as described in Covert, Greenstone, al., “Environmental health risks and housing values”; Chang et al., th 7 and Knittel, “Will we ever stop using fossil fuels?” “Particulate pollution and the productivity of pear packers”; Gra! Zivin 4 percent for most of the 20 century. car sales. Internal combustion engines (ICE) remain the and Neidell. “The impact of pollution on worker productivity”; Chang 9 BP plc, BP Statistical Review of World Energy 2016; BP plc, BP Statistical et al., “The e!ect of pollution on worker productivity”; Ham et al., Review of World Energy 2020. 5 Calculations from Covert, Greenstone, and Knittel, “Will we ever stop “Pollution, Test Scores and the Distribution of Academic Achievement”; 2 EPIC Analysis based on U.S. Energy Information Administration, using fossil fuels?” using battery prices from Bloomberg New Energy 10 Roser and Ortiz-Ospina, “Global Extreme Poverty.” Ebenstein, Lavy, and Roth. “The long-run economic consequences of Annual Energy Outlook 2020. Finance’s 2019 Battery Price Survey. high-stakes examinations.” 11 Ayaburi et al., “Measuring “Reasonably Reliable” access to electricity 3 U.S. Energy Information Administration, “Electricity Explained.” 6 U.S. Energy Information Administration, U.S. Crude Oil. services”; United Nations, The Sustainable Development Goals Report. 14 Isen, Rossin-Slater, and Walker, “Every breath you take.”

4 Edison Electric Institute, Electric Vehicle Sales. 7 Covert, Greenstone, and Knittel, “Will we ever stop using fossil fuels?” 12 International Energy Agency, “IEA Atlas of Energy.” 15 Greenstone and Fan. Annual Update.

52 U.S. ENERGY & CLIMATE ROADMAP EPIC.UCHICAGO.EDU U.S. ENERGY & CLIMATE ROADMAP 53 FIGURE 2 Global Annual GHG Emissions societies to make tradeo!s. Addressing these shared Increasing the price of emissions also ensures that objectives is especially challenging because emissions businesses and consumers will take only the most

160 Gigatons CO2e from Peoria have the same impact on the U.S. climate and cost-e!ective steps to reduce them. If abating a ton economy as those that originate in Chengdu, Moscow, of emissions is too costly, then they can choose to pay Mumbai, and anywhere else on the planet. Thus, the the tax or purchase a permit instead. In contrast to 120 United States will bene"t most from climate policy that regulations that prescribe speci"c actions regardless No Action 2100 Temp Impact: generates emissions reductions at home and abroad. of their cost, this allows consumers and "rms the +4.5°C (8.1° F) $exibility to choose inexpensive forms of abatement Figure 2 shows that mitigating the most serious 80 INDC Pathway and forego costly ones. Thus, imposing a price on carbon 2100 Temp Impact: consequences of climate change will involve an abrupt emissions—through either a tax or an emissions trading +3.5°C (6.3° F) and signi"cant change in the path of global emissions, scheme—tilts the market against high-emissions Two Degrees Pathway requiring countries around the world to act swiftly on 2100 Temp Impact: technologies and activities to align people’s choices with 40 an enormous scale. To achieve such a dramatic change, +2.0°C (3.6° F) the broader social good. This is why it has widespread policymakers will need to be laser-focused on achieving support among economists as the most cost-e!ective the most cost-e!ective policy possible, maximizing 0 method to combat climate change. 2000 2025 2050 2075 2100 emissions reductions per dollar to ensure the greatest bene"t to the climate at the lowest possible cost to "rms, Carbon pricing policies have been expanding rapidly Source: EPIC analysis. consumers, and taxpayers. There is widespread agreement around the world in recent years. The World Bank reports among economists and other analysts that putting a price that, as of 2019, "fty-seven countries and localities have on carbon, either through a carbon tax or cap-and-trade implemented or scheduled policies that cover about Local fossil fuel combustion also causes global climate While people in relatively poor and hot countries will market, will deliver the greatest carbon reductions at 20 percent of global emissions, a sharp increase from change. Because carbon-based energy production emits be most vulnerable to the risks of climate change, the the lowest cost by allowing markets to identify the least less than 5 percent coverage as recently as 2011. Figure heat-trapping carbon dioxide into the atmosphere, United States will not be immune. Climate change will expensive mechanisms to reduce emissions. 