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The How and Why of Pricing Carbon

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The How and Why of Pricing Carbon 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.
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