3 shows that the present set of policies consists of a mix burning through all known fossil fuel resources a!ect a range of activities in the American economy, of carbon taxes and emissions trading systems spread would raise global average temperatures by an almost from sharply reducing the productivity of staple grain across a range of developed and developing countries. unthinkable 5.5-8.3 C° (10-15 F°).16 Figure 2 shows that production in the Midwest to putting trillions of dollars How We Got Here global temperatures are on track to rise by 4.5 C° (8.1 F°) by of coastal property at risk from increased $ooding and The average price of emitting a ton of carbon remains Making "rms and consumers pay for the harms associated 2100 under current policy. Global emissions from energy sea level rise.20 Moreover, the impacts of climate change low, however. Even amongst jurisdictions with a policy with their actions is an old idea in economics, dating back production alone totaled 33 billion metric tons in 2019 in other countries will have spillover e!ects on American in place, 51 percent of covered emissions are priced at to Arthur Pigou in 1920.22 Pigou found that people will and have risen nearly 10 percent over the past decade.17 security and prosperity as exposure to extreme weather under $10 per ton, far below the Obama administration’s engage in activities that generate excess harm to society According to a review conducted by President Barack could intensify geopolitical con$icts and refugee crises.21 $51 estimate of the climate damage caused by each ton of if prices re$ect only the costs to individuals and not those Obama’s administration, each ton of emissions costs Slowing and reversing the rise of global carbon emissions carbon emissions. Because most emissions in the world that individual choices impose on others. Pigouvian taxes society about $51 in monetized climate change damages will be essential to ensure human $ourishing at home are not yet priced, the average cost of emitting a ton of incorporate the social costs of an act—in this case, the act (this concept, known as the social cost of carbon, is covered and abroad in the 21st century. carbon in the world is only $2.48 per ton, more than an of emitting carbon dioxide—into the price. further in " Updating the United States Government’s order of magnitude smaller than the best estimates of Social Cost of Carbon, page 20).18 Recent research suggests Maximizing Bang for the Buck When the government requires economic actors to pay the likely damage. Thus, while global carbon pricing that the damage from just one consequence of climate a tax or purchase a permit for each unit of emissions policy has shown a promising ascent in recent years, it The problem facing the Biden administration is change—mortality from exposure to extreme heat—could they produce, it raises the price of emitting so that it has a long road remaining to reach the necessary level of ultimately one of balancing the goals of inexpensive and cost nearly as much as this estimate, implying that the incorporates its social costs. Raising the price, of course, prevalence and stringency.23 reliable energy with the health and climate damages total cost of all climate change damages could be even makes emitting more expensive, creating a disincentive from fossil fuels. This critical endeavor, frequently The United States has a long history of using market- higher than previously believed.19 for forms of consumption and production that are referred to as the global energy challenge, requires all based solutions to manage environmental problems. relatively pollution-intensive. People may still choose In 1982, the Environmental Protection Agency (EPA) actions that generate emissions, but they will choose to 16 See note 7 above. 20 Schlenker and Roberts. “Nonlinear Temperature E!ects Indicate implemented a program that reduced lead content in Severe Damages to U.S. Crop Yields”; Dahl et al., Underwater: Rising seas, do so only if the bene"t they gain outweighs the cost both 17 International Energy Agency, “Global CO emissions in 2019.” 2 chronic !oods, and the implications for U.S. coastal real estate. The scale of to themselves and to society. 18 Greenstone, Kopits, and Wolverton, “Developing a social cost of carbon coastal property risk is also based on a preliminary, work-in-progress for U.S. regulatory analysis.” analysis by the Climate Impact Lab. Future estimates will provide more detail on the nature and full extent of the risk. 19 Carleton et al., Valuing the global mortality consequences of climate 23 World Bank Group, State and Trends of Carbon Pricing 2020. $2.48 change. 21 Burke, Hsiang, and Miguel, “Climate and Con$ict.” 22 Pigou, The economics of welfare. number is based on an EPIC calculation.

54 U.S. ENERGY & CLIMATE ROADMAP EPIC.UCHICAGO.EDU U.S. ENERGY & CLIMATE ROADMAP 55 FIGURE 3 Carbon Pricing Initiatives Worldwide (ETS and Carbon Tax)

Many U.S. states, including New York (pictured), have implemented some form of carbon pricing. Polls indicate that Americans may also be open to a national-level carbon tax.

California followed by implementing its own emissions in the U.S. Senate, including six Republicans.30 Support cap-and-trade system.27 Together, the two programs for carbon pricing crested in 2008 when both presidential now cover about 6 percent of U.S. emissions (California’s candidates supported a national emissions trading system cap covers about 75 percent of its statewide emissions to confront climate change. The push for legislation that and RGGI covers about 15 percent of total emissions in year featured an ad campaign with bipartisan duos such participating states).28 While these policies have been in as Newt Gingrich and Nancy Pelosi jointly calling for place, emissions have fallen from 2005 levels by about 30 comprehensive climate policy.31 In 2009, the U.S. House of percent in California and 45 percent in the RGGI states Representatives passed the American Clean Energy and ETS passed Carbon Tax passed ETS and Carbon Tax passed ETS and/or Carbon Tax under consideration with permit prices remaining relatively low—about $6 Security Act (commonly known as the Waxman-Markey Source: World Bank Group, State and Trends of Carbon Pricing 2020. for RGGI and $15 in California in 2019.29 Though it is not bill) to implement a cap-and-trade system with the goal possible to separate the e!ect of these cap-and-trade of reducing U.S. emissions 83 percent by 2050 relative to programs on emissions from a multitude of other factors, 2005 levels. The bill stalled in the Senate amidst the global gasoline by 90 percent using a tradable permit scheme.24 to traditional regulation, while still achieving their such as competing policies and changes in fuel prices, "nancial crisis and recession, however, and interest waned. Subsequently, the landmark Clean Air Act Amendments targeted pollution reductions.26 it is evident from the low permit prices that the costs of of 1990 created two critical market-based policies that The 116th Congress showed signs of renewed interest in These programs reduce costs relative to technology-speci"c compliance have not been high. The RGGI cap is scheduled dramatically reduced the presence of harmful pollutants. carbon pricing. Ten bills proposing either a gradually mandates in two ways. First, they allow "rms the $exibility to mandate a further 30 percent reduction in emissions First, the sulfur dioxide allowance trading program increasing carbon tax or a declining cap on emissions have to choose and innovate solutions to achieve the cheapest by 2030 and California’s policy requires emissions to be placed a national cap on acid rain-causing SO emissions been introduced, several of which were co-sponsored by 2 reductions in their own emissions. Second, when the costs 80 percent below 1990 levels by 2050. However, these that mandated a 50 percent reduction by the year 2000. Republicans.32 The path to a comprehensive, cost-e!ective of reducing emissions di!er substantially across "rms, increasingly aggressive targets will continue to apply to Second, the NO Budget Program in eleven northeastern approach to U.S. climate policy remains challenging, but x tradable permits or pollution taxes ensure that emissions only a small proportion of U.S. emissions. states and the District of Columbia implemented a cap- open. Recent polling data suggests that a strong majority will be reduced by those "rms for whom it is least costly and-trade system that ultimately brought NO emissions The e!ort to establish a national U.S. carbon pricing policy of Americans may be open to supporting a carbon tax, x to do so, thereby maximizing the environmental bene"t down by 74 percent between 1990 and 2006.25 has persisted for decades and shown sporadic bursts of depending on the details of how the accompanying associated with a given economic cost. momentum toward legislation. Senators John McCain revenues are used.33 These market-based systems to reduce pollution in the Market-based programs to reduce carbon emissions have and Joseph Lieberman "rst introduced legislation in 2003 United States have been overwhelmingly successful. also been implemented in some parts of the United States, to establish a national carbon cap-and-trade system. Analysis by the EPA found that the costs of reducing th but lag behind those for other pollutants in both coverage Though the bill did not pass, it garnered forty-three votes 30 United States Senate, “Roll Call Vote 108 Congress.” lead in gasoline were 20 percent lower because the and stringency. In 2009, ten northeastern states launched 31 Gingrich and Pelosi, “WeCanSolvelt.org Ad.” policy allowed for trading. Similarly, the SO2 Allowance 32 Friends Committee on National Legislation, Bill Analysis; CONGRESS. the Regional Greenhouse Gas Initiative (RGGI) and in 2012 27 The original participants in RGGI were Connecticut, Delaware, Maine, Program and NO Budget Program reduced costs by 15- GOV, “H.R.763.” Francis Rooney (R, FL-19) co-sponsored both bills. Brian x Maryland, Massachusetts, New Hampshire, New Jersey, New York, Fitzpatrick (R, PA-01) co-sponsored the "rst. The Market Choice Act 90 percent and 40-47 percent, respectively, compared Rhode Island, and Vermont. New Jersey exited the program in 2012 and would start with a $35 per ton carbon tax rising by 5 percent each year 26 First result is from Chan et al., The SO allowance trading system as rejoined in 2018. 2 plus in$ation. The Energy Innovation and Carbon Dividend Act would described in Goulder, “Markets for pollution allowances.” Second result 24 Schmalensee and Stavins, “Lessons learned from three decades of 28 Larsen, “The Footprint of U.S. Carbon Pricing Plans.” start with a $15 carbon tax, set to rise by $10 each year with adjustments is from Farrell, “The NO budget” as described in Schmalensee and experience with cap and trade.” x determined by progress in meeting pre-speci"ed emissions targets. Stavins, “Lessons learned from three decades of experience with cap 29 California Air Resources Board, “Climate Change”; Center for Climate 25 Ibid. and trade.” and Energy Solutions, “Regional Greenhouse Gas Initiative.” 33 Energy Policy Institute at the University of Chicago, “New Poll.”

56 U.S. ENERGY & CLIMATE ROADMAP EPIC.UCHICAGO.EDU U.S. ENERGY & CLIMATE ROADMAP 57 FIGURE 4 Current U.S. Policy is Piecemeal and Often Expensive Americans hundreds of billions of dollars every year. This underscores the critical importance of prioritizing cost- Low Carbon Fuel Standards $2971 e!ective policies for climate mitigation. By putting a price Solar Photovoltaics Subsidies $2151 on carbon, the Biden administration can choose a climate Cash for Clunkers policy that minimizes the cost per ton of emissions Weatherization Assistance Program reduced and achieves the largest possible environmental CAFE Standards Wind Energy Subsidies bene"t at a given price. Renewable Portfolio Standards Renewable Fuel Subsidies Livestock Management Policies PRINCIPLE Reduced Federal Coal Leasing Technology- and sector-speci!c mandates reduce Agricultural Emissions Policies the cost-e"ectiveness of a carbon price. Methane Flaring Reduction Clean Power Plan Carbon pricing minimizes costs by maximizing $exibility. Reforestation When market participants can choose how to reduce Behavioral Energy E!ciency Direct Air Capture emissions, they are free to choose the least costly response. Policies that mandate speci"c technologies and -200 0 200 400 600 FURTHER READING methods for reducing emissions restrict this $exibility, Abatement Cost ($ per ton of CO2, 2018 USD) making it more expensive for people and companies to Low High Carbon Pricing achieve the same emissions reductions. Source: Authors' analysis with data from Gillingham and Stock (2018). In principle, Congress and regulators could identify and direct low-cost approaches to emissions abatement Americans Support In the absence of a nationwide price on carbon, U.S. themselves, but the programs assessed in Figure 4 show a Carbon Tax climate policy has fallen back on a series of costly What To Do that this approach has not been successful in practice. EPIC/AP-NORC Poll sector- and technology-speci"c mandates that have Putting a price on carbon is a broadly recommended Furthermore, mandates applied simultaneously with According to a 2019 poll been relatively ine!ective at reducing emissions. Figure policy proposal that presents a variety of options for an emissions cap achieve no additional environmental EPIC conducted with The 4 shows estimates of the cost per ton abated for a range implementation. Rather than prescribe a particular bene"t beyond the target set by the cap. They simply Associated Press-NORC of proposed or implemented carbon reduction policies. approach, the balance of this chapter will outline direct how the cap should be achieved; they do not lower Center for Public A!airs While some policies, such as the Clean Power Plan, show a principles that the Biden administration could use to it. Since the total amount of emissions has been preset, Research, 44 percent of high level of emissions reductions per dollar spent, others, guide its policy development process. any reductions achieved through the regulatory approach Americans surveyed support a carbon tax, while such as the Weatherization Assistance Program, cost will free up permits for other "rms and consumers to use 29 percent oppose one. When told some ways the several hundred dollars per ton reduced. The price society and leave total emissions unchanged. Thus, the Biden funds might be used, support is higher. Two- PRINCIPLE pays for a given unit of climate mitigation varies widely administration could achieve the greatest net bene"t by thirds support a carbon tax if the funds are used Policies that achieve the largest carbon abatement across programs, and frequently far exceeds conventional working with Congress to establish a carbon price as a for environmental restoration. If respondents per dollar spent will play an important role in estimates of the climate change damage caused by each replacement for, rather than a complement to, existing are told that the revenues will be rebated to making large-scale climate mitigation attainable. ton of emissions. and proposed regulatory approaches to carbon abatement. households, support is only modestly higher, at The scale of the climate change problem requires the 49 percent. Figure 4 demonstrates that regulations that prescribe a Biden administration to achieve enormous reductions speci"c mechanism for reducing emissions have been PRINCIPLE in carbon emissions to prevent serious climate change an unreliable path to carbon abatement. The Biden Policymakers can choose between price (tax) damage during this century. Reaching an emissions administration could instead adopt a cost-e!ective and quantity (cap) instruments to balance target comparable to that of the Waxman-Markey method of climate change mitigation by putting a price environmental and economic goals. legislation would require the United States to reduce over on carbon. This approach will ensure that "rms and 4 billion tons of emissions per year by 2050. Given such The "fty-seven existing carbon pricing policies around consumers choose only the lowest cost actions that reduce ambitious goals for emissions reductions, if the range of the world consist of twenty-nine carbon taxes and twenty- emissions, thereby maximizing the emissions reductions abatement costs for future climate mitigation policies eight emissions trading systems. Carbon taxes allow that can be achieved for a given economic price. is as wide as that of the past policies shown in Figure 4, policymakers to choose the price polluters pay for each choosing more cost-e!ective policy options could save unit of emissions, whereas trading systems allow them to

58 U.S. ENERGY & CLIMATE ROADMAP EPIC.UCHICAGO.EDU U.S. ENERGY & CLIMATE ROADMAP 59 The Biden administration can choose among a broad impose on other people. It removes an implicit subsidy, There is a powerful opportunity for the Biden range of options to implement carbon pricing programs or unpaid cost to society, for polluting activities and administration to align goals and harmonize policy that balance competing policy priorities. incentivizes a shift toward lower-emission forms of mechanisms across countries. For example, the production and consumption. Thus, while a carbon tax stringency of U.S. carbon pricing can be tied to the or the auction of emissions permits creates a stream of stringency of carbon policies undertaken by other PRINCIPLE government revenue, the environmental bene"ts of the major carbon polluters through multilateral or bilateral The Social Cost of Carbon is an appealing carbon price do not depend on how that revenue is spent. agreements. This will encourage other countries to benchmark for the level of a carbon tax. reciprocate with their own climate mitigation policies and Existing carbon pricing policies typically allocate A Pigouvian tax, as noted above, is designed to ensure that increase the ambition of their emissions reductions. In government revenues in three ways: climate-related clean the price of emitting carbon incorporates the social costs addition, border tari! adjustments can be used to ensure energy spending, general treasury funds, and directly Carbon pricing policies that mandate certain technologies limit of those emissions. If a company or person chooses to emit foreign and domestic "rms are competing on equal terms. flexibility and make it more expensive to achieve the same paired tax cuts or rebates. Of the $28.3 billion in global once the social costs are re$ected in the price, the bene"ts Further arrangements to coordinate policy can also be emissions reductions. carbon pricing revenues, 27 percent goes to “green” they accrue from it are, as evidenced by their choice, developed through continued international negotiation spending, 26 percent to general revenues, and 36 percent higher than the social cost. Market-based programs to and cooperation. toward rebates and tax cuts.35 choose a cap on total emissions. Carbon taxes leave the reduce emissions, like carbon pricing, allow "rms and total quantity of emissions to market forces while leaving consumers to determine for themselves the bene"ts they In general, it is sensible for policymakers to view the the price of emissions "xed. Cap-and-trade systems allow receive from an action that creates emissions. decision of how to allocate the revenues from carbon Closing Argument markets to determine the price per unit of emissions while pricing no di!erently than any other public "nance Climate change is a historic challenge to American society Thus, it is critical that the level of the carbon price re$ects "xing the level of emissions. decision over spending or taxation. However, there is a and the global community. Cheap, reliable fossil fuels the best available estimates of the harm to society caused market failure that keeps basic research into clean energy have been the foundation of the energy system and are In principle, if policymakers could perfectly predict how by each unit of emissions, also known as the Social Cost of below its optimum. Further, carbon pricing policies tend poised to remain so for decades to come. A serious e!ort costly it would be for "rms to reduce emissions, the two Carbon. A review by the Obama administration previously to be regressive. Consequently, there is a strong case for to prevent the most damaging consequences of climate options could be calibrated to achieve the exact same assessed the scienti"c evidence to provide an estimate of devoting some of the revenue to clean energy research that change will require enormous declines in emissions, outcome. In practice, policymakers can choose the policy this measure, and the Biden administration may choose the private sector would not undertake and to refunding underscoring the urgent need for policies that reduce instrument to prioritize between goals. Carbon taxes to update it to re$ect recent advances in research (for some of the revenues to address the disproportionate pollution as cost-e!ectively as possible. have the advantage of providing greater certainty to more, see "Updating the United States Government’s impacts that would otherwise be borne by low-income businesses about the costs of compliance and the return Social Cost of Carbon," page 20).34 The existing piecemeal regulatory approach to carbon households. Recent polling evidence shows that rebating on investments made to reduce emissions. On the other abatement has been neither e!ective nor e#cient, When the price of emissions matches the social cost, "rms revenue and particularly funding renewable energy hand, cap-and-trade systems deliver greater certainty generally reducing emissions at a relatively high cost and consumers will undertake those actions for which the research raise public support for carbon pricing.36 about the environmental bene"t the policy will achieve by per ton. Enacting a national, market-based framework bene"ts outweigh the costs to society and forego those guaranteeing that emissions stay below a certain level. to put a price on carbon can achieve ambitious climate actions for which the costs to society are greater than the PRINCIPLE change goals while minimizing the cost to the American That said, the choice need not be binary. Many carbon bene"ts for themselves. Thus, this approach maximizes International cooperation is critical to economy. The most e!ective climate policy will be one that pricing policies consist of a hybrid between cap-and- the net bene"ts of climate mitigation. addressing the climate change threat and it is establishes a national carbon price and that incentivizes trade and a carbon tax. For instance, emissions trading vital that a carbon pricing policy encourage other countries to reduce their emissions as well. systems frequently include price ceilings and price $oors PRINCIPLE climate action in other countries. to provide "rms with certainty that the cost per ton of The environmental bene!ts from carbon pricing are emissions will fall within a certain range. These backstops Climate change damages in each country in the world una"ected by how the revenues are used. However, are achieved by making extra permits available to prevent will be caused by emissions that come from all countries there is a strong case for devoting some of the revenue the price from rising past the ceiling or removing permits in the world. The United States accounts for about 5 to clean energy research that the private sector would from circulation to prevent the price from falling beneath percent of the world’s population and 15 percent of global not undertake and to refunding some of the revenues the $oor, thus relaxing the precision of the emissions carbon emissions.37 Protecting Americans from the most to address the disproportionate impacts that would goal. Similarly, carbon taxes can be designed with harmful consequences of climate change requires major otherwise be borne by low-income households. $exibility to assure certain emissions goals. For example, international cooperation. policymakers can tie the level of the tax to emissions so Carbon pricing improves social welfare by making "rms it adjusts automatically to keep the long-run trajectory of and consumers pay the full cost that their emissions 35 Carl and Fedor, “Tracking global carbon revenues.” emissions within a pre-speci"ed range. 36 See note 33 above.

34 See note 18 above. 37 BP plc, BP Statistical Review of World Energy 2020.

60 U.S. ENERGY & CLIMATE ROADMAP EPIC.UCHICAGO.EDU U.S. ENERGY & CLIMATE ROADMAP 61 REFERENCES Currie, Janet, Lucas Davis, Michael Greenstone, and Reed Walker. Ham, John, Jacqueline Zweig, and Edward Avol. “Pollution, Test Roser, Max, and Esteban Ortiz-Ospina. “Global Extreme Poverty.” “Environmental health risks and housing values: evidence from 1,600 Scores and the Distribution of Academic Achievement: Evidence from Our World in Data. Last modi$ed 2019. https://ourworldindata.org/ Ayaburi, John, Morgan Bazilian, Jacob Kincer, and Todd Moss. toxic plant openings and closings.” American Economic Review 105, no. California Schools 2002-2008.” Manuscript, University of Maryland extreme-poverty. “Measuring “Reasonably Reliable” access to electricity services.” The 2 (2015): 678-709. (2014). Electricity Journal 33, no. 7 (2020): 106828. Schlenker, Wolfram, and Michael J. Roberts. “Nonlinear Temperature

Currie, Janet, and Matthew Neidell. “Air pollution and infant health: International Energy Agency. “Global CO2 emissions in 2019.” Last E!ects Indicate Severe Damages to U.S. Crop Yields under Climate Bloomberg New Energy Finance. Battery Price Survey 2019. 2019. what can we learn from California’s recent experience?” The Quarterly modi$ed February 11, 2020. https://www.iea.org/articles/global-co2- Change.” Proceedings of the National Academy of Sciences 106, Journal of Economics 120, no. 3 (2005): 1003-1030. emissions-in-2019. no. 37 (September 15, 2009): 15594. https://doi.org/10.1073/ BP plc. BP Statistical Review of World Energy 2016. 2016. pnas.0906865106. Currie, Janet, and Reed Walker. “Tra%c congestion and infant International Energy Agency. “IEA Atlas of Energy.” Accessed October ———. BP Statistical Review of World Energy 2019. 2019. health: Evidence from E-ZPass.” American Economic Journal: Applied 31, 2020. http://energyatlas.iea.org/#!/tellmap/-1118783123/1 Schmalensee, Richard, and Robert N. Stavins. “Lessons learned ———. BP Statistical Review of World Energy 2020. 2020. Economics 3, no. 1 (2011): 65-90. from three decades of experience with cap and trade.” Review of Isen, Adam, Maya Rossin-Slater, and W. Reed Walker. “Every breath Environmental Economics and Policy 11, no. 1 (2017): 59-79. Burke, Marshall, Solomon M. Hsiang, and Edward Miguel. “Climate Dahl, Kristina, Rachel Cleetus, Erika Spanger-Siegfried, Shana you take—every dollar you’ll make: The long-term consequences of and Con#ict.” Annual Review of Economics 7, no. 1 (2015): 577-617. Udvardy, Astrid Caldas, and Pamela Worth. Underwater: Rising seas, the clean air act of 1970.” Journal of Political Economy 125, no. 3 (2017): United Nations. The Sustainable Development Goals Report. United https://doi.org/10.1146/annurev-economics-080614-115430. chronic "oods, and the implications for US coastal real estate. Cambridge, 848-902. Nations, 2020. MA: Union of Concerned Scientists, 2018. California Air Resources Board. “Climate Change.” Accessed Larsen, John. “The Footprint of US Carbon Pricing Plans.” Rhodium United States Senate. “Roll Call Vote 108th Congress – 1st Session.” November 1, 2020. https://ww2.arb.ca.gov/our-work/topics/climate- Ebenstein, Avraham, Victor Lavy, and Se$ Roth. “The long-run Group. May 23, 2018. United States Senate. Accessed November 1, 2020. https://www. change economic consequences of high-stakes examinations: Evidence from https://rhg.com/research/the-footprint-of-us-carbon-pricing-plans/. senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm. transitory variation in pollution.” American Economic Journal: Applied cfm?congress=108&session=1&vote=00420 Carl, Jeremy, and David Fedor. “Tracking global carbon revenues: A Economics 8, no. 4 (2016): 36-65. McGlade, Christophe, and Paul Ekins. “The geographical survey of carbon taxes versus cap-and-trade in the real world.” Energy distribution of fossil fuels unused when limiting global warming to 2 U.S. Energy Information Administration. Annual Energy Outlook 2020. Policy 96 (2016): 50-77. Edison Electric Institute. Electric Vehicle Sales: Facts & Figures. C.” Nature 517, no. 7533 (2015): 187-190. Washington, DC: 2020. Washington, DC: Edison Electric Institute, 2019. Carleton, Tamma A., Amir Jina, Michael T. Delgado, Michael Missirian, Anouch, and Wolfram Schlenker. “Asylum Applications ———. “Electricity Explained: Electricity in the United States.” Last Greenstone, Trevor Houser, Solomon M. Hsiang, Andrew Hultgren, Energy Policy Institute at the University of Chicago. “New Poll: Respond to Temperature Fluctuations.” Science 358, no. 6370 modi$ed March 20, 2020. Robert E. Kopp, Kelly E. McCusker, Ishan B. Nath, James Rising, Nearly Half of Americans Are More Convinced Than They Were (December 22, 2017): 1610. https://doi.org/10.1126/science.aao0432. https://www.eia.gov/energyexplained/electricity/electricity-in-the-us. Ashwin Rode, Hee Kwon Seo, Arvid Viaene, Jiacan Yuan, and Alice Five Years Ago That Climate Change Is Happening, With Extreme php Pigou, Arthur Cecil. The economics of welfare. Palgrave Macmillan, Tianbo Zhang. “Valuing the global mortality consequences of climate Weather Driving Their Views.” January 22, 2019. https://epic.uchicago. 2013. ———. U.S. Crude Oil and Natural Gas Proved Reserves Year-End 2018. change accounting for adaptation costs and bene$ts.” National Bureau edu/news/new-poll-nearly-half-of-americans-are-more-convinced- Washington, DC: 2019. of Economic Research, no.27599 (2020). https://doi.org/10.3386/w27599 than-they-were-$ve-years-ago-that-climate-change-is-happening- Ritchie, Hannah, and Max Roser. “United States: CO Country Pro$le.” 2 https://www.eia.gov/naturalgas/crudeoilreserves/ with-extreme-weather-driving-their-views/ Our World in Data. Last modi$ed 2019. https://ourworldindata.org/ Center for Climate and Energy Solutions. “Regional Greenhouse Gas extreme-poverty. World Bank Group. State and Trends of Carbon Pricing 2020. Initiative (RGGI).” Accessed November 1, 2020. https://www.c2es.org/ Farrell, Alex. “The NOx budget: A look at the $rst year.” The Electricity Washington, DC: 2020. content/regional-greenhouse-gas-initiative-rggi/ Journal 13, no. 2 (2000): 83-93.

Chan, Gabriel, Robert Stavins, Robert Stowe, and Richard Friends Committee on National Legislation. Bill Analysis: The Market

Sweeney. “The SO2 allowance trading system and the clean air Choice Act of 2019 (H.R. 4520). Washington, DC. https://www.fcnl.org/ act amendments of 1990: Re#ections on twenty years of policy documents/1097 innovation.” National Bureau of Economic Research, no. 17845 (2012). Gillingham, Kenneth and James H. Stock, “The Cost of Reducing https://doi.org/10.3386/w17845 Greenhouse Gas Emissions,” Journal of Economic Perspectives, Vol. 32, Chang, Tom, Joshua Gra! Zivin, Tal Gross, and Matthew Neidell. No. 4 (Fall 2018): 53-72. “Particulate pollution and the productivity of pear packers.” American Gingrich, Newt and Nancy Pelosi. “WeCanSolvelt.org Ad – Gingrich Economic Journal: Economic Policy 8, no. 3 (2016): 141-69. & Pelosi.” POLITICO video, 0:30. May 13, 2011. https://www.politico. ———. “The e!ect of pollution on worker productivity: evidence from com/video/2011/05/wecansolveitorg-ad-gingrich-pelosi-018436 call center workers in China.” American Economic Journal: Applied Goulder, Lawrence H. “Markets for pollution allowances: what are the Economics 11, no. 1 (2019): 151-72. (new) lessons?” Journal of Economic Perspectives 27, no. 1 (2013): 87-102. Chay, Kenneth Y., and Michael Greenstone. “The impact of air Gra! Zivin, Joshua, and Matthew Neidell. “The impact of pollution pollution on infant mortality: evidence from geographic variation on worker productivity.” American Economic Review 102, no. 7 (2012): in pollution shocks induced by a recession.” The Quarterly Journal of 3652-73. Economics 118, no. 3 (2003): 1121-1167. Greenstone, Michael and Claire Fan. Annual Update. Energy Policy CONGRESS.GOV. “H.R.763 – Energy Innovation and Carbon Dividend Institute at the University of Chicago, 2020. https://dev-aqli-epic. Act of 2019.” Accessed November 1, 2020. https://www.congress.gov/ pantheonsite.io/reports/ bill/116th-congress/house-bill/763. Greenstone, Michael, Elizabeth Kopits, and Ann Wolverton. Covert, Thomas, Michael Greenstone, and Christopher R. Knittel. “Will “Developing a social cost of carbon for US regulatory analysis: A we ever stop using fossil fuels?” Journal of Economic Perspectives 30, no. methodology and interpretation.” Review of Environmental 1 (2016): 117-38. Economics and Policy 7, no. 1 (2013): 23-46.

62 U.S. ENERGY & CLIMATE ROADMAP EPIC.UCHICAGO.EDU U.S. ENERGY & CLIMATE ROADMAP 63